e Commerce is Org Bible(2009v2)

Singapore Institute of Management

University of London London School of Economics & Political Science

Information Systems & Organization

(2790136)

“ISORG Bible” examination questions w. solution guide

2009/10

The questions in this guide are derived from several sources: LSE SG samples, tutorials, past year exams and questions generated by the author, co-lecturer Chan Veng Seng and their students.

This guide hopes to serve as a good reference. However, it should not be taken as the only source in preparing for the ISORG examination.

This guide is privilege access to registered SIM students only.

(Apologies for some duplication of materials, if any. Indeed, material is far from perfect.)

isorgbible_ver5; copyrights reserved. For reprints, kindly seek permission from author: [email protected]

Advices

1. Stay with the Question! For example, don’t write about data model when the Q asks you to compare only TCM and DMM. You risk exposing yourself to unnecessary errors or half-truth. And, if you try to explain further on data model, you risk writing “out of context”. However, in the conclusion, it is ok to give a mention on “out of context” elements … as you can demonstrate your wider perspective and broader knowledge of related issues as a form on closing (BUT not in the body) of the essay. Determine the number of parts in the Q. Plan and estimate the value % to each part before you start writing.

Be aware that the useof too many acronyms may irritate the examiners. So, on the safe side, write in full or use acronyms minimally.

2. In the conclusion, make sure it is “conclusion”. Do not try to introduce new points that are meant for the essay body and which you have inadvertently missed out in the earlier paragraphs. You’ll be accused of trying to rush, being disorganized, and trying to show off all you know without any proper structures. It is better to arrow them into the appropriate paragraphs of the essay body or index with guide e.g. see “*”; see “**”, etc.

3. Beating around the bush in your introduction gives a bad impression and an indication you are trying to buy time. An introduction is like a first impression (which tends to be lasting). A good introduction provides a big picture of what to expect in the essay-body, somewhat like a concise content-page of a book. Use the keywords/phrases found in the Q. Introductions should normally be short. Avoid words like “e.g., etc, for example, i.e. such as, like . . .” and diagrams, examples and details should be elaborated in the essay-body.

4. Keep all paragraphs should be short for effective read and not dull the examiners. Bad layout can irk him and affects your marks. As a guide, try to keep to 4 or 5 statements or less per paragraph. Read any newspapers or online news to understand what I meant.

Topics of high importance and likely targets in the May/June 2009/10 Examination In this “bible, please understand well the first few questions and solutions in each section. They represent he latest updates done to the “Bible”. Please make you own extensions, arguments, views and/or reviews to the solutions here.

1. e-Commerce strategy, market & business process reengineering 2. Organization analysis and Information system designs theory 3. Data model 4. Decision making model 5. Transaction costs model 6. Information systems strategy & strategic information systems (competitive

advantage) 7. Operating systems, and connectivity 8. Information systems development: Make or buy 9. Professional roles & their impact on information strategies

Sit for the Prelim Test!!! It is the best preparation for the examination

isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 1

Keywords and key topics (Following is a review of keywords and the key topics “you should know” before you walk into the ISORG examination room) Why ICT? The significance and role of technology in the economy and in society has become extremely important over the last decade. People, organizations and governments enthusiastically embrace all that technology has to offer, while others are more cautious or even resistant. With the benefit of an historical perspective, and building on our experience of earlier and highly significant constellations of technologies, people often suggest that a small number of key technologies (e.g. the Internet, mobile communications, e-Commerce) are shaping and changing our society and our lives. The role of information and communication technologies in shaping human activity in our private and professional lives has become more and more prominent. Hence it is with concern how these information and communication technologies (ICT), shedding light on how they are understood, designed, applied and used within organizational settings, in particular in business organizations. The main focus is on how we understand the potential of ICT to support organizational activities and hence how we design these technologies to achieve these goals. It is important to understand how different models used to analyze organizational activities affect the shape of ICT. Here we argue that ICT designed to support organizational activities are differently shaped as a consequence of the three analytical models (Data, transaction and decision making models) we have used to analyze the organization. Theories of information systems The study of information systems is normally premised on the assumption that information systems are socio-technical systems that encompass both technical and social variables. Information systems are sets of interrelated components that collect, retrieve, process, store and distribute information to support decision-making, co-ordination, control, analysis and organizational planning.

Socio-technical= cognitive, behavioral and technical perspectives.

Although information systems are socio-technical systems, and should be designed with an appropriate design model that covers all these aspects, sadly though, there is no such model. Broadly speaking though, there are three different paradigms on information systems, namely the technical, the cognitive and the behavioral perspectives. Technical (computer science, OR, mgt science) – Data Model Cognitive (psychology + sociology) – Decision making model Behavioral (economics + sociology of group/ individual/ organizational behaviors) – Transaction costs model The technical perspective emphasizes mathematically based models to study information systems, as well as the physical technology and formal capabilities of these systems. It draws on management science, operation research and computer science. The cognitive perspective draws on socio-psychological theories to study how decision-makers perceive and use information.


Finally, the behavioral perspective draws on economics and sociology to study the economics and behavioral issues that arise in the development and long-term maintenance of information systems. The three different perspectives of information system are addressed respectively by the data, decision-making and transaction-cost models. The Data Model According to the data model, the design of an information system should be undertaken mainly to capture the data and improve its flow-paths in the organization. The systems analyst should only consider the data flows, documents, files and processes in the organization, by examining all reports, files and other information sources used by managers. By so doing, the analyst should obtain a stream of raw facts that needs to be computerised and stored into a database in a form that people can understand and use. Thus, designing an information system means designing and implementing functional requirements and specifications that will lead to new ways to capture, produce, exchange, and process data which are faster, more reliable and secure than previous practices. The analyst should look at the organization as a data flow machine and design the information system so as to improve data flow paths with the ability of the organization to produce, exchange, manage and analyze data. Simple examples are the UOL examiner lunch story, the SIM course evaluation story, SIM attendance clocking system, inventory system, and ERP application.

tabula rasa raison d’etre

The main weakness of data model is that it under-estimates the importance of the socio-behavorial elements that define the characteristics of the organization and of the people working there, hence the HDB upgrading story, Subprime mortgage story and the Judge story. The Decision-making model (readings: Laudon’s Chapters 1, 2, 3, 12 and 13) The decision-making model attempts to ascertain the way information systems can support individual and collective decision-making which comprises of 4 stages: intelligence gathering, design, choice, and implementation. The model examines how the organization can be conceptualized as a decision-making system that scans the environment with the purpose of evaluating alternative solutions to a specific problem. In making decisions, decision makers, at some point in time, may be exposed or “wear” (not intentionally) different decision “hats” models such as the rational model, bounded rationality, muddling through, satisficing, and psychological. Decision makers are not bounded by any specific cognitive decision model/s although we can say that the higher up the hierarchy, the more active the decision makers the higher the exposure to more than one decision models. The lower hierarchical decision makers, bounded by standard operating procedures (SOPs), standard guidelines and structured problems have less reason for bounded


rationality, and muddling through. After all, at this low level, decision-making falls into the PK/SK quadrant (problem known/solution known). Bounded rationality. March and Simon (1958) have proposed an insightful adjustment to the rational model described above. Rather than optimizing, which presumes searching for all the alternative courses of actions, the actor can satisfice; that is, choose a course of action which is based on a sub-set of all the alternative courses of action. Actors who satisfice are also said to be “muddling through” because they make successive limited comparisons between alternative courses of action, thus incrementally building their decision-making process (extract SG/pg 59). This cognitive model is based on the assumption that people have bounded rationality because they stick with tried-and-tested rules and procedures since they are not able to take into account all the possible courses of action. Thus, bounded rationality refers to the cognitive limitations that people face in terms of knowledge and cognitive capacity because they can only choose a sub-set of all the alternative courses of action and undertake a satisfying course of action. Generally, we can say that decision process is also influenced by the nature of the organization that the decision-makers belong to. The most influential parts of the model are based on the idea that decisions, irrespective of the various decision models deployed, can be broadly categorized into three types of programmed or structured decisions, semi-structured, and non-programmed or unstructured ones. Information systems can be conceived in line with the decision-making. It should show how it support and harness effective decision-making. Managers use information systems in order to reduce the uncertainty associated with decision-making. This is more so the case with higher managers where they face unstructured, complex tasks and environments. An organization is generally made up of three different broad layers of managers. They have different responsibilities and made different type of decisions to support their respective area of responsibilities. Their decision types can be classified into three categories of structured, semi-structured and unstructured. This made for clear distinction of mapping the correct types of information systems to its decision-making requirements. The diagram below shows that information systems are categorized generally into three levels to meet the information needs at the strategic, management & control, and operational levels. This categorization aligns neatly with the decision-making model of three types: unstructured, semi-structured and structured decision-making. The information system types can be divided into three mainstream systems. They are:

• unstructured: executive support system (ESS). Information design to support for unbounded rationality, exposure to “muddling through”, “satisficing” and psychological intuitive decision models.

• semi-structured: Management information system (MIS). Support for “optimizing” decision making. Some exposure to bounded rationality.

• structured: transaction processing system (TPS). Support “optimizing” decision making. Achieving “rational decision” is probably highest at this level.


Mgt & Control: DSS, MIS

Operations: TPS

Strategic: ESS/DSS

Structured/programmable decisions

Unstructured decisions

The transaction-cost model The transaction-cost model views the organization as a contractual arrangement and obligations to govern a set of transactions. Various types of cost are incurred in an exchange, particularly in an imperfect market. A transaction involves the transfer of property rights: use, alter, income, and transfer of ownership (UAIT). Compared with the other models, the transaction-cost approach to information systems acknowledges that individuals might distort the use of information to achieve their individual goals. Thus, the transaction-cost approach takes into account the possibility that individuals might act opportunistically to maximise their objectives so as to distort, misrepresent or manipulate information to their own advantage. Hence, in general, information systems will be more complicated in organizations where the level of trust is low (i.e. market form of organizing) because opportunistic information processing may occur. Based on these insights, the model identifies the different information processing costs that individuals face, namely search costs, contracting costs, regulation/control costs and maintenance costs (SCRM). In the transaction-cost model, we may conceive of information technology as a mediating technology because it mediates the transactions or exchanges between the parties. Information technology can reduce the costs of transacting (i.e. the information costs) because it allows for more information to be communicated in the same amount of time. Information technology can also contribute to better linkage between buyer and seller, as well as more efficient and effective contracting processes between the parties through brokerage effects. In the transaction-cost model, information technology is further seen as increasing the functioning of the market, leading to market-like forms of organization. The argument is that the lower the transaction costs, the more suitable the market as a form of organising. In other words, traditionally, markets, as opposed to hierarchies (i.e. bureaucracies), entail transaction costs. On the other hand, bureaucracies replace transactions with hierarchical decision-making entailing a higher amount of managerial/supervisory costs (also known as agency cost) rather than transaction costs. It has generally by seen that the more one uses information technology, the lower the transaction costs and, therefore, the more efficient the market as an allocation mechanism. However, the capital and acquisition costs of computers and its implementation (i.e.


processing and co-ordination cost) must be carefully evaluated to ensure they do not outweigh the benefits of information technology. Besides bounded rationality and opportunism, other factors like uncertainty, frequency, asset specificity, small numbers (BOUFAS) will affect transaction costs in varying degrees and efficiency of the market mechanism. Information technology and systems can mediate in different ways with respects to the elements in SCRM and the effects of BOUFAS. Information Systems Strategy An Information Systems Strategy may be viewed as a plan for the identification of ICT information systems solutions towards some future vision of organization that meet the overall business strategy. This means an information systems strategy does not just contain strategic information systems but includes plan of all other necessary support-level information systems and ICT infrastructure. There is no single all encompassing strategy within the organization, but instead there are a number of systems that operate at different levels of strategy. They are firm, the business and the industry level strategy. At firm level, the organization strategies at maximizing its resources and processes – synergizing all it functional units (departments or business units). At business level, the organization strategies at value maximizing processes with its partners, suppliers, customers and associates (upstream and downstream processes). At industry level, the organization looks at strategies to compete or combine with competitors to leverage competitive advantages against other industry competitors. An information systems strategy also importantly must entail the identification of strategic information systems and their strategic implications which provide the catalyst in strategic transitions of the firm - demanding changes in the technical and social elements of the organization. Thus, you may view strategic transitions as movements from one level of socio-technical systems to another, since the adoption of the information systems strategy requires changes that go well beyond the technical infrastructure to encompass improved ways of conducting internal and external operations, new business goals, relationships with customers, suppliers, business associates and even competitors. What is strategic implication? Strategic implication has got to do with a crucial target action, and what likely consequences that may result from achieving that action. Going forward, the crucial action could drastically change the way the organization or individual perform its work, compete and plan (so as to maintain the advantage gained). Strategic implications, when realized, lead to the achievement of the competitive advantages. Hence, identifying strategic implications is a necessary action of all businesses and the supporting information systems to achieve those implications. Let us examine the strategic implications of some case studies. This exercise is ‘thinking over an issue as deeply as possible’. Firm: American Airlines. a) Key business: Passenger Airlines – integrated global services


b) Strategic information system (SIS): Real-time Air-ticketing system (also linked to partners: hotels, car rental firms) c) Goal of SIS: Global coordination of seat-reservations. Optimal utilization of seating capacity of all passenger planes. d) Strategic implications of SIS: Service differentiation, Build technological barrier. e) Competitive Advantage: Strengthen Customer loyalty, Increased market share, Lock-out competitors (with mileage points) Firm: Flextronics. a) Key business: Electronics contract manufacturing on global basis b) Strategic information system (SIS): Global SCM, Global ERP, Collaborative design system c) Goal of SIS: Logistics linkage with industry supply chains on a global basis. Integration of business processes with customers and suppliers (extranets) d) Strategic implications of SIS: Service and product differentiations – faster time to market (integrated all processes from raw material to production to marketplace. Better manufacturing processes, better product designs, build technological barrier. e) Competitive Advantage: Lock-in customers, Lock-in suppliers, low price, increased market share E-commerce: a transaction-cost analysis E-commerce is the process of buying and selling (include marketing and distribution) of goods, services and information electronically over networking technologies, including the Internet. These technologies increase the availability and total amount of information. The upshot is market uncertainty and complexity are reduced (as market is interested only in product price and product specifications), reduction in transaction costs, bounded rationality, opportunism, and information asymmetry. E-commerce enables the exploit of low frequency which otherwise would be too expensive in market places. E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and paper-based procedures with electronic alternatives which foster information flows in new and dynamic ways that link and form partnerships between suppliers, buyers and sellers – thus, enabling a dynamic change from “flow of places” to “flow of spaces”. e-Commerce facilitates market processes to open thorough the year round, shrink distance and time, promote disintermediation, reduce “time to market” of products and services, process complexity, extended channels and marketplace. In a traditional “bricks & mortar” operation, handling market transactions is often time-consuming, complex, and expensive. Processes are costly, difficult to control and re-engineer, as they are dictated by market forces that outside the control of the organization. e-Commerce makes market transactions more efficient than firm transactions – purchasers have more choices and yet able to obtain equally good or better price and quantity discount with low frequency (which traditionally is only possible with high frequency and “hierarchies” form of organizing) – as seen in the examples of AsiaRooms, Zuji, Ctrip, AsiaTravels, Flextronics, and Baxter Healthcare. eCommerce can be conceptualized as market process re-engineering, a process aimed at decoupling product flows (as in “hierarchy” form of organizing) with market transactions through online


trading. E-Commerce partners can concentrate on their core competencies, thus reducing the overall cost of transaction. The growth of e-commerce (and now extended to m-commerce) is probably unstoppable. The high visibility of market processes (MPR) demands that proactive organizations review their ecommerce strategy in order to stay relevant and competitive. Hence, the six building blocks of e-commerce strategy, namely network communication technologies, e-commerce platform, e-business models, e-commerce payment system, website design considerations, problems/pitfall and success factors, would likely be on the talk of many company executives. BPR Vs MPR Both deals in streamlining, improving, changing, removing business processes such as to improve the competitiveness of the firm Business process re-engineering = internal processes Market process re-engineering = outside/ external processes. BPR and value chain analysis are technique and strategies to reengineer internal processes across the whole enterprise. E-Commerce, e-business, SCM and other enterprise applications uses IT and network technologies to reengineer and streamline market (outside) processes, which traditionally are difficult to control and cost ineffective (and only possible through internalization, and “hierarchy’ form of organizing). B2B is more complicated than B2C, C2C? Many B2B has provisions for database linkup to each other business partner’s enterprise information systems. One could argue that here is a higher element of trust and contractual obligations. As B2B requires their business partners in “communicating” their database and application systems, efficient network systems (e.g. intranet, extranet or private networks), telecommunication, database systems, security, data protection and business enterprise privacy are priorities. This has business impact on the organizational structure and the IT strategies of partners in business partnerships. Flextronics and Baxter Healthcare are such examples. Part of their application software must be able to “talk” to one another automatically and update each other databases instantaneously through efficient electronic networks. Both Zuji.com and AsiaRooms,com (although a front-end B2C setup) has a back-end B2B business partnership with their banks and/or hotels partners. Similarly arguments go for NETS and SAP. Electronic network linkages with the business databases and applications are crucial and supported by good network infrastructure. What about Ali Baba - another B2B site? Is Ali Baba complex structure? Not so. In this case, Ali Baba keeps a database of all interested business enquiries. This database is opened to all its registered business suppliers who make offers and deals through Ali Baba.


Outsourcing as a System Development strategy Outsourcing is based on the similar concept of “sub-contracting”, specialization and division of labor. Today, there are many qualified outsourcing service providers with expert knowledge in all aspects of specialized works, including information system development and operations. Outsourcers have proven knowledge, wealth of experience, international connection and networks, high reliability, and strong development skills. NCS, EDS, and Accenture are examples of such international IT outsourcing provider companies. Organizations have began to ask “why should we be involved in such non-core IT development when it is actually more costly and time-consuming than to outsource them?” Because of a combination of IT technological advances, availability of expertise and cheaper labour in 3rd world countries, it is now attractive for companies to outsource their non-core business activities. We see this in a lower cost operations call-centre servicing even local and global enquiries can be located in any part of the world. Application development can be carried out quickly and cheaply by IT experts in another country.

Complexity, core competency, flexibility (speed), lower cost ?

Benefits: reduce bounded rationality, uncertainty, complexity, avoid low asset specificity (machine & skills), build core competencies, low upfront ‘sunk” cost. Limitations: opportunism may increase, insecurity, loss of technical skill, and dependence on external partners. Of course, outsourcing can be deployed in any aspect of the business, such as electronic production and assembly activities. Why Operating System? An operating system is a suite of software that resides in a computer RAM memory at all times. The operating system is a type of system software. It can be liken to a firm’s managing director (MD) and its board of directors (BOD). An OS (like the MD & BOD) control, manage and allocate the resources and operations of a computer (firm), and its linkages (relationships) to the outside world. An OS suite of programs can be categorized into seven managerial software. They are memory manager, secondary storage manager, I/O, user-interface, processor, etc . Without them, the computer would be also impossible to use and at it’s best can only manage one task or process at a time. The all importance aspect of multi-tasking and resource sharing would not have been possible without an OS. The O/S facilitates multitasking, multiprogramming, multiprocessing, networking, data management, security and control. The user-interface manager reduces learning curve of users and increases productivity of IT developers. The Network manager provides the connectivity to the outside world and sharing of resources.


The relationship between BS, ISS and ISP (Flextronics as the example)

Objectives BS: Identify medium & long term business directions and goals at firm, business, industry levels ISS: Identify new IS, ICT, SIS to support BS

Take Flextronics, as the example BS: Global contract manufacturing with service/product differentiation. ICT as enterprise bridge + barrier to competitors. ISS: Build global enterprise information system to support diverse global business. Build global network + knowledge sharing.

BPR TQM EA CSF

Plan the new information

ISP: Global ERP (FLS), Global SCM

SDLC Outsourc

ApplicatiPackages

End-UserComputi

Prototypi

BP

ITS ISS

BS

Planned organizationchange thru:

System DevStrategies th

isorgbible_ver 5; 0

ISP
systems, strategic information systems, budget, schedule
(BLS), Collaborative systems for designers (ILS) as their SIS (strategic information systems) FLS =firm level strategy BLS = Business level ILS = industry level

Analyse, design, construct, implement the new information systems (IS)

Fully working and networked ERP, SCM, collaborative system for designers

al

Devt of the new IS

ing

on ng ng

t ru:

6-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 10

The next section examines the past examination questions, and simulated questions posted by the author and students. These questions are categorized into following subsections. Take the effort to understand at least the first 3 questions in each section. Sections:

A. e-Commerce strategy, market & business process reengineering B. Organization analysis and Information system designs theory C. Data model D. Decision making model E. Transaction costs model F. Information systems strategy & strategic information systems G. Operating systems, and connectivity H. Information Systems Development –Make or buy I. (not use) J. Professional roles & their impact on information strategies


A. ELECTRONIC COMMERCE STRATEGY Question A1 What is e-commerce? Discuss, with examples, the advantages, potentials, and limits of using e-commerce strategies. [SG] Solution guide (note that the Q has 4 parts): E-commerce is the process of buying and selling (including marketing, negotiation, and distribution) of goods, services and information electronically over network communication technologies, including the Internet. These technologies increase the availability and total amount of information. e-Commerce aims to make market transactions as efficient or more efficient than firm transactions. E-Commerce is fuelling the growth of electronic marketplaces by replacing manual and paper-based procedures with electronic alternatives which foster information flows in new and dynamic ways that link and form partnerships between suppliers, buyers and sellers – thus, enabling a dynamic change from “flow of places” to “flow of spaces”. How does e-Commerce makes market transactions as efficient or more efficient than firm? e-Commerce facilitates market processes to open thorough the year round, shrink distance and time, promote disintermediation, reduce “time to market” of products and services, reduce process complexity, extended channels and marketplace. Buyers have more choices and yet able to obtain equally good or better price and quantity discount with low frequency (which traditionally is only possible with high frequency and internalization through “hierarchy” form of organizing) – as seen in the examples of AsiaRooms, Zuji, Ctrip, AsiaTravel, Flextronics, and Baxter Healthcare. We can conceptualize the implementation of e-commerce as market process re-engineering, a process aimed at decoupling product flows from market transactions through online trading. In Flextronics, their customers (e.g. Ericsson, Cisco) decouple their firm’s production and supply chain activities to Flextronics to concentrate on their core skills in product design and marketing activities.


Baxter Healthcare provides an inventory-less infrastructure for 80% of the USA hospitals, allowing their hospital clients to concentrate on their core competencies of providing quality medical aids. Asiarooms (and other similar sites like Expedia, Octopus, AsiaTravel, Zuji) provides professional online global search, secured contracting and regulation services for the best hotel room rates at a minimal transaction brokering cost for its clients. E-Commerce applications, SCM, IT and network technologies re-engineer, streamline and coordinate market (external) processes, which traditionally are difficult to control and cost ineffective (and only possible through internalization, and “hierarchy’ form of organizing).


Other key ingredients of e-Commerce strategy include the suitability of product and services, the nature of e-business models, choice of e-commerce payments, understanding the target market, and design considerations. The choice of suitable products and services is crucial to ensure an effective e-commerce offensive. AsiaRooms.com specializes in providing worldwide transaction brokering services in the booking of hotel rooms, Amazon.com in virtual shop-front selling books, magazine and digital content, while ebay specializes on online auction or eMarketplace. Not all products and services are suitable for e-Commerce, especially when it involves the sense of taste or smell. Marketing food and spectacles over e-Commerce have lesser economics appeal than digital products and on-line services. Determining an appropriate strategy and e-business model platform for the products and services is important. Not just any e-business model can be successful. Dell uses the B2C virtual storefront model, eBay uses the C2C virtual online auction model, SAP.com uses the B2B virtual storefront model, Asiarooms uses the B2C transaction broker model and Google uses the B2C information portal model. The selection of a B2B, B2C or C2C model is the result of identifying the final target audience. An e-Commerce website often involved monetary transactions. An appropriate e-commerce payment system is important to accompany the selected business model. A local online brokerage house called iOCBC used the Electronic Billing Presentment & Payment (like GIRO, in Singapore), digital cheque and the traditional “bricks & mortar” cheque as their alternative payment system, Finatiq.com (a online financial advisor firm) adopted the Stored Value Payment, while Asiarooms.com adopted the Credit Card system. A major concern of e-commerce and consumers is to make digital payment secured, safe, trustworthy and private. Many e-Commerce users have only general IT knowledge, so the website designers must ensure a design of high ease of use, friendly yet personal, attractive, organized, informative, high availability, and a reasonable upload speed. A key spin-off of e-Commerce strategies lie in the fact that market transaction has become more efficient than firm transactions! This creates a host of e-Commerce advantages. Examiner

expresses a need to discuss advantages, potentials, limits in the light of B2B, B2C, C2C models too.

As we have seen, e-Commerce has great potentials in reducing various stages of transaction costs: search, contract, regulation and maintenance cost. e-Commerce facilitates market processes to open thorough the year round, shrink distance and time, provide extended channels. The upshot in e-commerce is reduction in market uncertainty and complexity, reduction in transaction costs, bounded rationality, and information asymmetry. E-commerce enables the exploit of low frequency which otherwise would be too expensive to conduct businesses in market places. In a traditional “bricks & mortar” transaction, the stages of search, contracting, regulation and control, and maintenance are often shrouded with bounded rationality, uncertainty and opportunism. They are time-consuming, complex, and expensive. Traditionally, external market processes are costly, difficult to control and re-engineer, as they are dictated by market forces that outside the control of the organization. This increases bounded rationality, and opportunism promoted by information asymmetry between buyers and


sellers (besides market uncertainty, asset specificity, small numbers and frequency). All these factors increase the overall transaction costs. However, with the introduction of e-commerce, new IT advances and electronic communication networks, the market processes are suddenly becoming more manageable and streamlined. e-Commerce facilitates electronic automation of many of the market processes, simplified complex tasks, and remove unnecessary intermediaries. New business model provides for new way of doing business and new e-Commerce payment systems increasing the convenience of e-commerce. This has resulted in reduction of transaction costs and agency cost, at the same time, reducing delivery time of goods, services and information. Electronics networks and Internet remove the barriers associated with time and distance. The promise of e-commerce is that transaction costs can be constrained to its minimum for each type of transaction. There is an abundance of easily accessible information reservoirs and information is available at the finger time. This greatly improved information quality, as seen in the diagram, and led to the reduction of market uncertainty. The higher the uncertainty the impact of increasing cost, particularly in search, contract and maintenance costs.

Info Quality

Just-in-time (JIT) information reduces information asymmetry between buyers and sellers. Having piles of preprinted information pages are things of the past, although the excesses of worldwide information may sometime leads to an information overload.

Uncertainty

Dis-intermediation removes intermediate layers of transactions and streamline processes. This provides for direct communication between trading partners facilitating faster market transactions, decision-making and lowering overall cost. E-Commerce rides on global computer networks. Today, such networks deploy compatible, universal and easy-to-use set of technologies (e.g. web-based email, video conferencing, tele-conferencing, file transfer, HTML, XML documents) and technology standards (TCP/IP, HTTP) that can be easily adopted by any organization with disparate systems. This implies the world is the stage for all kinds of business – large and small alike are given the same opportunities of access and extended distribution channels. With Internet, E-Commerce cater for a round-the-clock service. Business does not have to sleep. The availability is 24/7 – 24hours, 7 days a week.

E-commerce supports advanced design and manufacturing concepts like zero-inventory, and concurrent engineering. Concurrent engineering is a systematic approach to the simultaneous, integrated design of products and their related processes, such as manufacturing, testing and supporting. They are all oriented to co-ordination and integration of various aspects of the production and distribution processes. It facilitates new kind of on-demand marketing concepts throughout a wide range of production


services. This can be seen with Flextronics collaborative commerce network with Nokia, Dell computers and Ericsson. Toyota and its key suppliers is another example. E-Commerce generates transaction information immediately in the form that permits subsequent processing. The transactions can be quickly uploaded to enterprise applications for sophisticated processing and distribution. The data can be used to support information system that is designed to increase the responsiveness, flexibility, efficiency and accountability of business process. The new kind of business models with E-Commerce provides opportunities for new market relationships to evolve in the electronic marketplace. This has resulted in many highly visible new markets for new products and services. These are created around changing patterns of work & leisure - allowing consumers to access such services as banking, insurance, and travel reservations directly from their homes and businesses, both in and out of normal business hours.

E-Commerce has great potentials. Riding on the popularity and power of Internet, the strong potentials of E-Commerce lies in the media, entertainment and communication sector. E-Ccommerce can be increasing developed as the interactive tool to develop world-wide audience. Interactive vLogging and entertainment like YouTube.com, iTunes, and communication blogs like blogspot.com are runaway successes within 3 years of their introductions and reaching critical mass population around the world. Internet TV has great potentials of reaching every household replacing the conventional TV services. IP / Internet phones like Skype, are threatening normal landmine telephony system. Skype allows users to make “telephone” digital calls from their computer to other Skype users free of charge, or to landlines and cell phones for a fee. Additional features include instant messaging, file transfer, short message service, video conferencing and its ability to circumvent firewalls. Education and Training is another fast growing important area where EC can build up the infrastructure of skills upon which new educational electronic services can be developed. In news reporting, EC has the potential of changing the way news are reported with better speed and better accuracy. STOMP, LiveLeak, NowPublic, and TVblog are examples where the future news will come not from the paid reporters but from the very people who read the news. These people are ever so willing to immediately capture the latest events occurring around them on video clips and 3G them over to the newspaper companies. The significance and growth potential of E-Commerce is linked to the broader socialization and opening up of the electronic networking environment. A phenomenon that looks certain to proliferate the current atmosphere. The true market mass is yet to come.

The view of major firms across the world is that the changes in access media would have to be customer driven.


Customers will gravitate to the medium that is easiest, quickest, cost effective, and most convenient to use. Customers prefer to stay with that medium until it is obvious to them that a different medium is superior. For now, it is the Internet and e-Commerce is the medium. e-Commerce has great potentials in many areas of industries in making market transactions as efficient or more efficient than firm.

Limitations. As in any technology, there are also limitations in using E-Commerce strategies. The creation of new customer database is multiplying and increasing at very fast pace New security, privacy and legal issues will arise. For this purpose, business & government co-operation and support is essential to work and produce new security solutions.

E-Commerce is not always suitable for all kinds of products and services. Some products that involve taste and smell may not be suitable. For examples, selling cakes and cantonese dishes over a virtual storefront would likely to be inappropriate and raise transaction costs. E-Commerce provides a global stage not just for business minded people but also a world stage for cheats. It is borderless. Transacting parties are often faceless to one another. No specific country laws can underscore a transaction done over international boundaries. It is actually very difficult to identify fly-by-night operator. The company called SG-gadgets (ST 20/10/06) “pulled off” $10 million from his customers across the United States, Europe and Australia. EC actually augment asymmetry! EC removes the need of human interaction, and as such, promotes faceless transaction partners – as we have witnessed in the ebay transactions (the African story, where seller/buyer who are continent apart, promote a situation of information asymmetry and cheating over one another) – an unhealthy business environment and breeding ground for the undesirables and increased costs of transacting. E-Commerce business models largely operate out of websites. The website must be constantly updated. The tedious effort of providing new information, new skin and look is necessary. It is a limitation in itself and there is no fast easy turnaround to this activity. Certainly, increasing the IT coordination cost. Information societies have becoming increasing reliance on E-Commerce. A prolong major electronic telecommunication network failure can trigger devastating, crippling effects on organization and economies on a global basis. In conclusion, E-Commerce is not merely for automation but also for creating new business opportunities. The world has become smaller. Globalization and breaking down of trade barriers becoming reality. It is now a standard business tool, moving beyond cost saving and strategic objectives altogether. E-Commerce is now popular not just as B2C models but also B2B and C2C, and beware, the playground for universal cheats and digital criminals too!


Question A2 Discuss what an electronic market is and critically discuss whether it can reduce transaction costs. [2007 ZA Exam] and other similar type Qs: Q. Discuss why electronic commerce can reduce transaction costs. Provide examples to justify your answers. [2007 Prelim] Q. Discuss what B2B marketplaces are and critically discuss whether they can reduce transaction costs.[2007 ZB exam] Q. Explain how the transaction costs model applies to the design of information systems. Explain how e-Commerce helps in reducing such transaction costs (also classified as D6) Solution guide: Electronic market refers basically to commerce over electronic communication means, often called e-Commerce. Often, we see an e-Commerce site as a B2B, B2C or C2C. Examiner

expresses a need to discuss ecommerce in the light of B2B, B2C, C2C models too.

E-Commerce is the process of buying and selling (including marketing, negotiation and distribution) of goods, services and information electronically over networking technologies, including the Internet. E-commerce facilitates market processes to open thorough the year round, shrink distance and time, and provides extended channels. E-commerce increases the transaction availability, total amount of information, reduces information asymmetry between transaction partners, reduces market uncertainty, and reduces transaction complexity. E-commerce enables the exploit of low frequency which otherwise would be too expensive to conduct businesses in market places. E-commerce streamlines market processes, making market transactions as efficient or more efficient than firm’s. Buyers have more choices and yet able to obtain equally good or better price and quantity discount with low frequency which traditionally is only possible with high frequency and internalization through “hierarchy” form of organizing (i.e. firm). E-commerce offers a myriad of new business models opening up opportunities for new businesses and new ways of delivering product and services. While e-commerce lowers costs in various stages of transacting (search, contract, regulation and maintenance), it also provides ample opportunities to re-examine factors of cost (such as bounded rationality, frequency, opportunism, uncertainty, asset specificity, and small number). E-commerce comes in various forms of new business models, namely transaction broker (e.g. TDS brokering house), information broker (e.g. Hardwarezone IT products), virtual storefront (e.g. Amazon), online auction marketplace (e.g. ebay) and many others. Often, an enterprise would have to ensure the suitability of the product or services for ecommerce, together with an appropriate e-commerce payment system such a digital wallet, credit card payment, stored value payments and electronic billing. Can electronic market or e-Commerce reduce transaction costs? A transaction involves costs and uses resources. A transaction goes through a cycle of search, contract, regulation, and maintenance (SCRM) – and often may be seen as the various costs incurred during the stages of a transaction. However, there are several key


factors in an imperfect market that impact and affect SCRM in varying ways. These factors are bounded rationality, opportunism, uncertainty, frequency, asset specificity, small numbers (as proposed by Williamson and A.Cordella). In a traditional “bricks & mortar” transaction, the actors in the stages of transacting are often shrouded with bounded rationality and opportunism. These cause the actors to be suspicious resulting in more searches for information that are time-consuming and expensive. This is particularly so in an imperfect market, as shown in the diagram below. Actors or trading partners are bestowed with asymmetric information.

Information not yet access by both actors A & B

Common information

Actor B’s private information (asymmetric information)

Rectangle: maximum information of a market

A B

In a B2B, would the overlapping area of the 2 circles be larger than says C2C or B2C? Why? B2B examples: IBM & Cisco; Oracles & IBM; Flextronics & Ericsson; Hotelclub & its associate hoteliers.

External processes are difficult to control and costly to re-engineer (as they are dictated by market forces that are outside the control of the organization). This is especially so when the trading partners or actors are located far apart (thus increasing the difficulties in communications). Factors of low frequency and small numbers contribute to increase costs. We see these costs are consequences of market uncertainty and complexity of the economic system. Uncertainty and complexity are related to environmental and unpredictable events. We see these in the unpredictable raising commodity prices (e.g. oil, rice, steel, raw materials), economics (e.g. Dubai economic fallout) and political instability (e.g. Myammar, Iran) A major reason for these factors of cost is caused by an unequal distribution of information between the actors involved in the transaction. A simple scenario below summarizes how some factors increase economic frictions and raise transaction costs. A supplier may successfully bid in a competitive environment (market) for a customer’s tender on the building of a special widget. However, to make the widget, the supplier will be required to build specialized machinery which cannot be easily redeployed to make other products (high asset specificity and high sunk cost). Now, once the contract is awarded to the supplier, the relationship between the customer and supplier changes from a competitive environment to an opportunistic situation of


“monopolistic” relationship. Here, one party can subsequently dictate the terms of pricing. In such in a situation, quite similar to small-numbers, it is futile to search for more customers, the demand and price are inelastic. The outcome of this scenario would be different had the supplier exploit e-commerce and information technology to obtain more information on the factors of cost and stages of transacting, understand market conditions, conduct due diligence to reduce market uncertainty, bounded rationality and opportunism. With the wide adoption of the Internet and other network technologies, many different kinds of e-Commerce business models have been developed and blossomed. Virtual storefronts, transaction brokers, information brokers, online auction houses, portals, content providers and virtual communities are some examples. They provide global reach and richness in information. These take various forms of B2B (business-to-business), B2C (business-to-consumers) and C2C (consumer-to-consumer) forms of online business. This explosive growth has contributed to availability of quality information, search engines, and empowering the both actors in seeking out information. This reduces information asymmetry between trading partners. The diagram, on the left, shows that quality information reduces uncertainty. This is equally true for bounded rationality and opportunism. This leads to reduced search cost, contract cost and regulation costs.

Info Quality

Uncertainty

Today, electronic market facilitates an abundance of easily accessible information reservoirs and information is available at the finger time leading to a more intensive use of electronic markets rather than electronic hierarchies (i.e. firms) We shall now look at some e-commerce examples to understand how transaction costs are reduced and how market electronic processes may be more efficient than firm’s. Amazon.com, an online B2C book and magazine wholesaler, takes orders online and automatically follow up with necessary processes to complete the delivery and handling logistics to the transportation partners. Amazon also caters to the sales of e-books and e-magazine that hardly requires any physical warehouse holding space. All orders are accompanied by online payment schemes. Most of the processes are done with minimal need for labor intervention. Buyers buy directly with Amazon. Amazon’s eCommerce website has dis-intermediated and has removed several layers of intermediaries of dealers and agents. Telefonica in Spain operates a virtual storefront - content provider to sell music download, video-on-demand and customer registrations without incurring cost in labor and office space. As they are all in digital forms, theoretically there is no need for any warehouse anymore and yes, thus lowering both transaction and agency costs too. AsiaRooms.com and Zuji specialize in providing worldwide B2C services in the booking of hotel rooms. They do not own any hotel but are brokers that provide a platform of network of hotels across the world. They help to ‘sell’ the hotel rooms for a commission. They are not virtual store-fronts as they do not hold any inventory. They deployed SCM


application and computer network systems so as to be confirmed within 24 hours the room availability (they have a backend B2B computer network connection with all the hotels and banking partners). This is a case of e-commerce exploitation by intermediary brokers who have the volume (high frequency) and economy of scale to “internalize” the business processes with business partners using the means of electronic market. Then, they share the price/ quantity discount with end consumers (of low frequency demand). They lowered the search, contract and regulation costs with the electronic online processing. In traditional “hierarchy” transactions, an end consumer with infrequent need for hotel-room bookings will incur high transaction costs of search, contract and regulation costs caused by factors of uncertainty, frequency and small numbers. Hardwarezone.com is a B2C information broker e-commerce business model. It provides information services on IT product specifications, shop locations, and comparative prices. It also provides product reviews. It is not an IT store and it does not sell any IT products. Such information broker reduces the searching and contract cost of the buyers. It also reduces information asymmetry. eBay, the giant C2C online auction eMarketplace website is an example which lower search and contract cost. Its business is based on networks of millions of global users communicating with one another directly. eBay is an example of network externalities which capitalize on the electronic market to build communities on its platform in minimizing bounded rationality, high asset specificity, and the disadvantages associated with low frequency. AliBaba, a B2B, operates on near similar lines but deals only with business partners not end-consumers. eCommerce is not always suitable for all kinds of products and services. Some products that involve taste and smell may not be suitable. For examples, selling cakes and Cantonese dishes over a virtual storefront would likely to be inappropriate and raise transaction costs. eCommerce provides a global stage not just for business minded people but also a world stage for cheats. It is borderless. Transacting parties are often faceless to one another. No specific country laws can underscore a transaction done over international boundaries. It is actually very difficult to identify fly-by-night operator. The company called SG-gadgets (ST 20/10/06) “pulled off” $10 million from his customers across the United States, Europe and Australia. EC actually augment asymmetry! EC removes the need of human interaction, and as such, promotes faceless transaction partners, as we have witnessed in the ebay transactions (the African story, where seller/buyer who are continent apart, promote a situation of information asymmetry and cheating over one another) – an unhealthy business environment and breeding ground for the undesirables and increased costs of transacting. eCommerce business models largely operate out of websites. The website must be constantly updated. The tedious effort of providing new information, new skin and look is necessary. It is a limitation in itself and there is no fast easy turnaround to this activity. Certainly, increasing the IT coordination cost.


