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RFundamentals of Information SystemsPart 1 Chapter 1

his chapter starts with an overview of common uses for computers and information systems, explains the difference between computer lit-eracy and information literacy, and then reviews transaction processing

systems as one of the earliest applications of informa-tion systems. Next, we discuss the components of a management information system (MIS), including data, database, process, and information and see how infor-mation systems relate to information technologies. This chapter also covers the roles and applications of infor-mation systems and explains the Five Forces Model, used to develop strategies for gaining a competitive advantage. Finally, we will touch on the future of infor-mation systems.

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learning outcomes

After studying this chapter you should be able to:

LO1 Discuss common applications of computers and information systems.

LO2 Explain the differences between computer literacy and information literacy.

LO3 Define transaction processing systems and management information systems.

LO4 Describe the four major components of an information system.

LO5 Discuss the differences between data and information.

LO6 Explain the importance and applications of information systems in functional areas of a business.

LO7 Discuss how information technologies are used to gain a competitive advantage.

LO8 Explain the Five Forces Model and strategies for gaining a competitive advantage.

LO9 Summarize the future outlook of information systems.

1 Computers and Information Systems in Daily Lifeo

rganizations use computers and information systems to reduce costs and gain a competitive advantage in the marketplace. Throughout this book, you will study many information system

applications. For now, let’s look at some common applications used in your daily life.

Computers and information systems are all around you. As a student, you use computers and office suite software and might take online classes. Computers are

often used to grade your exam answers and generate detailed reports comparing the performance of each student in your class. Computers and information sys-tems also calculate grades and GPAs and can deliver this information to you.

Computers and information systems are commonly used in grocery and retail stores as well. For example, a point-of-sale (POS) system speeds up service by reading the universal product codes (UPCs) on items in your shopping cart. This same system also manages store inventory, and some information systems can even re-order stock automatically. Banks, too, use computers and information systems for generating your monthly statement and running ATM machines for many bank-ing activities.

Organizations use computers and information systems to reduce costs and gain a competitive advantage in the marketplace.

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for improving decision making but involve some chal-lenges, too, such as security and privacy issues. The information box on TJX Companies is an example of potential challenges.

be more effective and pro-ductive, no matter what profession you choose. In addition, you can connect to the rest of the world to share information, knowl-edge, videos, ideas, and almost anything else you can imagine. Throughout this book, we will explore these opportunities and the real power of computers and information systems.

As you read, keep in mind that the terms “information systems” and “information tech-nologies” are used some-what interchangeably. Information systems are broader in scope than infor-mation technologies, but the two overlap in many areas. Both are used to help organizations be more competi-tive and improve their overall efficiency and effective-ness. Information technologies offer many advantages

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As a knowledge worker of the future, computers and information technology will help you be more effective and productive, no matter what profession you choose.

TJX Companies, Inc.: Credit Card Breach

In January 2007, TJX Companies, which includes T.J. Maxx and Marshalls stores, announced that identity thieves had stolen more than 46.5 million credit cards. Identity theft is a crime in which unauthorized people obtain personal infor-mation, such as social security numbers, bank account numbers, and driver’s license numbers, and use them for their personal gain.

“While technology has made our lives much easier, it has also created new vulnerabilities,” Michael J. Sullivan, U.S. Attorney for the District of Massachusetts, said in a statement announcing the indictments. “This case clearly shows how strokes on a keyboard with a criminal purpose can have costly results.”1

The identity thieves used sophisticated hacking techniques to break through security systems and steal information from TJX. For example, they used wireless scanners to find stores with vulnerable networks and network sniffers to cap-ture credit card numbers and other information. They stored the stolen information on servers in Eastern Europe and the United States and sold some account information to other criminals. They were able to convert the stolen data to cash by creating counterfeit credit and debit cards and then using them to withdraw money from ATMs.

This case also shows the international nature of cybercrime, as several members of the identity theft ring are from countries outside the United States, including Ukraine, Estonia, China, and Belarus.

brief text updates, called “tweets.” These posts are displayed on your profile page, and other users can sign up to have them deliv-ered to their inboxes.

Organizations also use social networking sites to give customers up-to-date information and even “how-to” support with videos. These sites can re-duce organizations’ costs by providing an inexpen-sive medium for targeting a large customer base.