We can conceptualize the implementations of various strategies (B2B, B2C, C2C) and business models of e-commerce as market process re-engineering, that is, a process aimed at decoupling product flows from market transactions through online trading. This reduces transaction costs and coordination costs as seen with the traditional bricks-and-mortar “hierarchy” (i.e. firm) operations. Obviously, there are still possibilities of opportunistic behavior and bounded rationality that can result in higher transaction costs with e-commerce. Nevertheless, we conclude that e-Commerce generally lower overall transaction costs, make market transactions more efficient than firm transactions and a true form of market-like form of organizing. Question A3 What constitute a good e-commerce strategy? Solution guide: An e-commerce strategy is concerned with how network technologies and the Internet can be exploited to improve the organization’s competitive edge, and overall value. It is a part of the overall information systems strategy of an organization. A good e-commerce strategy covers several key factors that include suitable choice of product and services, identification of target markets, identification of suitable e-business model platforms, identification of suitable e-commerce payment systems, marketing strategy, considerations of key success factors, e-site designs, security, and data privacy. The strategy is applicable B2B, B2C or C2C platform. What is e-commerce? E-commerce is the process of buying and selling (including marketing, negotiation, and distribution) of goods, services and information electronically over networking technologies, including the Internet. These technologies increase the availability and total amount of information. The upshot is market uncertainty and complexity are reduced (as market is interested only in product price and product specifications), reduction in transaction costs (SCRM), bounded rationality, and information asymmetry. E-commerce enables the exploit of low frequency which otherwise would be too expensive in market places. First, a good e-commerce strategy should be aligned with its overall mission statement, business strategy, business plan, and information system strategy. Examiner

expresses a need to discuss ecommerce in the light of B2B, B2C, C2C models too.

The choice of suitable products and services is crucial. Not all products and services are suitable for e-Commerce, especially when it involves the sense of taste or smell. AsiaRooms.com specializes in providing worldwide services in the booking of hotel rooms, Amazon.com in selling of books, magazine and digital content, while ebay specializes on online auction (also known as eMarketplace). Determining an appropriate e-business model platform for the products and services is important. Not just any e-business model can be successful. Dell uses the B2C virtual


storefront model, eBay uses the C2C virtual online auction model, SAP.com uses the B2B virtual storefront model. Expedia and Asiarooms uses the B2C transaction broker model and Google uses the B2C information portal model. The selection of a B2B, B2C or C2C strategy is the result of identifying the final target audience. In many of these models, the front-end maybe a B2C, like AsiaRooms.com and Zuji.com, but in reality they may have a backend B2B too to provide linkages with its business partners so as to complete the business transaction efficiently and in a transparent fashion. BUT the front-end is the real and actual business model. Once the business model is decided, the strategy must next identify the appropriate e-commerce payment system or systems to accompany the business model. A local online brokerage house called iOCBC used the Electronic Billing Presentment & Payment (like GIRO, in Singapore), digital cheque and the traditional “bricks & mortar” cheque as their various alternative payment systems, Finatiq.com (a online financial advisor firm) adopted the Stored Value Payment, while Asiarooms.com adopted the Credit Card system. A major concern of e-commerce and consumers is to make digital payment secured, safe, trustworthy and private (briefly, go through the nature of all the e-commerce payment systems and their merits). How to FAIL quickly ! We are aware that a front-end B2C model like Hotelclub and AsiaRooms cannot reallysuffice without a supporting backend B2B. BUT, do not say that such business is both aB2C and a B2B in one breath. You will puzzle your readers. Every business has a target audience, target products and will focus its business based onthese parameters. Its front-end main infrastructure setup is meant to meet their corebusiness objectives. Hence, Hotelclub, ctrip, and AsiaRooms are really a B2C businessnot a B2B. (so, a fast way to score badly in the exam is to declare their business as a B2CAND also a B2B!!). The B2B is the back-end to support to its main B2C business.

Marketing strategy is always important in any business strategy and this is no less the case when planning an e-commerce strategy. Ability to attract customers to use their services, competitive pricing, good personalized services, and effective product/services communications are important areas. A successful e-commerce strategy is able to attract customers and retain them to revisit and buy the firm’s products or services again and again. In order to be able to sell anything over electronic means, people must first be aware of the company's e-commerce existence. So, there is a need to "market" the e-site. One marketing mix for e-commerce is to register the site on suitable search engines like google, yahoo, and MSN. Another, is to secure advertisement pop-ups with established information portals. Other strategies of using cookies to collect marketing data, location-based “push” advertisement, and banners should also be carefully considered. e-Commerce is actually traditional commerce that has gone electronic. In traditional


commerce, part of the strategy would include how to market oneself i.e. to let customers know about company existence and its products via TV ads, newspaper, magazine, promotion, exhibition and holding competitions. With e-commerce, these marketing strategies can also be relevant too. Considerations of key success factors, e-site designs, and capabilities are the other major areas an e-commerce strategy must look into. Many e-Commerce users have only general IT knowledge, so the website designers must ensure a design of high ease of use, friendly yet personal, attractive, organized, informative, availability, and a reasonable upload speed.

(expand on these areas, see ISORG notes)

A good e-commerce strategy must exploit the benefits of e-commerce and e-business. It must avoid the weaknesses and limitations that come with the technologies.

Question A4

a. What is e-commerce? Describe the sort of IT infrastructure that you would expect to be used to support large scale b2b e-commerce.

b. Suggest four key factors that might determine the success of a company's project to implement a b2b service. [2004/Q3]

Solution guide: a) What is e-commerce? E-commerce is the process of buying and selling (including marketing, negotiation, and distribution) of goods, services and information electronically over networking technologies, including the Internet. These technologies increase the availability and total amount of information. The upshot is reduction in market uncertainty and complexity, reduction in transaction costs (SCRM), bounded rationality, opportunism, and information asymmetry. E-commerce enables the exploit of low frequency which otherwise would be too expensive in market places e-Commerce (or EC) may be structured as a B2B, B2C or C2C setup. A discussion of e-commerce would include topics like suitability of product & services to e-market, e-business models, e-commerce payments, target market, and design considerations. e-Commerce reduces information asymmetry, remove intermediary agents (dis-intermediation), remove time and distance barriers, reduce agency and transaction costs. Most e-Commerce sites provide some form of personalization, so that appropriate information about the customer is kept. e-Commerce has great potentials in reducing transaction costs such as in search cost, negotiation of contract terms, selection of partners, writing of contract, monitoring and enforcing the contract terms. e-Commerce facilitates market processes, make market processes easier than firm’s, and are open thorough the year round, shrinks distance and time, promote disintermediation, reduce “time to market” of products, services and information, facilitates extended channels and marketplace.


In the traditional “bricks & mortar” operations, the handling of market transactions are often complex, time-consuming and expensive. Processes are difficult to monitor, control and re-engineer, as they are often dictated by market forces that outside the control of the organization. Sometimes, firms internalized such market processes to take better control of them. However, with the introduction of e-commerce and communication networks, the market processes are suddenly becoming more manageable and streamlined. What was earlier thought easier as internalized firm’s processes do not seem so anymore. E-Commerce facilitates electronic automation of many of the market processes and removable of intermediaries. New business model, and new e-commerce payment system are examples. This has resulted in reduction of transaction costs and agency cost besides effective logistics, reducing delivery time of goods, services and information. e-Commerce applications include new e-business models, e-commerce payment systems, search engine, shopping cart, email, and web-services. A shopping cart provides friendliness, ease of use of web-site, product costing and it represents the sales order. An e-commerce payment system - may it be digital payment (i.e credit card), digital wallet, stored payment, peer-to-peer, digital cheque system – facilitates customers to pay online. Powerful search engines - such as those seen with e-Bay, Amazon.com and Hardwarezone.com - facilitates the search for product and pricing information – reducing information asymmetry in the process. Most e-commerce websites facilitate further product enquiries and open correspondence avenues with consumers with email and web-services applications - providing “pull” and “push” information services. What is a B2B? And what constitute a large-scale B2B service? B2B is conduct of e-business between business entities. GeBIZ - a Singapore government procurement extranet site that services all government bodies and ministries - is one example. Others include SAP.Com -a B2B enterprise software virtual storefront, GoIndustry.com – a B2B auction site. Others required backend B2B infrastructure to support their front-end B2C services are Hotel club, AsiaRoom.Com and Zuji.com. With large-scale b2b, many suppliers and businesses linkages with high data traffic are expected. Communication and data traffic are expected to be regular and voluminous each day. Processing would have to be reasonable speedy with high degree of availability and accessibility. Ctrip, Hotelclub or Asiarooms.com has a B2B with its banking partners to feedback on the credibility of Asiarooms.com’s customers. HotelClub, Ctrip, or Asiarooms.com also has another B2B linkage to their hotel partners to confirm on room availability and accounting records maintenance. The payment credit terms between B2B partners are very different from c2c or b2c. B2B accounting between partners can be very complicating especially when the partners have regional and international exposures with varying accounting and legal implications across different states and countries. Think about Asiarooms and its international business partners, Baxter and their dispersed hospital business partners throughout America, and outsourcing company like Flextronics with their worldwide outsourced international business customers. They are expected to keep large amount of partner transactions, maintain working data and proper accounting information. B2B involves partner’s corporate sites. The data and application processes of each other corporate customers are interlinked. This means they can “look” and “write” into each


other databases. A high degree of trust and contractual partnership would have to be forged and maintained. What would be the IT infrastructure for such large-scale B2B? Such B2B would require large databases, efficient DBMS, and high-speed network infrastructure to support the heavy data traffic, information upload demands, request for quotations, confirmations, credit management, and the networked application processing between partners. It would well be an extranet, or private networks where fast and secure business-to-business linkages are critical. eCommerce can benefit with the Internet technology, if use it as the backbone platform. As the connection line has to support heavy 24/7 data traffic (24hours/7days), T1 or T2 broadband communication lines with capacity above 10 mbps are necessary. Routers, firewall, power backup like an uninterrupted power supply (UPS) device would be required. Besides the usual applications that e-commerce support, large b2b e-commerce normally has enterprise applications such as ERP, and SCM to support too. A powerful computer with fault tolerant and powerful processing capability, such as tandem or high-end IBM computers, would be appropriate. Large-scale infrastructure opens up other issues of security, privacy, training, and change management. Hackers, IT criminals, opportunists, unhappy employees, workers resistant to changes, increased effort to monitor changes would be part of the consideration when designing the e-Commerce infrastructure. In large-scale b2b e-commerce, a company must ensure the plans fit into the overall business strategy. It often includes enterprise-wide, industry-wide requirements not just at country-level but global context. Business drivers, global scale of economies, global strategy, transborder political aspects on data collection and privacy, global communication standards, multicultural context, enforcement of government regulatory, global financial infrastructure, scalability. Selected IT solutions must fit into the company overall information systems strategy, facilitate change management on global basis and compatible integration of infrastructure.

Remember this: e-Commerce has great potentials in reducing transaction costs in the areas of search cost (i.e.collecting, collating, comparing information), contract cost (i.e. evaluation and selection ofpartners, writing contract) and regulation cost (i.e. enforcing and follow through on the contractterms). e-Commerce facilitates market processes to open thorough the year round, shrink distanceand time, promote disintermediation, reduce “time to market” of products and services, extendedchannels and marketplace. In a “bricks & mortar” situation, handling market transactions is often time-consuming, complex,and expensive. Business processes are difficult to control and re-engineer, as they are dictated bymarket forces that outside the control of the firm. However, with the introduction of e-commerce andother advancement in IT, the market processes are suddenly becoming manageable, re-engineered,and streamlined. E-Commerce facilitates electronic automation of many of the market processes,removable of intermediaries, and the necessary of high frequency. New ways of doing business, newbusiness models, and new e-commerce payment system facilities the market processes. This hasresulted in the reduction of stages of transaction cost, coordination cost, processing cost andagency cost (i.e. firm’s supervision).


b) There are many factors, either internal or external, such as correct choice of ICT infrastructure, choice of product and services to market, efficient enterprise information systems such as SCM/ERP/CRM applications, technical know-how, friendliness of website design, correct choice of e-commerce business model and payment system, communication networks, regular maintenance, management support, support services, reachability & richness, security, privacy, reliability, customer acceptability and managing change/ transition. [You may work on any four in greater detail] Question A5 (a) What is a business process reengineering strategy (BPR)? (b) What are the main challenges of this strategy? Why has BPR a reputation

for often failing to deliver real benefits? c) What is the difference between business process re-engineering and

market process re-engineering? [2005] Solution guide: a) BPR is an analytical tool NOT an information system design model to design

information system. BPR involves detailed examination of existing “internal” business processes related to a particular business activity, with the objective to streamline, eradicate, improve or change the business processes. Such business processes related to processes within a firm, an enterprise.


The business processes are often under the control of the firm management. BPR is rather technical in nature and is seen from an economic point of view. Often, BPR does not involved only one department but examination of processes involving several departments and across the enterprise. Subsequent to the BPR exercise, organizational changes in both roles and responsibilities may take effect and affect the whole enterprise. Often the Data Model takes over from here to design the new information system. Besides streamlining of processes, other key objectives of BPR are to reduce coordination cost, processing cost, and agency cost (although technically, internal processes increases agency cost – cost of supervision and managerial staff), gain competitive advantages through innovative production and work processes. Example: Ford invoice-less system and ERP, which are the results of using the BPR and Data model approach

b) BPR radically may impact changes across-the-board in the whole enterprise. A change in accounting processes for payables, has great impact on various downstream processes such as QC, Receiving department, Inventory stores, logistic department, purchasing and invoicing departments. BPR involves job changes, new responsibilities, relocation, enlargement, and training. Collaboration, cooperation, and coordination across various departments are often not forth coming readily. Organizational resistance is understandable. Particularly with large scale BPR involving subsidiaries across different countries affecting


different country laws, accounting rules, personnel expectation, and cultural aspects – trigger point on socio-cultural and cognitive aspects. Coordinated implementation and training are necessary. While streamlining and transaction costs are key objectives, the end results could confusion and disorientation on the ground and expectation of higher managers.

c) Business process = internal. Market process = outside external business processes

BPR is a strategy which look at reengineering of internal business processes across whole enterprise. BPR streamline, eradicate, reorganize business processes so that they are easier to control, modify and implement. Market processes involved external parties like suppliers, business associates and customers. Traditionally and technically, external market processes are much harder to modify, control, coordinate and implement. They cooperation and collaboration from external parties are not easy to administer and control. But with the rapid technological advancements in the last two decades, computer and communication networks, the Internet, e-commerce, collaborative commerce, sophisticated enterprise applications (such as SCM, ERP, groupware) are well accepted effective technologies. They promote the reengineering and streamlining of market processes through online market processes – making market processes easier to control and manage than firm’s. Firms need mostly have to commit to strong contracts and regulating the external “market” parties with effective enterprise application/ computer networks/ ecommerce and not be concerned with the actual production, inventory, logistics processes. [Give examples of the GM “internalization” of fisher so as to control and exploit economy-of-scale benefits, and the “de-internalization” of Nokia & Ericsson to Flextronics so as to concentrate on core competencies and lower transaction costs using SCM and computer network technologies]


B. ORGANISATION ANALYSIS & INFORMATION SYSTEM DESIGNS THEORY

Question-1 What do you understand by “information systems are viewed as socio-technical systems”? Would the Data model approach suffice? Solution guide: The study of information systems is normally premised on the assumption that information systems are socio-technical systems that encompass both technical and social variables. In general, all information systems encompass some degree of various aspects of sociology, psychology, economics, management science, operational research, and computer science. These socio-technical aspects can be broadly categorized into three different paradigms, namely technical, cognitive, and behavioral. The technical paradigm emphasizes mathematically based models to study information systems, as well as the physical technology and formal capabilities of these systems. It draws on management science, operation research and computer science. The cognitive paradigm draws on socio-psychological theories to study how decision-makers perceive, use information and make decisions. Finally, the behavioral paradigm draws on the economics and sociology theories to study the economics and behavioral issues that arise in the transacting processes - how, when and why trading partners engage in the exchanges, the stages of cost and the factors affecting these cost. As seen in the diagram below, the three different paradigms are addressed respectively by three different analytical design models called the data model, decision-making model and transaction-cost model. It is contended that in reality, there is no one single design model that is able to address all the socio-technical aspects of an enterprise. The firm’s socio-technical aspect is always larger than any single paradigm.

Ovneecombehper

isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from

Each circle represents the data, decision making and transaction- cost model respectively. No single model can cover all socio-technicalaspects.

erall socio-technical ds of an enterprise prise of technical,

avioral, cognitive spectives

[email protected] 28

In practical sense, a specific organisational problem has the tendency to “lean” closer towards one of the three paradigms. Be aware

that the useof too many acronyms may irritate the examiners. So, on the safe side, write in full or use acronyms minimally.

Certain organizational problem may be bias towards the technical aspects rather than behavioral or cognitive or vice versa. For example, the inventory control information system, SIM attendance clocking system, SIM course evaluation system, and even the enterprise application such as ERP system are considered to be bias towards the technical perspective rather than cognitive or behavioral perspectives. However, SCM, collaborative commerce systems, and most of the e-Commerce applications, these are bias towards the behavioral perspectives (because of the market processes and transaction cost). Here, the main concerns are reducing bounded rationality, opportunism and market uncertainty. Would the Data model approach suffice then? Although studies suggest that all information systems are viewed as socio-technical systems, in practice, organizational problems tend to “lean” toward one of the three possible paradigms. Let take the simple “UOL lunch story” and the “SIM Course evaluation system” to under why the data model approach would suffice in these cases. The UOL lunch story is about the capture of UOL external examiners’ lunch-meal orders (data), at the time of request through an information system (rather than writing on pieces of paper). The data is retrieved and then subsequently make available to all related information processing and operational activities.

Some students may venture to use the SIM attendance clocking system, Subprime mortgage story or “own” researchedstories

It is important that the same pieces of data are readily available to all the processes that produce information for the office, kitchen, restaurant and the receptionist. In this case, we clearly see that the timeliness and accuracy of how the data is produced, captured, exchanged and processed is of paramount importance. The SIM course evaluation system is about the capture of the course survey forms completed by each individual SIM students. The data on the survey forms is processed to provide information for SIM course coordinator, course managers and lecturers for their necessary follow up actions. Again, it is important that the same pieces of data are readily available to all the processes producing the various set of information for the different end-users. Again, it is of paramount importance, and perhaps the only one important requirement here, that the data is accurately and timely produced, captured, exchanged and processed. The organisational problem in both cases above are clearly technical in nature, requiring information solutions of mathematical accuracy and precision (i.e. application of schools of operational research, management science and computer science). We can see that both examples require little or no need to analyse the cognitive aspects of decision making, and behavioral aspects of stages of transaction cost and factors of cost. Doing so would indeed be superfluous and confusing, in these technical cases.


We can see that for both cases above, the design begins with a “blank sheet” – a tabula rasa approach. There is no need to establish where is the start or entry point to the design of the new information system. There is also little or no necessity to examine existing rules, procedures, norms or practices, and why certain things are presently done a certain way – the raison d’etre need not be established. This means there is no existing baggage to weigh down, delay, or complicate the design and development of the new information system. The systems analyst need only have to ask about “what” data, and not “why”. The data model has high transparency and the design is not affected by personal bias, prejudices and opportunism. With the data model approach, new rules and procedures may be set to ensure that the people and environment integrate efficiently with the new information system. In conclusion, we see that with the data model approach, the systems analyst can quickly design and develop the new information system much faster than the decision and transaction cost approaches. In fact, with the data model approach, the design and development of the new information system is possible with minimal or even without the help from the people (i.e. end-users) in the organization. Question B2 Discuss the relationships between information systems design and organization analysis. Critically analyze whether it is possible to design an information system around the needs of an organization. Illustrate your answer with practical examples. [2007 ZB Exam] Other similar Questions: Q. Is the data model an organizational endeavour? And in what respect is the data model

a key managerial decision? (read tutorial discussion on same) Q. What is the relationship between organizational analysis and information systems

design? Critically analyze whether it is possible to design an information system around the needs of an organization. Illustrate your answer with practical examples [2007 ZA Exam]

Q. How are the needs of an organisation identified to inform the IS design? Critically discuss the relationships between organisation analysis and information systems design. How and why do problems occur when information systems are implemented in the organisation? [2008/May ZA exam]

Q. Information systems are designed to optimise organisation performances. Discuss, supporting your argument with relevant examples, how and if this can be done. [2009/March, Mock Exam]

Solution guide: (Note that the essay below is lengthy as it attempts to cover all the above four questions in one go. Kindly read UOL study guide’s chapter-1/page1 and Study Material on article by Dr. Antonio Cordella) Every organization has socio-technical information needs. In the most desirable situation, a information systems design of a new information system should meet all the socio-technical needs. In theory, an organization analysis should discover most, if not all, of the organizational needs for a given specific problem. In reality though, the actual information


systems design, must adopt a specific design model that best fits the new information system’s key requirements. The relationships between information systems design and organization analysis are intertwined. An organization analysis enables a review of the business processes and information needs of the organization. An organization is a social arrangement comprises of human beings who will set and purse the enterprise goals. Information system design is the art and science of preparing information so that it can be used by human beings with efficiency and effectiveness in relation to a specific problem. Identify what role information technology can play in respect to the human information processing and how to design information system that support the current or desired ways to process information to resolve organisational problems. The activities of human beings are themselves affected by various socio-technical elements of sociology, psychology, economics, operations research, management sciences and computer sciences. Organization analysis (sometimes referred to as “organizational endeavour”) is the detailed examination of its organizational activities, both socio-technical complexities and business processes. This includes an understanding of why and how people in organizations use, produce and communicate information. Take note the same socio-technical elements as referred in information system design. In a market-oriented environment, an organization’s performance depend on how well it manages its operations (e.g. sales order processing, purchase order processing, inventory control, sales forecasting, budgeting) and interactions with its environments, e.g. customers, suppliers, government, politics, and competitors. Market uncertainty and complexities complicate organizational processes and activities. Still, an organization must manage and solve complex problems and obstacles along the way so as to achieve their enterprise goals. One of the key support pillars in any organization is “information”. Hence, information systems play vital roles in integrating and managing business processes, reducing bounded rationality, opportunism, process complexities and market uncertainty. The dynamic progress in information and communication technologies such as networks, databases, e-commerce, and enterprise information systems impose compelling “pull” and “push” factors on organization to digitize using market-like rather than hierarchy-like (i.e. firm) of transacting. The role of information systems in shaping human and organisational activity has become more and more prominent. Hence, how the design of the new information system should be conceived and proved its socio-technical values in respects to the organization’s operations and interactions with its markets. However, while information systems are socio-technical systems, and should be designed with an appropriate design model that covers all the needs of an organisation, there is no such model. While we respect that the needs of an organization, managed by human beings, are socio-technical in nature, how are the needs of an organisation identified to inform the IS design then?


The design of a new information system is often based on how a firm generally views its problems and its organizational needs in relation to the new information system. The problem can be broadly perceived as an organization viewing it as either as a bundle of data, decisions or transactions. Hence, there are three main analytical design models to organization analysis pertaining to the design of new information systems. The three design models are Data, Decision-making and Transaction-cost models. This three design models are like analytical “lenses”. They are used to perform the organization analysis relating to the area of organizational concerns and determine the specifications that form the designs of the new information system. The paradigm will influences the ways in which information processing systems are conceived, designed and used. Quickly, the data model is rather technical bias and approach from the study of management sciences, operational research and computer science. The decision-making model approach is more intense with the cognitive aspects of the study of psychology, and sociology; while the transaction-cost model covers largely the behavioral field of sociology and economics studies. Although, it is well known that information systems are socio-technical system, organization must choose the design model, an appropriate “lense”, that best “fit” the organization analysis for that specific new information system. So, is it possible to design an information system around all the needs of an organization? Yes, in theory. Can we use all the three design models to design the new information system? No, it is not possible. Dr. Antonio Cordella has stressed that it is not possible to use all three design-models as the Systems analyst and his team will lose focus. It is an impossible task to accomplish and will end up with a poorly designed product. The development will be over elaborative covering all aspects of socio-technical elements and will take extended duration to develop. As the System Analysts, Designers and other members in the development teams are human beings, they themselves will suffer from bounded rationality. The results of the final information system design will be disastrous. Be aware

that the useof too many acronyms may irritate the examiners. So, on the safe side, write in full or use acronyms minimally.

So, an organization and the Systems Analyst would have to choose the most appropriate design model that best suit the problem. Of course, the design and characteristics of the new information system will be impacted by the design model chosen, which will be the “analytical lense” deployed. The diagram below shows that no one specific design model covers all aspects and informational needs of an organization to allow a complete organization analysis. The organization is represented by the broken-lines, while each circle represents one specific design model. Each design model analyses and critically covers specific aspects of technical, behavioral or cognitive of an organization. The final shape of the information system will be influenced by the chosen design model! Hence, it is a key managerial decision to carefully deliberate on the most appropriate design model to adopt for that organizational problem.


Overall socio-technical needs of an enterprise comprise of technical, behavioral, cognitive perspectives

Each circle represents the DM, DMM and TCM model. No single model can cover all socio-technical aspects.

With the Data model, the information system is principally viewed as bundle of data, data flows, and network of processes. Information systems designed with the data model approach are largely concerned with how the data is captured, produced, exchanged and processed. The data model is indifferent to opportunism, bounded rationality and other factors of cost. The data model approach aims to improve the data flow (while not so much the process flow) through automation and ‘centralized’ database processing (optimization of the process flow is the objective of another technique called Business process engineering. (BPR)). The Systems Analyst performs detailed analysis of an organization’s documents and files to understand the content (attributes) and how they flow and are processed through the organization. The analyst does not question why actions were carried out and who should do it. Rather they are interested in what these documents and files are and whether they are efficiently flowing from one actor (process) to the next actor (process) in an automated environment. Automation is seen as a new way to produce, store and communicate data in a better way - faster, more reliable and secure. Implementation is about building the new system and introducing it into the organization, thus substituting the old way of handling data with a new, computer-based information system. With data model, the data and its data flows are redesigned from scratch irrespective of the existing organizational structures, norms, and practices. Existing formalized routines may be overwritten with new ones. Roles and responsibilities may be reorganized and restructured to suit the new information system, without the need to take into consideration current social, cultural or other staff implications. For example, the Data Model would be the design choice if the new information system is required to accurately capture, store, and process the organisational data, its data flows, and how the data is exchanged, consumed and processed. This would be the case of the Keppel Sailing Club, where the organization has to capture its member details, member’s boat details, processing of berthing charges and monthly billing.


The highly technical, tabula rasa, raison d’etre approach of the data model, with focused interest in the way the data are produced, exchanged and processed, without questioning the implications and rationales, can drastically change the way the firm operates tomorrow. The implicit assumption is that the old organization should adopt and adapt to the superior new data model design. Any resistance would be considered as an irrational behavior to be curbed and eliminated. This can constitute to serious and costly affair during the implementation stage - the example of the judge story where the new computerized judicial system breaks down because the judges refused and failed to communicate with each other. Nevertheless, indeed, a truly organizational endeavor and a crucial key managerial decision whether to use the data model to analyze the organization needs, rather than the other two models discussed below. Let’s take a look at them. But do remember this, that irrespective of the chosen design model, each model has its limitations and strength. Again, there is no perfect design model. All models have certain disadvantages. (Note: Our study is not to try and create a revolutionary new design model!) The decision-making model views the organization as a network of decisions and decision-making activities. It is a specific way of analyzing the organization whereby the systems analyst attempts to ascertain the way the new information systems can support individual and collective decision-making processes on the basis of their structural features. It is in relation to decision-making that information systems should be conceived and should prove their value to support and assist effective decision-making. The model assumes decision makers will attempt to make rational decisions and will not act opportunistically. But, in reality, individuals might act opportunistically to distort, misrepresent or manipulate information to their own advantage (Shelling). For example, mid-level manager’s responsibilities are “control and monitoring” to ensure production and sales forecasts of the organisation are met. The Decision making model is likely to be the “analytical lense” deployed. They would need information systems that could provide information to help them to make decisions on how to solve problems like “How do I balance actual sales versus forecast? What action/s do I take to balance the budget imbalance? Quality information is a key input to decision-making, and can contribute significantly to decision-making processes moving towards rational decisions. Information technology is seen as a key design tool to provide the needed quality information. Where the problem is repetitive in nature and highly structured, the chance of producing quality information to achieve rational decisions increased. Such is the case where the processes in decision-making are easily identifiable and well structured, and automation through information system can be easily programmed along the lines of the rational decision model. Where problems are unstructured, making rational decisions become increasingly difficult. Often bounded rationality and improvisations begin to take roots here. The required information is highly unstructured and may come from various known, trusted, and “word


of mouth” sources. Uncertainty reigns. This is the case where decision makers, at the mid and higher hierarchy levels, may lapse in making decision involving the muddling-through, satisficing and psychological decision-making models. We must note that nobody like to use such models in their decision-making processes. Generally, the Decision making model broadly classified problems into three levels of structured, semi-structured and unstructured. Decision making model attempts to design information along this line of reasoning. Hence, Information systems are characterized to meet and support decision-making at operational, control and strategic level decision makers. The practical examples of information system supporting these three broad levels are transaction processing systems, management information systems and executive support systems. The third design model, on the other hand, views the organization as a contractual arrangement to govern sets of transactions and a network of exchanges & contracts. The design views contracts as binding instrument between individuals and recognize that individuals (and organizations) might distort the use of information to achieve their individual goals. Such is often the situation where market (i.e. external) processes are involved. With Transaction cost model (TCM), information technology and information system are seen as a “mediating technology” affecting the pattern of exchanges between contracting parties, where trust, market uncertainty and other market factors are major concerns.

Be aware that the use of too many acronyms may irritate the examiners. So, on the safe side, write in full or use acronyms minimally.

Transaction cost model entails an examination of the stages (search, contract, regulation and maintenance) of transaction costs and how they are impacted by various sources (factors) of transaction costs in an imperfect market. Such sources include bounded rationality, small numbers, uncertainty, complexity, opportunism, asset specificity and frequency. Transaction cost model also analyzes how the firm can use ICT to foster a more intensive use of markets and market-like organizational forms. This can actually result in managing market processes (MPR) more efficiently than internal business processes (BPR). Transaction cost model would likely be the most appropriate design model when external trading partners are involved. Examples would include electronic commerce applications (like Expedia, Asiaroom, Ebay) and Supply Chain management systems (used by Flextronics, Dell, Nokia, Baxter healthcare), which examine the cost of the four stages of transaction and other factors of cost (such as bounded rationality, opportunism, uncertainty, small numbers, asset specificity). Here, the organization analyses market processes and how they could made as efficient or more efficient than firm’s. We now see that all the three design models perform organizational endeavors and analysis from three specific, different angles. The decision-making and transaction-cost are more complicated and involved cognitive and behavioral analysis respectively. They are useful to analyze the information needs from these other angles. Irrespective of the design model chosen, an organization must perceive that problems will occur when information systems are implemented in the organization. The resistance to


change from the people (most internal staff) is real. It always occurred. Change Management is a must in all cases. Change management can be achieved with several approaches. Critical Success Factors analysis, Enterprise analysis, Business process engineering and Total quality management. All these methods attempt to involve the staff members in an organization early up, well even before the development is started by the team of developers. They are invited to participate in recommending process changes. Staff, being the change agents would be the best way forward. We can conclude that it is not possible to design an information system around all the socio-technical needs of an organization. As one has to choose (as in all real world situations), the limitations of the chosen design model will have a certain limiting effect. However, a carefully selected design model would suffice and often meet the key issues and needs of the organization for the area of analysis. The systems analyst will be able to focus on the correct issues, specific organizational needs, and produce a robust, well-analyzed new information system - thus, a rational organizational endeavor. Question-B3 Why are information systems crucial for large organizations with many operational branches around the world today? Discuss. Similar question. Q. Why is the decision to invest in information systems not always successful? What are the conditions that make it successful? Justify your answer using relevant theories [2009 May, ZoneB]. Solution for this Q may follow along the line given below or discuss along the line of socio-technical systems and show reasons why NOT choosing the appropriate design models may led to unsuccessful outcome. The conditions that make it successful may include internal and external factors of acceptance. Solution guide.

A good introduction provides a big picture of what to expect in the essay-body, somewhat like a concise content-page of a book. Use the keywords found in the Q. Avoid words like “e.g., etc, for example, i.e. such as, like . . .” and diagrams, examples and details be elaborated in the essay-body.

With globalization and advancement in technology, information system is increasing becoming a crucial resource in the operations of many organizations. This is particularly more so for large organizations with many operational branches around the world and facing problems of global dimensions. Over the last decades, the technological progresses made in systems software, computers, communication networks, database systems, and particularly information systems have facilitated many organizations to effectively globalize their businesses and operations. Business processes can now be seamlessly integrated in friendly, efficient and cost-effective ways over large distributed environment. This effect of globalization has “forced” many large organizations (especially those with many operational branches around the world) to rethink their overall strategy and becoming digital firms.


Physical infrastructures, “bricks and mortar” and face-to-face meetings (“flow of places”) were once necessary pre-requisites in conducting any meaningful business dealings and developments. Today, integrated global sales transactions (case of American Airlines), design engineering (case of Toyota), integrated manufacturing/ production - SCM (case of Flextronics), stockless inventory control (case of Baxter) conducted most of the key business processes through digital means (“flow of spaces”). Global competitions are forcing organizations to focus on speed to market, better customer service, availability, and quality execution. Today, relying their key global business processes mainly on “bricks and mortar” operations would be disastrous. Obviously, well-designed information systems is the driving force on how the various underlying technologies could be jelled together to form an effective, cost-efficiency whole. The need to create competitive yet effective information system has now become even more critical for large organizations with many branches around the world, i.e. large global organizations. Why? Information system serving large global organizations is crucial in eliminating the problems caused by distance, language, different time zones, high agency and operation cost for global business processes. With efficient information system to assist digital global communications (e.g. email, blackberry, VoIP) and digital face-to-face meetings (e.g. MSN, Skype, video conferencing, group decision support system), a large part of the difficulties associated with “flow of places” communications is eradicated. The information system used by such large global organizations has a higher and critical dependency on modern technologies, i.e. computer networks (the Internet, extranet, intranet), database mirroring technology, information processing (distributed, centralized, decentralized), computer servers, and communication technology. Besides competitive reasons, their information system must be carefully designed to exploit and capitalize on these technologies so as to ensure proper coordination and processing of their business processes across all their branches around the world. Enterprise information system is seen as a key infrastructure to seamlessly integrate business processes within or beyond the boundary of such large global organizations. It is crucial that large global organizations exploit the functionalities of information system such as Enterprise Resource Planning system (ERP), Supplier Chain Management system (SCM), Customer Relationship Management system (CRM), Knowledge Management System (KMS) and collaborative commerce system (CCS) in their strategies. We shall see why some of these applications are pivotal in the operations of large global organizations through the “lenses” of American Airlines, Toyota, AOL, and Baxter Healthcare. American Airlines was the first international airline to exploit enterprise information system to coordinate online air-ticketing sales processing, accounting and resources allocation across all their branches around the world. The enterprise information system,


which eventually evolved into an ERP system, immediately resolved the problems of seat over-booking or under-booking that has plagued the airline industry for many years. The successful implementation resulted in an exodus of passengers migrating to American Airlines. This caused many of their competitor airlines to lose their market shares. Their competitors failed to anticipate the strategic competitive advantages of information system which American Airlines foresaw. They exploited the outreach of the information system, new computer technology and the benefits of globalization. Many of their competitors, not being able to compete, eventually fall into bankruptcies. Toyota’s supply chain management (SCM) and collaborative commerce system (CCS) integrated its 56 plants in 25 countries, 1000-odd suppliers, and distributors. It is crucial for Toyota that design engineers, suppliers and distributors, from various locations around the world, collaborate together during the design, production, manufacturing and distribution processes. Toyota is able achieve their design-to-production-to-market strategy in record time (less than 10 months). The information system plays the crucial role in achieving proactive product designs, effective process integration, resources maximization and supply chain management. It is crucial that large global organizations exploit current technological advancements, and Toyota continues to do so and this helps them to achieve the world number-1 motor vehicle manufacturer. America OnLine (AOL), the world’s largest internet service provider had to turn to CRM software to help it manages its increasingly complex sales and marketing processes which involved multiple external partners and the information across multiple groups and contacts. Through successful application of CRM software, AOL is able to direct its customers and employees (located throughout various parts of the world) through the fastest and most efficient channels when seeking information or solutions, thereby increasing customer satisfaction and employee efficiency. Retention of valued customers is especially crucial for large global organizations as these customers have great impact on the bottom line and marketing effectiveness. Baxter Healthcare’s stockless inventory system (part of the overall SCM) for its hospital clients, located all over USA and Canada, has proved to be superior over JIT supply system and traditional inventory practices. It enables customers to eliminate inventory holding cost entirely and the risk of hospitals carrying expired or damage inventory during storage. The information system has thus reduces labor, inventory and agency cost significantly, improves turnaround time, giving Baxter a competitive advantage over competitors.

A good conclusion provides a concise summary of whats been discussed and not try to introduce new topic/s. However, a conclusion can urge the readers to think about the “other side of the coin”, even stimulating a controversy.

American Airlines, Toyota, AOL, and Baxter are just a few examples of large organizations with global operations that must made effective uses of information system to stay competitive and effective. It is crucial for large global organizations to develop innovative information system to help them stayed operationally effective and stay ahead of the competitive curve. In conclusion, information system (either developed in-house or software packages) is a key component in the business operations, whether small and large organizations. However, we see that the larger the enterprise, the more globalize they would become, the


more crucial and more dependant they the have become on information system and technology. The digital age and the drive towards harnessing of knowledge have expanded the roles of information system. Indeed, without effective information system, large organisations with many operational branches around the world will have great difficulties managing their global business processes efficiently and effectively. Having said, the implications of failed information system and computers can be unimaginably damaging for these large organizations too.


C. DATA MODEL Question-C1 a. Explain the principal features of a data model and show how they can represent or reflect the environment in which an information system will operate. b. Explain the limitations or constraints of this approach [2003/Q5]. Other similar Q: Q. The data model is often used to inform information systems design. Discuss, with examples, the main limitations of this model both from the design and the implementation viewpoints.[2009 May Zone-A Exam] Solution guide a. The principal features of a data model are technically bias in nature and largely concerned with what data is captured, produced, exchanged and processed. The data model views the organizational problem as a bundle of data and network of processes. Hence, the data model approach entails comprehensive data analysis, data capturing, data storing, and representation of the processes that consume the data. Data flow-path is optimized.

“Explain” is as good as a “what is” Q. You can also include discussion on advantages and weaknesses of data model, if not asked for in the 2nd half of the Q.

The data model approach is data centric and technically driven. It is aligned to the mathematical model’s principles based on the studies of operation research, management science, and computer sciences. It adopts a tabula rasa mentality, i.e. starts from a “blank sheet” with disregard to any need for any formal starting point to the data analysis. The System Analyst is free to choose any entry point and in this respect, there is no need to consult the end-users about this too. The data model disregards the sedimentation of practices, minimal or zero concerns of any behavioral socio-cultural elements of the organization and the human aspects or organizational arrangements that have emerged over time. This raison d’etre approach actually ignores any rationales behind existing practices, norms and procedures. With the data model approach to designing new information system, where the systems analyst has a completely “free hand” in carrying out his responsibility (including writing new rules and guidelines), it would appear that uncooperative and reluctant people in the organization would not pose a real threat to the successful design or development of the new information system. In fact, the Systems analyst has the mandate to look into any files of document in the organization to design and develop the new information system and can do so without any assistance from the people working there. The data model’s concentration of the technical aspects and disregards of the implications and rationales can drastically change the way the firm operates tomorrow. The implicit assumption is that the old organization should adopt and adapt to the superior new data model design. Any resistance would be considered as an irrational behavior to be curbed and eliminated.


This weakness can, sometimes, become costly during the implementation stage (of the new information system). This is reflected in the examples of the subprime mortgage incident (where the underlying information system merely discharged the housing loan amount and computed the monthly loan repayments irregardless whether the principal borrower was borrowing beyond his ability to repay the principal sum) and the Singapore HDB upgrading program (where the underlying information system merely compute the sum each household will equally share to repay for the upgrading programme of the common facilities and buildings, irregardless whether the house owners have the financial means or not). The data model shows high transparency and the design is not affected by personal bias, prejudices of bounded rationality and opportunism. The absence of other factors such as market uncertainty and small numbers make the data model approach the right design choice. With the data model approach, new rules and procedures may be created during the implementation stage to ensure that the people and environment integrate efficiently with the new information system. To show how the data model can represent or reflect the environment in which an information system will operate, let us illustrate with the examples of the simple “UOL lunch story” and the “SIM Course evaluation system”. The UOL lunch story is about the capture of UOL external examiners’ lunch-meal orders (data), at the time of request through an information system (rather than writing on pieces of paper). The data is retrieved and then subsequently make available to all related information processing and operational activities.

Some students may venture to use the SIM attendance clocking system, or “own” researchedstories

It is important that the same pieces of data are readily available to all the processes that produce information for the office, kitchen, restaurant and the receptionist. In this case, we clearly see that the timeliness and accuracy of how the data is produced, captured, exchanged and processed is of paramount importance. The SIM course evaluation system is about the capture of the course survey forms completed by each individual SIM students. The data on the survey forms is processed to provide information for SIM course coordinator, course managers and lecturers for their necessary follow up actions. Again, it is important that the same pieces of data are readily available to all the processes producing the various set of information for the different end-users. Again, it is of paramount importance, and perhaps the only one important requirement here, that the data is accurately and timely produced, captured, exchanged and processed. The organisational problems in both cases above are clearly technical in nature, requiring information solutions of mathematical accuracy and precision (i.e. application of schools of operational research, management science and computer science).


We can see that both examples require little or no need to analyse the cognitive aspects of decision making, and behavioral aspects of stages of transaction cost and factors of cost. Doing so would indeed be superfluous and confusing, for these technical cases. Hence, we can conclude that the data model approach of tabula rasa, rasion d’etre, detailed analysis in the data capture, data flow, what/how data is processed, exchanged and produced sufficiently reflect the environment of the two case examples in which the information system will operate. b. Explain the advantages, limitations or constraints of this approach The advantages or strength of data model lie in its technical and data-centric approach. The data model is an abstraction of the real world of the system. It provides a representative “picture” and clear representation of the environment in which the new information system will operate to guide the development of the new information system. We see this in examples such as the SIM course evaluation and SIM student attendance clocking system which clearly represent the affairs of the environment that they operate in. The systems analyst need just only concentrate on which data (and their data flow paths) are produced, captured, exchanged and processed without the need to question the reasons why this is happening. The data model promotes full transparency. Being technical and data-centric in approach, the design model neither dependent on human perceptions or interactions (of the current system), nor is concerned with the norms and cultures inherent in the workplace. Hence, a tabula rasa approach is possible to designing the new information system. There is minimal chance of influence by opportunistic behavior and bounded rationality. The Systems analyst can redesign data flows and files from scratch irrespective of existing organizational structures, procedures, and practices. No need to inquire further about their raison d’etre. In other words, data model does not bother with existing “baggage” of the current system (i.e. existing practices, rules or norms. This is a clear winner as the new information system can be quickly designed and develop in a short space of time involving minimal resources.

The data model is effective. It is technically accurate, reliable, economical and durable so that the system does not need constant reconstruction as compare to building information system based cognitive and behavioural perspectives whose factors are dynamic in nature. As new rules and procedures with new data and flow paths can be introduced without concern of current procedures or ruling, the development and implementation of the new information system encounter minimal “construction” frictions. The data model complements the business process re-engineering (BPR) technique by providing the design model for the design of the new information system to represent the new ways of organizing, exchanging and producing new information. isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 42

The technical representations of the analytical model provides benefits of minimal data redundancy, data flow efficiency, accessibility, security, data independence, program independence, scalability, shareability, adaptability and data transparency. As with any design model, the data model has its disadvantages or limitations. The data model underestimates the importance of the socio-behavioral elements that define the characteristics of the organization and of the people working there. The data model approach disregards the sedimentation of practices, ergonomics, human factors, and organizational arrangements that have emerged over time. Data model is not interested why certain agents are involved in the flow paths and there is no need to inquire further about their raison d’etre. The drastic changes, caused by the data model design approach, during the later implementation stage may create severe implementation problems. The new information system may faced resistance and non-acceptances by the people and refused to cooperation causing the new information system to fail (explain the Hdb upgrading story, subprime mortgage story or the judge story here, or your own story) The organization assumed the new information system designed by the data model is superior to the old organization. Any resistance forthcoming should be considered irrational and be curbed. The design approach captures the data, data flow paths, processes, how they are produced, exchanged and processed over a defined period of time – i.e. a “static view” approach. This may limit its abilities to experience and handle exceptional and irregular circumstances. Data model is based on a high level of abstraction since it does not “bother” with current practices and norms. This leaves rooms for many open questions and debate among the people. Insufficient depth of critical analysis raise questions that the solution may not be fully representative. In conclusion, the data model is a technical approach to design of information systems. Being technical, it is more structured, methodical, and straight-forward as compare to the other two design models of transaction-cost and decision making. Hence being so, it has its strength and limitations.


Question C2 What is a data model? Why and when would you recommend the Data model approach to design of information systems? Similar question: Q. Suppose that you are a consultant whose job is to design a new information system in

an organization where people behave in an un-cooperative fashion. Which approach to information systems would be more viable in this situation? Why? [2009]

Solution guide: (also read SM/pg-7 Article by Dr. Antonio Cordella) What is a data model? “What” question = characteristics (mainly). Depending of other part of question, you may discuss strength, advantages and disadvantages too The data model approach is an information-system design-model that provides a specific technical framework to guide the analysis and design of a new information system solution for a specific organizational problem. Data model views the organizational problem as a bundle of data and network of processes. Data model centers organization’s data, data-flow paths, processes and files. The data model is just interested in the way the data are captured, produced, exchanged and processed, without questioning the implications and rationales why this is happening. Hence, the data model approach entails comprehensive data analysis, data capturing, data storing, and representation of the processes that consume the data. Data flow-path is optimized.

In a “what” Q, you are free to discuss on any of the 5W1H “why, when, how, who, which, where” as long as not asked for in the next half of the Q. You can also include discussion on advantages and weaknesses of data model

The data model approach is data centric and technically driven. It is aligned to the mathematical model’s principles based on the studies of operation research, management science, and computer sciences. It adopts a tabula rasa mentality, i.e. starts from a clean sheet with disregard to any need for any formal starting point to the data analysis. The System Analyst is free to choose any entry point and in this respect, there is no need to consult the end-users about this too. The data model disregards the sedimentation of practices, minimal or zero concerns of any behavioral socio-cultural elements of the organization and the human aspects or organizational arrangements that have emerged over time. This raison d’etre approach actually ignores any rationales behind existing practices, norms and procedures. With the data model approach to designing new information system, where the Systems Analyst has a completely “free hand” in carrying out his responsibility (including writing new rules and guidelines), it would appear that uncooperative and reluctant people in the organization would not pose a real threat to the successful design or development of the new information system. In fact, the Systems analyst has the mandate to look into any files of document in the organization to design and develop the new information system and can do so without any assistance from the people working there. The data model’s concentration of the technical aspects and disregards of the implications and rationales can become a weakness. Sometimes, this can become costly during the implementation stage (of the new information system).


This is reflected in the examples of the subprime mortgage incident (where the underlying information system merely discharged the housing loan amount and computed the monthly loan repayments irregardless whether the principal borrower was borrowing beyond his ability to repay the principal sum) and the Singapore HDB upgrading program (where the underlying information system merely compute the sum each household will equally share to repay for the upgrading programme of the common facilities and buildings, irregardless whether the house owners have the financial means or not). However, the choice of data model as the design model for information system such as the inventory control system, enterprise resource planning system, Keppel club boating club, and even UOL lunch scheduling system is likely to be an appropriate and suitable one. The absence of factors such as bounded rationality, opportunism and market uncertainty, make the data model approach the right design choice. Why would the data model be recommended? (“Why”? is somewhat like asking Why go by taxi or train? May include a “helicopter view” comparison with other models as in: why not other models. Exploit DM characteristics and strength). Some reasons why the data model is recommended include the new information system is urgently required, the current processes and policies are badly organized and need to be reorganized quickly, the other two design models (decision-making and the transaction-cost models) are not appropriate design models for the organizational problems on hand. The firm embraces a “tabula rasa” and “raison d’etre” approach for a fast development of the new information system. Data model leads to fast development through the system development life cycle (i.e. seven stages). The design model provides for a fast product uptime, involves much lesser resources (as compared to the other two design models), is easier to manage, plan and budget. Designing and implementing functional requirements and specifications lead to new ways to produce, store and manage the data and processes. Data model is the less complex of the three design-models. It’s technically and mathematically driven model. Here, the cognitive and behavioral aspects are not important considerations unlike the situation of the decision-making and transaction-cost models. Decision-making model assumes the organization as a bundle of decision and decision makers and characterizes on cognitive aspects, whereas the transaction-cost model is complex model, being more concerned with the stages of transaction cost, contractual obligations property rights, and factors of cost such as opportunism, bounded rationality, market uncertainty and asset specificity (which are particularly important only when involving external trading partners).


When would the data model be recommended? (“When” and “why” questions appear very close relatives like “Why or when taxi?” “When” = advantages, strength, and when to avoid (i.e. major disadvantages are evident)) Data model is recommended when the organization views the firm as a bundle of data and network of processes rather than a network of employees, relationships, environmental factors, decision-makers, transactions and contractual obligations involving external trading partners. Data and processes are internal to the organization, follow standard procedures, industry practices and not deviate very far from the norm of practices. Often with the building of new information systems - which imply impending changes to the organizational processes, roles, and structure – staff’s resistance and non-cooperation will increase. Many staff is skeptical of the new information system. Often firm’s experts and qualified professionals will excuse with not having the time to formally sit down to detailed discussions or be interviewed. The nature of the data model approach allows the staff interaction to be “relegated” to the background. With the data model approach, the new information system is highly dependent on accurate capturing and representation of the data, data flow-paths and processes. The social, behavioral, and cognitive aspects are key considerations of the design. The design is largely technically and mathematically bias. It is concerned with the accurate building a database, optimization and efficient processing of data, so as to cater to secure, coordinated, yet easy accessibility for the coordination of structured functional processes, and production of reports and statistics. In conclusion, that data model can be used successfully as the basis of the design of a new information system, even with minimal or no co-operation from the people in the organisation. This holds true as long as the Systems analyst has unrestricted access to the organisation’s data (documents, files), know where and how the data is consumed by the business processes. As in all models, the data model approach has it weaknesses too. Question C3 Discuss the data model and, with examples, explain the advantages and disadvantages of this approach to inform information system design [SG]

Inform = influence

Other similar question: Q. Describe the data model and explain, with examples, why it is useful to guide the design

of information systems. [2007 Prelim] Solution guide: The data model is a technical approach to the design of information systems to meet processing requirements for a specific organizational problem. The data model views the organization as a bundle of data and network of processes. The data model centers on detailed data analysis, capturing, exchanging, processing and representation of the organization’s data, documents and files that represent the enterprise operations. Data model examines and optimizes the data flow-path. A normalized data model is the resulted of the technical analysis of data model and forms the basis for the creation of the physical database that supports the information system.


Many other authors see the data model in slightly different ways: “The Data model describes in abstract way how data are represented in an information system and the enterprise”. “Data modeling is the process of defining what data is used in an information system or organization and how that data is organized”. “Data model summarizes the business view of the data to be stored in the database and how they are accessed”. “The Data model provides the conceptual design of the database of the information system”. The data model approach assumes the organization is data centric and technically driven. Although it is well-known that information systems are socio-technical systems, the data model does not take into consideration socio-cultural, behavioral, and cognitive aspects that the transaction-cost and decision-making models embrace respectively. Data model, being a technical model draws on technical perspective emphasizing mathematically based models to study information system using techniques of management science, operation research and computer science. The Data model analyses the organization’s data, business processes, files and how the data (documents) flows through various departments and people using them. Data is stream of raw, unprocessed facts, representing events that occur within the organization or the environment. Disorganised. Once organized and arranged into meaningful information lead to relevant, accurate and timely information that help the organization perform their obligations to the customers and partners. With Data model, the design of an information system is concerned mainly to optimize the data flow in the organization. Hence, as a systems analyst, you should only consider the data and files in the organization as a data flow machine. In other words, the system analyst should ascertain the management information requirements by examining all reports, files and other information sources used by managers. By so doing, the analyst should obtain a stream of raw facts that needs to be computerized and stored into a database in a form that people can understand and use. The new design the information system should improve data flow paths with the ability of the organization to produce, manage and analyze data. The diagrams below provide a pictorial representation of “before” and “after” the application of Data model to solving the informational needs of an organizational problem.


The flow-paths are optimized and streamlined, all necessary data, documents, business processes, and files are captured into a database for information processing.


Data, documents

database

After DM: Streamline data in centralized database. Optimize with most efficient data flow path. Improve data handling.

Before DM: Documents/ Data/Files flow by/through many various processes

Typical examples of application software modeled with data model approach are the SIM course evaluation system, Keppel Boat club system, and UOL lunch story (see B1). Thus, designing an information system means designing and implementing functional requirements and specifications that will lead to new ways to produce, store, process and exchange data faster, more reliable and secure than previous practices. The systems analyst should look at the organization as a data flow machine and design the information system so as to improve the ability of the organization to produce, manage and analyze data. Basically, the systems analyst should look at data flows with two assumptions in mind: • First, that individual and organizational knowledge are fully accessible to the analyst

so that the analyst can resort to a structured method to capture and include them in formalized (computerized) routines.

• Second, that the analyst can redesign data flows and files from scratch irrespective of existing organizational structures, procedures, and practices in accordance with what data are required to perform the new functions - a tabula rasa (“blank sheet”) approach.

In other words, • Data model is largely concerned with “WHAT” data is captured, produced,

exchanged, and processed without questioning WHY this is happening. • Data model does not consider organizational norms, existing practices, and culture -

raison d’etre approach. A technically accurate design is foremost. The data model can be technically represented and hence this is how the data model informs the design of information system. The exercise involves the identification of all the entities, their relationships and their data items associated with the problem. Entities are objects, things, document, people, anything that has data values. Each group is collectively called “entity type”.


The basic tool for data modeling is called an entity-relationship diagram or ER-Diagram (ERD). The ERD provides a critical analysis of the data in the organization. Data modeling is a technical approach in determining the design of information systems. The first step to data modeling is to identify all the entity types that would represent the business operations and information needs of the new information system. The ER-Diagram is prepared with its cardinality between entity types clearly defined. Once completed, this is followed by the identifications of their attributes and keys (primary and foreign keys). A normalization process to remove all anomalies is performed before the database schema and database is created. The diagram below gives an overview of the ERD and the final database.

Information systems

Database

Normalisation (1NF to 5NF)

DataModel (via ER Diagram

The advantages or strength of data model lie in its technical and data centric approach. The data model is an abstraction of the real world of the system. It provides a representative “picture” and clear representation of the environment in which the new information system will operate to guide the development of the new information system. We see this in examples such as the SIM course evaluation and SIM student attendance clocking system which clearly represent the affairs of the environment that they operate in. The systems analyst need just only concentrate on which data (and their data flow paths) are produced, captured, exchanged and processed without the need to question the reasons why this is happening. The data model promotes full transparency. Being technical and data-centric in approach, the design model neither dependent on human perceptions or interactions (of the current system), nor is concerned with the norms and cultures inherent in the workplace. Hence, a tabula rasa approach is possible to designing the new information system. There is minimal chance of influence by opportunistic behavior and bounded rationality. The Systems analyst can redesign data flows and files from scratch irrespective of existing organizational structures, procedures, and practices. No need to inquire further about their raison d’etre. In other words, data model does not bother with existing “baggage” of the current system (i.e existing practices, rules or norms. This is a clear winner as the new information system can be quickly designed and develop in a short space of time involving minimal resources.

The data model is effective. It is technically accurate, reliable, economical and durable so that the system does not need constant reconstruction as compare to building


information system based cognitive and behavioural perspectives whose factors are dynamic in nature. As new rules and procedures with new data and flow paths can be introduced without concern of current procedures or ruling, the development and implementation of the new information system encounter minimal “construction” frictions. The data model complements the business process re-engineering (BPR) technique by providing the design model for the design of the new information system to represent the new ways of organizing, exchanging and producing new information. The technical representations of the analytical model provides benefits of minimal data redundancy, data flow efficiency, accessibility, security, data independence, program independence, scalability, shareability, adaptability and data transparency. As with any design model, the data model has its disadvantages or limitations. The data model underestimates the importance of the socio-behavioral elements that define the characteristics of the organization and of the people working there. The data model approach disregards the sedimentation of practices, ergonomics, human factors, and organizational arrangements that have emerged over time. Data model is not interested why certain agents are involved in the flow paths and there is no need to inquire further about their raison d’etre. The drastic changes, caused by the data model design approach, during the later implementation stage may create severe implementation problems. The new information system may faced resistance and non-acceptances by the people and refused to cooperation causing the new information system to fail (explain the Hdb upgrading story, subprime mortgage story or the judge story here, or your own story) The organization assumed the new information system designed by the data model is superior to the old organization. Any resistance forthcoming should be considered irrational and be curbed. The design approach captures the data, data flow paths, processes, how they are produced, exchanged and processed over a defined period of time – i.e. a “static view” approach. This may limit its abilities to experience and handle exceptional and irregular circumstances. Data model is based on a high level of abstraction since it does not “bother” with current practices and norms. This leaves rooms for many open questions and debate among the people. Insufficient depth of critical analysis raise questions that the solution may not be fully representative. In conclusion, the data model is a technical approach to design of information systems. Being technical, it is more structured, methodical, and straight-forward as compare to the other two design models of transaction-cost and decision making. Hence being so, it has its strength and limitations.


D. DECISION-MAKING MODEL Question D1 What is the difference between structured and unstructured decision making? Explain with examples the design of information systems that supports structured decision making. Similar questions, i.e. parts of solution are relevant to these Q: Q. The decision making model is often used to inform information systems design.

Discuss, with examples, the main limitations of this model both from the design and the implementation viewpoints [2009 May Zone-B]

Q. What is decision making? Explain with examples the design of information systems that supports unstructured decision making. Critically discuss the limitations of this approach to IS design.[2007 ZB exam]

Q. What is decision making? Explain with examples the design of information systems that supports structured decision making. Critically discuss the limitations of this approach to IS design [2007 ZA Exam]

Solution guide: Structured and unstructured decision-making are design issues of the decision-making model, which draws on socio-psychological theories to study how decision-makers perceive and use information. Both the structured and unstructured decision-making viewed an organization as a bundle of decisions and network of decision-makers. Structured decision-making refers to the decisions and frequent problems faced by the lowest level executives in an organization. The unstructured decision-making refers to the novel difficult decisions and problems faced by the top executives. An understanding of their characteristics, strength and weaknesses will lead to better designs of the relevant information system in supporting the decision-making processes of the different type of decision-makers in an organization. The decision making model generally categorized all decision-making into three types. They are structured, semi-structured, and unstructured. Each type is aligned to a specific group of decision makers bearing certain unique characteristics. The diagram below further depicts how structured decision-making relates to the problems at the operational level while unstructured decision-making, at the other end of the pole, deals with strategic level decision-makers.


Difficult, unprecedented,

Semi-structured decisions

Structured decisions

isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprint

complex, novel, Un-programmable

Frequent, daily, fixed procedures, programmable

Guidelines, experiences, semi-programmable

s, kindly seek permission from [email protected] 51

The differences, as shown in the diagram, between structured and semi-structured decision-making can be further explained thus. Structured decision-making is associated with decision makers at the operational level in an organization involving structured “organized” problems. They have short term impact and often are recurring problems – relating to the firm’s daily operational transaction problems. Because of its high frequency and recurrent nature, after a period of time, the problems have been “broken down” and become well defined. The sequence in deriving all the necessary information (often available internally within the firm) of all possible alternative solutions to support decision making can be elicited, leading to the development of predefined guidelines and standard operating procedures (SOPs). Being the case, the use of automation in facilitating the decision process became possible – resulting in programmed decision-making. Structured decision-makings are made by lower level decision-makers such as factory floor supervisors, sales clerk and supervisors, inventory control clerks, shipping officer and procurement officers and other operational workers. These structured decisions keep the “factory” running and firm’s resources operating at optimal performance levels. Decisions taken at the operational level have low risk of errors. Unstructured decision-making, unlike structured decision, relates to strategic decisions. Strategic decisions have long term impact, and affect the future directions of firm - firm’s resources and future viability. Unstructured decision-making are associated with the highest-level executives in the organizational hierarchy such as the managing director, CEO, CIO, CFO, and other chieftains in an organization Unstructured decision-making happens infrequently, are complex, difficult, and novel. Unstructured decision-makings are subjected to many changing dynamic factors (parameters) both externally and internally. Market is nearly always imperfect. Information asymmetry, opportunism, uncertainties and complexities exist. Information sources are subjected to uncertainty and complexity of politic, economics, competitions, and many other market environmental factors, thus affecting accuracy and completeness of input data. Because unstructured decision-making is non-routine and almost always a case of a new problem without any past references, the decision maker is involved in making intuition, judgment and improvisation (based on his personal knowledge, past experience, and exposure) to derive a “rational” decision.


Theorists argued such unstructured decision-making is often affected by the executive’s bounded rationality and external market forces. A diagram of bounded rationality and rational decision can be represented thus:

chance of making “ rational decision” by decision -maker is highest here owing to “problem-known/solution-known” type. The decision-maker seldom has to engage in “bounded rationality”.

unstructured

structured

Decreasing chance of effective rational decision, owing to many dynamic external factors

Decision is increasingly affected by “bounded rationality” of decision-maker

Unstructured decision is affected by today’s globalization, and advanced technological progress. Market competition is very keen and identifying strategic implications are increasingly complex and sophisticated. Sustaining competitive advantages are key responsibilities of top executives. Top executives cannot follow what other competitors are doing in making strategic decisions and hope to be different, and then generate competitive advantages. They have to differentiate themselves by exposing themselves to new information sources - unlimited, unbounded approach is necessary to gain new information and knowledge - both externally and internally. Only then can he improvises effectively and hope to make better decisions through intuition, and judgment (i.e. an indication of importance of top executive’s experiences and knowledge). Comprehensive rationality (i.e. detailed and accurate rationalization) and unbounded rationality (i.e. openness to new information, including untapped sources, to derive optimal rationality, and ability to evaluate/rank accurately) are indeed impossible to attain at this level. Because of the uncertainty and other factors that they face, it is observed the top executives and higher managers often increasingly expose to improvisation, bounded rationality, “muddling through”, and “satisficing” in their decision-making processes. (BUT remember, no executives will purposely choose to a decision model to make lesser sub-normal or irrational decisions). Because of the criticality and nature of unstructured decision, top executives are expected to be exposed many socio-technical knowledge and skills so as to identify and to rank, as accurately as possible, all available alternative decisions by their contributions and consequences to the desired goals. Hence, unstructured decisions are strategic and of high-risk nature. A poor decision has a disastrous strategic long-term effect and may cause serious set-back or obliterate the whole enterprise. One such deliberating example is wrongly investing and expanding into new markets and new factories in a foreign country. Unstructured decisions often tread on many unknown circumstances, unknown problems, and unknown solutions (PU/SU).


So, how are the designs of information systems different for structured and un-structured decision making? The decision-making model is a design model in analyzing the organization and to ascertain the specific type of information (i.e. information systems) to support the different layers of individual and collective decision-making processes within an organization. It is in relation to decision making that information systems should be conceived and should prove their value because, according to this perspective, information systems should support and harness effective decision-making. Managers use information systems in order to reduce the uncertainty associated with decision-making. Structured decision: to understand the design of required information for structured decision, we’ll take a look at some of the problems associated with structured decision. “Is this customer sales order valid?” “Which customer orders should be delivered tomorrow?” “What is the replenishment quantity for item abc?” As an example, the information needed to help make an appropriate and effective decision to the first problem would entail knowing what is the credit limit of the specific customer, what is the dollar value of the existing orders that are still opened and have yet to be delivered, what is the dollar values of existing open invoices which have not yet been paid, what is the customer rating, in term of order value, frequency and debt rating (paying on time)? Such information can be easily structured for extraction to support decision-making i.e. programmed. We can deduced that structured decisions are associated with repetitive known problems that occur frequently even on daily basis, and of low complexity. The design of information systems for structured decision-making takes into consideration the high data frequency and volume, available of standard guidelines and standard operating procedures. Data are largely available internally, narrow in scope, and easily captured. The information has low aggregation and often required detailed reporting. These are operational data, necessary to “keep the factory running daily and as efficiently as possible”. The information solutions to these structured problems are well known belonging to the quadrant PK/SK (problem known, solution known). Structured decision-making often require almost no improvisation and intuition. The design is not concern with bounded rationality and cognitive limitations of the decision-maker. High market uncertainty is not a factor of the design here. This type of information system falls into the category called “Transaction processing systems”, which bears all the above characteristics. In conclusion, structured decisions have high degree of programmability. The processes to derive the all the necessary information to support-decision making are well defined and well-tested standard operating procedures. The reverse is the case of unstructured decision-making. Hence, the design of information systems for unstructured decision-making will be more complicated as the phenomena of bounded rationality


and opportunistic information processing is likely to occur, given the wide scope and varied kind of market information needed to counter market uncertainty and complexity. Question D2 “What do you understand by decision-making?" How do information systems assist decision makers in unstructured problems” Solution guide: Decision-making is a cognitive process. Decision-making becomes increasing complex with difficult unstructured problems. Decision-makers may have to “wear” different hats of decision models in seeking the solutions. The goal is making rational decisions. Decision makers will need quality information from well-designed, reliable, robust information systems to do so. What is decision-making process? Decision is the selection of a course of action among alternative solutions. Decision-making is related to sense-making, evaluation and reasoning. The decision path taken is often affected by one’s past experiences, bounded rationality, and psychological exposures. Theoretically, the decision-making process goes through four different stages of intelligence, design, choice and implementation. But, why is there a need to make decision? We make decisions all the time. Some decisions are “easy” while others are “difficult”. When we referred to it as “easy”, we refer to the problems being simplistic, structured, and uncomplicated. When faced with simplistic problems - like choosing between taking a bus or taxi, which customer sales orders are due today - many individuals would have little difficulties making a rational decision. What is rational decision? Is rational decision possible, all the time? Rational decision is defined as selecting the accurate solution to a problem. To make rational decision, the decision makers identify all possible alternatives, their consequences, and rank them accurately in the correct order of economic values – there are many variable factors to capture and examine. We see that difficult complex problems - like deciding how to prevent declining confidence in company’s milk powder product, rebuilt the insurance business (AIG), or prevent collapse of the financial system - there are many factors, often very dynamic and complex, to consider. Deriving value maximizing decision, rational decision for complex problems would surely not be possible all the time, if not, most of the time. A decision-maker is often influenced by “bounded rationality” which is his past personal exposure, good and bad experiences, encountered with “tried and tested” approaches. He may also be affected by the changing environment factors and conflicting goals, and attempt to make a “best fit” decision though not necessary the best rational one, called “muddling-through decision”. He may be forced into a trial and error, intuitive situation, or apply formal methods to approach the problem, called “psychological types”. Yet again, rather than optimizing, he decides to choose the first solution that relates to the ultimate


goal, called “satisficing decision”. Bounded rationality, muddling-through, satisficing, psychological, and rational – hence, make up the various types of decision models. As observed, problems may be simple or complex. Simple problem can be systematically broken down, elicit alternative solutions, and derive the best alternative, a rational solution. We say such simple problems are structured problems requiring structured decisions, whereas the complex problems as unstructured problems requiring unstructured decision. The diagram below summarizes the decision complexities faced by decision-makers and their application of decision models. It depicts that decision makers with structured problems have a better chance of making effective rational decisions, whereas unstructured (or semi-structured) problems tend to expose the decision-makers to bounded rationality decision models. Unstructured Decision Semi-Structured Structured Decision “Rational” decision

“Muddling Through” “Satisficing” “Psychological” “Bounded Rationality”

Well, in order to make good decisions, decision makers require information – relevant, accurate, timely information. Information reduces uncertainty and task complexity associated with market and environmental factors. Information is produced by information systems. Information systems are application software like customer relationship management, enterprise resource planning system, market competitiveness analysis system, and research reports. To design information system to assist decision makers with unstructured problem, the systems analyst must first understand the characteristics of unstructured problems and the processes of decision-making by top-level decision maker. Besides being complex, unstructured problems bear the characteristics of being unprecedented, novel, infrequency, and difficult to define. We saw the unstructured problem examples of AIG rebuilding its insurance business (Is selling of the Asian businesses the rational solution?), USA Govt on rescue of Wall Street (Is selective bailout or aggressive lowering of currency inter-bank rate the rational solution?). Such problem and solution are often unknown (PU/SU) being unprecedented and novel. Here, unlike structured problems where the problems are known (PK) and even solutions are known (SK), eliciting all the necessary information to derive the rational decision for unstructured problem is almost impossible. Hence, identifying and automating all the required information is way out of the question with unstructured problems (i.e. unstructured decision-making is non-programmed). Looking at the PU/PK-SU/SK matrix below, we see unstructured problems fall in the quadrants of PU/SU and PK/SU. This means, the decision makers need a lot more


information, both in term of information complexity and wider scope of market/ environmental cross information (both from internal and external sources). Of course, the external information is always difficult to collect and produce and their 100% accuracy is questionable. But still they form one avenue of information source. The design of infobounded rationalitheir decision-masystems that are dimprovisation. Top executives concurrently. Theinformation system Hence, design of the above design fof the top executcostly and difficul The executive supexecutives in achi In order that execchart, bar chart, guser interfaces. Tthat the top executhe mouse. In order to provilinkages and inclBradstreets, Fore The design shoulmarket informatiounderstanding, vis In fact, deriving thexecutives. We se

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Treasury Paulson. Despite the availability of vast reservoirs of information sources and consultants, the final solution did not calm the global financial market that continues to reel in fear. In conclusion, unstructured problems can be extremely complex to elicit an effective rational decision. Sophisticated executive support information can assist unstructured problems/decisions, to a certain extent. But all said and done, the knowledge, experience, exposure, risk appetite, and business connections of the top executive may well make a difference to the eventual effective solution to an unstructured problem.

WHAT are the design considerations of information system for top-level executives? The design has to take into consideration the characteristics and nature of the problems faced by top executives,and the decision processes they went through. The kind of problems faced by top executives are PK/SU – problem known, solution unknown (e.g. What solution/sto resolve the falling demands although total local market in local market has increased steadily over the years?)and PU/SU - problem unknown/solution unknown (e.g. What strategy to ensure firm’s survival in Myammar’smarket). It is very difficult to produce all the necessary information to solve such unstructured problems. Unstructured problems are non-routine, complex, novel, rare, unprecedented, and very difficult to resolve. The topexecutives would require varied kind of information from many different internal and external sources. Theinformation required to support decision- making is wide, ranging from sales performances to consumer behaviorsto government policies (include foreign countries) to availability of technology and human resources. We could deduce that it would be impossible to capture all the necessary information. In this respect, unstructureddecision is said to entail a low degree of programmability. The design of information system for top-level executives acknowledges that exposure to bounded rationality,muddling through and satisficing decision-models are inevitable in their decision-making processes. Unstructureddecision-making requires information systems that are designed to give decision maker some rooms to intuition,judgment and improvisation. Top executives are very busy people and have many strategic issues to handle concurrently. They have very littletime to attend computer classes to learn how to use information systems. Hence, design of information systems for top executives must take into consideration all the above design factors.This type of information system, which support decision-making of the top executives, is called “Executive supportsystem”. Such systems are complex, costly and difficult to build. But they are important tools of the top executives. The executive support system, therefore, are designed bearing in mind the needs of top executives in achievingeffective decision-making and their decision processes. In order that executive support systems are easy to use, they must be graphical (i.e. pie chart, bar chart, graphs,diagrams, with very friendly easy-to- use touch-screen computer-user interfaces. They must offer high aggregationof data with drill-down capabilities, so that the top executives could “drill down” for next many levels of detailswith the click of the mouse. In order to provide for a selection of wide range of information, the system has easy linkages and inclusion ofreferences to internal and external databases such as Dun & Bradstreets, Forester Research and otherprofessional and government research bodies. The design should support the ability to produce selective and exception reporting with market informationsegmentation. This includes the use of colour codes to facilities understanding, visual impact on areas of attentionand importance.



Other information system classes: Decision support system (DSS) is used in supporting semi-structured to unstructured problems. Sometimes, DSSmay be used by lower-level managers and supervisors to assist in their decision-makings. DSS can be useful to both mid-level and top managers in semi-structured decision making such as seekingdecisions in “What is the correct pricing?” “What impact with the new advertisement?” There are twovariations of DSS. Data-driven and model-driven modeling. The former provides decisional support with data-mining and OLAP analysis while the latter in sensitivity and optimization modeling. MIS caters to the decisional needs of the mid-level managers. The mid-level managers primarily duties aremaking tactical semi-structured decisions that will ensure everything is working to plans, budgets and contractterms. They ensure that the strategic business plans are closely adhered to. The mid-level managers’ responsibilities are to control, monitor and rectify situation before they get badly outof control such as “What can be done to correct this month’s budget variances?” “Why are sales for Region-Xdoing badly over the last three months?” To do this, they need informational support such as MIS summarystatistics include sales comparison by salesmen, regions, budget expenditure variances, inventory level, damagereport. Exception reports include assembly line stoppage and slow moving inventory items. Unlike the operational level, the mid-level managers will not have the luxuries of SOPs or standard operating procedure guidelines to guide the handling semi-structured problems. But they also do not face the level of difficulties and uncertainty associated with unstructured problems faced by the top-level managers. Often accurate decision-making is still possible, given good information supports to preempt and rectify “out of control” situations. Sure, certain degree of the bounded rationality, and satisficing models may be adopted in their decision making at this level. Another two types of information systems, which are not main-stream information systems but nonethelesssupport decision-making are office automation system (OAS) and knowledge work systems (KWS). OAS isstructured while KWS tends to support unstructured forms. OAS is a general information system that caters to all data workers at all level of the hierarchy. OAS is designed as a productivity and efficiency tool suitable for all employees in the organization. KWS is a specialized information system and designed to cater to the experts and knowledge workers. These experts often work better and produce revolutionary results in new designs and innovations under “unbounded”conditions not unduly “bounded” by fixed routines, rules and procedures.

Question D3 Discuss the decision making model and, with examples, explain the advantages and disadvantages of using this approach to inform information system design. [SG] Other similar question: Q. What is decision making? Explain how it support unstructured decision making.

Critically discuss the limitations of this approach to IS design. Solution guide: The decision-making model assumed that an organization comprises of a bundle of decisions and decision-makers. The idea is decisions can be broadly categorized into structured decisions, semi-structured, and unstructured ones. The decision-making model is a specific way of analyzing the organization whereby the systems analyst attempts to ascertain the way information systems can support individual and collective value-maximizing decision-making processes on the basis of their hierarchical features. Decision making is the reasoning process comprising of four different stages: intelligence, design, choice, and implementation (iDCI). The decision making model assumes that the decision maker has the ability to accurately rank all possible alternative actions by their contributions to the desired goals (the rational model). However, where the actor has comprehensive rationality and can rank and perceive all possible alternatives, and their consequences accurately, an unbounded rationality model surfaces – which is nearly impossible yet is expected of executives in their decision making. Decision-making is related to sense-making – a cognitive process – and it affected by bounded rationality, and psychological aspects. The higher and top executives are often confronted with the prospect of unconsciously engaging in muddling through, and saticficing in their decision making processes. Information systems can be conceived in line to assist decision-making at the three broad category of decision-making: strategic, management & control, and operational levels. The diagram below shows how they support, promote and harness effective decision-making at the three levels with executive support system, management information system and transaction processing system respectively.

Mgt & Control level: MIS (Management Information system)

Operational level: TPS (Transaction Processing system)

Strategic level: ESS (Executive support system) The above three categories of information systems can be aligned to provide information to help the different kinds of problem solving. These problems and be divided into four quadrants: PK/SK - problem known/solution known (i.e. Which orders should be delivered tomorrow?); problem know/solution unknown (i.e. What could be done to resolve falling sales in the west district?); PU/SK - problem unknown, solution known (i.e. Worker’s isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 60

productivity in east building is high, but west building is very low); PU/SU - problem unknown/solution unknown (i.e. What approach to ensure firm’s survival in Myammar’s local market) There are advantages and disadvantages to using the decision-making model as the model in the design of information systems. The advantages lie in the fact that an organization is generally made up of three broad layers of decision-makers. Each layer of decision makers need different type of information to support their decision making processes, and their information characteristics can be fairly easy to identify. The diagram below shows how their decision types can be classified broadly into three categories: structured (programmable), semi-structured and unstructured (non-programmable). This made for clear distinction of corresponding mapping to the correct types of information systems to its decision-making requirements. Information systems are also classifiable into three broad categories. Operational Management Strategic level Unstructured ESS DSS Semi-structured MIS Structured TPS / OA Information Systems is the academic discipline covering the application of information technology to business and organizational problems. Information systems support decision makers by reducing uncertainty, complexity and bounded rationality with relevant, accurate, and timely information to reduce decision errors. This is more so the case with higher managers where they face unstructured, complex tasks and dynamic changing environments. The diagram below shows that information systems can be broadly categorized generally into 3 levels, similar to decision making. They are strategic, management & control, and operational levels. This categorization aligns neatly with the decision-making model of unstructured, semi-structured and structured decision-making, as follows:


Operations: TPS

Strategic: ESS/DSS • unstructured: executive support system (ESS). • semi-structured: decision support system (DSS)

and management information system (MIS) • structured: transaction processing system (TPS)

Structured decisions are based on well-known routines, fixed procedures, rules and guidelines. Standard operating procedure is an example. Hence, such decision processes


are easier to program. In an organization hierarchy, structured decision is often associated with the operational level – i.e. the lowest level in the organizational hierarchy. Unstructured decisions are non-routine, involves intuition, judgment and improvisation. The solution to a given problem is hence not fix and subject to many changing factors. Unstructured decision entails a low degree of programmability. In an organization hierarchy, unstructured decision is often associated with the strategic level - the highest level in the hierarchy. Decision support system (DSS) is sometimes considered semi-structured to unstructured, depending on the nature of the problem it is trying to resolve. DSS may also be used by operational level’s decision-makers. TPS is designed to cater to the information needs of the operational managers. TPS handled high daily volume of transactions and requires interactive processing. The operational staff and operational managers are responsible in making decisions that “keep the factory running optimally everyday”. The designs of TPS application software support decision-making of structured, frequent and low-risk nature. This is often the case with operational activities such as the handling of sales orders, tenders, purchase orders, production work-orders, invoices, and inventory transactions. MIS caters to the decisional needs of the mid-level managers. The mid-level managers primarily duties are making tactical decisions that will ensure everything is working to plans, budgets and contract terms. They ensure that the strategic business plans are closely adhered to. Their responsibilities are to control, monitor and rectify situation before they get badly out of control such as “What can be done to correct this month’s budget variances?” “Why are sales for Region-X doing badly over the last 3 months?” To do this, they need informational support such as MIS summary statistics include sales comparison by salesmen, regions, budget expenditure variances, inventory level, damage report. Exception reports include assembly line stoppage and slow moving inventory items. Unlike the operational level, the mid-level managers will not have the luxuries of SOPs or structuredness in handling problems, but they do not face the level of difficulties and uncertainty associated with problems of the top level managers. Often “rational” decision-making is still possible, given good information supports to preempt and counter “out of control” situations. Sure, bounded rationality, and saticficing may be the models to the decision making at this point. ESS is designed to support unstructured decision-makings by the top executives. Such unstructured decisions are often strategic in nature and have great impact on the direction and future of the enterprise. “Should the product line-x be terminated?” “Will a new 30,000sf factory in ShenZhen be the solution? are examples. Another two types of information systems, which are not main-stream information systems but nonetheless support decision-making in an organization are office automation


system (OAS) and knowledge work systems (KWS). OAS is structured while KWS tends to support unstructured forms. We can summarize the discussion of the advantages of DMM with the “alignment” diagram below. Decision types are shown on the 1st triangle. It is aligned neatly with the 2nd triangle of type of decision-makers. The 3rd triangle shows the characteristics of both decision types and decision-makers being aligned as one same characteristic-set. The last triangle shows the information system type useful to each level of decision-makers.