In addition, people use video sharing sites to watch news, sporting events, and entertainment videos. One of the most popular sites is YouTube (www.youtube.com). You

can upload and share video clips via Web sites, mobile devices, blogs, and e-mail. Users upload most of the content on YouTube, although media corporations such as CBS, BBC, Sony Music Group, The Sundance Chan-nel, and others also provide content. Anyone can watch videos on YouTube, but you must register to upload videos.

So what do all these examples mean to you? As a “knowledge worker”—those who use information tech-nologies daily to perform their duties—of the future, computers and information technology will help you

Many workers now use telecommuting to perform their jobs from home and often make use of PDAs (personal digital assistants such as a Palm). The most common PDA is a smartphone (such as iPhone and Blackberry) —also considered information systems—for some tasks. A typical PDA includes a calendar, address book, and task-list programs; more advanced PDAs often allow for wireless connection to the Internet and have built-in MP3 players. Smartphones are mobile phones with advanced capabilities, much like a mini PC. They include e-mail and Web browsing features, and most have a built-in keyboard or an external USB keyboard (see Figure 1-2).

The Internet is used for all kinds of activities, from shopping to school and work tasks. Search engines and broadband communication bring information to your desktop in a matter of sec-onds. The Internet is also used for social purposes. With social networking sites, such as Facebook, MySpace, and Twitter, you can connect with friends, family, and colleagues online and meet people with similar interests and hobbies. Twitter (www.twitter.com), for example, is a social networking and short-message service. Users can send and receive

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5 Major Components of an Information System

n addition to hardware, software, and human elements, an information system includes four major components, discussed in the following sec-tions: data, database, process, and information, as shown in Exhibit 1-1.3

collected and analyzed. Finally, information must be provided in a useful format for decision-making purposes.

Many MIS applications are used in both the private and public sectors. For example, an MIS for inventory control pro-vides data such as how much of each product is on hand, what items have been ordered, and what items are back-ordered. Another MIS might forecast sales volume for the next fiscal period. This type of system uses recent historical data and math-ematical or statistical models to generate the most accurate fore-cast, and sales managers can use this information for planning purposes. In the public sector, an MIS for a police department, for example, could provide information such as crime statistics, crime forecasts, and allocation of police units. Management can examine these statistics to spot in-creases and decreases in crime rates or types of crimes and analyze this data to determine future deployment of law enforcement personnel.

As you’ll see in this book, many organizations use information systems to gain a competitive advantage. The information box on Hertz is one example of this use. (Note: MISs are often referred to as just “informa-tion systems,” and these terms are used interchangeably in this book.)

2 Computer Literacy and Information Literacy

n the 21st century, knowledge workers need two types of knowledge to be competitive in the workplace: computer literacy and informa-tion literacy. Computer literacy is having skills in using productivity software, such as word processing, spreadsheet, database management systems, and presentation software, and having a basic knowledge of hardware and software,

the Internet, and collaboration tools and technologies. Information literacy, on the other hand, is understanding the role of information in generating and using business intelligence. Business intelligence (BI) is more than just information. It provides historical, current, and predic-tive views of business operations and environments and gives organizations a competitive advantage in the marketplace. (BI is discussed in more detail in Chapter 3.) To summarize, knowledge workers should know the following:

• Internalandexternalsourcesofdata

•Howdataiscollected

•Whydataiscollected

•Whattypeofdatashouldbecollected

•Howdataisconvertedtoinformationandeventuallyto business intelligence

•Howdatashouldbeindexedandupdated

•Howdataandinformationshouldbeusedtogainacompetitive advantage

3 The Beginning: Transaction Processing Systems or the past 60 years, transaction process-

ing systems (TPSs) have been applied to structured tasks such as record keeping, simple clerical operations, and inven-tory control. Payroll, for example, was one of the first applications to be auto-mated. TPSs focus on data collection

and processing, and the major reason for using them is cost reduction.

Computers are most beneficial in transaction processing operations. These operations are repetitive, such as printing numerous checks, or involve enormous volumes of data, such as inventory control in a multi-national textile company. When these systems are au-tomated, human involvement is minimal. For example, in an automated payroll system, there’s little need for managerial judgment in the task of printing and send-ing checks, which reduces personnel costs.