Semi-structured decisions



Difficult, unprecedented, complex, novel, unprogrammable

Mgt & Control

Operations

Strategic Mgt

DSS, MIS

TPS

ESS,DSS

Structured decisions


There are some disadvantages using DMM to information systems. Decisions are make by human beings based on maximizing values. They are often bounded by limited knowledge and experience of “tried and tested” methods. This is bounded rationality of decision-making. The model assumes that information systems can be designed to fully provide rational decision-making to all decision makers in the firm. Bounded rationality refers to the cognitive limitations that people face in terms of knowledge and cognitive capacity because they can only choose a sub-set of all the alternative courses of action and undertake a satisfying course of action that they are familiar with. Human tends to have their own belief and limited by their inability to see beyond the horizons. Top executive informational needs entail a lower degree of programmability because of its unstructuredness. Owing to the difficult, novel and unprecedented problem, as such, even with ESS, top executives are said to be involved in muddling-through and satisficing, whenever they are making their “unstructured” decisions. They require information systems that facilitate rooms for intuition, judgment and improvisation – designed with “unbounded rationality” (i.e. not to “bind” the top executives to the limited information provided by the ESS or DSS information system, but to encourage and facilitate further query and clarifications for rationality and other alternatives). Such design approach is difficult to conceive and build. Hence, often top executives cannot just rely fully on their internal and external information sources (provided via ESS,


DSS, or GDSS) but also have to be receptive to many other formal and informal sources including hearsay, and “words of mouth”. The DMM leaves rooms for information suppression, misuse and misrepresentation especially when the information sources are from external parties. As information system acts only as decision supporting role, managers can actually distort information and decision. This provides opportunity for individual to behave opportunistically that DMM assumed will not happen and do not support in its design. Information systems build with DMM has the disadvantages that certain decisional support may be overlooked or incompetent by bounded rationality and limited experience of the development team. DMM is failing in certain areas where these represent the strength of the other two design models, i.e. transaction costs model (TCM) and data model (DM). The TCM model is controlled by the actual requirements to meet consumer’s needs (behavioral, socio-cultural aspects) and assumed presences of opportunistic behavior. Besides opportunism, the TCM designs take into consideration other factors such as bounded rationality, asset specificity, small numbers, frequency, uncertainty affecting different the type of transaction costs. DM is simple, and does not get bogged down with “baggages” of current norms and procedures. Unlike DM, a tabula rasa approach with DMM is not possible. In conclusion, the decision-making model provides useful understanding of decision model “hats” that decision makers are exposed to them at different times and situation. The broad classification of decisions into three broad categories of decision types provide useful guidelines to inform the design of appropriate information systems for each level of decision-makers. As with all design models, decision-making model has its limitations and it is with this understanding that the design of information systems be proceeded with. Question D4 “How do information systems assist decision makers? Discuss” Similar questions: Q. Discuss with examples the links decision making and ICT. [2007 Prelim] Q. What do you understand by “information systems are viewed as socio-technical

systems”? Would the Decision-making model approach suffice? Q. What is a decision-making model? Why and when would you recommend the model

approach to design of information systems? Solution guide: While understandably information systems are socio-technical systems, the design of a specific information system may be more cognitive rather than technical, behavioral or vice versa. This is especially the case when we look at the essential responsibilities of the decision-makers in the organizations. Decision makers use information systems to reduce the uncertainty and bounded rationality, as they face complex tasks and an increasingly imperfect market conditions.


We recognized that decision-making is the cognitive process leading to the selection of a course of action among several alternatives. Decision-making takes place at all levels of the hierarchy of management. A discussion of the decision models is hence in order, so as to understand how best information systems be conceived and prove their values to decision makers. Decision-making is a reasoning process. There are 4 stages - intelligence, design, choice and implementation (iDCi). Intelligence consists of collecting information and identifying the problems occurring in the organization. Intelligence indicates why, where, and with what effects a situation occurs. During design, the second stage of decision-making, the decision maker designs possible solutions to the problems. Choice stage consists of choosing among alternatives. The last stage is where the choice is implemented. At each stage, information systems may be useful to assist in the process. In order to understand how decision makers make decisions, we’ll briefly examine a number of decision models that attempt to describe how individuals and organization make decisions. They are the rational model, bounded rationality, satisficing, muddling-through, and the psychological models. The rational decision-making model is a process model for making logically accurate decisions. The rational model of human behavior is built on consistent, value maximization within constraints. The ability to accurately identify, list and rank all alternatives in their correct order of maximum value returns. Decisions are affected by bounded rationality which refers to a person’s cognitive style, limited knowledge and preferences. Decision makers, at all level in an organization, are subjected to the limitations of bounded rationality, and thus leads to satisficing, and muddling through - a situation more evidently so higher up the decision hierarchy. The various models do not take into consideration that decisions may be influenced by opportunistic behaviors. The satisficing model suggests that a few alternatives are examined and the first available alternative that moves people toward their ultimate goal is chosen. The muddling-through model describes the conflict of goals among individual and organization. People have to choose among policies that contain various mixes of conflicting goals. This happens especially in the control and strategic level. The psychological model has a cognitive style that describes the underlying personality dispositions toward the treatment of information and the selection processes and the evaluation of consequences. There are the systematic and intuitive types of cognitive styles. Systematic decision makers approach a problem by structuring it in terms of some formal method and evaluate and gather information in terms of their structured method. Intuitive decision makers approach a problem with multiple methods, using trial and error to find a solution, and tend to not structure information gathering or evaluation. Neither type is superior to the other, but some types of thinking are more appropriate for certain tasks and roles in the organization.


Generally, the various decision models may be broadly applicable to three broad categories of decision types – namely, strategic, tactical and operational. The diagram below shows that no specific decision model can be linked directly to a decision type. In real life, decision makers are exposed to different “decision models” hats at different times depending on the problem at hand. These decision types can be further classified as unstructured, semi, and structured decisions. Why? Main Characteristic Decision Types Decision models

Structured

Semi-Structured

Unstructured

Operational decisions

Tactical decisions

Strategic decisions

Psychological

Muddling-Through

Bounded rational

Satisficing model

Rational model

Strategic decision has long term impact on the firm’s future directions and overall resources. Such critical decisions are make by top decision-makers. “Should the firm venture into China?” Such decisions are difficult to make. They are complex, novel, complicated, and unprecedented. Information sources are often dynamic, combination of external and internal, and often partially complete. To determine the sequence to derive a complete rational strategic decision would be nearly impossible. We can conclude that strategic decision-making is unstructured and the processes to produce all the necessary information to support a comprehensive rational strategic decision-making are non-programmable. Tactical decision has medium term impact on the firm’s future directions and resources. Tactical decisions are related to the execution, control, monitoring of the strategic business plans e.g. budgeting, resources allocations, variances control and enforcement of policies. Tactical decisions are make by experienced mid-level decision-makers. Unlike strategic decisions, the degree of uncertainties and business complexities are not so onerous. We can conclude that the processes to making tactical decisions are semi-structured and can be partially programmed. Operational decision has short-term, immediate impact on the firm’s resources. Such decisions are make to satisfy daily recurring problems. “Which customers are entitled to discount?” Such decisions enable the execution of the firm’s daily transactions. Rules and guidelines are abide closely to “tried and tested” procedures (SOPs – standard operating procedures).


Operational decisions incur lower risk and small margin of errors. We can derive that the structured processes to arrive a rational decision are hence easily automated and programmable. Can information systems be designed to assist these 3 broad categories of decision-makers? Yes. In the diagram, we see that within an organization, different types of decision are made on the basis of their structural features. We can model information systems based on the idea that decisions can be split into programmed decisions and non-programmed ones. While programmed or structured decisions are related to highly repetitive, routine problems, the non-programmed decisions are more intuitive in nature and requiring improvisation, knowledge, and critical judgment entailing a lower degree of programmability The next diagram layered programmed or structured desystems (TPS), semi-programmed decisions into Managand non-programmed or unstructured decisions as Execu Unstructured decisions are associated with higher- leveexecutives who require information systems that givthem more rooms for intuition, judgment animprovisation. We can said ESS facilitates “muddling through” an“satisficing” decision process in highly unstructured anvaried goals situation. “What product strategy? Global oregional?” Such decision is subjected to unbounderationality, changing economic and externalities factorOften, there are many alternative solutions requirinextensive analysis and rationalization. On the other end of the scale is structured decision rewell-known routines, fixed procedures, standard rulesroutine problems. In between the structured and unstructured lies the sactions are needed to correct the variances in the budgethe decisions undertaken to resolve such semi-structureddifficult, they are neither simplistic nor straight-forwaMIS provides the facts and simulations that are necessdecision-making.

isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek

Difficult, unprecedented, complex, novel, Un-programmable



cisions as Transaction processing ement information systems (MIS), tive support systems (ESS).

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Unstructured.

d d r d s. g

fers, a

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prord lary

perm

Strategic: ESS

Structured.Operational:TPS


to making decision based on nd step-by-step guidelines to

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ission from [email protected] 67

We can now look at information systems as 3 broad categories: strategic, management & control, operational. This categorization aligns neatly with the decision-making model’s three levels of unstructured, semi-structured and structured decision-making. This is a key positive advantage of the decision-making model. The information system are explained thus:

• executive support system (ESS) that supports unstructured decisions • management information system (MIS) that supports semi-structured decisions • transaction processing system (TPS) that supports structured decisions.

Executive Support System (ESS). Strategic decisions and related activities are performed by the senior and top decision-makers. To make effective strategic decisions, these decision makers will often have to scan external information and knowledge from untested, unknown from unlimited sources. Often a situation of information overload may exist, and senior executives need effective executive support information systems to help them evaluate the complexity and uncertainty of market conditions. Top executives are required to employ effective judgment, intuition and improvisation and must open themselves to all known and unknown (including risky) sources of information. At the top level, decision-making is seldom discrete. Decision is based on many known and unknown factors – combination of facts, experiences, knowledge - rationally, “irrationally”, bounded and unbounded rationality. They have to be receptive to all possible alternatives, wide array of parameters and variables. An ESS provides easy access to both internal and external data relevant to meeting the business strategies of the organization. One major characteristic of ESS is its ability to assist top decision-makers filter out extraneous details with graphical, pictorial representations (pie chart, bar chart, graphs) or drill down to a very detailed transaction level. Often, an ESS would involve sophisticated database system and network infrastructure. Management information system (MIS). The mid-level decision-makers are charged with main responsibilities of “monitoring, control, organizing and planning”. Tactical decisions ensure everything is working to plans, and budgets. The main purpose of MIS is to help the mid-level decision-makers perform these tasks effectively, rather than just efficiently. Problems at this level do not followed fixed SOPs to derive their solutions and depend on correct reading of several dynamic variables. Such semi-structured decisions depend on MIS to provide accurate statistics, summary, comparative reports, latest order and stock positions, exception reports on resources and facilities to make informed decisions. MIS information such as sales comparison by salesmen, regions, budget expenditure variances, replenishment inventory level, lost and damage report, financial reports, supply logistics, assembly line stoppage warning reports, and slow moving inventory items are examples. Often, such management information is extracted from existing ERP, SCM, CRM and KMS application system. Transaction Processing System (TPS). TPS is designed to cater to the day-to-day information needs of the operational decision-makers. Efficient decisions are make to


“keep the factory running” as smoothly as possible everyday and to use resources optimally. TPS caters to routine problems and track the flow of business activities through the organization. Decision-making processes are highly structured and organized around SOPs. The main design of TPS applications include the ability to support decision support of transaction with high daily volume, high frequency, routine, low-risk nature, interactive and online processing. This is often the case with daily business functions such as the processing of sales orders, purchase orders, request for quotations, inventory movements, production, assembly, payroll processing, billing, and QC rejects. Typically these daily functions are part of the larger enterprise application of ERP and SCM. Many organizations such as Flextronics, Toyota, Dell, Walmart and Baxter use these TPS. TPS is important and at times critical for most organizations, but not necessarily strategic in nature. Without TPS, there will be no MIS and higher-level ESS. There are other categories of information systems such as knowledge management systems (KMS), office automation sytems (OAS), decision support systems (DSS) and group decision support systems (GDSS). They complement the 3 main categories of TPS, MIS, and ESS and provide the complete set of information systems assisting decision makers. Together, these systems cater to the decisional support for structured, semi-structured and unstructured decisions. Decision makers need the various different types of information systems to harness decision making, simplify processes, improve accuracy, speed, accessibility, lower transaction costs, and availability. More importantly, they improve the decision-makers’ decisional processes, efficiency and effectiveness, reduce complexity and uncertainty associated with decision making. Question D5 Why is an understanding of decision-making model important to the design of an information system? Is it useful to also include aspects of the other models in the design? Solution guide. An understanding of the decision-making model help the systems analyst to ascertain the way information systems can support individual and collective decision-making during the four states of decision making process of intelligence gathering, design, choice, and implementation. The model examines how the organization can be conceptualized as a decision-making system that scans the environment with the purpose of evaluating alternative solutions to a specific problem. In making decisions, decision makers, at some point in time, may be exposed or “wear” (not intentionally) different decision “hats” models such as the rational model, bounded rationality, muddling through, satisficing, and psychological. Decision makers are not bounded by any specific cognitive decision model/s although we can say that the higher up


the hierarchy, the more active the decision makers the higher the exposure to more than one decision models. The lower hierarchical decision makers, bounded by standard operating procedures (SOPs), standard guidelines and structured problems have less reason for bounded rationality, and muddling through. After all, at this low level, decision-making falls into the PK/SK quadrant (problem known/solution known). Rational decision is highly possible. Bounded rationality. March and Simon (1958) have proposed an insightful adjustment to the rational model. Rather than optimizing, which presumes searching for all the alternative courses of actions, the actor can satisfice; that is, choose a course of action which is based on a sub-set of all the alternative courses of action. Actors who satisfice are also said to be “muddling through” because they make successive limited comparisons between alternative courses of action, thus incrementally building their decision-making process (extract SG/pg 59). This cognitive model is based on the assumption that people have bounded rationality because they stick with tried-and-tested rules and procedures since they are not able to take into account all the possible courses of action. Thus, bounded rationality refers to the cognitive limitations that people face in terms of knowledge and cognitive capacity because they can only choose a sub-set of all the alternative courses of action and undertake a satisfying course of action. Generally, we can say that decision process is also influenced by the nature of the organization that the decision-makers belong to. The most influential parts of the model are based on the idea that decisions, irrespective of the various decision models deployed, can be broadly categorized into three types of programmed or structured decisions, semi-structured, and non-programmed or unstructured ones. Information systems can be conceived in line with the decision-making. It should show how it support and harness effective decision-making. Managers use information systems in order to reduce the uncertainty associated with decision-making. This is more so the case with higher managers where they face unstructured, complex tasks and environments. An organization is generally made up of three different broad layers of managers. They have different responsibilities and made different type of decisions to support their respective area of responsibilities. Their decision types can be classified into three categories of structured, semi-structured and unstructured. This made for clear distinction of mapping the correct types of information systems to its decision-making requirements. The diagram below shows that information systems are categorized generally into three levels to meet the information needs at the strategic, management & control, and operational levels. This categorization aligns neatly with the decision-making model of three types: unstructured, semi-structured and structured decision-making. The information system types can be divided into three mainstream systems. They are:

• unstructured: executive support system (ESS). Information design to support for unbounded rationality, exposure to “muddling through”, “satisficing” and psychological intuitive decision models.


• semi-structured: Management information system (MIS). Support for “optimizing” decision making. Some exposure to bounded rationality.

• structured: transaction processing system (TPS). Support “optimizing” decision making. Achieving “rational decision” is probably highest at this level.


Operations: TPS

Strategic: ESS/DSS

Structured/programmable decisions


Is it useful to also include aspects of the other models in the design? In theory, all information systems are socio-technical system. (provide your discussion from a socio-technical standpoint, provide a brief comparison with the other 2 models, Transaction cost model and Data model. The main basis of comparison should be that Decision making model is cognitive centric, Transaction cost model is socio-behavioral centric while Data model is technical data- centric in their approach to design of information systems. Although it is true all information systems are socio-technical in nature and they reflected the way the organizations carry themselves. In reality, the design of any information systems must adopt one main model for its design. As with everything, there are limitations, and this applies to design of information system too). So, in this respect, in real practical sense, it is not useful to try to include other aspects of other models in the design.


E. TRANSACTION COSTS MODEL Question E1 Discuss with examples the reasons of transaction costs and explain why information technologies can help in reducing them. [SG] Similar questions: Q. Describe the four phases of the transaction lifecycle. Critically analyze, using example,

how ICT can reduce the transaction costs associated to two of these phases [2007 ZB exam]

Q. Describe the communication and brokerage effects of ICT. Explain how and why they

reduce transaction costs [2009 March Mock] [communication and brokerage effects refer to buyers and sellers improved

communication link, information asymmetry, and intermediary cost with ICT] Q. Information systems can reduce transaction costs. Explain how and when this can

happen. Critically discuss with examples [2009 May Zone-B] Q. The transaction-cost model sees information technology as a factor that can decrease

the costs of transacting, thus improving the functioning of the market or leading to market- like forms of organization. Critically discuss this statement providing examples to support your arguments.[2007 ZA Exam]

Solution guide: The exchange of goods and services between trading partners entail transaction costs. The smoothness of the various stages of cost depends on factors or frictions encounter during the stages. These factors are the reasons of transaction cost and generally information technologies can help in reducing the effects caused by these factors. A transaction involves costs and the uses of resources. A transaction goes through a lifecycle comprising of four stages of search, contract, regulation, and maintenance (SCRM) – and often are seen as the various costs incurred during an exchange or transaction. An exchange of goods, services or information takes place in a transaction. Certain exchanges are simplistic, straightforward transactions while some can be very complex in nature. The property rights of non-digital objects (such as a table, chair, audio player) are evidently less complex as compared to digital objects (such as audio CD, textbook, printed material). A reason of cost transaction cost called asset specificity factor is behind this exchange. The asset specificity of the digital objects is much more fluid and complex. Its form and content could easily be manipulated, duplicated and transformed. The possibility of opportunistic behavior arising out of such transactions of digitized objects is hence very real. Because of the increased uncertainty associated with such transactions, the UAIT (use, alter, income, transfer) elements deservedly attract closer


examination and scrutiny during the negotiation/contract stage, increasing the contract cost, of the transaction cycle. The diagram below reveals that there are several key factors that impact and affect SCRM in varying ways. These factors are bounded rationality, opportunism, uncertainty, frequency, asset specificity, small numbers (BOUFAS) as proposed by Williamson and A.Cordella. These factors are indeed the main reasons and sources that determine the shapes and sizes of the transaction costs (SRCM). Opportunism

Transaction cost

Uncertainty/ Complexity

Small Numbers Bounded

Rationality

Asset Specificity Frequency

Search – Contract – Regulation - Maintenance

How does each BOUFAS-factors impacts the stages of transaction cost (SCRM)? The diagram below provides a graphic illustration of a transaction involving two actors – buyer and seller and where the sources occurred. The arrow between the two actors represents the transaction. Bounded rationality and opportunism are factors of the actors. The other sources are factors of the transaction itself.

Use, alter, income, transfer (UAIT)

Search cost - Contract cost - Regulation Cost - Maintenance Cost (SCRM)

Transaction Actor B

Transaction Actor A

- Asset specificity - Uncertainty - Frequency - Small numbers

- bounded rationality

- opportunism


- opportunism

Bounded rationality. The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world -- or even for a reasonable approximation to such objective rationality. Hence, individual turns to their past


experiences, exposures, tried & tested methods and this has a limiting effect on getting the best value from the transaction. Bounded rationality is a source of transaction costs, particularly in the area of search, contract, and monitoring & regulation costs. How is this so? Take “search cost”. Individual, limited by bounded rationality and being unfamiliar with the market or not knowing what to look for, may be actually conduct excessive searches and be overwhelmed with information. This information overload can lead to increased uncertainty, augment information asymmetry, and confusion. The diagram below shows that this is particularly so in a capitalist economy where the market is imperfect.

The same bounded rationality limits the individual ability to negotiate effectively and draft an incomprehensive contract that may result in higher cost eventually. Thus, humans are inclined to make erroneous decisions. Errors constitutes increase contract and regulation costs.

Information not access by both A & B

Common information

B’s private information (asymmetric information)

Rectangle: complete information

A B

The Sim-Lim story gives an idea why IT can help mediate bounded rationality. The scenario involved the shopping for the best priced and quality hard-disk at Sim Lim Electronic Complex [Anthony Cordella, 2007]. Sim Lim has hundreds of IT shops. Bounded rationality will set in after going around half the shops, as the individuals will rely on past experiences and limited knowledge to retain the information in his brain. This will cause him to lose information that he is not familiar with. This increases the search and contract costs, as the optimal results cannot be attained at the end of his search. But IT can reduce this cost. A simple exploit of Excel spreadsheet on a handheld would have greatly improved the data management, and hence reduced the transaction costs! IT can mediate bounded rationality further with the development of search engines, information portals, and connectivity to public and private information databases. Frequency. Frequency describes how often a specific transaction takes place. Frequency is the measurement of the number of occurrences of a repeated event per unit of time. The frequency of a particular type of transaction impacts transaction costs particularly in the area of search, contract, or regulation cost.


The general guidelines for frequency and why IT can mediate to lower certain type of cost in SCRM are as follow: o Low frequency – Low frequency of a transaction type increases search and contract

cost for buying parties as the processes to look for a contracting partner get restarted each time the need to conduct an exchange. With low frequency, the buying parties will experience lower agency cost (in-house supervision and managerial cost), but traditionally, does not enjoy low cost associated with high frequency of volume purchases), increased transaction costs in searching (for reliable intermediaries), contracting (negotiation, contract terms), and subsequently, maintenance/ review cost. With the advancement in IT, network communication systems, SCM, and ecommerce, this is not exactly the truth anymore. Two scenarios have resulted regarding the frequency factor: Intermediaries such as e-commerce transaction brokers (e.g. Accomline, Asiarooms, and Expedia) have blossomed. They are able to exploit IT network communication systems to harness volume transactions (i.e. high frequency) as intermediate brokers between buyers and sellers (globally). Because these brokers are able to attract and accumulate volume sales (electronically, on a global scale), they are able to get a competitive price/quantity discount (in the market place) similar to distributor status from the sellers and pass the benefits to their buyers (of low frequency). Traditionally, getting a good price/quantity discount not possible without high frequency of the buyers. Market-like form of organizing persists. Another development is for firm to “transfer” part of their internal business processes (often non-core competencies) to external market processes. This has the key advantage of utilizing the specialist knowledge of professional intermediaries (brokerage) and lowering of sunk cost. Ericsson/Nokia/Dell and Flextronics International, Baxter Healthcare and its hospital clients, DBS and outsourced telephone-pool are examples. This form of de-internalization reverses the traditional internalization strategy to enjoy economy of scale. Again, market-like form of organizing persists here.

o High frequency – High frequency of a transaction type lowers transaction costs and

permits exploit of economies of scale - processing in-house with own development team and resources. This can result in lower search and contract cost, but higher contract cost in employment contract and regulation cost (agency cost of supervision, control, and monitoring). Traditionally, high frequency provides opportunity for better control, coordination, and security. Traditionally, this lead to hierarchy form of organizing (such as the case of Fisher and GM). With industry strategy, high frequency provides the opportunity for development of network externalities where an increase in the number of transactions has very little or marginal increase in the overall cost, similar to the telephone network and cable services of Singtel and Starhub, where any increase in numbers of subscribers will have little or no impact in increased cost on running the telephone network.


Opportunism. (you have to discuss about opportunistic behaviours and how IT effectiveness in reducing transaction costs depending on forms of organizing and how trust affect opportunism. Cases of SG gadget and Africian story of IT increasing information asymmetry). Uncertainty. (you have to discuss about market processes and globalization increase uncertainty through bounded rationality and complexity. Uncertainty leads to information asymmetry, opportunism and higher transaction costs. The type of asset and its asset specificity can contribute to uncertainty where the physical specificity is fluid and forms can change easily. IT through electronics networks, e-commerce, ebusiness and enterprise systems can reduce SCRM selectively). Asset Specificity: (you have to discuss different type of assets – content type affect value of asset. Specialist skill or facility in contract binding to only one party. Digital content and UAIT in particular and where IT can reduce cost). Small numbers. (you have to discuss monopolistic situation where contract cost is higher to prevent opportunistic behavior of unreasonable, frequent price increases. Cases of Starhub and Singtel on business cables & network lines) In conclusion, IT can mediate in lowering of transaction costs is applicable in any situation, irrespective of the type of reasons or sources. The actual cost benefits with IT will differ from case to case, nature and type of transactions, organizational form of organizing, the degree of frictions, the extensiveness and scope of the implementation of the information systems and technology. Question E2 Explain, with examples, how transaction costs are incurred? Does IT always reduce transaction costs? Similar questions: Q. Describe the four phases of the transaction lifecycle. Critically analyze, using example, how ICT can reduce the transaction costs associated to two of these phases. Solution guide: Transaction costs are cost incurred in making an economic exchange. An exchange involved various stages of cost in searching, contracting, regulation, and maintenance. These stages are complicated by various reasons of bounded rationality, opportunism, uncertainty, frequency, asset specificity and small numbers. Let us look at an example: buying bananas from my goreng-pisang store. The Transaction costs = price of banana + effort to find out which of the various bananas make the specifications + where to get them + negotiate for the best price + transportation cost + QC cost + time and energy to coordinate and acquire the bananas. Thus, when rationally evaluating a potential transaction, it is important to consider transaction costs that might prove significant. Hence, the stages of a transaction and their


cost be carefully examined. 1) Search and information costs (stage-1). They are costs such as those incurred to determine information of the required goods available on the market, which suppliers, their reputations, who has the lowest price and best quality, etc. Bounded rationality often cause one to feel inadequate to search for “more” information leading to a situation of information overload and increased coordination cost. It is also true that bounded rationality often cause one to look only at known sources and hence missed out on new information resulting in an inadequate search. In an imperfect market condition, the buyers and sellers will act opportunistically and will try to “hide” information from one another causing market disparity and increased market uncertainty. 2) Bargaining costs (and contract cost) (stage-2). Costs are incurred in effort in working out an acceptable agreement with the supplier on the transaction, drawing up an appropriate contract, evaluating the terms, etc. Bounded rationality, insufficient information, market uncertainty, small numbers, frequency, nature of asset specificity can negatively impact negotiation and contractual terms. 3) Policy and enforcement costs (also known as “regulation & control cost”) – stage-3 Costs that are incurred in supervising, monitoring and ensuring that the supplier sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to the case. Where trust is high, such cost may be lowered. In cases of poorly negotiated contractual terms, the cost of enforcement can be very high. 4) Maintenance cost ….. bla bla bla… These costs are consequences of complexity and uncertainty of the economic system. Uncertainty and complexity are related to either human behavior or environmental and unpredictable events. They are both the outcome of an unequal distribution of information between the actors involved in the transaction. Today, we have a largely imperfect global market. Competition is the order of the day. We cannot expect all transactions to work out smoothly. As we have seen, many factors such as opportunistic behaviors, bounded rationality, market uncertainty can disrupt orderly transactions. The scenario below summarizes how various factors can impede and raise transaction costs. A supplier may successfully bid in a competitive environment (market) for a customer’s tender on the building of a special widget. However, to make the widget, the supplier will be required to build specialized machinery which cannot be easily redeployed to make other products (high asset specificity). Now, once the contract is awarded to the supplier, the relationship between the customer and supplier changes from a competitive environment to an opportunistic situation of monopoly relationship. Here, one party can subsequently dictate the terms of pricing. In such in a “monopoly” quite situation similar to small-numbers, where it is futile to search for more customers, the demand and price are inelastic. This means that the customer has greater leverage over the supplier such as price cut with


subsequent orders. To avoid these potential costs for the supplier, "hostages" may be swapped to avoid this event. "Hostages" could include partial ownership in the widget factory – where costs are shared between customer and supplier. Revenue sharing might be another way. Automobile companies and their suppliers often fit into this category - as seen in the case of GM and Fishers. GM forced Fishers to relocate its factory next to GM (asset specificity) as the transportation cost was too high for GM. As nearly the whole production of Fishers (frequency factor) was meant only for one customer (GM), Fishers has no choice but to let GM dictate terms. So, does IT always reduce transaction costs? Yes, in most cases as in eCommerce, and SCM. Often resulting in reduce search , contract, regulation costs. Be aware

that the use of too many acronyms may irritate the examiners. So, on the safe side, write in full or use acronyms minimally.

Indeed, implementing a new information technology is generally seen as a means for reducing the transaction costs of an organisation. Some reasons being higher availability, increased information, increased accessibility, 24/7, efficient network linkages between sellers and buyers. However, in practice, implementing new informational technology may often result in higher transaction costs. This is because of the amount of information that needs to be processed by the organization increases. Organizations are overly bounded to provide highly precise information. Organizations are not able to efficiently differentiate the useful information to collect. Poorly coordinated data warehousing and archival system can aggravate further the processing problems. This can result in information overload. The cost of handling this information is coordination cost. The overall processing cost increases leading to a situation where the cost of the new information technology exceeding the saving in the transaction cost. IT may increase information asymmetry and opportunism, hence increasing transaction costs too. How? (African Story, SG gadget) If these costs exceed the benefits of IT, then the implementation of IT becomes something negative and expensive. To reduce coordination costs, organizations can do following: 1) Improve information processing capabilities. This can be done through implementing new information systems. Technologies like SCM, e-commerce and ERP can provide technical support for the strategies, rather than piece-meal developments. 2) Use IT to reduce the need for coordination through increased slack resources, i.e. reduces the need for extreme precision e.g. “over” or excessive search owing to unnecessary feeling of uncertainty. 3) The decreased amount of information to process = lower coordination cost, which in turns leads to lower transaction costs e.g. summary, links. An understanding of the transaction costs and its reasons can lead to better and effective use of IT and the design of information systems. Today, information is the all important


factor to cost management. Understandable, IT should increase the amount of relevant information to facilitate efficient search, contract, regulation and maintenance activities. We dare venture that effective management of transaction costs can be equated to effective use of IT. Question E3 What is transaction costs model? How are they incurred? Can IT mediate to lower overall cost? Solution guide: The transaction-cost model (TCM) views the organization as a contractual arrangement to govern sets of transactions and a network of exchanges & contracts. The contracts are binding instruments between individuals and organizations. TCM recognizes that individuals might distort the use of information to achieve their individual goals and generate strategic misrepresentation. TCM recognizes that IT can mediate transactions & exchanges between parties to lower transaction costs. At the same time, TCM can use IT to foster a more intensive use of markets and market-like organizational forms. A transaction goes through a series of stages (lifecycle) from search to contracting and review. These stages incur various kind of cost. These are called transaction costs. Transaction costs are incurred during of searching for buyers and sellers (vendors), selection of partners, negotiations, and writing the contract terms, and regulating, monitoring and enforcing the contracts, and maintenance and review of the contracts (SCRM). These various type of transaction costs can be explained in details as follows: Cost of searching for buyers and sellers (vendors)

• Searching, collecting, collating product information during procurement • Comparing prices of product and services during the procurement process • Marketing of services and products

Cost of selection of partner and writing the contract • Research the background, reliability, dependability and tenure of partners • Evaluation of reputation of partner • Selection of partner • Drafting the terms of contract • Negotiate terms of contract • Securing and writing the contract

Cost of monitoring and enforcing the contract • Sales order processing: capturing, monitor, supervising and allocating • Delivery and transportation of goods • Customer services • Monitoring and enforcing contract. Control and regulation costs - costs relate to the

implementation of the contract under conditions of uncertainty, the policing of deviations from the contract terms and the enforcement of penalty to restore conditions suitable to the terms agreed upon

Cost of maintaining and reviewing the contracts • Cost of review of partnership


• Costs of resources incurred in all the stages (in looking for new partner or updates on existing partner)

• New information about existing and new partners The actual degree of involvement of each type of transaction costs will further depend on the reasons or sources of the cost, namely BOUFAS (bounded rationality, opportunism, uncertainty, frequency, asset specificity and small numbers). Technically speaking, reaching out to the market places is expensive. Can information technology mediate and reduce transaction costs? Over the last decade, information technology has made tremendous progress. It improves the enterprise’s operations, access to markets, decision-making capabilities, and communication – and improving the overall enterprise value chain leading to lower transaction costs. From an economic standpoint, information system technology can be viewed as a factor of production that can be freely substituted for capital and labor. As the cost of information system technology falls, it is substituted for labor. Historically, labor has been a rising cost. Now with lowering cost of IT, firms are experiencing lower cost of market participation (i.e. the transaction costs incurred in external market processes), making it worthwhile for firms to contract with external suppliers (though Internet, extranets and e-commerce linkup) instead of building up own internal sources incurring new resources both staff and equipment. Hence, IT should also lead to a decline in the number of supervisory middle managers and clerical workers as information technology substitutes for their labor – lowering of agency cost and transaction costs (contract & regulation cost) IT facilitates overall seamless coordination, cooperation and fast efficient processing of all aspects of business transactions which include purchases, sales, inventory, production, assembly, transportation, accounting, training of new staff, account receivable, account payable, supply chain management, customer relationship management and enterprise resource planning. The lower transaction costs is achieved together with less labor cost, less office space, less operational space, reduces firm size (physically) and less agency cost (cost of monitoring and supervision). Information technology has also facilitated the formation of network alliance between contract manufacturers, buyers, and customers. This reduces SCRM (searching, contracting, regulation/monitoring, and maintenance cost) further. The IT responsible for this phenomenon includes e-business, e-commerce, Internet, extranet, telecommunication network services, database systems, and global enterprise information systems such as SCM, ERP, CRM, KMS. In the sales order processing system – customers can make direct enquiries on prices, place orders, and check status of their orders without the intervention of firm’s human labor. This is the case of Asiarooms.com, Zara and Mango’s ERP information systems. Zara’s sales invoices and reminders of outstanding payments can be automatically created and dispatched to customers, without human interventions. On top of that, there is less supervision and monitoring cost (agency cost).


Inventory control and production control are automated with minimum involvement of human labor as in the case of WalMart Hypermart and Ford Motor using RFID tags. The inventory level of each item is computed based on the data collected from the RFID tags. Their inventory system automatically recommended inventory replenishment for items that falls below the minimum stock levels. Their information systems result in reduced inventory holding both in the central inventory warehouse and the respective display or shop-floor holding areas. This means less space is required, less damaged items, less misplacements, less coordination effort – resulting in all round saving. Baxter Healthcare formed an alliance with its hospital partners. Baxter healthcare’s SCM takes care of all the inventory, warehousing and supply needs of the hospitals. The searching, contracting, regulation and maintenance cost of the hospitals were virtually eradicated. Besides the lower transaction costs, the hospital also further benefited as they could concentrate on their core business and competency. On the other hand, Baxter benefited on economy of scale and, with lower transaction costs, could deliver its product and services at a reduced cost. This scenario is also replayed in the case of Flextronics International and their customers such as Dell and Ericsson. Call centers handle all customer enquiries for all its various branches. Calls and enquiries are all channeled to a distributed ‘logical’ centralized network call center that is located in another country with cheaper labor cost. With this service outsourced, the firm size is actually reduced too. With virtually no more supervision and monitoring activities, the agency cost is reduced when layers of middle managers can be removed. We see this with all banks. e-Commerce business models and Internet technology provide great transactional saving and greatly lower the transaction costs. E-Commerce models includes virtual storefront, information broker, transaction broker, online auction, content provider, virtual community, online service provider, and information portal. They facilitate low-cost online transactions with secured e-commerce payment systems, 24/7 services, extended channel of distributions, low cost barrier to entry, and richness in advertisement. Amazon.com, a B2C virtual storefront, keeps just-in-time (JIT) inventory of books and magazines. Supplies are acquired only when customer orders are received online. Amazon.com also sell e-books and e-magazine that hardly requires any physical warehouse holding space. In such cases, orders are automatically catered for with accompany online payment. All this is done without the need for any labor intervention. Telefonica in Spain operates a virtual storefront - content provider to sell music download, video-on-demand and customer registrations without incurring cost in labor and office space. As they are all in digital forms, theoretically there is no need for any warehouse anymore and yes, thus lowering both transaction and agency costs too. Another e-business model is the Information broker model. Hardwarezone.com is one example. It is an information broker portal that provides information services on IT product specifications, shop locations, and prices. It also provides free price comparison


and product reviews. It is not an IT store and it does not sell any IT products too. Such information portal reduces the searching and procurement cost of the buyers. It also reduces information asymmetry. The Q is not

really concern about limitations of IT, but we can put this in the conclusion to show the wider effects of IT

There are many more examples of great saving in transaction costs using IT, e-Commerce, and Internet. United Parcel Services, American Airlines, eBay, CTrip, Dell Computer, Toyota, and Ford’s special experience with the invoice-less processing system. The list is endless. Indeed, information technology has greatly lower the transaction costs. However, the growth of IT, network systems and globalization has created a situation of excessive databases and global network of information. The ugly heads of information overload, insecurity, privacy invasion and infringement of property rights are becoming urgent problems. Control mechanisms and sophisticated software to counter these problems can offset the benefits and may actually raise transaction costs eventually. Question E4 Explain outsourcing from a transaction costs perspective. Explain with examples the potential roles play by ICT in supporting outsourcing of information systems. Similar questions: Q. What is a transaction costs model (TCM)? Why and when would you recommend the

TCM model approach to design of information systems? Solution guide: Outsourcing is based on the concept of “sub-contracting”, specialization and division of labor. Outsourcing involves de-internalization of internal process to market processes. Outsourcing involves the negotiation and writing of a contract with intermediaries, or 3rd parties to perform professional tasks that otherwise would have been performed in-house with the firm’s own in-house teams of managers, workers, developers, programmers, office space, machinery and hardware resources Organizations have begin to ask “why should organization be involved in non-core business processes when it is cheaper, more efficient, less time-consuming and readily available skilful experienced professionals to do so?”

The Q is really concern about why outsourcing of development of information systems is now popular… and with transaction cost as the main reason.

Outsourcing from a transaction costs perspective. What is “transaction costs perspective”? Transaction costs refer to the costs incurred by the series of activities necessary to complete a transaction. These costs are incurred during of the search for outsourcing partners, selection of partners, negotiations of terms, and writing the contract, and regulating, monitoring and enforcing the contracts, and maintenance and review of the contracts - in short, search, contract, regulation and maintenance costs (SCRM). The diagram below shows that the SCRM costs associated with outsourcing are in turn affected by several reasons such as bounded rationality, opportunism, uncertainty, frequency, asset specificity and small numbers (BOUFAS).


Opportunism

Transaction cost


Small Numbers

Bounded Rationality



Take the analogy of “would you outsource your lunch”? Obviously, for nearly everyone, the answer is yes. Why yes? Reasons are transaction costs in relation to factors of BOUFAS, economy of scale, convenience, and level of trust. This is the same scenario too when outsourcing information systems, be it during the development stages, operations or building the telecommunication network to support the information systems. Frequency. Frequency describes how often a specific transaction such as new information system projects, network communication installations, and PC maintenance take place. Frequency is the measurement of the number of occurrences of a repeated event per unit of time. The frequency of a particular type of transaction impacts transaction costs particularly in the area of search, contract, and regulation cost. With low frequency transaction, the search, contract and regulation (supervisory, agency) cost increases for the buying parties as the processes to contract (employment contracts) and manage a new team of developers or professionals get restarted each time a new project comes around. Keeping a team, sitting around and waiting for new projects similarly also increase transaction costs, in like ways. A viable alternative is to outsource part or all of the processes. This has the key advantage of utilizing the specialist knowledge of professional intermediaries to get the best deal lowering agency cost. NCS, EDS, and Accenture are three such international IT outsourcing provider companies. Bounded Rationality. This limits the inhouse developers abilities to optimize on its limited resources. This increases transaction costs (search, contract and regulation costs) when bounded rationality forces the developers to compensate with misguided excessive search for information on business knowledge, information overload, and incompetent negotiations of contract of IT tools, and limited ability to maximise on the resources during development stages. Bounded rationality can be mediated with external specialist knowledge by engaging external specialists and professional intermediaries through outsourcing. This is attractive option opened up the doors to unbounded rationality and reduction of transaction costs, particularly in agency and coordination cost.


Small numbers and Assest specificity. Within a country where there is a very limited number of avaliable experienced professional IT specialists in a very specialised business area, employing such professionals incurred high cost of contracting. This is also the reason of high asset specificity of the professionals. Investing in intensive search effort not help much since such professionals are limited. BUT in today context, the world is the very connected. Already in place are effective network infrastructure and global connectivity (IT externalities) where the world is becoming "w/o boundaries" - a big dot. Outsourcing the information systems to faraway professional vendors in another countries is very viable. This has the effect of diminishing the limiting conditions associated with small numbers and asset specificity. (Uncertainty & Opportunism. You will note that all other reasons like complexity, opportunism, bounded rationality, asset specificity, frequency can lead to uncertainty. Type of organization forms and goal congruence and trust also affect uncertainty. Think about it… you can discuss about market processes and globalization increase uncertainty through bounded rationality and complexity. Uncertainty leads to information asymmetry, opportunism and higher transaction costs) So, how does ICT support outsourcing of information systems? Today, there are many qualified outsourcing service providers with expert knowledge in all aspects of information systems activity. They have proven knowledge, wealth of experience, international networks and development skills. NCS, EDS, and Accenture International are three such global software outsourcing providers. Because of a combination of IT technological advances and ease of global connectivity (through improved communication networks, Internet, extranets, distributed databases, etc), globalization, availability of expertise, and cheap skilful labor in 3rd world countries, it is now attractive for companies to outsource their non-core business activities. Examples included well-known low-cost operational call-centers servicing local enquiries that may be located in a faraway location and in any part of the world. Application development can be carried out quickly and cheaply by IT experts in another country and delivered over global communication networks. Outsourcing of information systems may be illustrated with the following three main areas. Computer operations – Owing to globalization and a wired world, most organizations run 24/7 operations. Running on 3 shifts requires more human resources and infrastructure. But when there is dip in demands or rise in demands as with seasonal promotional sales and lull periods, it is not easy to maximize the resource utilization in both manpower and infrastructure – hence higher transaction costs of supervision, monitoring – agency cost. Many business IS operational processes are standard forms. Standard equipment and devices are also used. They are fairly easy to operate and maintain. Maintaining full time staff at all time is hence costly. Whereas shared resources via outsourcing is attractive. Standard chartered bank and OCBC bank are examples. Telecommunication networks – Mainframe computers, communication equipment, security devices, routers, gateways, firewalls, distributed databases are expensive infrastructures. With globalization and internationalization of business enterprise, managing and building own


international telecommunication networks can be exorbitantly costly. New technology changes quickly and obsolescence is high (market uncertainty and complexity). Keeping up with the latest is important to reap best benefits of effective communication networks. This is expensive. Individual organizations would have problem optimizing without any scale of economies. The outsourcing of such telecommunication requirements to network providers is most appropriate. Applications software development – In application development, particularly large scale developments involving the full life cycle approach is demanding, strenuous, time consuming and resources sapping. Because it takes years to develop, staff turnover is inevitable during the various phases of development. This means delays and higher transaction costs – caused by searching, re-contracting, retraining, and recruitment. Again, the development team may not have the expert experiences (bounded rationality). Inevitably, when the development is completed, the problems of retrenching, and demoralizing existing “left behind” staff become evident. Given the situation, outsourcing to IT provider with professional experts would be more cost effective. Singapore Polytechnic is an example. Outsourcing may open doors. The professional outsourcing company has global reach, networks, and ICT connectivity. They know where, how, and who to get the best skills, equipment, techniques, tools, raw materials, logistics support, and at the best price. Flextronics is an example. In most organization, many large organizations are shifting towards outsourcing of their key development and operational activities such as IT operations, systems analysis, systems designs, application developments, networks and security management. The likes of these can be found in Standard Chartered Bank, DBS, SIA, and Government statutory bodies. In conclusion, in today’s context, outsourcing of information systems indeed has positive effects on reduction of transaction costs and promotion of core competencies. While this is true, organization must contend with the sacrifices of losing their own team of IT experts, weaker system security, lost of control, originality of information systems, property rights and other factors when having own development team of developers. Question E5 What do you understand by “property rights” in a transaction? Explain any 2 reasons of transaction costs and how IT can mediate in them. An

introduction should give the BIG picture, keywords w/o any details. Details, definitions, illustrations should be in the essay body

Similar question: Q. Describe the transaction costs model. Discuss, with examples, how ICT can reduce the transaction costs associated to uncertainty and bounded rationality.[2007 Prelim] Solution guide: Property rights are intrinsic values of an asset. In a transaction or exchange, which attracts various stages of cost, the property rights of the transacted asset are automatically transferred to the new owner. The cost of an exchange is complicated by various reasons isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 85

of bounded rationality, opportunistic behaviors, uncertainty, frequency, asset specificity and small numbers. A contract, either implicit or explicit, takes place between the two actors (buyer and seller) in an exchange. Property rights give the new owner the rights of “use”, “alter”, “income” and “transfer” (UAIT) of the transacted asset. An asset maybe any kind of goods, services or information. “Use” refers to the buyer who can use it in any ways he sees fit. Similarly, he may make alterations and/or make an “income” out the acquired asset. Of course, all these must be done within the context of the contract. Finally, he may sell and transfer his rights of the property to another buyer. Certain exchanges are simplistic, straightforward transactions while others may be very complex – this depends on the nature of the transacted asset. The property rights of non-digitized objects (such as a table, chair, audio player) are evidently less complex as compared to digitized objects (such as audio CD, textbook, printed material). With the latter, the asset specificity is much more fluid, manipulative, and transferable. Low asset specificity suggests that an asset’s form and content could easily be reorganized, duplicated and transformed for reuse and re-contract. In an imperfect market, the possibility of opportunistic behavior arising out of such transactions of digitized objects is very real. Because of the increased uncertainty associated with such transactions, the UAIT elements deservedly attract closer examination and scrutiny during the negotiation/contract stage of the transaction cycle.


A transaction involves various costs and the uses of resources. In a perfect market, all transaction costs would be the same irrespective of the suppliers. But this is not true of an imperfect market where frictions and impediments to a smooth transaction will drive up the transaction costs. Such transaction goes through a cycle of search, contract, regulation, and maintenance (SCRM) – and is seen as the various costs incurred during a transaction. However, in an imperfect market, there are several key reasons that affect SCRM cost. As seen in the diagram below, these reasons are bounded rationality, opportunism, uncertainty, frequency, asset specificity, small numbers (BOUFAS), as proposed by Williamson and A.Cordella.


They impact search, contract, regulation and maintenance (SCRM) cost in various ways and depth. These factors are indeed the sources and main reasons that determine the final shapes and sizes of the transaction costs.

Opportunism

Transaction cost


Small Numbers

Bounded Rationality



How does each BOUFAS factor impact the different SCRM? The diagram below provides a graphic illustration of a transaction involving 2 actors – buyer and seller and where the sources occurred. The arrow between the 2 actors represents the transaction. Bounded rationality and opportunism are factors of the actors. The other sources are factors of the transaction itself. We shall further investigate two of the key contributors of transaction costs, namely bounded rationality and frequency.

Use, alter, income, transfer

Search cost - Contract cost - Regulation Cost - Maintenance Cost

Transaction Actor B

Transaction Actor A

- Asset specificity - Uncertainty - Frequency - Small numbers


- opportunism


- opportunism

Bounded rationality. The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is re required for objectively rational behavior in the real world -- or even for a reasonable approximation to such objective rationality. Hence, individual turns to their past experiences, exposures, tried & tested methods and this has a limiting effect on getting the best value from the transaction. Bounded rationality is a reason of transaction costs, particularly in the area of search, contract, and monitoring & regulation costs.


How is this so? Take “search cost”. Individual, limited by bounded rationality and being unfamiliar with the market or not knowing what to look for, may be actually conduct excessive searches and be overwhelmed with information. This information overload can lead to increased uncertainty, augment information asymmetry, and confusion. The same bounded rationality limits the individual ability to negotiate effectively and draft an incomprehensive contract that may result in higher cost eventually. Thus, humans are inclined to make erroneous decisions. Errors constitutes increase contract and regulation costs. The Sim-Lim story gives an idea how IT can help mediate bounded rationality. The scenario involved the shopping for the best priced and quality hard-disk at Sim Lim Electronic Complex [Anthony Cordella, 2007]. Sim Lim has hundreds of IT shops. Bounded rationality will set in after going around half the shops, as the individuals will rely on past experiences and limited knowledge to retain the information in his brain. This will cause him to lose information that he is not familiar with. This increases the search and contract costs, as the optimal results cannot be attained at the end of his search. But IT can reduce this cost. A simple exploit of Excel spreadsheet on a handheld would have greatly improved the data management, and hence reduced the transaction costs! IT can mediate bounded rationality further with the development of search engines, information portals, and connectivity to public and private information databases. Frequency. Frequency describes how often a specific transaction takes place. Frequency is the measurement of the number of occurrences of a repeated event per unit of time. The frequency of a particular type of transaction impacts transaction costs particularly in the area of search, contract, or regulation cost. The general guidelines for frequency and why IT can mediate to lower certain type of cost in SCRM are as follow: o Low frequency – Low frequency of a transaction type increases search and contract

cost for buying parties as the processes to look for a contracting partner get restarted each time the need to conduct an exchange. With low frequency, the buying parties will experience lower agency cost (in-house supervision and managerial cost), but traditionally, does not enjoy low cost associated with high frequency of volume purchases), increased transaction costs in searching (for reliable intermediaries), contracting (negotiation, contract terms), and subsequently, maintenance/ review cost. With the advancement in IT, network communication systems, SCM, and ecommerce, this is not exactly the truth anymore. Two scenarios have resulted regarding the frequency factor: Intermediaries such as e-commerce transaction brokers (e.g. Accomline, Asiarooms, and Expedia) have blossomed. They are able to exploit IT network communication systems to harness volume transactions (i.e. high frequency) as intermediate brokers between buyers and sellers (globally). Because these brokers are able to attract and accumulate volume sales (electronically, on a global scale), they are able to get a competitive price/quantity discount (in the market place) similar to distributor status


from the sellers and pass the benefits to their buyers (of low frequency). Traditionally, getting a good price/quantity discount not possible without high frequency of the buyers. Market-like form of organizing persists. Another development is for firm to “transfer” part of their internal business processes (often non-core competencies) to external market processes. This has the key advantage of utilizing the specialist knowledge of professional intermediaries (brokerage) and lowering of sunk cost. Ericsson/Nokia/Dell and Flextronics International, Baxter Healthcare and its hospital clients, DBS and outsourced telephone-pool are examples. This form of de-internalization reverses the traditional internalization strategy to enjoy economy of scale. Again, market-like form of organizing persists here.

o High frequency – High frequency of a transaction type lowers transaction costs and

permits exploit of economies of scale - processing in-house with own development team and resources. This can result in lower search and contract cost, but higher contract cost in employment contract and regulation cost (agency cost of supervision, control, and monitoring). Traditionally, high frequency provides opportunity for better control, coordination, and security. Traditionally, this lead to hierarchy form of organizing (such as the case of Fisher and GM). With industry strategy, high frequency provides the opportunity for development of network externalities where an increase in the number of transactions has very little or marginal increase in the overall cost, similar to the telephone network and cable services of Singtel and Starhub, where any increase in numbers of subscribers will have little or no impact in increased cost on running the telephone network.

In conclusion, IT can mediate in any situation, irrespective of the type of sources. The actual cost benefits with IT will differ from case to case, nature and type of transactions, organizational form of organizing, the degree of frictions, the extensiveness and scope of the implementation of the information systems and technology. Question E6 Discuss the effect of uncertainty on transaction costs and explain why information technologies can help in reducing them. [SG] Solution guide: A transaction involves costs and the uses of resources. A transaction goes through a cycle of search, contract, regulation, and maintenance (SCRM) – and often may be seen as the various costs incurred during a transaction. Transaction-cost recognizes that individuals might distort the use of information to achieve their individual goals and generate strategic misrepresentation. Such opportunistic behavior increases uncertainty leading to higher transaction costs and undesirable consequences. IT can mediate such transactions & exchanges between parties to lower the transaction costs.


There are several key factors that impact and affect transaction costs in varying ways. The diagram below recognizes several factors of transaction costs. There are bounded rationality, opportunism, uncertainty, frequency, asset specificity, and small numbers as proposed by Williamson and A.Cordella. These factors determine the eventual shapes and sizes of the various types of transaction costs. Uncertainty

Opportunism

Transaction cost

Small Numbers

Bounded Rationality

Asset Specificity Frequency Search – Contract – Regulation - Maintenance Uncertainty factor places a major role in transaction costs. Uncertainty, often also has a hand in all the other factors of cost. (You will note that all other reasons like complexity, opportunism, bounded rationality, asset specificity, frequency can lead to uncertainty. Type of organization forms and goal congruence and trust also affect uncertainty. Think about it… you can discuss about market processes and globalization increase uncertainty through bounded rationality and complexity. Uncertainty leads to information asymmetry, opportunism and higher transaction costs. The type of asset and its asset specificity can contribute to uncertainty where the physical specificity is fluid and forms can change easily. Opportunism examples: case of fraud by POSB’s lucky draw transaction - 1st prize goes to the analyst’s house maid. Cases of manipulation of transactions by CAO’s CEO/Chen and Barring’s Nick Leeson. IT through electronics networks, e-commerce, e-business and enterprise systems can reduce SCRM selectively. Give examples how ecommerce, SCM can mediate such as AsiaRooms, ebay, Baxter, Flextronics etc. In conclusion, IT can mediate in lowering of transaction costs is applicable in any situation, irrespective of the type of reasons or sources. The actual cost benefits with IT will differ from case to case, nature and type of transactions, organizational form of organizing, the degree of frictions, the extensiveness and scope of the implementation of the information systems and technology. Question E7 Explain how the transaction costs model applies to the design of information systems. Explain how e-Commerce helps in reducing such transaction costs.


Similar Q: The transaction-cost model has often been used to inform e-business strategies. After a brief presentation of this model discuss, providing examples, how transaction costs theory has informed B2C strategies [2008 May ZoneB] Solution guide The transaction-cost model (TCM) views the organization as a bundle of transactions and network of contractual arrangements to govern each set of transactions and exchanges. The contracts are binding instruments between individuals, and organizations. TCM recognizes that individuals might distort the use of information to achieve their individual goals and generate strategic misrepresentations. TCM recognizes that IT can mediate transactions & exchanges between parties to lower transaction costs. At the same time, TCM can use IT to foster a more intensive use of markets and market-like organizational forms. A transaction goes through a lifecycle or series of stages from search to eventual purchase and review. These stages incur various kind of transaction costs. Transaction costs are incurred during of searching for buyers and sellers (vendors), selection of partners, negotiations, and writing the contract terms, and regulating, monitoring and enforcing the contracts, and maintenance and review of the contracts. The intensity of the search, contract, regulation and maintenance (SCRM) costs are affected by several reasons such as bounded rationality, opportunism, uncertainty, frequency, asset specificity and small numbers (BOUFAS). So, how does TCM apply to the design of information systems? The primarily objective of these information systems is to exploit ICT to reduce transaction costs in each stages of the transaction either by streamlining, eradicating or minimizing the intermediate processes and the reasons (BOUFAS) promoting the transaction costs. <you need to argue how each BOUFAS factors can be incorporated into the design of information to reduce cost regulated contractual obligations> Information systems such as e-commerce, m-commerce, e-business, ERP, SCM applications and electronics communication networks are all concerned with reducing process complexity, reducing market uncertainty, improving efficiency and effectiveness of transaction handling. Processes in transaction incur resources and cost – labor, office, factory space, logistics, machinery, material and time and coordination cost in handling and managing the information resources. e-Commerce is rapidly becoming the infrastructure of choice for electronic handling transactions. It offers easy and fast way to link with other business partners and individuals at low cost. Most e-Commerce systems ride on the Internet technology and extranets. Internet provides a universal and easy-to-use set of technologies and technology standards that can be easily adopted by all participating organizations, no matter what computer system or information technology platform the organizations are using. e-Commerce has great potentials in reducing search cost, cost of selection of partners, cost of writing contract, and cost of enforcing the contract terms. We can see this in the


examples of AsiaRooms, Zuji, Baxter, and Flextronics (you may explain these example further). e-Commerce facilitates market transactions to be available anytime, anyplace, shrinking distance and time, promote dis-intermediation, reduce “time to market” of products and services, provide extended channels and new marketplaces. Trading partners can directly communicate with each other, bypassing intermediaries and inefficient multi-layered procedures reducing complexity, uncertainty, coordination cost and contract costs. Web sites are available to consumers 24 hours a day, 7 days a week (24/7). In a “bricks & mortar”, handling market transactions is often time consuming, complex, and expensive. Market uncertainties abound. Processes are difficult to control and re-engineer, as they are dictated by market forces that outside the control of the organization.

Can we say “eCommerce” indirectly internalize external processes?

However, with the introduction of e-commerce, the market processes are suddenly becoming manageable and easier to streamline. E-Commerce facilitates electronic automation of many of the market processes and removable of intermediaries reducing search and regulation costs. New business model, and new e-commerce payment system are examples. This has resulted in reduction of transaction costs and agency cost besides reducing delivery time of goods and services. The new business models provide new channel of distributions and new types of products and services are spawned. e-Commerce “forces” organizations to rethink and reduce transaction costs in new ways with efficient online offerings, easy access, low-cost exchanges, innovative services and improve their strategic advantage. So, what are the new electronic business models? Here are the main ones and examples. Virtual storefront: Amazon.Com; TigerAirways.com Information broker: shopila.com, hardwarezone.com Transaction broker: Finatiq.com, cTrip.com, Asiarooms.com, Zuji.com Online Marketplace (also known as eAuction): eBay. com Content provider: CNN.com, MP3.com Virtual community: iVillage.com Geocities, Fortunecity Information Portal : Yahoo.com, MSN.com, google.com An organization often uses more than one electronic business models in their e-Commerce strategy. Telefonica’s e-Commerce strategy, as an example, initially uses 3 of the electronic business models to improve customer reachability and reduce transaction costs. They are virtual storefront, online marketplace and information portal. Telefonica use e-commerce to extend their existing distribution channels, creating outlets for attracting and serving customers that otherwise would not patronize the company. In a virtual storefront eCommerce, the vendor need not have to own any physical store to market their products and services. They can use the Internet to distribute the information surrounding their wares, such as product pricing, options, availability, and delivery time. Web-based discount brokerages have attracted new customers who could not afford paying the high commissions and fees charged by conventional brokerage and financial services firms. This is the case of the transaction broker business model.


Handling transactions electronically can reduce transaction costs and reduce delivery time for some goods and services. This is especially the case for those that are purely digital such as music download, e-magazine, e-newspaper, e-books, software, images, videos or services of trouble shooting over the networks. These products and services can be distributed over e-Commerce as electronic versions. This is the “digital content provider” business model. With the information portal business model, like Google and Yahoo, search for information and procurement have never been make more convenient. This not only reduces information asymmetry but reducing the transaction search cost for many activities. The model facilitates for a one-stop location to reach a variety of market information resources. TCM becomes more prominent with the pervasive use of e-Commerce information systems as they contribute strongly to lowering of transaction costs. As e-Commerce is about market transactions, it has fostered a more intensive use of markets and market-driven infrastructures. Although potentially beneficial in all aspect of business commerce, eCommerce attracts opportunistic behaviour, fraudsters, system insecurity, invasion of privacy and property rights. As in any technology, e-commerce has its own limitations too. Other Questions: Q. What do you understand by “information systems are viewed as socio-technical systems”? Would the Transaction-cost model approach suffice?


F. INFORMATION SYSTEMS STRATEGY & STRATEGIC INFORMATION SYSTEMS

Question F1 What is competitive advantage? What is the role of people in defining the strategic implications of ICT solutions? [SG] Similar Q: What is an information systems strategy? Critically discuss the role of people in defining the strategic implication of ICT solutions [2007 ZA exam] Solution guide: Keywords: competitive advantages, people, strategic implications, ICT solutions. Strategic information system.Porter 5 forces, ladder of business benefits with IT, 3 levels of strategy: business, firm, and industry. BPR, Value chain, Value Web, Ecosystem, Network economy & externalities, IT partnership. Topdown, bottom-up, CIO, CEO, CFO, COO, CTO, managers, end-users, social and technical aspects, CSFs, TQM Competitive advantage refers to an organization having positive market leverages over its competitors. Michael Porter states that a competitive advantage, sustainable or not, exists when a company makes economic rents. A well-designed ICT solution, that involves both technical and social aspects, is a catalyst to attaining competitive advantage. Competitive advantages are goals of strategic information systems. Strategic information systems are information systems that are designed with the objectives to effectively change the goals, operations (both internal and external), products, services, or business relationships of organizations. Such activities that will reshape organization, differentiate services and products, build “barriers” or transform the business. Not just ordinary improvement in efficiency or productivity, but company wide improvement either in sustained profits, alliance, capturing larger market share, locking-in (the customers), and reducing cost. Michael Porter summarizes these into five strategic competitive aspects that can impact competitive advantages:

a) threat of new entrants into its market, b) pressure from substitute products or services, c) bargaining power of customers, d) bargaining power of suppliers, and e) low cost rivalry

Venkatraman suggests the five stages in his “Ladders of Business Benefits with IT” with the last three stages as revolutionary where competitive advantages can be attained:

a) localized exploitation b) internal integration c) business process redesign d) business network redesign e) business scope redefined


Organization gaining competitive advantages with strategic use of ICT includes American Airlines, Baxter healthcare, Quaker Chemical. We’ll now take a quick look. American Airlines gained competitive advantage not because of cost reductions but because it redesigned it business process to give a significantly better service to travel agents and passengers. This success led to American Airlines redefining its business scope and transforming its business. Firms achieve competitive advantage when they provide more value to their customers or when they provide the same value to customers at a lower price. An information system could have strategic implications if it helps the firm provide products and services at a lower cost than competitors. The Baxter Healthcare’s stockless inventory is a powerful instrument for locking in customers, thus giving the supplier a decided competitive advantage. Information systems can also raise switching costs by making product support, service, and other interactions with customers more convenient and reliable Harness business intelligence! It breeds and promotes organizational learning. This leads to organizational sharing, enterprise collaboration, new innovative products/services and better customer services. KMS helps Quaker to create and sustain competitive advantage. Competitive advantage can be achieved by enhancing the firm's ability to deal with customers, suppliers, substitute products and services, and new entrants to its market, which in turn may change the balance of power between a firm and other competitors in the industry in the firm's favor. Hence, strategic uses of ICT to gain competitive advantage can be carefully addressed at the firm-level, business-level and industry-level. A firm-level and business-level competitive advantage can be attained with value chain and related value web strategies. The activities of the firm value chain, and its partner’s value chain could be enhanced with supply chain management information systems to make each of the value transaction more cost-effective. This is the case of Flextronics and its customers (e.g. Cisco, Ericsson). A firm can achieve a competitive advantage over competitors by developing highly effective and efficient ties to its business partners and their value chains. By working with other firms, industry participants can to develop ICT solution for industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. We see this in the bank consortium of OCBC, DBS and UOB establishing the NETS electronic payment system – an industry-level strategy indeed. Eco systems such as Microsoft operating system and network economy & externalities such as Starhub Cable are other examples. Strategic information systems are not specific to any one organizational level. They have more far-reaching and deep impact than any other kinds of systems. They profoundly alters the way a firm conducts its business. As we will see, organizations may need to change their internal operations and relationship with customers,


suppliers, business associates, and even competitors in order to take advantage of new ICT solutions. The competitive advantage gained from new strategic ICT solution often does not last forever. It is often difficult to sustain. Competitors can retaliate and copy the strategic systems. We see this happening with American Airline's SABRE computerized reservation system, Toyota’s SCM, and Citibank's ATM system. Firms must hence be constantly on their toes to identify new strategic uses of ICT to keep ahead and sustain their competitive advantage. Strategic ICT solutions provide the catalyst in strategic transitions – demanding “revolutionary” changes in both the technical and social elements of the organization. Thus, we may view strategic transitions as movements from one level of socio-technical systems to another involving people in the identification of ICT solutions and their strategic implications. Defining strategic implications can be carried out with a bottom-up or top-down approach. The bottom-up approach starts from the ground involving the people at the operational level. Understanding the social aspect of people working in an organization plays an important role in defining the new ICT solutions and its strategic implications. The bottom up approach involves its all workers, supervisors and managers before moving up to the divisional managers and top executives such as CEO, COO, and CFO. The CIO provides the leading role and manages the strategic implications and transitions. The bottom up approach can be very tedious but welcoming in term of achieving change management. Departmental managers and his staff know their areas of work and concerns well. They are the people who have direct dealings with the customers, suppliers and other supply chain partners. Understanding and addressing their needs, not just the technical but also the social aspects, are crucial in the new ICT solutions. Failure to understand the social aspects is an early warning sign of disaster of the new ICT solution. Certain approaches like strategic analysis, total quality management, and BPR can be deployed to involve the people early to unearth their concerns and identify strategic implications of new ICT solutions. SStrategic Analysis (also known as critical success factors – CSFs) argues that an organization’s information systems success is dependent on critical success factors identified by the managers and supervisors of the various functional units. Hence, new information systems should be shaped to support these CSF to ensure organizational success. Besides, planning change towards the new information systems would be synonymous to supporting the functional unit managers’ CSFs. “Inventory system to eradicate losses and damages” is an example of a likely CSF from the inventory supervisor and storekeepers. Total quality management (TQM) is a management approach for an organization, centred on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to


business partners. The concept of TQM is to make quality the responsibility of all the staff in an organization and use TQM as the basis for change. An example of improved quality, as identified by TQM process lies “in reduction of downtime in assembly line through QC” Business process reengineering (BPR) is a management approach that involves workers, supervisors and managers. BPR examines various aspects of related business processes and its interactions on an organisational wide basis with a view to radical redesign and streamline the processes for better productivity and efficiency. With the top-down approach, the opinions of top executives are the core catalysts to the identification of strategic ICT solution. They are the CEO, CFO, COO, CIO, CTO, CKO, key business divisional and departmental managers may be involved, where appropriate, in defining strategic implications and specifications of the new ICT solutions. CIO provides the direction and focal point for ICT deployment and development initiatives. He takes the lead role in the formulation of the information systems strategy (ISS) and identification of information systems that provide strategic competitive advantages. The CTO is the technology expert. He provides technology R&D support and assess strategic potentials of new technology to business strategies. The CKO is the latest addition, in the information age, who is responsible to cultivate a culture of harnessing knowledge, learning organization, and motivation of development of knowledge-based core competencies. The CIO - in consultation with the CTO and other top executives like CEO, COO and CFO - must determine how the organization wants to use ICT technology to achieve the goals set out in the business strategy (BS). Strategic ICT solutions will have to be carefully determined at business, firm and industry level. CIO and his team (CKO, CTO, project leaders) must be aware that different information systems strategy at each level is required to achieve low cost, product/service differentiation and changing the scope of competition. He must be able to correctly assess the level of IT culture in the organization, and formulate a good strategy to move the organization up the ladder of business benefits with IT. In any implementation of any information systems strategy and strategic ICT solutions, the CIO and his team of developers must manage the change carefully. He must ensure the end-users are well informed and well prepared for the change. Only when the changes are successfully implemented, then can we hope to see competitive advantages filtering through. Deployment of the latest sophisticated ICT technology in the hope of achieving competitive advantages without a well thought out information systems strategy (ISS) will meet futile soil if there is no strong committed support from the higher executives. This is especially so if the CEO does not “walk the talk”. The CEO, together with his lieutenants (CFO, COO, divisional directors) to be involved in the defining of strategic implications of the new ICT solutions and possibly be present in


the many user-meetings, announcements and briefings. CEO and his top executives play vital roles. Their unreserved supports are crucial. New information systems signify impending organizational and structural changes. It involves social responsibilities couple with technical aspect. The development process must be handled with great care to ensure successful identification, definition and implementation of any new ICT solution and it strategic implications. Question F2 Why is it often argued that technology is not enough to provide competitive advantage? What is the role of people in defining the strategic implication of ICT solutions? [SG] Solution guide: Indeed, “technology alone is not enough to provide the competitive advantage over competitors”. In any successful strategic technological solutions, the social responsibilities play equally important roles besides the technical aspects.

ICT = information & comm systems

0%Key management executives such as CIO, CFO, COO, CTO, CKO, and CEO play important roles in defining strategic ICT solutions and deployment of the ICT strategy. The line managers and key functional personnel also contribute to defining strategic ICT solutions. First, lets understand what is “technology”. Then follow by “competitive advantage”. We will then proceed to discuss how the involvement of people in defining strategic ICT solutions leading to competitive advantage. “Technology” includes computer hardware, input-output devices, networks, telecommunication systems, the Internet, extranet, intranet, systems software, application software including enterprise information systems, e-commerce, e-business, multi-media hardware and software, database systems, and storage devices. This represents the possible combination of technologies that could make up the ICT platform of an organization. It is not a question of simply deploying the latest and most expensive technologies. An optimal mix includes the considerations of the social aspects of people - their readiness, knowledge, expectations and fear. New techology must be planned for and meet the firm’s business strategy (BS) and business plans (BP). As we know, business strategy and business plans are the responsibilities of the CEO and his senior executives CFO, and COO. Competitive advantage refers to an organization having positive market leverages over its competitors. Michael Porter states that a competitive advantage, sustainable or not, exists when a company makes economic rents. In today’s context, ICT technology and solutions are strategic. ICT technology shrinks the distance and time factors between trading partners. ICT creates opportunities for an extended marketplace, enhance collaborative partnerships and commerce, facilitate seamless transaction processing on global basis, and promote effective global enterprise


computing. ICT technology has the capacity to create competitive advantages. This can be done by in several ways: differentiating its products and services, lowering transaction costs, changing the scope of competition with niche market or creation of new market opportunities. As ICT has great influences over an organization’s overall business strategy and business plans, deployment of ICT technologies must be carefully planned and organized. This optimal mix of ICT technologies appropriate to the enterprise is defined in the information technology strategy (ITS). But an ITS must in turn support the organization’s information needs which must support its business strategy (BS) and business plans (BP).


The information needs must include strategic ICT solutions that will bring about competitive advantages for the organization. Such information needs are defined in the organization’s information systems strategy (ISS). The CIO with its lieutenants (CTO, system team) must understand and ensure the information systems strategy provides the backbone and directions on how ICT solutions and technology can be used to create competitive advantages at business, firm and industry levels. Strategic ICT solutions provide the catalyst in strategic transitions - demanding changes in both the technical and social elements of the organization. Thus, we may view strategic transitions as movements from one level of socio-technical systems to another, as the adoption of the information systems strategy requires changes that go well beyond the technical infrastructure to encompass improved ways of conducting internal and external operations, new business goals, relationships with customers, suppliers, business associates and even competitors. Be able to identify and adopt the correct strategies at firm, business, and industry levels. It has to be responsible people to decide how best to use the technology, how and what roles will change and redesign. It has to be responsible people to ensure that information technology strategy (ITS) is aligned to information systems strategy (ISS). The diagram below shows, that they must in turn be aligned to business strategy (BS) and business plan (BP). Flextronics, Baxter, Zara, and Telefonica are examples of organisations that planned and aligned their strategies well. They attained tremendous successes with the uses of ICT technology. BP

BSISS

ITS So, who will be the person/s responsible for the formulation of information systems strategy and defining of strategic ICT? Generally, this can be proceeded with the Top down or Bottom-up approach.


The bottom-up approach starts from the ground involving the people at the operational level. Understanding the social aspect of people working in an organization plays an important role in defining the new ICT solutions and its strategic implications. The bottom up approach involves its all workers, supervisors and managers before moving up to the divisional managers and top executives such as CEO, COO, and CFO. The CIO provides the leading role and manages the strategic implications and transitions. The bottom up approach can be very tedious but welcoming in term of achieving change management. Departmental managers and his staff know their areas of work and concerns well. They are the people who have direct dealings with the customers, suppliers and other supply chain partners. Understanding and addressing their needs, not just the technical but also the social aspects, are crucial in the new ICT solutions. Failure to understand the social aspects is an early warning sign of disaster of the new ICT solution. Certain approaches like strategic analysis, total quality management, and BPR can be deployed to involve the people early to unearth their concerns and identify strategic implications of new ICT solutions. With the top-down approach, the opinions of top executives are the core catalysts to the identifications of strategic ICT solution. They are the CEO, CFO, COO, CIO, CTO, CKO, key business divisional and departmental managers may be involved, where appropriate, in defining strategic implications and specifications of the new ICT solutions. CIO provides the direction and focal point for ICT deployment and development initiatives. He takes the lead role in the formulation of the information systems strategy (ISS) and identification of information systems that provide strategic competitive advantages. The CTO is the technology expert. He provides technology R&D support and assess strategic potentials of new technology to business strategies. The CKO is the latest addition, in the information age, who is responsible to cultivate a culture of harnessing knowledge, learning organization, and motivation of development of knowledge-based core competencies. The CIO - in consultation with the CTO and other top executives like CEO, COO and CFO - must determine how the organization wants to use ICT technology to achieve the goals set out in the business strategy (BS). Strategic ICT solutions will have to be carefully examined at business, firm and industry level. CIO and his team (CKO, CTO, project leaders) must be aware that different information systems strategy at each level is required to achieve low cost, product and service differentiation and changing the scope of competition. He must be able to correctly assess the level of IT culture in the organization, and formulate a good strategy to move the organization up the ladder of business benefits with IT.


The ladder of business benefits with IT has 5 stages. It depicts how an organization moves from efficiency to business transformation, achieving sustainable competitive advantages. UPS, Baxter healthcare and American Airlines are organizations that have moved through the higher stages and achieved sustainable competitive advantages. At each stage of the ladder, the CIO should know what strategy models may be deployed to achieve the advantages of that stage. As stated, strategies are formulated at business, firm and industry level. Each level has its own effective strategic ICT solutions. There are two possible approaches to defining strategic ICT solution at firm-level. They are to create synergies between business units within firm and enhance firm’s core competencies. Besides the CIO and project leader, the roles of business unit line managers and executives in defining the solutions are crucial too. Since the firm may be viewed as a bundle of transactions between and among its various business units, management might opt for an information systems strategy at the firm level that promotes the sharing of knowledge across business units whenever there are synergies between business units. In other words, synergies make the transactions between business units more frequent because they tie together the operations of disparate business units so that their combined production is greater than the sum of their individual production. Laudon and Laudon (2006) define those information systems that integrate the key internal business processes of the firm as enterprise systems such as ERP and CRM. The core competencies of organizations, e.g. American Airlines is in (1) selling air-tickets, (2) selling online-ticketing system, and (3) providing training (on ticketing system). OCBC core competencies are in the businesses of (1) ATM services, (2) Investments, (3) Safe deposit boxes, and (4) Forex, while Ericsson is in (1) Design handsets (2) Production Handsets (3) Distribution & Logistics and (4) Marketing/Sales. Firm outsourced business units that dilute their competent areas so as to concentrate on their area of strength. CIO and responsible business unit managers identify the information systems that encourages the sharing of knowledge that enhances core competencies and help employees become aware of new external knowledge to gain business leverage. There are four possible approaches to defining strategic ICT solutions at the business level. CIO provides the lead role with involvement of key responsible divisional managers. They are:

a) leverage technology in the value chain to lower transaction costs b) products/services differentiation with information systems c) systems to focus on market niche d) supply chain management

Value Chain. Deployment of information systems infrastructure that make customer and supply chain data flow seamlessly among the various business partners. Business should try to develop strategic information systems for both the internal value chain activities and


the external value chain activities that add the most value. This solution requires the involvement of the IT project leader, business units and business partners. Computerized reservation systems such as American Airlines's SABRE system started out as a powerful source of product differentiation for the airline and travel industries. The key strategic question at the Industry level is whether to compete against or co-operate with other rivals in the industry. There are four possible approaches to designing strategy at the industry level. They are:

a) Information Partnerships b) Porter’s competitive five competitive forces model c) Business Ecosystems: Keystone firms d) Network economics & externalities

At the industry level, the CIO will have to formulate strategic solutions on how best to exploit the four strategies to produce strategic ICT implications. Of course, any selection of these strategies must be appropriate to the organization’s business strategy. The CIO with his team must ensure that any information systems strategy (ISS) be carefully aligned to the business strategy (BS) and business plans (BP). OCBC, Maybank, UOB, and Standard Chartered formed a partnership to share their ATMs. The partner banks and all their customers benefited from this partnership. There is saving in transaction costs for all parties, and “lock in” qualities. Honda, Aprila, Suzuki and Vespa scooter formed a European partnership to procure raw material as a group. These organizations can raise the industry's productivity by working together to create an integrated supply chain. Such partnerships help firms gain access to new customers, creating new opportunities for cross-selling and targeting products. Companies that have been traditional competitors may find such alliances to be mutually advantageous In Porter's competitive forces model, a firm faces a number of external threats and opportunities (Porter 1985). There are the

a) threat of new entrants into its market, b) pressure from substitute products or services, c) bargaining power of customers, d) bargaining power of suppliers, and e) low cost rivalry (result of Internet and information asymmetry)

The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference being that cooperation takes place across many industries rather than many firms. For instance, both Microsoft and Wal-Mart provide platforms com-posed of information systems, technologies, and services that thousands of other firms in different industries use to enhance their own capabilities. Microsoft has estimated that more than 40,000 firms use its Windows platform to deliver their own products, support Microsoft products, and extend the value of Microsoft's own firm.