4 Management Information Systems

a management information sys-tem (MIS) is an organized integration of hardware and software technologies, data, processes, and human elements designed to produce timely, inte-

grated, relevant, accurate, and useful information for decision-making purposes.

The hardware components (discussed in more de-tail in Chapter 2) include input, output, and memory devices and vary depending on the application and the organization. MIS software, also covered in Chapter 2, can include commercial programs, software developed in-house, or both. The application or organization determines the type of software used. Processes are usu-ally methods for performing a task in an MIS applica-tion. The human element includes users, programmers, systems analysts, and other technical personnel. This book emphasizes users of MISs.

In designing an MIS, the first task is to define the system’s objectives clearly. Second, data must be

Computer literacy is having the skills in using productivity software, such as word processing, spreadsheet, database man-agement systems, and presentation software, and having a basic knowedge of hardware and software, the Internet, and collabora-tion tools and technologies.

Information literacy is understanding the role of information in generating and using business intelligence.

Business intelligence (BI) provides historical, current, and predictive views of business operations and environments and gives organizations a competitive advantage in the marketplace.

Transaction processing systems (TPS) focus on data collection and processing, and the major reason for using them is cost reduction.

A management information system (MIS) is an orga-nized integration of hardware and software technologies, data, processes, and human elements designed to produce timely, integrated, relevant, accurate, and useful information for decision-making purposes.

Data Database Process Information

Exhibit 1.1 Major components of an information system

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i fInformation Technology at Hertz Car Rental Company

Executives in the car-rental business must be able to electronically sift through important information on a wide array of topics, such as cities, climates, holidays, business cycles, tourist activity, past promotions, and market forecasts. Examining this information helps executives make effective marketing decisions so that they can compete in the car rental business.

To gain a competitive edge, Hertz used a mainframe-based decision support system (DSS) and an executive information system (EIS) that includes tools for analyzing the massive amount of demographic data to make real-time marketing decisions. (DSSs and EISs are discussed in Chapter 12.)

With the EIS, Hertz executives can now analyze essential information from both external and internal sources. Internal sources include rental agreements, fleet purchases, computer reservation system reports, and airport reports compar-ing revenues for Hertz and other car-rental companies. In addition, they can ma-nipulate and refine data to make it more meaningful and use data for a variety of what-if analyses. According to Hertz executive Scott H. Meadow, using an EIS doesn’t ensure prosperity, but “how you use it” does have an impact.2

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output of an information system—consists of facts that have been analyzed by the process component and, there-fore, are more useful for decision making. For example, XYZ Company’s sales total last month was $5,000,000. This number is data because it doesn’t tell you how the company performed. Did it meet the sales goal? Did sales increase or decrease from the previous month? How did the company perform against its top competitors? These questions and more can be answered by the information an information system provides.

The quality of information is determined by its usefulness to users, and its usefulness determines the success of an information system. Information is useful if it enables decision makers to make the right decision in a timely manner. To be useful, information must have the following qualities:

• Timeliness

• Integrationwithotherdataandinformation

• Consistencyandaccuracy

• Relevance

If information lacks any of these qualities, the re-sults are incorrect decisions, misallocation of resources, and overlooked windows of opportunity. If the system can’t give users a minimum level of confidence in its reliability, it won’t be used or users might dismiss the reports it generates. Information must provide a base for users to explore different options or gain insight into tasks.

Another factor affecting the usefulness of informa-tion is the information system’s user interface. Because this interface must be flexible and easy to use, most information systems make use of graphical user interfaces (GUIs), with features such as menus and buttons. To be useful, information systems should also produce information in different formats, including graph-ics (pie charts and bar graphs, for example), tables, and exception re-ports, which highlights data that is outside a specified range. Supplying information systems in a variety of formats increases the likelihood of users understanding and being able to use the information. Note that in addition to the formal information that an information system gener-ates, users need to be able to make use of informal information, such as rumors, unconfirmed reports, and stories, when solving problems.

The ultimate goal of an information system is to generate business intelligence (BI), described earlier in this chapter. As you’ll learn throughout this book, many different tools, techniques, and types of information system technologies are used to generate BI.

5.5 Examples of Information SystemsTo better understand the four main components of an information system, take a look at the following examples.