In network externalities, the CIO and CEO have to decide to whether to work in close partnership with their rivals to develop industry-wide standards for exchanging information or business transactions electronically. Such efforts raise the entry barriers at the industry level while creating network externalities because the larger the number of users, the more valuable the industry-wide standard. In a network, the marginal costs of adding another participant are close to zero while the marginal gain can be much larger. Examples are Starhub cablevision, SingTel fixed telephone lines. In any implementation of any information systems strategy and strategic ICT solutions, the CIO and his team of developers must manage the change carefully. He must ensure the end-users are well informed and well prepared for the change. Only when the changes are successfully implemented, then can we hope to see competitive advantages filtering through. Deployment of the latest sophisticated ICT technology in the hope of achieving competitive advantages is a misnomer. New technology and new ICT solutions involve social responsibilities as well as effective technical exploitations. The whole process must be handled with great care to ensure successful identification, definition and implementation of any new ICT solution and it strategic implications. Question F3 Why is an “information system strategy” important to an organization? What is strategic alliance? Show how potential strategic competitive advantages may be gained through such alliances. General Guidelines and keywords Remember the question is “WHY” not “WHAT ISS? So, answer from the “WHY” angle. WHY ISS (ICT) is important now? Importance at Firm-level, business-level, industry-level, identification of information needs of the organization at all levels including strategic IS with strategic implications and the organization’s general information needs at all levels. Strategic implications/competitive advantages=product/service differentiations, build technological barrier, move up Venkatraman’s ladder of business benefits with ICT. Strategic alliance = any form of cooperation, collaboration, coordination with suppliers, competitors, customers, associates partnerships using ICT. Information partnership, business ecosystem/network externalities, SCM, collaborative commerce, value web. Strategic competitive advantages are gained using examples like Baxter, AA, Aprila/Honda/Suzuki,, Flextronics/Cisco, Microsoft, Intel, Dell, NETS. solution guide (note. There is no fixed solution. There is always more than one approach with “strategy”, eCommerce” or “design type” questions). The last decade has seen persistent, aggressive advancement in computer networks, communication systems and info-communications technology. This has fostered the market into a favorable global stage for proactive organizations to do business, add value, and compete in.


The drive towards knowledge economies has increased the level of urgency and importance for organizations to plan their information system strategy to explore these technologies and identify strategic implications toward the development of strategic information systems. One such potentially powerful strategy is the formation of strategic alliances with industry partners. An information system strategy (ISS) is a strategic plan. It details the new information systems and ICT infrastructure needed by the enterprise to achieve its long-term strategic goals (for the next 5, 10 years or so). The new information systems include strategic and operational (non-strategic) information systems necessary to position the enterprise to meet the new challenges. An ISS is important to an organization because info-communications technology (ICT) plays crucial technological roles in today’s fast-paced dynamic marketplace peppered with endless market uncertainties. ICT has progressed rapidly over the last two decades. Then, ICT was playing only backroom roles. In those early days, most organisations were contented just using ICT for efficient record-keepings such as tracking customer sales orders, purchase orders, accounting book-keeping, and coordinating employee payrolls. Over the years, computers have become extremely powerful and efficient. The bandwidth and capability of communication networks has increased tremendously. This facilitates high-speed transmission (of voice, data and graphical content) promoting a new kind of globalization in both global trade and communications. Application software has improved dramatically facilitating global commerce and trade. Today, ICT has become very important and is one of the key infrastructure pillars in enterprise. Organizations cannot afford not to include it as one of its important strategic weapon. The importance of ICT and strategic information systems requires strategizing them at all levels of firm, business and industry-level. At firm-level strategy, the organization looks at ICT solutions as strategies in maximizing its internal resources and processes - synergizing all it functional units (departments or business units). Often, an enterprise resource planning system (ERP) is implemented to integrate and manage them. At business-level strategy, the organization examines strategies to maximize its value chains and processes with its partners, suppliers, customers and associates (both upstream and downstream processes) through such information system like the supply chain management system (SCM). At industry-level strategy, the organization strategies in competing against or combining with competitors to leverage competitive advantages against other competitors in the industry. The importance of information system strategy (ISS) can be further illustrated using the example of Flextronics. Flextronics, a 12 year-old global electronic contract manufacturers,


realizes the strategic implications with ICT and the need to carefully strategize its deployment with a formal ISS to support its overall business strategy. Flextronics’ success was phenomenal, catapulting it into the world’s number two position, over 10 short years. The ISS of Flextronics includes, amongst others, the development of a global enterprise resources planning (ERP) information system, a global integrated supply chain management system (SCM), a collaborative design systems (CDS) integrating its engineers with designer engineers from its suppliers and manufacturers. You will notice that the ERP is part of the firm-level IS strategy, the SCM at business-level IS strategy, and the CDS at Industry-level IS strategy. Strategic alliance is a cooperation and collaboration between business organisations that aim for a synergy. The synergy from the alliance hopefully result in strategic competitive advantges and economic gain which will be greater than those effort from an individual enterprise. The organisations in the alliance may be comprised of suppliers, customers, business associates, organisations from another industry, or business competitors.


Such strategic alliance includes information partnership, strategic partnership, value web, business ecosystem and network externalities. The alliance is further strengthened with information system such as supply chain management and collaborative commerce systems. Information Partnership. Firms can form information partnerships and share part of their information systems to achieve unique synergies. In an information partnership, both companies can join forces without actually merging by sharing information. OCBC, Maybank, UOB, and Standard Chartered formed a partnership to share their ATMs. The partner banks and all their customers benefited from this partnership. There is saving in transaction cost for all parties, and “lock in” qualities. Honda, Aprila, Suzuki and Vespa scooter formed a European partnership to procure raw material as a group. These organizations can raise the industry's productivity by working together to create an integrated supply chain (SCM) and higher purchasing power as a group. This can lead to low cost production and cheaper products by all partners – thus a potential strategic competitive advantage over their rivals. Strategic partnership. A strategic partnership is a formal alliance between two enterprises, usually formalized by one or more business contracts but falls short of forming a legal partnership or, agency, or corporate affiliate relationship. American Airlines formed a strategic partnership arrangement with Citibank to award one mile in its frequent flier program for every dollar spent using Citibank credit cards. American Airlines benefits from potential competitive advantage of increased customer loyalty, while Citibank gains new credit card subscribers and a highly creditworthy customer base for cross-marketing - thus, increasing market share for both partners In local context, many banks are in strategic partnerships with hotels, restaurants, spa resorts, passenger car distributors, and even supermarkets. Such partnerships help firms


gain access to new customers, creating new customer market base and new opportunities for cross-marketing and targeting products. Value Web. This is an extension of the firm’s value chain. A value web system (often called “value system”) includes the value chains of a firm's supplier/manufacturer partners, the firm’s distribution channels, and other associate partners with the firm’s own business processes. This may include the firm’s competitors. In fact, today’s small businesses like the neighborhood’s motor-tire shops, computer shops and restaurants have their own “value web”. Often a shop who has sold out on a product will still be able to “sell” because it just “borrow first” from its neighboring “business partner” shop! Value web can lead to competitive advantage of low cost for all partners. Business Ecosystem is a strategic strategy and widely adopted in the high tech community. It is loosely coupled but interdependent networks of business community of “partners” including suppliers, lead producers, competitors, and other stakeholders who produce goods and services of value to their customers, who are themselves members of the ecosystem. In a business ecosystem, the economic community’s directions is often set by one or more central companies. In order words, business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. For instance, Microsoft is the keystone firm that provides the key platform where thousands of other firms in different industries use to enhance their own capabilities, products and services. The potential competitive advantages for keystone firms in business ecosystem lie in the sophisticated technological infrastructure barriers present to new entrants. The Microsoft’s business ecosystem would include loosely coupled technology partners such as Intel, Oracle and Cisco. As seen in the diagram below, Microsoft has estimated that more than 40,000 firms (e.g. Dell, SAP, Cisco, Oracles, software developers) use its Windows platform to deliver their own products and services, support Microsoft products, and even extend the business values of Microsoft's own firm. Niche firms include thousands of software application firms, software developers, service firms, networking firms, and consulting firms that support and rely on the Microsoft products.

Software developers

SAP Intel Oracles

Acer Dell IBM Microsoft Operating System

Another, Wal-Mart's order entry and inventory management system is a platform used by thousands of suppliers to obtain real-time access to customer demand, track shipments, and control inventories.


General Motors, Cisco networks, and Unix open-platform are other examples of keystone firms in business ecosystems where thousands of other firms’ products and services “come” together, thus forming their own economic communities. Network Economics & Externalities. Network economics refers to business economics that benefit from the network effect. This is when the value of a good or service increases when others buy the same good or service provided by the network economics and externalities. The potential strategic competitive advantages through such alliance lie in the product and service differentiation resulting from the development of new industry-wide standards in effective exchange of information and business transactions electronically. Many firms might find it more profitable to cooperate with their rivals to gain long-term strategic advantage. For instance, firms might decide to work in close partnership with some rivals to compete with others in the industry.

Exploit of high frequency?

Several local banks, (UOB, DBS, OCBC) have come together to build a new standard in e-commerce online payment system called NETS (Network for Electronic Transfers Services) 1985. The objective is to operate payment networks and drive adoption of electronic payments. NETS has been at the forefront of Singapore’s cashless revolution for more than twenty years. Such efforts raise the entry barriers at the industry level while creating network economies and externalities because the larger the number of users, the more valuable the industry-wide standard the group has created. Starhub is example of a single organization that developed a new network economics and externality with its cable network infrastructure setup. We see that the marginal costs of adding another participant or subscriber are close to zero while the marginal gain is increasing getting larger. The diagram below show the more subscribers there are in Starhub’s cable network (or a telephone network exchange), the greater the value to all participants because each user can interact with more people. At the same time, the business values of Starhub’s cable network also increase. It is no more expensive to operate a cable network, telephone exchange or television station with 1,000 subscribers than with 10 million subscribers. Adding a new subscriber has a marginal cost which is close to zero. Unlike traditional economics, the law of diminishing returns does not work here. Individual subscribers Company subscribers

VoD providers Starhub Cable Network ISPs


In conclusion, we have observed that OCBC, Maybank, UOB, Honda, Aprila, American Airlines, Citibank, Microsoft, NETS and Starhub have one thing in common in the approach in their ICT strategies and information system strategy. They exploited and capitalized on the advances made in ICT technology to derive strategic advantages for their firms. Many of these organizations could not have done it alone without some form of partnerships, either formal or loosely coupled, with its suppliers, customers, business partners and even competitors. Question F4 What are information system strategy and strategic information system? Give examples of ICT strategies that exploit and capitalize on the concept of partnership, of any forms. Other similar Questions: Q: Why do we refer to industry level information strategy? Why can firms decide to work

in close partnership with their rivals to develop industry-wide standards for exchanging information or business transactions electronically? Critically discuss with examples.[2007 ZB exam]

Q. What are the strategic implications of ICT? Discuss with examples. [2007 Prelim] Q. Striking information partnerships with rival firms might entail costs rather than

benefits. Discuss the factors for and against this strategy. [SG] General Guidelines and keywords Remember the question is “WHAT” not “WHY ISS and SIS? So, answer from the “WHAT” angle. Some keywords: competitive advantages, medium-long term, firm-level, business-level, industry-level, strategic alliance, value chain, value web, information partnership, ecosystem and network economics/externalities. Baxter, AA, Aprila/Honda, Flextronics/Cisco, Microsoft, Intel, Dell, Starhub, NETS. (check out http://supernet.som.umass.edu/austria_lectures/fintrosl.pdf) Today, impressive technological advancements have taken place in the field of ICT. It has become critical that every firm looks for effective ways to exploit existing advanced telecommunications, network systems, computer systems, e-commerce, powerful databases, knowledge management system, supply chain management and other sophisticated enterprise systems to gain competitive advantage and stay relevant and competitive.

Using the keywords from the Q to form an introduction

Firm must plan and strategize for the medium and long-term ICT needs and how they can strategically align to the firm’s overall business strategy and plans. Hence, identifying strategic information systems that exploit and capitalize on the concept of partnerships are some of the key strategies found in an information system strategy. An information systems strategy (ISS) may be viewed as a plan for the development of information systems towards some future vision of organization that meet the overall business strategy. An information systems strategy identifies strategic information systems, other support-level non-strategic information systems and ICT infrastructure for the long and medium terms. Information systems, often of socio-technical in nature, can


operate effectively at several different levels of strategy. They are firm, the business and the industry-level strategies. At firm-level strategy, the organization looks at ICT solutions as strategies in maximizing its internal resources and processes - synergising all it functional units (departments or business units). Often, an enterprise resource planning system (ERP) is implemented to integrate and manage them. At business-level strategy, the organization examines strategies to maximize its value chains and processes with its partners, suppliers, customers and associates (both upstream and downstream processes) through such information system like the supply chain management system. At industry-level strategy, the organization strategies in competing against or combining with competitors to leverage competitive advantages against other competitors in the industry. Strategic information systems (SIS) are information systems that are designed with the objective to gain strategic competitive advantages over their competitors. This includes developing strategic information system that creates high technological barriers (thus preventing new entrants from joining the fray), differentiate services (thus retain and increase market share) and transforming relationships between its customers, suppliers, business associates and even competitors. SIS has more far-reaching and deep impact than any other kinds of systems. SIS provide the catalyst in strategic transitions – demanding “revolutionary” changes in both the technical and social elements of the organization. Hence, SIS profoundly alters the way a firm conducts its business. Organizations may need to change their internal operations and relationships with customers, suppliers, business associates, and even competitors in order to take advantage of new information systems and technology. Formulation of information systems strategy and defining of strategic information systems can be a top down (involving largely the higher executives) or bottom up approach (involving all people elements in an organization). Formulating information system strategy, identifying strategic information systems and their implications can be generally classified collectively as ICT strategy. ICT strategy that exploits and capitalizes on the concept of partnership includes information partnership, strategic partnership, cross marketing partnership, business ecosystems (loose coupled business partners), and network externalities. Organisations that successfully exploit these strategies include Baxter/Hospital clients, American Airlines/Hotels and other travel industry partners, Flextronic/Ericsson, Aprila/Honda/Suzuki, Microsoft/Intel, and Starhub. Information Partnership. Firms can form information partnerships and share part of their information systems to achieve unique synergies. In an information partnership, both companies can join forces without actually merging by sharing information. OCBC, Maybank, UOB, and Standard Chartered formed a partnership to share their ATMs. The partner banks and all their customers benefited from this partnership. There is saving in transaction cost for all parties, and “lock in” qualities.


Honda, Aprila, Suzuki and Vespa scooter formed a European partnership to procure raw material as a group. These organizations can raise the industry's productivity by working together to create an integrated supply chain (SCM) and higher purchasing power as a group. Strategic partnership. A strategic partnership is a formal alliance between two enterprises, usually formalized by one or more business contracts but falls short of forming a legal partnership or, agency, or corporate affiliate relationship. American Airlines formed a strategic partnership arrangement with Citibank to award one mile in its frequent flier program for every dollar spent using Citibank credit cards. American Airlines benefits from increased customer loyalty, and Citibank gains new credit card subscribers and a highly creditworthy customer base for cross-marketing. In local context, many banks are in strategic partnerships with hotels, restaurants, spa resorts, passenger car distributors, and even supermarkets. Such partnerships help firms gain access to new customers, creating new opportunities for cross-marketing and targeting products. Value Web. This is an extension of the firm’s value chain. A value web system (often called “value system”) includes the value chains of a firm's supplier/manufacturer partners, the firm’s distribution channels, and other associate partners with the firm’s own business processes. This may include the firm’s competitors. In fact, today’s small businesses like the neighborhood’s motor-tire shops, computer shops and restaurants have their own “value web”. Often a shop who has sold out on a product will still be able to “sell” because it just “borrow first” from its neighboring “business partner” shop! Business ecosystem is another term for loosely coupled but interdependent networks of business community of “partners” of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers (Lansiti and Levien, 2004). The concept of a business ecosystem can be viewed as a large-scaled value web partnership described earlier. The cooperation may even take place across industries rather than firms, involving large numbers of “partners”. In a business ecosystem, the economic community’s directions is often set by one or more central companies. In order words, business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. For instance, Microsoft is the keystone firm that provides the key platform where thousands of other firms in different industries use to enhance their own capabilities, products and services The Microsoft’s business ecosystem would include loosely coupled technology partners such as Intel, Oracle and Cisco. As seen in the diagram below, Microsoft has estimated that more than 40,000 firms (e.g. Dell, SAP, Cisco, Oracles, software developers) use its Windows platform to deliver their own products and services, support Microsoft products, and even extend the business values of Microsoft's own firm. Niche firms


include thousands of software application firms, software developers, service firms, networking firms, and consulting firms that support and rely on the Microsoft products.

Software developers

SAP Intel Oracles

Acer Dell IBM Microsoft Operating System

Another, Wal-Mart's order entry and inventory management system is a platform used by thousands of suppliers to obtain real-time access to customer demand, track shipments, and control inventories. General Motors, Cisco networks, and Unix open-platform are other examples of keystone firms in business ecosystems where thousands of other firms’ products and services “come” together, thus forming their own economic communities. Network Economics & Externalities. Network economics refers to business economics that benefit from the network effect. This is when the value of a good or service increases when others buy the same good or service. Firms might find it more profitable to cooperate with their rivals to gain long-term strategic advantage. For instance, firms might decide to work in close partnership with their rivals to develop industry-wide standards for exchanging information or business transactions electronically.

Singtel with Bharti Airtel, GlobeTransit, Google, KDDI and Pacnet will build a 10,000Km ultra high-speed submarine cable system named Unity. It will link the United States to Japan. The cable system is expected to be ready for service inthe first quarter of 2010 (BT, 26/2/08)

Several local banks, (UOB, DBS, OCBC) have come together to build a new standard in e-commerce online payment system called NETS (Network for Electronic Transfers Services) 1985. The objective is to operate payment networks and drive adoption of electronic payments. NETS has been at the forefront of Singapore’s cashless revolution for more than twenty years. Such efforts raise the entry barriers at the industry level while creating network economies and externalities because the larger the number of users, the more valuable the industry-wide standard the group has created. Starhub is example of a single organization that developed a new network economics and externality with its cable network infrastructure setup. We see that the marginal costs of adding another participant or subscriber are close to zero while the marginal gain is increasing getting larger. The diagram below show the more subscribers there are in Starhub’s cable network (or a telephone network exchange), the greater the value to all participants because each user can interact with more people. At the same time, the business values of Starhub’s cable network also increase. It is no more expensive to operate a cable network, telephone exchange or television station with 1,000 subscribers than with 10 million subscribers. Adding a new subscriber


has a marginal cost which is close to zero. Unlike traditional economics, the law of diminishing returns does not work here. Individual subscribers Company subscribers

VoD providers Starhub Cable Network ISPs In conclusion, we have observed that OCBC, Maybank, UOB, Honda, Aprila, American Airlines, Citibank, Microsoft, NETS and Starhub have one thing in common in the approach in their ICT strategies and information system strategy. They exploited and capitalized on the advances made in ICT technology to derive strategic advantages for their firms. Many of these organizations could not have done it alone without some form of partnerships, either formal or loosely coupled, with its suppliers, customers, business partners and even competitors. Question F5 Is ICT strategic? Can ICT alone provide business the competitive advantages they need to compete successfully? Other similar question: Q. What are the strategic implications of ICT? Discuss with examples. Solution guide: (with partial extracts from “IT strategy for Business”, Joe Peppard, Pitman Publishing) Yes, ICT is a strategic resource that can create new opportunities, competitive advantages, and support business strategy and goals. However, ICT can become a double-edged sword and be detrimental to the organization, if proper strategic planning is not carefully carried out. ICT offers new management and business opportunities and can be applied strategically in at least four different ways:

• to gain a competitive advantage • to improve productivity and performance • to facilitate new ways of managing and organizing • to develop new businesses.

However, the strategic application of ICT raises a number of key business concerns. These concerns, which directly influence the effectiveness of ICT in an organisation, can be categorised under the headings of planning, technology, and people. Planning - Just as organisations coordinate and plan their business direction they must also plan their investment in technology. No business strategy is now complete without an ICT strategy. ICT must not only support business strategy but may also provide a strategic opportunity in its own right. isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 112

Technology - In many organisations a gulf exists between management and the 'technology people' (the IT professionals). To identify potential competitive advantage opportunities and to align the ICT strategy with the business strategy, management must be able to bridge this gap. An in-depth knowledge of technical details is not necessary but rather an understanding of the technologies' capabilities, the opportunities they present, and the strategic issues they raise. Every ICT strategic planning process makes assumptions about the nature and the role of technological developments. People - The ICT plan is only a blueprint, which must be put into action. Implementation involves developing the various applications which result from the ICT strategy and managing this process. Implementation of an ICT plan also involves change, and this change must be managed effectively. People are generally frightened of change so they need the support of a well managed change process. Ineffective implementation is the prime reason why IT investments fail to result in business gains. There must, of course, be an underlying understanding of the strategic significance of ICT and its role in the management of the information resource. The overall driving force of the ICT planning process is the underlying business strategy: the ICT strategy is derived from the business strategy. Managers don't need an in-depth knowledge of computers or telecommunications to identify opportunities where ICT might be used strategically or to manage ICT investments effectively. What they do need to understand is how ICT can contribute effectively to achieve business objectives in their organisations. We must admit that many technological innovations are very impressive; however, one should not loose sight of the raison d'etre (French for “reasons to be”) of these systems. Just as a high quality paint-brush is rarely sufficient to produce a legendary Mona Lisa art piece, technology itself is usually not sufficient for superior performance. Technology is only a means to an end and for any organisation this end is the effective management of the information resource. The information age is well and truly upon us. Many countries are information societies today. The most universally obvious effect is shown in the changing distribution of work across the whole economy. If profiles of working populations in the developed world are examined, they show that the largest proportion of workers are now engaged in some form of information handling work. Today's business organisation is an information-based, and digitally driven organisation. Information is the lifeblood of any organisation and everything an organisation does involves using information in some way. It is intricately bound up with the control of other resources. Information both supports and is involved in the total business.


Strategy and strategic planning. Strategy has become a key term in every major organisation. The essence of business strategy lies in creating future competitive advantages faster than competitors. It is seen as involving a complete reappraisal of the organisation in relation to its environment and is a blueprint for which alternative entrepreneurial, competitive and functional area approaches will be pursued in positioning the organisation. As a result of the work of Michael Porter, a Harvard University Professor, the 1980s saw a pronounced emphasis on industry and competitor analysis and the search for competitive advantage. So influential has Porter's work been that we apply many of his ideas in developing an ICT strategy. ICT strategies which significantly improve information use and context in order to enhance performance and coordinate activities across functional and business unit lines, as well as the interactions with external entities, in pursuit of strategic competitive advantage. This is the case of Flextronics, Zara, and Baxter Healthcare. They developed integrated systems, called enterprise applications, to efficient and effective coordinated the business processes across the whole company and form strategic collaborative system with their customers and suppliers. In order to manage information strategically, organizations develop what are known as strategic information systems. ICT can provide business with competitive advantages with the development and deployment of strategic information systems. Technically, strategic information systems may be no different from traditional information systems, however they can be distinguished by their focus on treating information as a strategic resource. Their objective is not just to automate existing information flows and operations to increase efficiency (as in most cases of transaction processing systems) but to give the business competitive advantage. We see this in American Airlines whose global online ticketing (SABRE) and Flextronics whose global SCM – both largely transactional information systems – scored strategic advantage over their competitors in the area of service/product differentiation and low production cost. By using ICT strategically, organisations attempt to externally disturb the competitive forces at work in an industry and in so doing change the industry structure. Consider the impact which ICT has had in the financial services industry from 'Big Bang' through to 24 hour electronic trading in equities. The once familiar open call system of the stock exchange has been replaced by buyers and sellers linking together electronically to buy and sell shares. A physical presence in the exchange is now no longer necessary. There are many other examples with the rise of e-commerce, collaborative commerce, and e-business. The innovative use of computer-related technology has enabled a wide range of firms in many different industries to create new products, new services, new processes, and dramatically reduce costs, thereby gaining a significant and sustainable competitive edge


over their competition. Well known examples include Flextronics, Amazon.com, e-Bay, Google, YouTube, and Blogger.com Competitive advantage through ICT is not only to make an old process more efficient or quicker but to transform it and radically change the way business is conducted. For example, firms traditionally pay bills on receipt of supplier invoices and pay by cheque. This process could be redesigned so that payment is made on receipt of goods rather than an supplier invoice (what is known as self-billing). After all, the invoice just reconfirms the delivery. This is the product of a business process re-engineering project which later came to be known as Ford Motor Invoiceless System. Instead of sending a cheque, an electronic payment instruction is sent to the payor's bank. The payor's account is debited and the payee's account is credited. A traditional way of doing business has been redesigned to take advantage of IT. We are not arguing that traditional systems are no longer appropriate. On the contrary, strategic systems supplement existing systems and in many cases derive from them. However some interesting characteristics emerge if we compare their differing emphasis: Strategic ICT Traditional IT 1. External focus on customers, Focus on internal processes. suppliers, competition, and other market entities. 2. Adding value – differentiation Cost reduction. through better products or services. 3. Sharing the benefits - within Localised benefits. the organisation and with customers or suppliers; even with competitors through appropriate strategic alliances. 4. Understanding customers needs Solving internal problems. and delivering value and solutions to problems. 5. Business-driven innovation Technology-led development. without emphasis on the latest technology. 6. Incremental development - Total system defined and developed. stepped approach, often by 'trial and error, or prototyping or package or outsource. 7. Exploiting the information to No exploitation beyond initial develop the business - for example, system. by market segmentation.


In thinking about the role ICT should play in an organisation, managers must understand the nature of the competitive position of the company or business unit and how it competes. This position and competition situation significantly influence the degree to which ICT is strategically important to a unit, the way investment in IS technologies should be considered and the way planning should be executed. It is imperative to recognise that there is a difference between having an ICT strategy and having an ICT strategy that is aligned to the business strategy. For many organisations ICT investment has tended to be piecemeal and haphazard. Coordination and integration of systems is very often not a consideration. This has been exacerbated in many organisations with the advent of cheap micros and local area network (LAN) software. Aligning ICT with existing business strategy requires the development of both an ISS (IS strategy) - what is required in relation to information systems, and an IT strategy (ITS) – what technology platform will be needed to deliver the ISS. The key is that business strategy drives IS strategy and IT strategy. However, beyond using ICT to support existing business strategy, firms have the opportunity in using ICT, proactively, to create new opportunities for the business. This has happened for many organizations, such as FedEx and American Airlines. So, what are the ICT technologies? What issues need careful consideration when planning the strategy? It is one of the ironies of business strategic planning that those furthest from the customer generally formulate it. Similarly, people with little understanding of ICT usually decide on IT investment decisions. This is especially true for small-to-medium sized companies who don't normally have the in-house technological expertise. While senior managers aren't expected to have an in-depth knowledge of technologies, they should, however, be aware of their capabilities and the issues involved. Every ICT planning process must make assumptions about the nature and role of technological evolution. There are two main reasons for this

• implementing an ICT strategy takes time • technology is rapidly changing.

One of the consequences of this is that you plan now to develop a system with a technology which may be obsolete by the time it is actually fully implemented. Telecommunications is the technology of information transfer. Multinational organisations (like Flextronics, Toyota, and Mango) especially need good communication systems to coordinate the activities of many people in diverse locations.


Communications can be used by all organisations to reduce the costs and delays associated with more traditional means of communication, improve sales through better customer service, and establish better means of communicating with suppliers and customers. The ultimate goal of this evolution in communications is a broadband integrated digital network where a wide range of traffic types (voice, data, image, video) and value added services are supported by a global communications network. The Internet, which is owned by nobody and freely accessible to all, is today the most use communication network. Advances in communications have lead to collaborative networks where organisations have begun to link to each other electronically. So, for example, instead of sending orders through the post, which can take several days, they can now be sent electronically in real-time. Developments in value added networks and network security lead to services like electronic data interchange (EDI), intranet and extranet - these developments can be used to improve document (like product design) exchange, slash inventory, improve cash flow, streamline a company's operation, and often forge a competitive advantage. Research in artificial intelligence (Al) seeks to expand the frontiers of information management, and spans a new era: the "intelligence age". Probably the most successful results to date in Al are expert systems that seek to encapsulate the knowledge of experts in specific domains. Neural networks, intelligent databases, voice recognition, biometric systems, multimedia, virtual reality and document image processing are recent technologies that can become strategic weapons for the proactive organizations. Implementing an IS strategy is a crucial stage. Formulating an IS strategy is one thing, implementing it is another. Organisations are social structures composed of people and ICT has a direct effect on their role in the organisation. It is important that actions and changes required to implement an ICT strategy are anticipated so as to maximise the benefits. Implementing an ICT plan involves change. Employees are given new roles and responsibilities; there is change in the way tasks are performed and how people work with each other. Information itself is a resource that is closely linked with status, enhances authority, and shapes relationships. Changes in the availability of information can result in disruption and organisation conflict. To gain maximium benefits from information systems, both its flow and use throughout the organisation must be properly managed. The success of the implementation will ultimately be measured by how effectively this change is managed. Change management must begin with an understanding of the nature of change itself.


In conclusion, ICT is strategic to modern organizations. Failure to maximize on new ICT technologies and identification of potential competitive advantages can spell the beginning of the end of any multinational organization. Summary Key points:

Information should be regarded as a key resource.

No corporate strategy is complete if there is no IS strategy. This should be obvious by now.

ICT is too important to be left solely to the IT professionals

Planning. for ICT should be an important and integral part of the firm's competitive strategy development. ICT must be planned for strategically.

ICT can be used to create substantial and sustainable competitive advantage.

Keep abreast of how other companies are using ICT around the world. Remember that innovative applications in another industry may be just the key to permit you to get a jump on your competitors.

Cultivate a culture that considers IS/IT issues as it does general business issues. ICT permeates the whole organisation and it is now an integral part of the competitive makeup of industries. An appropriate environment must be established within the organisation to reorientate the treatment of IS/IT.

Technological choices are essentially business decisions. Technology is just a means to an end.

Filter out buzz words. They are the IT industry's way of confusing the business community. Managers do not need an in-depth knowledge of technical details but an understanding of the technologies' capabilities, the opportunities they present, and the issues that they raise.


Question F6 a) Distinguish between an information systems strategy and an information

technology strategy. Is it sensible for a medium sized or large organization to recognize these 2 distinct areas?

b) In developing an IS or an IT strategy to what extend should a company be influenced by what other organizations are doing? [2006]

Solution guide a) Information Technology strategy (ITS) refers to the set of Information technology that provides the best platform for the enterprise application software to run from. An Information systems strategy refers to the desirable set of information systems and strategic information systems which an organization must identify and implement in order to achieve the objectives of the business strategy and plans. A strategy spells out HOW best and with WHAT resources should be used to achieve a certain set of enterprise objectives and results. Example of strategy could be “building barrier to new entries”, “broaden the base of customers and suppliers to reduce their powers”. IT includes database systems, type of computers, communications technologies, network infrastructure, Internet, intranet, extranet, e-commerce, e-commerce payment systems, input and output devices. IS includes all form of applications to meet the requirements of the various function in an enterprise. Such functions include inventory, sales order processing, purchase order, warehousing, assembly, production control, OC/QA, logistics, invoicing, accounting, payroll, finance, human resources, e-commerce applications, KMS, KWS, CRM, SCM and ERP. IT and IS are interlinked (note the diagram below & explain it). Particularly for medium and large organization, the danger of many disparate systems with varying platforms can arise over the longer term – making the progress to adopt new technology increasing difficult. However, it has been argued though that as long as developments are modular, client-server architecture, Internet technology based, web-based technology - it may not pose real problems to integrate any IT infrastructure. This is partially true as disparate systems still require integration and ‘handshaking” interfaces.

BS

BP

ISS

ITS


b) In developing an IS or an IT strategy to what extend should a company be influenced by what other organizations are doing?

Company ISS is influenced by other organizations and technology in following ways: - technology pull – the desire to be the forerunner in using new technology but risks

associated! But may result in ‘cash cows”.

- technology push – the desire to keep up and follow with competitors. E.g. if many banks have biometric security, the remaining banks may be pushed into adoption and hence requires monetary resources. Walmart uses of RFID. Flextronics extensive use of ERP. American airline on computer network and online ticketing are examples. They led and forces others to follow or “die”

(What should company do? Company influences by effects on other companies and their reactions. Strategy will have to be formulated at business, firm and industry level. for discussion of business, firm and industry level strategies, see E1) Question F7 a. Explain the purpose of an information systems strategy and who it is of use to? b. Are all information systems strategic for an organisation, or are some more

significant than others in terms of their benefits and their impact on the organisation? [2002/Q7]

Solution guide. a. The purpose of an information systems strategy (ISS) is provide a strategy to approach the development of enterprise applications that will achieve the business strategy and business plans of the organization. ISS includes the identification of strategic information systems (SIS) and how best IT resources (database systems, telecommunication, networks, computers, software, security platform, data protection policy, IT budget, IT personnel policy) are deployed. A good ISS must support and be aligned to the company’s business strategy and requirements in the medium and long terms. “Strategic” refers to operations that could make a difference to the company performances and future achievements over their competitors.

Draw the alignment diagram of 4 boxes: BS, BP, ISS, ITS

ISS detailed how best to use and incorporate IT in line with the firm’s overall business strategy. ISS considers all factors (organisational aspects, environmental etc). ISS may be developed to incorporate strategy at 3 levels: business, firm and industry. At business level – BPR and value chain At firm level – collaborative network, value web with e-commerce At the industry level, one powerful strategy model lies in Michael Porter’s 5 forces. e.g. “new entrants into the markets”. “New substitute product and services e.g. Typewriter substitutes by PC + word-processor and Greeting card substitutes by e-Card. Avoid


competition on low price rivalry by using IT to improve design, functionalities and cost. Power of consumers and suppliers base. (to expand briefly with examples) So who use the ISS? The key users will be the higher management – in particular CEO, CIO, CTO, CKO, and CFO who are responsible for using IT strategically. ISS has great impact on what goes into the business strategy and business plan. ISS provides the overall directions and guidelines to what, when, which IS, IT and human resources be acquired, and installed. Managers from various departments such as the financial, HR would be involved. The ISS often included another important component called the ISP (information system plan). It is the result of input from ISS + Business strategy + Business Plan. Amongst other items, the ISP details the development timeframe of new information systems (including SIS) to be developed over the medium and long term. The CIO, and CTO are jointly responsible for identify suitable development approaches and plans to achieve the ISS. They have identified whether the development is carried out in-house, outsource, or go for application packages. They have to work closely with the end-users to pace the necessary development and deadline of the ISS/ISP. b. Are all information systems strategic for an organisation, or are some more significant than others in terms of their benefits and their impact on the organisation? No. Not all information systems are strategic to all organisations. “Strategic” implies “transformation”, “made a great difference” “critical success factors” and involve major changes affecting the company’s current and future competitive position and directions. American Airline, and Baxter Healthcare are examples that transform the company’s customer base by a large margin as a result of the successful implementation of their strategic applications. A firm’s overall information needs often consist of a basket of different types of application systems falling into 4 quadrants as suggested by McFarlan. McFarlan’s strategic grid suggests that organization often has a balance portfolio of applications namely Turnaround, Strategic, Factory, Support. Turnaround applications are future “cash-cow” applications. Strategic information systems (SIS) or applications are those that are very important applications, and are strategic, a “critical success factor” to the company today. An example is Flextronics International’s ERP and SCM which links all its global subsidiaries and global suppliers into an international supply chain network. This enables Flextronics to source for the best suppliers and subcontractors world-wide with speedy responses to their customers at low price. Factory and support applications are often applications that are required to keep the factory running in its day-to-day operation efficiently and effectively. They are not strategic but equally important too. Bills and salary need to be paid, taxes needs to be collected like GST, sales orders need to be captured, office emails and word processing


packages must continue to work correctly – all these are either factory or support applications – not strategic but important to the daily running of the company. Information systems and innovations may not have same strategic importance to different type of industry. Take the Inventory system – this kind of application may be critical and strategic to Walmart and Baxter Healthcare, as examples. Walmart controlling their daily store inventory would be a bread and butter issue for them. While for Baxter, their Inventory-less information system that is networked & linked to all their hospital customers is both critical and strategic to Baxter. BUT an inventory system to an educational institute or a cement factory that keep inventory of stationery or office material may just be superfluous – such computerized inventory system may be not necessary at all. Another example would be the ticketing system – a transaction processing system (TPS). Such would be critical and strategic to the airline industry but may not be that critical for a cinema or public swimming pool collecting entry tickets. Would an accounting system be strategic or a necessity? Many IT applications may not be “strategic” applications but they are important to keep the daily operations running smoothly or ensure the middle management received management reports to help them monitor and control the operations. A key question to ask to help determine the application’s critical and strategic importance is “What happens if the computer systems break down for a week, 2 or three weeks?” “Strategic IS” are applications that will help a firm gains strategic advantages and leverage against its competitors. SIS helps achieve the strategies laid out in the Business strategy and ISS. This is achievable with Information Systems that improve the enterprise’s value chain, discover unique processing methods, achieving strategic advantages through low cost, product or service differentiation, better design, substitute product, faster and accurate processing, broaden the base of customers and supplier (Porter’s 5 forces), and integrated information to help top manager make effective strategic decisions - like new factory, new product line, new sale force, dividend declaration, low cost or cost barrier strategy. A point to note though is that strategic IS are NOT necessary targeted or used by the top management. A strategic application may belong to transaction processing system (TPS), MIS, DSS, KMS, or ESS category. Also take note that an application will lose it strategic values when other competitors copy and built similar systems. Once that happens, then what was strategic yesterday may become a necessary normal operational system today (like ATM machine provided by all Banks).