Example 1 A state university stores all student data in a database. The collected data includes each student’s first name, last name, age, gender, major, nationality, and so forth. The process component of the informa-tion system performs all sorts of analysis on this data. For example, the university’s DBMS has a built-in query capability that can generate the following information:

•Howmanystudentsareineachmajor?

•Whichmajoristhefastestgrowing?

•Whatistheaveragestudentage?

• Amongtheinternationalstudents,whichcountryrepresents the highest number of students?

•Whatistheratioofmaletofemalestudentsineach major?

Many other types of analysis can be done. A fore-casting model (part of the process component) could be used to generate the estimated number of students for 2015, for instance. In addition, decisions could be

5.1 DataThe data component of an information system is con-sidered the input to the system. The information users need affects the type of data that’s collected and used. Generally, there are two sources of data: external and internal. An information system should collect data from both sources, although organizational objec-tives and the type of application also determine what sources to use. Internal data includes, for example, sales records, personnel records, and so forth. The following list shows some examples of external data sources:

• Customers,competitors,andsuppliers

•Governmentagenciesandfinancialinstitutions

• Laborandpopulationstatistics

• Economicconditions

Typically, data has a time orientation, too. For ex-ample, past data is collected for performance reports, and current data is collected for operational reports. In addition, future data is predicted for budgets or cash flow reports. Data can also be collected in different forms, such as aggregated (reporting subtotals for cat-egories of information, for example) or disaggregated (itemized lists, for instance). An organization might want disaggregated data to analyze sales by product, territory, or salesperson. Aggregated data can be use-

ful for reporting overall performance during a particular sales quarter, for instance, but it limits decision makers’ ability to focus on specific factors.

If an organization has defined its strategic goals, objectives, and critical success factors, structur-ing the data component to define what type of data is collected and in what form is usually easy. On the other hand, if there are conflicting goals and objectives or the company

Data consists of raw facts and is a component of an informa-tion system.

A database is a collection of all relevant data organized in a series of integrated files.

The process component of an information system generates the most useful type of infor-mation for decision making, in-cluding transaction-processing reports and models for decision analysis.

Information consists of facts that have been analyzed by the process component and is an output of an information system.

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If an organization has defined its strategic goals, objectives, and critical success factors, structuring the data component to define what type of data is collected and in what form is usually easy.

isn’t aware of critical success factors, many problems in data collection can occur, which affects an information system’s reliability and effectiveness.

5.2 DatabaseA database, the heart of an information system, is a collection of all relevant data organized in a series of integrated files. (You learn more about databases in Chapter 3.) A comprehensive database is essential for the success of any information system. To create, organize, and manage databases, a database manage-ment system (DBMS) is used, such as Microsoft Access or Patch Software’s FileMaker Pro for home or small-office use. In a large organization, a DBMS, such as Oracle or IBM DB2, might be used.

Databases are also important for reducing person-nel time needed to gather, process, and interpret data manually. With a computerized database and a DBMS, data can be treated as a common resource that’s easy to access and use.

5.3 ProcessThe purpose of an information system’s process compo-nent is generating the most useful type of information for decision making. This component generally includes transaction-processing reports and models for decision analysis that can be built into the system or accessed from external sources.

An information system can include a wide range of models to support all levels of decision making. Users should be able to query an information system and gen-erate a variety of reports. In addition, an information system should be able to grow with the organization so that users can redefine and restructure models and incorporate new information into their analyses.

5.4 InformationAlthough they might seem the same, data and informa-tion are different. Data consists of raw facts and by itself is difficult to use for decision making. Information—the

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• Allocatinghumanandfinancialresources

A logistics information system (LIS) is designed to reduce thecost of transporting materials yet maintain safe and reliable delivery. The following are a few example of decisionssupportedbyanLIS:

• Improvingroutinganddeliveryschedules

• Selectingthebestmodesoftrans-portation

• Improvingtransportationbudgeting

• Improvingshipmentplanning

The information box on UPS shows uses of informa-tion systems and information technologies, particularly logistics information systems.