Question F8 a. Explain the purpose of an information systems strategy b. How should such a strategy be developed? c. How significant are an organizations existing information systems and technical

knowledge when developing such a strategy? [2001/Q7] a. What is an information systems strategy? b. Why is such a strategy widely believed to be essential for most modern

organisations? c. Who should be involved in developing such a strategy? [2003/Q7] Solution guide a. What is an information systems strategy? ISS is a strategy that detailed how best to incorporate and maximize ICT into the firm’s overall business strategy (BS) and business plan (BP). The strategy includes examining new technology and company’s existing IT resources (both IT infrastructure, applications and IT human resources). ISS identifies information systems that are strategic and critical to the firm’s current and future operations. Such information systems are often called strategic information systems (SIS). IT covers databases, computers, communications systems, application software, system software, security and data protection policy. ISS also takes into consideration organisational aspects (politics, social, culture), environmental, software development policy and current infrastructure). “Strategic IS” refers to information systems that could make a difference to the company performances and future achievements over their competitors. These include competitive differentiation, enterprise transformation, forming competitive alliances, special product features, designs and revolutionary operational efficiency. Help an organisation gains strategic and sustainable advantages over their competitors. ISS may be developed to incorporate strategy at three levels: business, firm and industry. At business level – BPR and value web with e-commerce At firm level – Core competencies and value chain At the industry level, powerful strategic models lie in eco-systems, information partnership, and in Michael Porter’s 5 forces. e.g. “new entrants into the markets”. “New substitute product and services e.g. Typewriter substitutes by PC + word-processor and Greeting card substitutes by e-Card. Avoid competition on low price rivalry by using IT to improve design, functionalities and cost. (to expand briefly with examples) ISS is derived after alignment with the firm’s business strategy and plans. Alignment ensures that the best results are attained in each quadrant. In today’s fast paced technological advances and strategic progress in IT (telecommunication, database systems,

Draw the alignment diagram of 4 boxes: BS, BP, ISS, ITS


application systems and computer hardware), IT has major impacts on BP and BS - affecting the final shapes of BS and BP. Unlike the 1990’s, IT was simply tools and exists only to help organisation achieve their BP and BS. ISS may be developed following one or more strategy models like Value Chain Analysis, 5-Strategic forces, McFarlen’s strategic grid (do NOT over detailed on these strategy models). ISS may be approached from a top-down, bottom-up approach or a hybrid approach. b. Why is such a strategy widely believed to be essential for most modern organisations? ISS is essential for most modern organisation because it provides directions on what and how best IT be used to realise the firm’s BP (implementation plans) and BS (vision and goals). ISS is focus on gaining and sustaining strategic advantages for the firm. With globalisation and growth in importance in knowledge economy, IT has become more strategic today. They are no more just merely tools to help an organisation automate it operations or providing information for management decisions in control and monitoring functions. They affect the ways business compete and grow its business. Strategic information systems can result in paradigm shift in the ways business operates and transform its operations. Venkatraman’s ladder of business benefits from IT attests to this. Today, IT can help resolve strategic issues by building barrier to entry, counter the threats from new product and service substitution, erodes the power of suppliers and customers, lock-in customers or change the rivalry through low cost or differentiation. ISS looks at the needs of management of all levels: strategic, tactical, operational issues as a whole. It examines which TPS, MIS, KWS, ESS, DSS could meet with management issues of operations, planning, monitoring, organizing, directing, controlling and improving the firm’s value chains at enterprise and industry levels. SCM, CRM, ERP, KMS are often the results that meet these needs. Ford, Baxter, Toyota, UPS, Flextronics, AA (Sabre) are some of the global companies that have benefitted with effective, well-aligned ISS. Who should be involved in developing such a strategy? Depending on the culture of the firm, some may advocate a top down (top management decides), or bottom up (analysing proposals from lower operational supervisors, managers first), or a combination.


A good start would be to look at what current technical knowledge, and IT resources the company possess. Then review the new IT technologies and resources that may be important to the future development of the organisation. A good strategy should transverse all five stages of IT exploitation per Venkatraman’s ladder of business benefits with IT. A balance portfolio as per McFarlen’s strategic grid


should be perceived. It must include strategic information systems that could help the organisation gain strategic and sustain advantages over their competitors. The major stakeholders (investors) representations lie with top mgt (CIO, CEO, CFO, CTO, COO, CKO). The lower operational managers and supervisors are in direct contacts with what’s happening on the ground – both customer and suppliers, and they are important ingredients an ISS must consider. It is often the case though that top management plays larger role as they are in better position to develop a firm and industry-level ISS as they are aware of market developments, company business plan, goals and strategy which the ISS must align to. Question F9 When is an information system considered strategic? Why are strategic information systems (SIS) difficult to build and sustain? Solution guide Information systems are strategic when the applications aim to provide strategic and competitive advantages to an organization - adding significant values and changes to the organization. This could be a firm, business or industry strategy. The characteristics of a strategic information system (SIS) are positioning organization towards gaining & sustaining competitive advantages, help achieve strategic results, support enterprise global operations, new effective operational procedures, new products and better services, build and strengthening business relationships (behavioural), nurturing a learning organization environment (cognitive). “Strategic” activities make a difference to the company performances and future achievements over their competitors Strategic information systems (SIS) are difficult to build and sustain simply because it is often large and complex system. Often, they involved innovative concepts, new technology, comprehensive array of both hardware (networks, databases), software resources, technical skills and human resources. They often involved many higher-level management and many experts. Case in points - think of American airline’s SABRE when they first developed the systems, think of Baxter’s inventoryless system and Flextronic international’s global SCM and ERP.


As SIS is often huge and complex, they require complete holistic data sources (internal and external, environment, formal & informal). Building SIS is time consuming and large pool of expertises in various fields are often required to be involved in the specifications and designs of the applications, particularly in KMS, ERP and SCM. These applications also ride on the latest relevant technology (telecommunications, computer hardware, database systems) to exploit their new capabilities. But new technological developments and new tools are arriving at a very fast rate making the selection of the right choice infrastructure difficult.


The ability to think strategically, possess global knowledge and special skills are necessary. SIS is often a multinational enterprise or global system. Many different country’s culture, expectations, organisational hierarchy, competitions, and local regulations would have to be taken into consideration. Identify strategic systems that differentiate, innovate and transform the organisation is no easy task Globalisation and rapid business changes add to the difficulties to build a sustainable SIS. Changes must be monitored and a flexible IS to quickly adapt to the changing environment is necessary. Competitors can easily copy the technology and one quickly loses the competitive advantages. To sustain, strategic IS must be reviewed, and continuously improve to strengthen the parameters mentioned in Porter’s 5 forces. An effective SIS would also often take into consideration the behavioural and cognitive aspects. SIS is one of the main key factors of success to any modern organisation. Although difficult to build and sustain, organisation must strive to identify them, build and sustain them so as to compete effectively in the current age of globalisation, industry networks and international systems. Note: Strategic Information Systems (SIS) Not = Information Systems Strategy (ISS) Other relevant questions: Q. What are the alternatives to a planned change approach to information systems starting

at the top with an IS strategy? Q. Why do strategic-level decisions entail a higher degree of improvisation? Q. Can markets and organizations both be viewed as sets of transactions? If they can,

when is it more efficient to buy rather than make a product?

Q. What is the difference between business process re-engineering and market process re-engineering?

Q. Can you find out a situation where the Internet shrinks the information asymmetry

rather than augmenting it? Q. Is an executive support system (ESS) best seen as a type of decision support system or

as an extension to classic management information systems? Justify your answer. [SG]

Solution guide: The solution requires a comparison of ESS and MIS. ESS uses data from MIS, hence extension perse. But the set of people using them are different – ESS by top executives, while MIS by mid-level managers for different decision making purposes. Users of ESS require high degree of improvisation with market knowledge (market uncertainty, complexity) + external information + unbounded rationality + “word of mouth” from marketplace. The ESS may contribute only a very small percentage to the final decision. Whereas, MIS users strictly uses inhouse data/ information with high degree of accuracy and MIS has great impact on the decision made. Hence, ESS is seen more


as another type of decision support rather than an extension of MIS which has a much higher influence in the decision process.

Q. In what situations would you think of ‘word of mouth’ as a more efficient information

system than executive support systems (ESS)? [SG]

Solution guide: “Word of mouth” = informal system. Market is imperfect and always dynamic, with changing conditions. Higher executives “muddling thru” and deal with dynamic and fast changing market condition like financial market = Money, equity, gold, oil market and political situation which is full of uncertainty and complexity. They have to be open to all possible sources of information including word of mouth (by business associates, partners, conferences, round of golf, and market rumours). ESS takes considerable effort and time to generate, and involved considerable time lags in information collection and processing (both internal and external sources) – albeit ESS would be more organized and well thought through. Hence, it is possible that “word of mouth” information being more up-to-date may be more efficient than ESS.


G. OPERATING SYSTEMS, NETWORKS, TELECOMMUNICATIONS Question F1 a. Describe the main hardware elements of a modern desk-top computer and how

they work together b. Briefly describe how an application program makes use of these hardware

elements as it runs on the computer c. Explain how physical characteristics of 3 hardware elements can restrict or limit

a computer’s performance [2000/Q3] Solution guide. a) Describe the main hardware elements of a modern desk-top computer and how

they work together The main hardware elements of a modern desk-top computer comprises of 6 main building blocks. There are the CPU (Central Processing Unit consists of ALU +Control unit + set of registers), Primary (main) memory storage which includes the ROM memory, input devices, output devices, secondary storage, and communication unit. They are connected to the motherboard of the computer. The CPU is the “brain” – the central control. It is called MPU, in smaller computers like PDA, or desktops. It controls and synchronizes the other building blocks of the computer. Together with the operating system, it is like the government of a country – taking full charge of what’s going on in the whole computer. All the building blocks worked together under the control of CPU. The CPU acts as the traffic controller and overall manager. The CPU tells all the hardware devices when and what to do. If the CPU goes down the whole computer will hang (dead). As there are many devices attached in a computer, the normal CPU is assisted by 2 other key components called the northbridge and southbridge units. The diagram below show that together, they manager and share the load for all these connected resources and devices like RAM memory, PCI bus, clock and so on.

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The diagram below shows all the building blocks being linked together by a set of 3 types of buses: data bus, address bus, control bus to the CPU. Each of these buses performs a specific task. The data bus contains the data being moved, the address bus points to the location to get the data or move to, while the control bus contains the control signal to the hardware element. All devices that are connected to the computer have their software drivers to help interface correctly into the CPU and the overall hardware platform. These drivers are often built-in as part of the operating system. b) Briefly describe how an application program makes use of these hardware

elements as it runs on the computer When an application program (e.g. Order entry) runs, it often makes use of these hardware elements to complete it processing requirements. When an application program is not running, it is normally stored in the secondary storage - an external storage hardware element like a disk drive or CDROM. In order for the application program to run, the CPU (via the Operating System) will load the application program from the external secondary storage device into the main or primary storage hardware element (RAM memory). The operating system is the system software that is responsible for managing, allocating and controlling all the resources through the CPU. The operating system (OS) is made up of 7 managers: main memory, input/output, secondary storage, processor, network, program and human-interface manager. The CPU’s Control unit through the OS program manager will remember where the application program is located in the main memory. It is also responsible to remember


the exact address of the instruction in the application program that is being executed. The execution of a program’s instruction is carried out by the CPU Logical Unit. During execution, the application program may request for input or output (I/O) services from certain I/O devices or communication services. The CPU (via the Operating System) will call the appropriate driver to do the appropriate interfacing of reading, writing from or to the appropriate devices through the set of 3 buses (data, address, control). When the work is done the appropriate device will inform the CPU’s via the operating system. It then continues to fetch the next instruction for execution. This continues until the application program completes it’s processing. c) Explain how physical characteristics of 3 hardware elements can restrict or limit a

computer’s performance The physical characteristics of 3 hardware elements (like keyboard, printer, OCR) can restrict or limit a computer’s performances. The main reason is CPU works very fast, and executing in terms of billions of machine cycle per seconds. An program instruction is often between 1 to 8 bytes long. Each byte is roughly executed by one machine cycle. A machine cycle comprises of a fetch and an execute cycle. The CPU spent most time waiting for the physical transfer of data between itself and these hardware building blocks. It is hence mostly under utilized. Keyboard: The transmission and capture of data is dependent on human speed. Keyboard is designed for interaction with the human user. A human fastest typing speed is 120 words or 700 characters per minutes. This is way behind the computer speed. If the computer is waiting for only keyboard input, then the computer performance will be very low. Also, keyboard has a limited buffer to store the keystrokes too. Printer – A printer receives data from the computer. But printer’s speed and capability are limited by its mechanical movement as in the print-head, print-chain, paper-tractor etc and its small print buffer. Computer’s CPU must wait for the printer to fill its buffer and to print. When a printer gets into a bottleneck, the computer performance is affected. It has to wait for the printer’s buffer to clear. OCR. The same goes for OCR. Although it is much faster than keyboard entry, the OCR must read and translate the marks into appropriate digital forms. It is designed to interact with human. As the human speed is involved again in handling & positioning the document - the computer will have to wait each time. Additional Q. What device is faster than the Computer’s CPU? Disk storage devices. The speed of writing and reading of data on hard disk is very fast and more efficient than CPU. Infact, it is much faster than the processing speed of most computer CPU. Maximum overall computer performance cannot be fully utilized unless the CPU’s machine cycle is


improved further. In this case the reverse is true where the computer limits the performance of the disk drives! Question G2 “Show how the Operating System is an important system software.” similar questions: Q. Briefly describe how an operating system works. How do computers connect to the

internet? How is the data transfer managed?[2007 ZA Exam] Q. Briefly describe the main components of a computer and how an operating system works.

(2007, Prelim) Brief: The main components of a computer can be represented by 6 building blocks. These building blocks represent the hardware layers or resources. To manage these scarce resources, the operating system, with its 7 managers, played the important roles of coordinating, allocating, and controlling them effectively and efficiently.

Solution guide. A computer system needs software, particularly application software, to perform meaningful, useful work. To do so, they rely heavily on the operating system. The operating system comprises of a suite of system software programs. Together, these programs control, allocate, monitor, regulate, process, terminate, reclaim and manage all the resources and operations of a computer system. We can think of an operating system as a good government. Without, a country (like a computer) will be in total chaos. It would be out of control when every opportunistic individual (like computer programs) do whatever they like to gain control and access to the limited resources. One way of viewing the importance of an operating system is that it coordinates the execution of the application software. It is resident in RAM memory at all time so that it can immediately attend to the many requesting complex tasks in real time. As shown in the diagram below, when a user wishes to run an application software, for example a spreadsheet program, he tells the operating system the name of the program. No application software is allowed to gain direct access to the hardware resources. If this is allowed, there will be traffic bottlenecks as all application software will opportunistically block and hold down resources even though they are not using it for some times.


The execution processes and coordination with the hardware resources that follow are all managed by the operating system’s set of functions. This frees the spreadsheet program to concentrate on the actual useful work that it should perform rather than trying to handle the many complicated technical communications with the hardware resources.

Hardware resources: CPU, I/O, Primary Memory, Secondary Stores

System Software (main one: Operating System)

Application Software (e.g Excel, Word, ERP) To perform these important technical chores, the responsibilities are divided up into seven software managers (similar to a government with its various ministries & statutory boards). These are main Memory (or RAM primary memory), Input/Output, User-human Interface (or human-machine interface), Secondary storage, Processor, Program and Network managers. Let understand their importance. Main Memory (MM) Manager. The MM manager of the operating system controls, monitors, allocates and reclaims main memory (RAM) of the active application programs. The spreadsheet program has to be allocated some RAM in which to locate itself and the data it manipulates, before it can be executed. It is like the human being, where one has to think (load into memory) about that something so as to be able to communicate (execute) about that thing. Similar to our human brain, RAM is limited in space. Yet, like our wonderful human brain, MM is able to handle almost unlimited number of application software “concurrently” – technically called multiprogramming, multi-tasking. How does this work? Typically if an application is 200KB-size, then theoretically a RAM space of about 50 pages (says, where 1 page = 4KB RAM) is required. However, in reality only the active one page, that is being executed, need be in RAM while the rest can be in virtual storage on standby and are moved in and out of RAM using a technique called “page-in, page-out”. Like the many activities occupying our brain, many active processes are “page-in” and “page-out”, without lost of connectivity between related processes, in a given timeframe. The memory manager takes care of all these actions rather than the individual user-program arranging for their own space and corrupting each other spaces. RAM uses memory maps to remember or reclaim the memory pages in RAM when an active program is completed. Input/Output (I/O) Manager. The part of the operating system that is responsible to manage I/O devices to enable application programs to obtain input (e.g. keyboard) and to direct outputs (e.g. screen or printer) is the I/O Manager. A spreadsheet will need input from the keyboard. When the user types at the keyboard it is the I/O manager that directly reads the keystrokes from the keyboard and passes them on to the spreadsheet program. Of course,


in performing this simple task, it has to seek assistances from other managers such as the MM and program managers. The I/O Manager controls the uses all input/output devices such as printer, scanner, mouse, keyboard, disk drive, DVD, modem etc. Each I/O device has its own appropriate device driver to interpret and handle the needed tasks. Just imagine how difficult and chaotic it would be to print anything without the I/O manager. As there is a possibility of more than one application programs wishing to print at the same time, who will set up the print queue and ensure that the printout are not garble, overlapped, and mess out? User-human Interface/ Human-Computer Interface. The operating system provides standard user interface features (called routines) such as the WIMP (windows, mouse, icon, pull-down menu) through its user-human interface manager. These special features are available to new application software that uses the operating system as its platform. New applications software merely need to perform a “call” in their programs to import the ready-made WIMP features during execution time. This is similar to pre-fab in building construction, where many building components like beams, doors, aircon ducts are ready-made and simply “reuse” in the designs of the different building. Importantly, the user-human interface facilitates effective communication, higher productivity, and reduced learning curve of new application software for its users and developers. We can see this common “look & feel” in many applications, such as Excel and IE (Internal explorer) that runs on same Windows platform. Secondary Storage (SS) Manager. Often, data has to be kept for subsequent processing. The operating system, through it SS manager, caters to this need by allocating space on an external storage device, like a CD or hard disk, to keep the data into a file. The SS manager maintains a directory index of file names and locations, so that each file can be located and read for subsequent processing. This is similar to the way we put our documents into paper files and into sections in a drawer of a filing cabinet or books nicely categorized into shelves with an index card on its side in a library. Of course, without the SS, data files will be storage laissez-faire all over the places in the external storage devices, and many would eventually be lost, misplaced, or accidentally overwritten. You’ll note that data cannot be left in the main memory (RAM) for subsequent processing, because once the computer is switched off, the data is lost forever. Although, humans may be more successful in recalling data from their brain after “switching off” each night, often though the data is distorted by the passage of time. In reality, humans therefore have the writing pad and diary, which act as the secondary storage to store the “data”. Processor Manager. The processor manager interprets instructions from an active program and directs it to the appropriate central processor unit (CPU) on what to do. This is especially important with computer that has multiple CPUs or processor multiplexing (simulation of multiple CPUs). In today context, the typical PC has dual-core CPU (or


even quad-core) too. This is similar to a man simulating with two heads – and, logically, he should be able to think, process much faster than someone with just one head! Sometimes, we see a printer-program printing while at the same time the computer is also retrieving data for the Internet Explorer program. This is multiprogramming, like someone who could write with both hands, talk and eat at the same time. The processor manager optimizes on the multiple CPUs and multiplex to achieve faster processing results and often “split” a task up in sub-tasks to achieve this goal. You can imagine what the processor manager must do with proper matrix control and synchronization between the various sub-tasks, mother tasks and the main programs - an impossible task for individual programs running on the computer. Program Manager. A user working on a PC often runs several application programs at the same time. Word, IE and mail programs are common situation. When many programs are running simultaneously in a computer it become inevitably more complicate to keep track where they are located in RAM. RAM memory cannot be shared between two programs, input must be to be directed to the correct program, and print output must be careful queue. Without the program manager, all user applications and their sub-tasks have to remember its “memory boundary” and all its corresponding sub-tasks (e.g. printing requests, wait for message) are well related and coordinated with its communication threads properly link back to its mother program. Network Manager. Today, most computers are connected in a local or wide area network. Many users use the IE program to surf the nets and retrieve information. Users share, retrieves or writes files on a networked file server. How can this is be done? We need the network manager. It establishes the network communication linkage, so that the appropriate application can follow through with its demands. Together with a network interface card or adaptor, a cable or communication modem, and an ISP (Internet service provider), the network manager provides the means to connect to the outside world, a wide area network or the Internet. Without the network manager, it would be extremely difficult for individual user application program to perform its own data packet-assembly and editing, flow and error control, and handshaking protocol into the outside world of networking. Limitations. An operating system is not without limitations. Its suite of software is complex and does not facilitate personalization. Being written for a specific hardware platform, the application software that is written with its I/O interfaces face portability difficulties. Migrating and populating such application software to another platform may face legal consequences and roadblocks too. Being the platform where applications are launched, popular operating systems (such as Windows XP and Unix) draw unwanted attentions and become the launch-pad for spams, viruses, spoofing, phishing and Trogen horses. These impair, diminish and corrupt the security and important roles of the operating system.


In conclusion, given the range of important duties that an operating system performs and coordinates, and considering the limitations are small glitches, we can deduce it would be quite impossible to get any substantial, meaningful work out of a computer if the machine comes without an operating system. Similarly, it is true that a competent operating system would be next to nothing, if an insufficient range of useful application software is not attract to execute on its platform because of insecurity and other digital parasites. Question G3 Briefly describe what a software package is. How do computers connect to the Internet? How is the data transfer managed? [2007, ZB Exam] Solution guide: A software package is a set of prewritten and pretest application software programs written by IT specialists and commercially available for sale or lease. The program may either be a system software or an application software. Software packages, in particular application software, are intended to remove the need for programming altogether by the end users. Professional experts have come together to develop industry packages. Packages are very sophisticated, modular, and can cater to a variation of configurations through module options and parameter settings to meet the varying requirements of different organizations. System software package includes the operating systems, device drivers, utilities, and computer languages. They manage, coordinate, and enable the computer hardware and its resources to function efficiently as a coordinated system. Application software package includes database systems, groupware, and enterprise information systems. Unlike system software, they do useful works. Application software packages can be considered to belong to two main categories: dedicated and general purposes. Dedicated packages normally refer to a particular business function like Airline reservations, Banking, Accounting, Payroll, Manufacturing, Sales systems, ERP, CRM and SCM. The general packages refer mostly to general office applications like spreadsheets, word processing software, and database systems. <provide a brief explanation of useful work done by any application e.g. airline reservations, SCM etc> <advantages (convenient, faster development time etc), disadvantages of packages (configuration problems, dependency, loss of expertise, etc) > Computers connect to the Internet and to one another by establishing handshaking protocols with computer nodes in the network and dispatching data packets through the connected nodes. There are two main modes: packet switched or circuit switched. The transmission media could be wireless (wifi, wimax, bluetooth, infrared) or wired (coaxial, cable, fibre optics, telephone lines) and over earth surface, across oceans, or sky satellites. The diagram below shows that a packet-switched network has many computer nodes to help relay the packets (one packet at a time) across the network between the sending


computer-A and the receiving computer-B. Each packet may take a different path in the network.

network

Each packet goes thru different flow path. Connection is between 2 nodes at time. The connection path is discarded once a packet has passed.

B A

To set up a network connection, all connecting computers must obtain their own IP address (e.g. 208.200.012.102). The IP address acts like a house number, with its street-name, district and country code. A computer must install a network interface card or adaptor. This provides the network manager (of the operating system) to the mean to access the local area network, or a wide area network (such as Internet) through a modem provided by a local Internet services provider (ISP) such as Singtel and Starhub. The network manager, with the help of the ISP, is responsible for assembling and editing the data packets to be sent out, establish handshakes between the computer nodes, transmit the data packets, control flow control, provide error control and re-transmission of error packets. So, how is the data transfer managed? The data or document to be transferred must meet transmission protocol standards of the network. The steps to carry out the data transfer can be listed thus:

1. The sending host first “cuts” the message into protocol standard packets. 2. Each packet bears and ID reference in running sequence. 3. The packets, after being encrypted, are then injected into the WAN network 4. Each packet is sent from one computer node (or switching routers) to the next

computer node of the WAN network after a successful handshake between the 2 nodes. The packets are transported independently over the network.

5. When they arrive at the next node, the node decides using a routing algorithm (i.e. formula) which outgoing transmission line to route through. Hence, the packets of a message could be taking different routes in the network.

6. Eventually, they are deposited at the receiving host computer. The host computer reassembled the packets, in accordance to sequence of their IDs, into the original message before forwarding to the final receiving host computer. The speed of data transfer depends on the transmission median, data upload and download speed of the service providers.


Question G4 a) How is the operating system (OS) related to the computer’s hardware resources? b) Illustrate, with examples, how users can benefit from, any 3 features, of an

operating system. Solution guide: a) The OS is related to the computer hardware resources through the responsibilities it perform. The OS is made up of 7 software managers which manages the following resources:

• Primary or main memory manager • input/output (I/O) manager • data storage manager • human-computer interface (HCI) manager • program manager • processor manager • network manager

The six main hardware building blocks (resources) are: CPU, Input devices, Output devices, Primary (Main) memory, secondary storage, and communication devices. Their relationships can be represented by table below: O/S Managers Hardware resources control by the O/S manager i) main memory allocate RAM memory to running programs. i) input devices control keyboard, mouse, fingerprint reader, etc iii) output devices control Monitor, Printer, disk iv) processor direct and carry out work for the CPU Processor v) network control communication devices: Modem, Router, hotspots. vi) data storage maintain indexing table to facilitate storing and retrieving of files in

secondary memory: disk, SD, thumbdrive, CD, DVD etc vii) program control the active applications that they do not overlap in memory (provide explanatory notes on the table with examples) The diagram shows that the hardware resources are available to the application software through the operating system. The operating system acts as the traffic and resources controller so as to ensure the hardware resources are optimally utilized by running application software.

Hardware resources: CPU, I/O, Primary Memory, Secondary Stores

System Software (main one: Operating System)

Application Software (e.g Excel, Word, ERP) isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 137

b) The objectives of OS are to facilitate the end-users like the computer programmers to concentrate on how to make the best uses of the computer resources through the application software. Otherwise, users will be overwhelmed with the need to control, manage and manipulate the hardware resources directly. There will be havoc when every application software attempts to write freely onto printer or main memory resources. We shall look into these 3 features of OS: Main memory manager, Secondary storage manager, and Program manager. Main memory manager manages, allocate, and retrieve free space in primary main memory. Using the example of the user wishing to use MS word or Excel spreadsheet software, the user need not have to worry about primary memory spaces where the application program will be located. Even in situation where there is hardly any primary memory space left, the main memory manager will use the page fault and paging techniques to ensure the application program can execute successfully. The user needs only to click the icon of the software to execute it. Secondary storage manager manages and retrieve files store on the secondary disk storage like the DASD, CDROM, thumbdrive. Using the example of the MSWord program wishing to save the data keyed, a new file would have to be set up. The storage manager would have to manage and update its directory and index table with the new filename, location, file-size, type, date of creation, and other file details, store the new file, and remember how to retrieve it later. Program manager manages and control boundary and security of running programs and processes. Using the example of 2 or more programs running on the computer, says IE, MSWord and Mail program, the Program manager will take charge of all information of all the active programs. Why? To prevent program overwriting one another, keep records on which stage of the processing of each active programs, assist main memory manager to locate the pages during the page in - page out processes, assist the processor manager to fetch the correct instructions from the current active program. Question G5 a) Is there any difference between wired and wireless communication? [SG] b) Illustrate with examples, any 2 cases where wireless technology was deployed by organizations to manage their operations. c) Explain, with examples, how the data is transferred and how the speed of data transfer being 2 points is calculated. [SG] Solution guide: a) The main differences in wired and wireless lie in the transmission medium, the speed, and the security aspects.


Wireless transmission does not use any cable or wire to physically connect the sending and receiving computers (nodes).

Technically speaking, the data packets are sent through the “space” through hot-spots, transmitters, repeaters, earth satellites and celestial satellites. There are the various mediums available with wireless transmission. These include radio frequency wave, microwave, satellite, infrared, natural light, ultra violet, x-ray, gamma ray. Commercially, they are also referred to as RFID, bluetooth, WiFi hotspots, WiMax, GPS, Inmarsat (used in aeroplanes) and maritime VSAT (used in ships). With wired transmission, a physical cable or wire connects the 2 or more computers. Data packets are then carried through this physical medium. These mediums include coaxial cable, telephone twisted pair, fibre optic and submarine cable. In general, the speed of transmission of wireless system (theoretical max speed: 600 Mbps) is slower as compared with their wired cousins like co-axial (max. 1 Gbps) and fibre optic cables (max 6.4 Tbps). As the data are openly transmitted though space with wireless transmission, the risk of insecurity is greater. b) The 2 examples are:

• Ford Motor and Walmart supermarket use wireless RFID tags to manage their supply chain. In the case of Ford, to manage the shop floor holding inventory to 2 hours of stock. As in Walmart, the RFID tags facilitate immediate billing at cashier exit point. In both cases, the data is used to replenish inventory stocks and issue P/O to suppliers.

• Johannes Diaries uses wireless GPS for their location-based information system to

simulate the best daily transportation routes and logistics for their delivery vehicles. They also use the GPS to provide logistics on the daily status of delivery

c) A communication network allows 2 or more computers to exchange data via its communication device such as network interface card or adaptor. An ISP (Internet service provider) is often required to provide the connection services. The data or document that is to be sent are first broken down into fixed length, and assembled into packets. The packets are edited with information like sender and receiver addresses, properly numbered in sequential order and security features. A handshake takes place between the computers in the network to assist the transmission of the packages through the network. Often, subnets in the WAN communication networks, like Internet, provides the handshaking between networks. Speed of transmission varies according to the type of services provided and medium used by the ISP.

To demonstrate or measure the speed of data transfer transmission speed, we will use an example a document (packets of total size) of 15Mbytes size to be transmitted over 2 different types of lines: a wireless modem (1.5megabit/sec) and a wired LAN (30


megabit/sec). Both operated in a digital signal environment. Of course, we could use an analogy modem of 50kbit/sec as an alternative example too. This way, we have an idea of the speed of transmission over different medians. Assuming the wireless modem has an upload speed of 1.5mbps (mega bits per second), the time taken for transmitting the document of 15Mbytes is (15M * 8) / 1.5 mbps = 80 seconds. Assuming the wired LAN has an upload speed of 30mbps, the time taken for transmitting the same document of 15Mbytes is (15M * 8) / 30mbps = 4 seconds. In both transmissions, we assumed a smooth, uninterrupted, error-free passage with zero time taken up for handshaking between nodes and flow control. Question G6 Explain the differences between wireless and wired network communication. How do computers exchange data amongst them? Explain, with examples, how to measure the speed of data transfer among computers. (SG) Solution guide: a) see F5 b) How do computers exchange data amongst them? Well, there must be a network communication system where the subscribing computers are part of the network. A network could be a WAN, LAN, MAN or even PAN. The participating computer must be installed with an appropriate network interface card or adaptor. To communicate or exchange data with a computer across a WAN (like Internet, or Extranet), the services of a service provider (like Singnet or Starhub Cable) would be required. Within the network, there is a communication protocol such as TCP/IP. The subscribing computers will have to adhere to the protocols to handshake and exchange data. A communication network provides these main duties: format the message into standard-size packets, establish handshake, transmit the packets, control of the flow of the packets through the network, perform error handling, packet re-transmission, and perform multiplexing. First the message must be divided and assembled into the stipulated fixed packet size (says, 2K i.e. 2048 or 4K i.e. 4096 bytes). Then each packet is labeled with the necessary header, trailer, destination addresses following the rules of the protocols. The packets are then sequentially numbered before being dispatched into the communication network.


All computers (called nodes) in the network will help to store, forward, and route the packets to arrive at the target destination. In a non-switched circuit transmission, the packets can arrive in any sequence (packet switched, as shown in diagram below). The final receiving host server will keep and wait until all the packets have arrived and them re-assembled the packets into their original sequence before forwarding them in one complete data to the destination computer.

network

Each packet goes thru different flow path. Connection is between 2 nodes at time. The connection path is discarded once a packet has passed.

B A

Question G7 a. Describe the essential tasks that any computer’s operating system must perform b. Explain in detail how an operating system can allow 2 or more programs to run

at the same time and share a single processor [2003/Q4] Solution guide a. Describe the essential tasks that any computer’s operating system must perform The essential tasks that any computer’s operating system must perform are controlling, scheduling and monitoring the computer hardware resources. The operating system consists of a suite of system software. They perform 7 main functions of memory management, I/O device management, storage file management, program (multiprocessing, multithreading, multiprogramming) management, processor management, interface management, and network management. I/O devices refers to input and output devices like biometric input devices, keyboard, mouse, touch-screen, voice recognition, RFID. (expand with examples) b. Explain in detail how an operating system can allow 2 or more programs to run at the same time and share a single processor An operating system can allow 2 or more programs to run at the same time and share a single processor with a technique called multiprogramming. The concept is called ‘Multiprogramming’ allows two or more application programs to execute “concurrently” using the computer’s only CPU (processor). The concept


involves the use of virtual storage, and control & allocation of time-slice to each running application software.

PageFile Application-4

O/S

Application-3

Application-2

Application-1

Main Memory Virtual memory storage When an application program starts, the operating system via its memory manager will allocate designated spaces in RAM memory. Many application programs may run on the computer. In the above diagram, 3 applications are running and a 4th one is trying to come in but the RAM memory has no more space. The Operating system will find RAM space by temporary paging out inactive portions of existing application programs onto the virtual memory storage. This way, the new application can be squeezed into memory to run. The Operating system will give each application program a time-slice, process ID, and a priority-no. The CPU, via the Operating system, will take instructions from one program at a time. Each application program can execute up to the allocated time slice (says 100 microseconds) or some higher priority application program takes over before giving control back to the Operating system. The working data of the program may be saved (page out) by the Operating system to the virtual memory storage, before the next application program takes over and starts execution. The operating system may need to reload (page in) relevant working data from the previous time out. The small time slice gives an impression that the single CPU is handling 2 or more programs concurrently. Another situation is an application program requests for I/O services e.g. to print some data (above diagram). The CPU, under instruction from the Operating System, will pass the request and data to the printer driver (another system software). The printer works independently of the CPU. It will actually execute the request by itself within it own printer’s built-in MPU. The CPU is now momentarily free to execute another application program while the first one waits for results of the print request from the printer driver. This multiprogramming-multithreading approach gives the user the impression that the CPU is attending to several application programs concurrently. QuestionG8 a. Explain the concept of client-server computing b. Give 3 positive characteristics of this approach, and three problems that it poses c. What key characteristics would you identify for an operating system of a

minicomputer working as a server? [2002/Q4]

Solution guide: isorgbible_ver 5; 06-Dec-09. copyrights reserved. For reprints, kindly seek permission from [email protected] 142

a) Explain the concept of client-server computing The concept of client-server computing comprises a simple architecture of 3 major ‘modular” components:

- Client = front end= user’s interface = requester - Server = back end= provider= network & database resources. - Middleware = network transport layer or interface application

This concept provide for the dissection of processing duties between the client-end and the server-end (versus the monolithic approach of older days). The server is responsible for the databases accesses and processing. Its backend resources can be “used” and shared by any clients. Client is responsible for the interface presentations, and its processing is independent of server processing in that they are black boxes to each other and a failure in client is not equal to a failure in the server end. Client-Server processing empowers the end-user to do what is appropriate with the data at their end. Client can have different platforms amongst themselves or the server. This way the computing power is delivered to the individual desktop as the end-user decides the kind of desktop powers he needs for his own client activities. Clients and servers communicated via “messages”. There are five categories of client-server: (draw the diagram and briefly explains them from intensive processing at the server-end, to intensive processing at the client-end). In the optimal case though, the client-side should have minimal processing and concentrate on the presentation of information to the user. b) Give three positive characteristics of this approach, and three problems that it poses The three positive characteristics of this approach are: Portability=programs can run anywhere. Scalability= the increase or reduction of number of clients or servers in the network will not affect the other. Maintainability = changes can be applied and introduce w/o hiccup or disruption. Robust= Failure in the network can be tracked down easily and shutdown w/o affecting overall performance Three problems that client-server poses: Disparate platforms = integration, unforeseen and difficult-to-resolve problems. Security= clients and servers are distributed all over many locations, this increase the threat of higher insecurity which is not the case with centralized computerization. Integrity of data & data protection is similarly made more difficult. Management & control: Databases are mirror or duplicates in many server-ends making managing of changes and installations more difficult


c) What key characteristics would you identify for an operating system (OS) of a minicomputer working as a server? The key characteristics for an operating system of a minicomputer working as a server would include the network manager, storage manager, memory manager, program manager, and processor manager. A powerful CPU with large storage capacity and network capability is needed. As a server, the GUI interface is not that important, but the other functions of memory, network, data storages, processor, and program management remain important. The I/O management is also not critical in relation to the fact that not to many I/O devices like mouse, scanner, touch-screen, biometric input devices, and joysticks are unlikely to be attached to a server. The OS serving the server must have powerful memory, process, and network management to keeping tracks of requests and responses to the correct request – hence able to handle multiprogramming, hyper-threading, virtual storage, and multiple processing. The OS must be able to manage and ensure network security and integrity with strong firewall features and capabilities. Question G9 Which is most important in a programming language: getting the best out of the hardware, getting the best out of the programmer or doing the best for the program’s user? [SG] Solution guide: Get the best out of the programmers should be the first priority. Why? Programming languages are designed for and to be used by programmers. Programmers should concentrate on how best to interpret the specifications into computer programs (their core competency) and not be concerned other aspects like hardware specificity like memory management, multiprogramming, or network connectivity (which should be taken care for by the operating system that sits on a particular computer platform), or the ease of use by the end-users (which is also the concern of the platform the programs will be running on… which is this case of the operating system’s user graphics interfaces such as WIMPs, GUI, APIs and to facilitate learning curve). Expand essay using following questions: What are the programmer duties and special skills and knowledge? What do we mean by other aspects of hardware specificity? Why OS?


H. INFORMATION SYSTEMS DEVELOPMENT Question H1 (a) What is an Enterprise Resource Planning (ERP) package? What are the primary

advantages for a company that adopts an ERP package as the basis of their core information systems?

(b) It is often said that the best way to reduce system development costs is to use application package software. Is this always the case? Are there some exceptions? [2004/Q7]

a) ERP package is an enterprise level business application that services the information needs of all primary and secondary business functions of an enterprise. ERP packages are often large, sophisticated information system. They are development by external professional specialists. Because it is a package, firm often has to purchase standard ERP package and its modules that may include functions they do not use.

Note: this ERP (Enterprise resource planning is not the same at the road gantry ERP = Electronic road pricing.

ERP is made up of many modules. Each module covers the business processes of a core business function. These core business functions include production, assembly, sales, marketing, warehousing, inventory control, purchasing, logistics, QC/QA, assembly, fixed asset control, accounting, finance, and human resources. Often, an ERP information system does not only handle the processing on a country basis but also on a world-wide scale as in the case of Flextronics International. ERP requires the backing of powerful databases and efficient computer networks and telecommunication systems so as to reap the full benefits of the system. As an ERP package is often developed to meet the needs of as many potential customers as possible, the appropriate functions would have to be selected and installed by a particular user firm. This means large enterprise packages like ERP would come along with many parameters for configuration and twitching to facilitate “customization”. So what are the primary advantages in adoption of ERP package as their core information system? As we have seen, ERP information system is the backbone of an organization business processing needs. A fully implemented ERP system would have taken care of all the core business functions of an organization. Hence, the primary advantages of using an ERP package are reduction in development time, provides a ready base for processing other information needs, increase confidence with customers & suppliers, co-ordinate training, reliable well-tested system developed by industry professionals, and resources problems encountered with in-house development.

“core” implies “main” or “key” or “foundation”

Reduction in development time. With ERP package, the timeframe from feasibility study to implementation would be greatly reduced. The core information systems would be up and running in much reduced timeframe. Of course large complicated package like ERP requires a good understanding of the various parameters that need to be twitched to meet the organization’s specific environment and processing requirements. However, this installation, tuning and


configuration effort on the package should still be much shorter than otherwise. With the ERP ready, this means all key informational needs of the core business processes are available. Without the ERP package approach, the alternative is to outsource or develop the ERP system in-house. Both approaches will require very thorough investigations, data collections, and verifications during the various analysis, design and construction phases. The total development process will take a long time. Meanwhile, the organization may suffer without an ERP system – resulting in negative consequences like bad data management and coordination, loss of confidence from customers, suppliers, staff, management and competitive disadvantage. Ready base for processing other information needs. With the core business functions in place, the ERP database serves as a server for any other information needs. Developers and end-users can search and query the databases to service ad-hoc and unstructured requests from customers, suppliers or management. Other core and non-core information systems can now be built around this core ERP system. Accounting information, CRM, SCM, KMS can be built around this core ERP system. Increase confidence. With the ERP package running and servicing the core business functions, we can expect timely, accurate information and updates for customers, suppliers, and managers. This means better relationships all round (socio aspects). The results –increase confidence, trust, and better rapport Co-ordinate training. As a package provides for faster implementation, training can start sooner. Trainings are often more systematic, well planned and organized since the package vendor would have the experience of doing many times with other customers. This means participants can get to see and learn from experienced trainers. This means a better chance of a successful change or cut-over to the new system. Reliable, well tested system. The ERP package would have been well tested and well used already with other enterprises. ERP packages often have the advantages of many professional experts of the vendor working on the package producing a final version with “formula-1” type qualities. Previous customers problems would have been corrected and improvement effected. Hence, the ERP package has the advantages of incorporating the improvements generated by all previous users. Errors and hiccups are not to be expected with ERP packages. Resources problems. IT staffing problems during the developmental stages would mostly be non-existent. Nevertheless, outside experts may be required to help configure the ERP package to meet the specific requirements of the organization. Late schedules and budget overrun will be much easier to control.


b). It is often said that the best way to reduce system development costs is to use application package software. Is this always the case? Are there some exceptions? ERP is a large enterprise application comprising of many business functions. Each business function is represented by an “independent” module. Hence, ERP it is modular, scalable, and implementation can be carried out in stages (module by module). System development, particularly with an ERP system, entails many layers of IT professionals, teamwork, and coordination. The stages are lengthy requiring great attention and uses of professional tools. Inevitably, an in-house development will be met with delays and staff turnover problems, making training and change management difficult to handle. Application packages remove most of the problems associated with in-house system development, since the development has been done by the professional skilled vendor. However, application packages are developed to meet business requirements and solutions to industry standards, standard procedures and structured problems. Often it would cover all possible functions, and superfluous requirements – since a package will try to satisfy as many different prospective customers as possible. An ERP package is often “fat & heavy” with many extra modules, options and many different parameter settings. Questions to ask would be “Does my company requires all the “Formula-1” features and capabilities?” “Should a lesser cheaper model like “Honda Civic” do?” “How do we go about doing so?”.

How does package reduces development cost? They come in modular form, configurable, ready to use, well tested, professionally developed, and with professional support services. Of late, this has become the best way even with large enterprise systems.

Is this always the case?

Evaluating for a suitable application package can be a formidable task. It will require expert knowledge of the various packages’ functionalities, options and various parameters for configuration (fine tuning). Choosing a correct package with the relevant modules can be a daunting task without expert helps. Outside experts are also required to help configure the application package during installation. This means additional cost. This means relying on outside help. This means loss of confidentiality and security. Will the company accept all these? Other

exceptions Organizations with too special requirements will not be able to use application packages off the shelf. Modification (with re-tailoring of the programs) can spell problems when a new version of the application package is released later. Too much modification can distort the infrastructure of the package and cause it to malfunction unknowingly. Vendor will also refuse to provide maintenance support. It will be too costly. As a guide, it is advised that any packages that exceed 10% modifications should not be adopted by the enterprise. Such 10% should be confided to output report layouts or screen designs and not redesign of program logics.


Packages should be avoided, if the business processes are largely non-standard. This is so with processes that are unique and critical to the company’s successes that involved confidentiality and high security. In such cases, the need to develop own in-house expertise or outsource is the alternative. A guaranteed continuity for business sustainability is preferred. Question H2 a) What is an ERP package? What are the primary problems faced by a company

during the acquisition and implementation of an ERP package? b) Does the use of packaged software solutions, when available, always give the

best results? [2004/Q4] Solution guide ERP package is an enterprise level business application that services the information needs of all functional aspects of the businesses in the organization. ERP helps planning and managing of sales, marketing, production, warehousing, assembly, inventory control, purchasing, logistics, QC/QA, accounting, and human resources not only on a country basis but, possibly on world wide scale like the case of Flextronics International. ERP would often require the backing of powerful databases, computer networks, telecommunication system, and ERP business experts so as to reap the full benefits of the system. The primary problems faced by a company during the acquisition and implementation of an ERP packages can be pinpointed to detailed analysis of requirement, evaluation, implementation, change management, and cut-over policy. During the acquisition stage, a detailed thorough analysis must be carried out so to look for a best match of available packages. The major problem faced is who to do this job. With package implementation, we know many of the technical experts and supporting staff would be removed once the package route is decided. Those left behind may also soon face the axe. So, who will hearten to do a good detailed analysis? Outside experts could be recruited to do the functional analysis but will it be as thorough and completed as in-house experts? Will it take into consideration all the socio-technical, cognitive aspects of the organization? Will the package selection and evaluation processes consider the best interests of the company and the people working there? Taking into consideration company expansion, further needs, scalability, local support availability, matching installed procedures, friendliness, documentations and cost. Again, identification of good experts to carry through the analysis and evaluation would be a great challenge. Evaluating package has the problems of first understanding the package itself.


Can in-house experts know what exactly is performed by the package, without first being exposed to using the package at all? Particularly with larger package like enterprise systems (ERP, SCM, KMS, CRM), what are the intricacies, configuration options and parameters available. To be able to conduct a fair evaluation of the package, the experts must know the package well! So, outside experts who have experienced with the package would have to be employed indeed. This means cost. Again, how much can an organization trust the experts? A big question during evaluation is how much modifications would be carried out on the ERP package to meet the organization’s special needs. Who will carry out the modifications? How long and what kind of cost? Then again, what percentage of re-tailoring would be acceptable? What impacts will such modifications have when the ERP package vendor releases another newer version later (again, will need to modify!!). Experts suggest that any re-tailoring that constitutes a sizeable change should not take on packages. Our examiner, Antonio, has indicated the unbearable maximum limit of modifications is probably 10%. Note: Modification = re-tailoring. Part programs of the ERP package have to be specially reprogrammed. Configuration = the process of fine-tuning the package by selecting the appropriate module, options and parameters to suit the company specifications. All packages come with varying configuration options and parameters. Configuring a package is NOT modification to the package. Implementation of package means getting the people to embrace the new information system. Staff training, configurating the ERP package, cutover policy, data conversion, job re-design, and new work procedures are inevitable. The question is know the employees best to conduct effective training taking into consideration the company culture, working habits, and informal systems. Outside experts from Oracle, Accenture or NCS? Well, these professional have good exposures to such packages and probably implement a few packages already. They should be the qualified professionals and more effective than trying to train internal staff to conduct training. But this means more cost. ERP package is large and complicate information system. They are designed to fit as many organizations as possible – hence called a package – but this means the package has many relevant and irrelevant features - a “fat” application. The ERP package must be configured to suit the organization. Then, again, does the internal IT staff have the ability to configure the package to meet the company’s specific needs?


Configuring the hundreds of parameters of a large enterprise package is no easy meat. Again, should outside expert be used? But who is in a better position to assess what is the special needs of the company? An outside expert? And further cost? The implementation’s cut-over policy is critical. Who should decide? An outside expert again? Using an immediate cutover policy can risk the viability of the organization should the cutover fails. A parallel cut-over policy would drain the resources of the organization. So, a carefully evaluated decision is very importance. Another necessary action is the conversion of existing database to the new ERP package format. Again, external experts familiar with the package will have to be employed. This is cost. Key question is how, what and when must be done to ensure data conversion can be carried smoothly? Implementation of a new ERP package (or any new information system, for that matter) is serious change management in action. New jobs are created, old jobs are removed, new work procedures are introduced - and all these can be very damaging, confusing and discouraging for employees. All activities require very careful and detailed planning. Bridging the new package to the people resources (both internal and external) in effective and seamless ways is crucial. b). Does the use of packaged software solutions, when available, always give the best results? System development entails many layers of IT professionals, teamwork, and coordination. The stages are lengthy requiring great attention and technical skills. Detailed systems design and construction will have to be carried out in-house. Professional development tools will have to be acquired. With ERP system, large team of developers and end-users will be involved during the various stages of development. Inevitably, there would be delays, staff turnover problems, scheduling, and budgeting problems Packages remove all the problems associated with in-house system development. The development is completely done by the professional vendor. The package is professional developed with the expertise that the vendor has gathered over the years, having deal with several other customer organizations. It is fully tested and ready working application for installation anytime. These represent major advantages of using packages. With packages, the maintenance of a development team is a non-issue. There is no worry of staff turnover. Because it is a ready package and taken off the shelf, problems related to insufficient ERP knowledge, to late delivery, problem of acquiring and learning new development tools are virtually non-existent. Does this means packages always give the best results? Application packages are often “general purposes” information systems. Being general purposes they are designed to meet the industry standard specifications, operations and business processes. Standard procedures, input and output interfaces. But to attract a larger base of customers, most packages would also attempt to incorporate a variety of possible known requirements of different consumers. Therefore, packages are often not of optimum size and are “larger


and fatter” with undesirable overheads. This will not be the case if the ERP information system is specially developed for an organization, whether in-house or outsourced. This being the case, packages are often developed in modular structure. This way, customers can pick the modules they need and not pay for the whole package. But for large enterprise packages like ERP, the individual modules are themselves still “large and fat” with built-in overheads. Installation of enterprise packages like ERP will require experts with good knowledge of the package’s functionalities and features. There is no guarantee that after configuring the modules and the overall package, the package will be optimum and work satisfactorily. Enterprises with special requirements will need modifications. Successful modifications do not mean the problems are solved. Simply said, a new version of the ERP package in the future will create the same problems face in the first instance. If nothing is done to use the latest versions, after a while, the first modified version will be obsolete. Using enterprise packages mean company would have to bend their business processes to fit the package’s processes and standards. Also to meet the package’s standard data structures, formats and telecommunication specifications. This signals the beginning of the organization losing its originality, confidentiality and data security. So, there are many tradeoffs in using packages. One assumed the vendor will be around forever to support the package. Packages do not necessarily give the best results and may courts more disadvantages with frequent update versions release over time. And, paying for additional features that may not be needed by the firm! Question H3 a. What is outsourcing? Describe three distinct aspects of information systems

operations that might be outsourced. In each case give key reasons why such outsourcing might be appropriate?

b. Nowadays, most organizations assume that all information systems activity will be outsourced unless a good case is made for developing the system in-house. Why has this occurred? [2004]

Similar question: Q. Explain outsourcing from a transaction costs perspective. Explain with examples the

potential roles play by ICT in supporting outsourcing of information systems. (see D4 for sample solution) Solution guide a). Outsourcing is the practice of contracting IT works to external specialist vendors. These IT works include computer center operations, telecommunications networks, and applications development.


The reasons and benefits for the organization are timely delivery, minimal staff turnover problems, utilization of international experts, concentration on core competency, efficient utilization of shared resources, backup systems, and faster startup. The appropriateness of outsourcing the following 3 distinct IT works are reasoned thus: Computer operations – Owing to globalization and a wired world, most organisations run 24/7 operations. Running on 3 shifts requires more human resources and infrastructure. But when there is dip in demands or rise in demands as with seasonal promotional sales and lull periods, it is not easy to maximize the resource utilization in both manpower and infrastructure. Many business processes in most organizations are standards. Standard equipment and devices are also used. They are fairly easy to operate and maintain. Maintaining full time staff is hence wasteful. Whereas shared resources via outsourcing is attractive. Standard chartered bank and OCBC bank are example. Telecommunication networks – These communication equipment, security locks, routers, gateways, firewalls, databases are expensive infrastructure. With globalization and internationalization of business enterprise, building own international telecommunication networks can be exorbitantly costly. Technology changes very fast. Keeping up with the latest is important to reap best benefits of effective communication is expensive. Individual organizations would have problem maximizing on the usage with no scale of economies. The outsourcing of such telecommunication requirements to Network providers is hence appropriate. Such providers include ISP: Internet Service Providers (Singtel, Pacific.Net), TSP: telecommunication services provider (Singapore One, Singtel, M1, Starhub). Applications development – In application development, particularly large scale ones, using the life cycle approach is particularly strenuous, time consuming and resources sapping. Because it takes some time to develop, staff turnover is inevitable during the various phases. This means delays – caused by retraining, and recruitment. The team may not have the expert experiences and often outside consultants have to be engaged - resulting in additional cost. Inevitably, when the development is completed, the problems of retrenching, demoralizing existing staff become evident. Given the situation, outsourcing to provider with relevant experts would be probably more appropriate. Singapore Polytechnic is an example. b). Outsourcing “all information systems activity” would mean various IT activities such as the feasibility studies, systems analysis, design, application developments, operations, networking, and maintenance of IT resources and information systems are “sub-contracted” to a professional third party. Developing “in-house” would mean the organization would have to employ and maintain its own team of experts, developers, and operation staff to handle all the information systems activity itself.


Nowadays, outsourcing has become the norm. Many companies outsource. This includes companies like Standard Chartered Bank (outsource their IT operations and application development), STPB (outsource their application development), and Singapore Polytechnic (outsource their operations, application development) Why is this so? Today, there are many qualified service providers with expert knowledge in all aspects of information systems activity. They have proven knowledge, wealth of experience, international networks and development skills. NCS, EDS, and Accenture are three such international outsourcing provider companies. Outsourcing is based on the concept of “sub-contracting”, specialization and division of labor. The party that can provide the expert services and products efficiently and cheaply should do the job. Every organization should not try to do every thing itself. Every organization should concentrate on what they can do best and enhance their core business. Organizations have begin to ask “why should organization be involved in such non-core business processes when it is more costly and time-consuming to do so?” This is situation of Baxter Healthcare’s Inventory-less system that nearly all USA hospitals have outsourced to. Organizations can then concentrate on cultivating their core business and core competency. Thanks to the improved & powerful IT infrastructure - computers, information systems, Internet, telecommunication systems, database systems - the distance and time that use to separate the world into many different zones have now been broken down. The world is now a global village. Accessibility and availability of expert services and professional products are no longer bother by time zone and physical distance. Unlike the industrial age, human & infrastructure resources must be pooled in one physical location in order to carry out business processes effectively, the current IT age is the reverse. Business processes can be equally achieved through logical presence and communication networks. The cost of doing global business has dropped drastically. Cheap labor and expertise – in any part of the world – can now be readily made available. Thanks to Internet, the IT literacy in many part of the world has also improved drastically. Because of a combination of IT technological advances, availability of expertise and cheaper labour in 3rd world countries, it is now attractive for companies to outsource their non-core business activities. A lower cost operations call-centre, servicing local enquiry, can be located anyway and in any part of the world. Application development can be carried out quickly and cheaply by IT experts in another country. Hence, outsourcing has now become the choice for many organizations. It is definitely more cost effective and practical.

When is it a good case for NOT using outsourcing services? This would be the case when organization fears the loss of critical in-house technical skills, loss of privacy and security,


control IT directions by outsourcing companies, contractual obligations are not guarantee over the long term (particularly, if the outsource providers go bust). Question H4 (a) Is the choice of an outsourcing strategy essentially just an economic decision about achieving required results at minimum cost? (b) When evaluating a proposed outsourcing arrangement, and assessing an outsourcing partner, what are the relevant factors that a company should consider? [2005] Solution guide a)

Note: you can disagree. Often security and designs/ production secrets are more important. In such case in-house development is preferred

Yes, the choice of an outsourcing strategy often indeed essentially boils down to economic decisions. While security and productions secrets might be the reasons for not outsourcing, the many factors contributing to achieving minimum cost in the development of information systems are overriding. Some of these factors include lower human resource cost, technical resource cost, specialization, develop on core competency, using outside experts, faster response time, cheaper production cost. But, greater benefits of social (behavioral, cognitive) aspects can come from outsourcing for the enterprise and the economy, in general. Human resources – Often a major reason of outsourcing is cheaper labor, which is available in 3rd world like India, and Philippines. They are also good sources for skilled programmers and designers. Globalization, Internet, and powerful telecommunication systems have made possible to effective contractual deployment of offshore labor. Many skilled specialists are available overseas and they can easily work on information system projects effectively without having to be physically present in the organization. Sourcing, staffing and retaining the people with the right skill sets are time consuming and involve high expenditure. With Outsourcing, this part of the cost is virtually saved. Technical resources - Identifying, procuring and acquisition of technical resources to support the new information systems are difficult tasks. Experienced and capable people are required. New technologies replace older technologies at a very fast rate. A huge portion of budget often goes into technical resources. With outsourcing, the problem is shifted to the outsourcing company. Specialisation - Outsourcing allows the outsourced enterprise to specialize in their areas that provide them the best competitive advantages. This is particularly true with offshore outsourcing.


Like Flextronics, any of their international subsidiaries that can provide the best prices get the contract. Other subsidiaries then began to then specialize in other areas which they have the best strength and economic factors. This also results in minimum cost. Core competency - Outsourcing facilitates the outsourced enterprise in concentrating on their core businesses and developing their core competencies. An orgainsation should not try to perform every business role by itself. Doing so will dilute their professional capacity. For examples, it is expensive and difficult to maintain an IT technical team to develop and maintain computer systems especially when the core business and competency of the enterprise is in furniture and design. Baxter healthcare Inventory-less is an example. Their customers, namely the US hospitals, could concentrate on their core business of health care and leave the business of inventory control of medical supplies in the hands of Baxter Healthcare. As a result, various roles of the enterprise are achieved effectively, yet at lower effective cost. Experts - Often, experts are difficult to cultivate, retain and employ. Outsourcing is applicable to various areas of programming (production), systems analysis, systems design, operations, telecommunication, and call centers. Outsourcing partners have the experts. They cater to large pools of customers justifying the setup of team of experts in various areas. Outsourced organization gets the benefits of exploiting these experts, but at minimal cost! Response time – With outsourcing, faster time-to-market delivery is achievable. Outsourcing partner will guarantee delivery time and quality. In-house development has the problems enduring long tedious development through the various stages of production, with delivery delay. Outsourced enterprises can achieve their promises to their customers with minimal logistics, hence at minimal cost in doing so. Cheaper production – Outsourcing partners are often able to produce at much cheaper cost. Like Flextronics, and Telefonica, they have the volume to be able to provide an assembly part or services cheaply. Riding on the outsourcing partner’s cheaper production techniques, would indirectly mean acquiring raw materials at minimal cost. However, in outsourcing, there are other greater benefits of a socio nature. These include union problems, higher added value jobs, progression up the ladder of business benefits (competitive advantages, differentiation) for local enterprise and economy. Union problems – Outsourcing means all problems of production are also outsourced. Labor strikes and union disputes, which can be costly to production, are virtually non existence now. Higher added value jobs – Where intensive labored work can be outsourced, the value-added work can be retained in the outsourced enterprise. This means better quality and expert staff who are more professional with better innovative, motivated, adaptable personalities. This can lead to a knowledge-based culture. In a knowledge economy, better design and products can be achievable this way. Thus benefiting both the outsourced enterprise and the economy in general.


Progression – With outsourcing, the outsourced enterprises can concentrate on the relevant activities that can achieve knowledge-based core competencies such as improved production processes, product designs, service differentiation, branding, niche market, business alliance and transformation – progressing up the ladder of business benefits with IT. b) In evaluating a proposed outsourcing arrangement, the following should be considered: Budget – what is the cost? Will it meet the budget for the project IT resource – What are the IT resources, and who will be providing the development and testing, integration platforms. Integration – The outsourced development must integrate as seamlessly as possible with existing information systems, including legacy systems. Functionality – Are the function specifications clearly understood? Will the finished product meet the specifications and what are the test criteria. Contract – roles and commitments of outsourcing company, the legal aspects, penalities for late delivery, consequences must be clearly stated. Schedule - the delivery must match the schedule of the organization. Tie in nicely with other related in-house development. In assessing an outsourcing partner, the relevant factors include reliability, references, dependability, services quality, technical support, global support, board of directors behind outsourcing company. Reliability factors – how reliable is the outsourcing company? Can they be trusted? Will they be able to keep confidential data safe? Will they be able to maintain good security? Will they be able to keep to schedule and take responsibility to resolve problems quickly? Will they do what they said, and said what they do effectively? Reference factors – Do they have customers who are willing to share their experiences? Who are they big customers? How long does their customers stay with them? Dependability – How long have they been around? Will they be around to give support in 5, 10 or 15 years time? Service quality – Do they own any industry award for their products? How do their services rated against competitors? Technical support – Do they have the expertise in the various aspects? On average, how long does their technical staff stays on? What specialized resources do they possesed? Global support - For offshore outsourcing and international systems, does the outsourcing partner has the local knowledge of culture, laws, formal and informal system? Board of directors – What general quality of directors? What are their personal background, history, technical know-how? Outsourcing is applicable to various areas of programming (production), systems analysis, systems design, operations, telecommunication, call centers. Outsourcing partners may not be good in all aspects. Hence, in assessing various factors, the relevant areas must be identified first.


Question H5

In theory, outsourcing is a rational way for organizations to gain access to services they cannot produce themselves as efficiently as they can be purchased in the market. In practice, in the case of information systems, it is often an admission of defeat by senior managers who are just baffled by technology and want to get rid of the problem”. Critically discuss this statement. [2006/Q6] Solution guide: Outsourcing, in theory, produces following benefits: - reduces agency & transaction costs - benefits from knowledge and exposure of external experts - guaranteed delivery (example of Accenture paying for not delivering on time) - benefits from external resources which is too expensive to acquire in-house - problems with in-house resources – e.g labor strife, recruitment, wrong equipment,

space - problems of having to deal with development staff after information system is

completed - exploitation of current benefits with globalisation Senior managers, in practice: - May be true that technology outpaces managers. There new developments almost

every month! - But outsourcing allows for concentration on core competency. Specialization. There is

a limit -managers can only do so much and best to do what he is best in for his company.

- In outsourcing, new skills like legal contract writing & evaluation (particularly with off-shore outsourcing) are key qualities senior managers will have to acquire

- Examples, Flextronics provides outsourcing services on electronics device production and facilitates the outsourced companies to concentrate on their core competency on design and marketing. Similarly Baxter Healthcare provides outsourcing in inventory management for most USA hospitals and enthuse the hospitals to concentrate on their core competency of patient care.

Question H6 a. When would you recommend taking a life cycle approach to developing a new information system? b. How can systems developer ensure that they have the best possible understanding of the needs of the users of a proposed system? [2003/Q2] solution guide a. The life cycle approach is often appropriate for large-scale system development with sophisticated complicated specifications and which involve a large team of developers. The alternative strategy of outsourcing, and package have been deemed inappropriate because of the nature of the system either its confidentiality or competitive characteristics.


For such large-scale in-house development, it is important that the large team of project developers or team members “speak one language” – using same standard well-defined tools, procedures, guidelines, methodologies. Project team members are often divided into groups. Their works must be integrated at some later point in time. Life cycle approach provides for the orderly management of the various stages of development. The Life cycle approach details the types of techniques and deliverables expected at the end of each phase. This ensures complete cooperation, communication, coordination and control amongst all project team members. It is crucial and very important for the success of such large project that often takes up to hundreds of man-years. Such large information systems can be found in enterprise applications such as CRM, ERP, SCM and KMS. However nowadays, packages developed by global professionals have becoming more feasible and are replacing the development of structured, large project by life cycle approach. But still, there are other reasons why some companies still prefer the life cycle approach. These other reasons include building and maintaining their own system expertises. For large international organizations like Toyota, Zara, Mango, Microsoft, and Flextronics International, building their own enterprise applications is important. This ensures continuity and control over their current and future development. Maintenance and integration with existing systems could also be key reasons. With packages and outsourcing, this would be a difficult aspect to handle. The different options and parameters from the various international subsidiaries demand varying degree of tailoring to fit their specific needs in their respective countries. Yet, the enterprise applications must provide for integration and consolidation to facilitate global reporting.

Database integration, legacy systems, global specs.

Maintaining the privacy and security of the databases is another reason why life cycle is appropriate. Where international company’s product designs and development processes are key critical success factors, it is important to keep these secrets close to your hearts. Life cycle approach offers the best alternative for companies with these special needs. Life cycle provides the following features and advantages that are not available with other development approaches like prototyping and packages

• Control and Monitoring: Stages are clearly defined. Automated tools are available to facilitate the captured, control, and sharing of requirements, designs, database, and program codes.

• Breakdown of work: Life cycle detailed what tools to use at each stage. A well-known methodology called SSADM actually breakdown the required works of each stage into hundreds of well-documented steps.

• Facilitate workload estimation: The well-documented steps in each stage and expected deliverables facilitate the estimation, planning, timing and organizing of workload and resources requisitions.

• Facilitate teamwork: As automated tools are available, team members could see each other progress. It provides a good basis for coordination, communication,


cooperation, and control at the same time. It also provides an easy mean to conduct walkthrough for members and the end-users.

• Clear deliverables at each stage: At the various stages of the life cycle, deliverables are well itemized. For example, DFD, ERD, Context diagram, Data dictionary, Process specifications are expected at the System Analysis stage. Structured diagram, screen interfaces, report output design, database design and form design are expected at the System Design stage.

• Standardization of designs: Standard formats and requirements are well-defined in a centralized folder. If an automated tool (like CASE – computer aided software engineering) is available, project standards can be referred to quickly by any project team members.

• Basis for development with well defined tools and techniques: All life cycle approach requires the tools, methodology or techniques to be used to be made known up front to all members. This may include standards for DFD, ERD, Data modeling, Data Dictionary, Structured charts, process specifications, database design, print and form standards. This provides a good basis to ensure all members know what, how and when to use, who to contact in case of doubts.

The life cycle approach has its weaknesses too. But with large-scale projects that require confidentiality, tailoring to niche area of requirements, building up own team of expertise, the life cycle is still the best way to develop the new information system. (Note: It is true too, that in today’s globalization, speed in development has become so important. End-users want to see results and get involved during the analysis, design and construction stages. Packages (where the requirements are industry standards with standard processing) and outsourcing (where experts in specialized areas are available) are slowly but surely taking over in-house development). b. How can systems developer ensure that they have the best possible understanding of the needs of the users of a proposed system? Systems developer can ensure that they have the best possible understanding of the needs of the users by following the procedures laid out in life cycle approach, use structured techniques, adopt appropriate systems analysis investigation techniques, conduct structured walkthrough, use prototyping approach and Joint application development (JAD). The life cycle stages, besides offering an effective way to control development, also depict the tools available to capture the users’ specifications at the systems analysis and design stages. During the SA and SD phases, developers will attempt to discover, confirm, redefine, re-engineer procedures and requirements. Structured techniques and tools ensure users requirements are carefully captured and documented. Such structured techniques include DFD, Context Diagram, ERD, Data modeling, Data dictionary, Normalization, Process specification and Structured charting. Often automated CASE (computer assisted software engineering) systems are used to improve the accuracy and data capture and synchronization. CASE is an automated system integrating all the structured techniques listed earlier.


Conducting regular structured walkthroughs with peers and end-users is a must-do. This facilitates specifications verifications, discovery of errors, and confirmation of understanding, ensuring all requirements are properly and completely captured. Involving end-users is always important. Structured walkthrough should be conducted during the SA, SD, Construction and testing stages. Where certain aspect of the system cannot be easily specified and documented, prototyping can also be used. Prototyping has the ability to quickly provide for a “quick and dirty” models of the requirements. End-users can “play’ with it to determine his needs. Through repetitive, iterative communicative processes between the end-users and the developers, the final requirements can be worked out. Such requirements refer to the input, process, and output requirements. Rapid Application Development (RAD – like VBasic), 4GL, DBMS (Database management systems) and Database SQL tools are examples of prototyping tools. Often, Joint Application Development (JAD) is also used where the end-users jointly work with the system developers to define the specifications and produced the final information system. A hand-on approach for the end-users! Structured investigation techniques demand the developers analyze all document materials, codebook, procedures, and rules. They may also get involve in the operations and handling of the current system to fully understand and discover any new information needs. Developers do not merely develop what end-users specify but are also responsible to know the business and to propose solutions. The various investigation techniques available include:

- interview of all key management and operational personnel - participation in key roles of the operations for a period of time to understand the

operations first hand - observation of operational peaks period and flow of documents and processes - survey to discover and understand all end-users understanding of the current and

new systems - questionnaires to discover, confirm, and clarify specifications and requirements - visits to vendor’s customer sites to discover and understand how others are using

such system All these approaches provide a strong basis for communication, cooperation, coordination, discovery, and specification verifications between the developers and the end-users. The increased communications will break down any barriers between developers and end-users. The result is a thorough discovery of specifications and complete system requirements. This will ensure that any misunderstanding and errors are rooted out as early as possible. This way, the strong chance of developing a new system acceptable to the end-users during the cutover stage can be assured.


Question H7 a. When would you NOT recommend taking the life cycle approach to developing a new information system? b. How should the interests of users be represented in a systems development project? In what ways are their interests distinct from those of management? [2003/Q2] solution guide: a. Life cycle approach (SDLC) is not recommend when the project is small, or when the requirements of the new information system are of industry standards. Package software, or prototyping, in this case, is more appropriate.


SDLC is tedious and rigorous. Requires an army of experience and discipline system developers. Costly to build and time consuming. Unstructured and semi-structured type applications are also not suitable for life cycle approach. b. Interests of end-users (the workers) are involved in frequent project walkthroughs at various stages of development. Examples data input analysis, requirement analysis, screen design and reports formats. Socio-technical balance? Various structured data capture techniques at system analysis and design phase are available to ensure end-users’ interests and specifications are properly captured. The management (decision makers) forms the steering committee. Often management looks at technical rational aspects - economic cost & operational efficiency. Detailed processing is often missed out. Question H8 a. What are the benefits of adopting standard software packages as the basis of an organization’s information systems? b. Using examples, explain what types of business applications are most suitable for such approach and those that are not [2002/Q2] solution guide: a. The benefits of adopting standard software packages as the basis of an organization’s information systems are speed of implementation, external expertise, and initial lower cost. These benefits can be detailed as:

- Speed. Save time. Implementation is almost immediate for smaller application, as it is a working application created by experts in the field. Obviously, large packages like SCM, CRM, ERP would require very specialized experts skills – often involving consultants (from companies like Accenture) to provide professional assistance in the configurating and minor modifications, if any to the package . But generally the package should not be taken if there is more than 10% modifications. Companies should consider modifying their work procedures rather


than the packages especially when later versions need the same modifications again.

- External expertise. o Professional training is often provided. This is useful when company is

shorthand in the first place. o Packages are produced by experts who have professional experience in the

area. Often, companies do not have enough experts and experience to develop the solution and is too expensive and impractical to recruit, train and build up own staff to do so.

- Lower cost.

Configurating large packages like ERP can complicatingand require professional knowledge inselectingcorrect parameters to meet specific

the

firm needs. o Likely to be error free and well tested, and a proven product particularly if

the product has been around for some time and used by many other companies.

o Referral from market as guidance before committing. It is easy to ask for references and check with companies who have used the package. One should check for implementation difficulties and weaknesses of the package.

o Cost-wise. If the requirements are standard type and fit the firm almost 100%, then startup cost would be much lower. There is no worry on the tedious SDLC phases and no worry of employing in-house staff & the need to “fire” them or worry about deployment later when project is completed.

o Having said, packages (particularly enterprise packages like ERP, SCM, CRM, KMS) can cost more after the initial implementation. Subsequent changes can be very costly. If it is not accurately evaluated to meet all functional requirements, technical supports, training and further expansion. Afterall, companies using packages has little control over the package supplier’s direction and business continuity.

In today environment, organization has to built enterprise systems and industry networks to compete and stay competitive. To completely develop all their information needs in-house with own experts will take too long. Today, most organizations are turning to proven packages or outsource to experts to resolve this software development problem. b. Using examples, explain what types of business applications are most suitable for such “packages” approach and those that are not The type of business applications that is most suitable for such “packages” approaches are those where the business processes are structured, uses industry standards, standard input and outputs. Decision-making is very structured in nature. Fig -1

TPS Such applications are normally TPS (transactional processing) type. Those at the bottom of the information needs of a company (fig-1). These are transactional nature such as payroll processing, inventory, sales order processing and account payable. Enterprise applications like ERP, CRM, and SCM can also be packages. SAP’s ERP and Microsoft’s CRM are examples. Such applications are often industry standard and use in many


organization and industry and their requirements (functions, technical support, training) are nearly similar. Packages are often the answer for companies that do not have a large team of experts in that particular area of the business applications. The type of business applications that is not suitable is the non-standard type and requires decision-making of a semi-structured or unstructured nature. Such applications would be those in the professional or higher level of the triangle of information needs in an organization. Such applications have non–standard requirements. Standard procedures and rules are difficult to streamline and apply correctly. Knowledge systems used by professionals such as Expert Systems, AI, Knowledge work systems (KWS), and those use by higher executives such as Executive support systems (ESS) and Decision support systems (DSS). Web-based Internet applications are also in this category. Often, because of its non-standard nature, the changing look-and-feel, and dynamic interactive interfaces. Instead of packages, prototyping combined with SDLC or outsourcing would be more suitable.


J. PROFESSIONAL ROLES & THEIR IMPACTS ON INFORMATION STRATEGIES Question J1 a. Compare the job of a Systems Analyst with that of a professional programmer

(software engineer) b. What must a systems analyst do to ensure that a new information system is

technically well structured and meets users’ requirement? [2002] Solution guide: a. The job of a systems analyst (SA) and a professional programmer is tied to the phases of the SDLC. Of course, the project leader is involved in all stages including the first stage of problem exploration (PE). The diagram below summarizes graphically the different stages the involved of these two IT professional. The SA is mostly at the early and last phases while Programmer is in the middle phases of SDLC.

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eprints, kindly seek permission from [email protected] 164

produced by the structured techniques. There is little need for him to understand the business aspects though. He is responsibility to conduct program and system-level integration testing and eventual maintenance of the new information system. The “big picture” responsibility of a programmer is “HOW” to interpret the new information system requirements to produce the necessary suite of computer programs to run smoothly on the computer. Unlike the Systems Analyst, he is largely involved in the middle stages of the system development life cycle. b. Systems Analyst can ensure that a new information system is technically well structured and meets users’ requirement by deployment of appropriate structured development tools and conduct comprehensive FS, SA, SD covering socio-technical aspects respectively. The structured techniques and tools include data modeling, DFD, ERD, data analysis, data Dictionary, information acquisition techniques (e.g. interview, observation, survey, participation, questionaire), and specification techniques (such as pseudo codes, NS diagram, flowchart). Often, to assist and automate the data capturing and structuring processes, a Database Management system (DBMS) and Computer aided software engineering (CASE) tool are also used. Other techniques like prototyping and Rapid application development techniques could also be relevant to discover requirements and errors in specifications. All these approaches provide a strong basis for communication, cooperation and coordination between the developers and the end-users. Besides providing opportunities for both developers and end-users to meet often, Systems Analyst should discuss all documented materials, codebooks, procedures, and operating rules to ensure the requirements are fully analyzed. The increased communications will break down any barriers between developers and end-users and lead to a thorough discovery of additional specifications/requirements and the complete development of specifications by the users. Regular communications and appropriate techniques are the keys to ensuring that developers have a good understanding of the end-users. Developers must conduct regular, progressive walkthrough of their progress with end-users and their developer counterparts. This will ensure that any misunderstanding and errors are rooted out as early as possible. This way, the strong chance of developing a new system acceptable to the end-users during the cutover stage can be assured. In conclusion, while the use of structured techniques and tools are important to ensure requirements are properly captured and structured, the Systems Analyst must be a good change agent and be able to excite the end-users into “looking forward” and taking ownership of the new information system – better still, convert them to change agents too.


Question J2 a) Why do developers use the structured approach to systems analysis? b) Explain how a Systems Analyst goes about collecting and structuring the

information that they need when undertaking the analysis task [Exam 2005/Q5]

Solution guide a) Developers use the structured approach to systems analysis because the approach provides a structured set of well-defined structured techniques and deliverables. They guide analytical activities and defined formal deliverables to ensure successful coordination & completion of the new system. Provide checkpoints for effective management control. The system requirements and designs stand a better chance of being consistently identified, analyzed, verified, and documented. Caters to a team development approach, where dozens of systems analysts and programmers must work together as an effective coordinated team. The final product stands a better chance of meeting all the user requirements and a successful cutover. Structured approach is a proven strategy. It has been used in many successful development projects including development by the UK government (using SSADM), Mindef, and IDA Singapore. Why? The system development life cycle (SDLC) approach is suitable for large-scale project involving many developers. Adoption of well-structured approach is critical so that all members in the whole development team will “speak” the same language. With large systems, it is often the case that many programmers and developers are divided into teams. Effective tools to ensure timely and effective communication are paramount importance. What characteristics? Structured techniques are graphical, partition, top-down, communicative, predictive, consistent, durable, minimal redundancy reducing wastage and time. Communication, control, and standardization are very important in these large projects. The system analysis stage is a key phase of the system development life cycle. There must be proper tools and techniques to assist the Systems Analyst in capturing all the requirements. Tools used must also help the systems analysts document them and collaborate with end users effectively. Standardization and structured techniques and tools ensure that all the developers’ work can be eventually combined to form the overall finished product.


What are the tools? Structured approach provides powerful structured techniques and tools. These include DFD, ERD, data-modeling, data-dictionary, interviewing techniques, process specifications, and structured walkthrough technique. ERD methodology provides for the analysis and identifications of all the data objects in the new application system. ERD relationships between the relations are uncovered. ERD traces the access paths between the relations to provide information on the data traffic of the new database system. Data modeling methodology provides for detailed analysis and capture of all the fields (columns) and the records (rows, tuples) that make up the logical and physical database. DFD methodology provides for the identification of all the processes and the data of the current and new system. An important document of DFD is the context diagram. It provides a overall bird-eye “executive summary” picture of the whole database system. Affected schedule and budget can be immediately revised. This ensures developmental changes are managed with updated budget and schedules. Some examples. Many end-users are consulted continuously and use of structured walkthrough to iron out any misconceptions or missing details. Structured walkthrough is a technique that guides the developers and users in conducting regular reviews of the work done. Get feedbacks and identification of errors as early as possible. Keep users aware of the progress of the development. As such, control and interactive documentation standards facilitate and improve communications between developers themselves and between the end-users. The use of standard procedures, tools and techniques facilitate identification and documentation of during the SA development process. The structured nature of the techniques gives rise to the creation of automated version called Computer aided software engineering (CASE) which further facilitate and improve the effectiveness of structured techniques. Structured approach is an efficient and effective methodology. It ensures every stakeholder know they roles and play their part in each stages and sub-phases. b) Explain how a Systems Analyst goes about collecting and structuring the information that they need when undertaking the analysis task A Systems analyst goes about collecting information by adopting proper information collection techniques such as interview, observation, survey, and participation. He needs work with and understand the end-users. Who “own” what documents, who “use” what data and what procedures are in place. He needs to understand all operating procedures (both formal and informal), code-books, rules, approval authority, and laws of the organization. A Systems Analyst is a key member in the application system development team. He has to ensure that the problems are fully understood - be able to capture and define them accurately. He has to look into viable alternative solutions and give proposal in details. Often has to work together with his project leader on the project’s budget, schedule, manpower requirement, machine and other IT resources requirements. He has to ensure


the specifications of the new system solutions are clear, complete, well structured and defined. To so do, the systems analyst has to ensure the collected information is properly structured with the appropriate documentation tools and techniques. In structuring the information and data collected, the systems analyst has many available structured tools and techniques. These include Context diagram, DFD, ERD, Data Modeling, Process specification tools, and structured charting. If objected orientation is involved, the OOD Structured diagram, Use and Sequence diagramming techniques are involved. These tools and techniques have a graphical, top down, partitioned approach to structuring the collected data and information. Important aspects are highlighted and the deliverables are themselves powerful communicative tools. Systems Analysts have to ensure that the new application system meets to the needs of the end-user and the specification guidelines in the ISP (Information Systems Plan). Good communications exchanged between the developers and the end-users are crucial and these tools/techniques will serve this purpose well. The socio-technical changes that come with the implementation of new application systems will need careful planning and integration well right up front at the early stages of systems analysis and design. Hence, it is important that accurate, effective and correct techniques are deployed. Other related questions Q. Why is it often argued that technology is not enough to provide competitive

advantage? What is the role of people in defining the strategic implication of ICT solutions? [SG]

Q. What is competitive advantage? What is the role of people in defining the strategic

implications of ICT solutions? [SG]