A manufacturing information system (MFIS) is used to manage manufacturing resources so that com-panies can reduce manufacturing costs, increase prod-uct quality, and improve inventory decisions. MFISs can perform many types of analysis with a high degree of timeliness and accuracy. For example, managers could use an MFIS to assess the effect on final product costs of a seven percent increase in raw materials or determine how many assembly-line workers are needed 6.1 The Importance of

Information SystemsInformation is the second most important resource (after the human element) in any organization. Timely, relevant, and accurate information is a critical tool for enhancing a company’s competitive position in the marketplace and managing the four Ms of resources: manpower, machinery, materials, and money.

To manage these resources, different types of information systems have been developed. Although all have the major components shown previously in Figure 1-5, they vary in the kind of data they collect and the analyses they perform. This section discusses some major types of information systems, focusing on the types of data and analysis used in each.

A personnel information system (PIS) or human resource information system (HRIS) is designed toprovide information that helps decision makers in personnel carry out their tasks more effectively. Web technologies have played a major role in improving the efficiency and effectiveness of HR departments.For example, intranets are often used to provide basic HRfunctions,suchasemployeescheckinghowmuchvacation time they have left or looking up how much they have in their 401k plans. Intranets reduce person-nel costs and speed up responses to common employee requests. As discussed in Chapter 7, an intranet is a network within an organization that uses Internet protocols and tech-nologies, for collecting, storing, and disseminating useful infor-mation that supports business activities such as sales, customer service, human resources, and marketing. The main difference between an intranet and the In-ternet is that intranets are private and the Internet is public. A PIS/HRISsupportsthefollowingdeci-sions, among others:

• Choosingthebestjob candidate

• Schedulingandassigningemployees

• Predictingtheorganization’sfuture personnel needs

• Providingreportsandstatisticson employee demographics

made or improved, based on information this system provides. For example, knowing which major is the fastest growing can help with decisions on hiring faculty, and know-ing the estimated number

of students for 2015 can help with facilities planning.

Example 2 Teletech, an international textile company, uses a database to store data on products, suppliers, sales personnel, costs, and so forth. The process component of the infor-mation system conducts analysis on the data to provide the following information about the preceding month:

•Whichsalespersongeneratedthehighestsales?

•Whichproductgeneratedthehighestsales? The lowest sales?

•Whichregiongeneratedthehighestsales?

Again, forecasting models can be used to generate predictions for the next sales period, and these predictions can be broken down by product, region, and salesperson. Based on this information, many decisions could be made, such as allocating the advertising budget to different products and regions.

6 Using Information Systems and Information Technologies

nformation systems are designed to collect data, process the collected data, and deliver timely, relevant, and useful information that can be used for decision making. To achieve this goal, an information system might use many differ-ent information technologies. For example, i

Information technolo-gies support information systems and come in the form of the Internet, computer net-works, database systems, POS systems, and radio frequency identification (RFID) tags

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Information systems are designed to collect data, process the collected data, and deliver timely, relevant, and useful information that can be used for decision making.

Information Technologies at UPS

Established in 1907, United Parcel Service (UPS, www.ups.com/content/us/en/about/index.html) is now a $49.7 billion global company and uses a sophisti-cated information system to manage delivering more than 14 million packages every day.6 UPS uses several types of networks in its operations, particularly GPS and wireless networks.

To better serve customers, UPS has developed UPS Delivery Intercept, a Web-based service that allows customers to intercept and reroute packages before they are delivered, thus avoiding potentially costly mistakes and wasted time and costs. UPS calls the technology behind this service Package Flow Tech-nology, which is also used to map efficient routes for drivers and mark packages for special handling. Kurt Kuehn, senior vice president of worldwide sales and marketing, says “Innovations like Package Flow Technology and services like UPS Delivery Intercept are key components of UPS’s drive to treat each of our millions of customers as if they’re our only customer. We’re constantly working on new and innovative ways to harness technology to help our customers meet their unique needs.”7

Information Technologies at Home Depot

Home Depot revolutionized the do-it-yourself home improvement industry in the United States. Its stores use a POS system4 for fast customer service and improved inventory management and a wireless network for efficient in-store communication. Home Depot also has a Web site to communicate with customers and increase sales with online orders and uses RFID tags to better manage inven-tory and improve the efficiency of its supply chain network.

Home Depot maintains a high-speed network connecting its stores throughout the United States and Canada and uses a data warehousing application to analyze variables affecting its success—customers, competitors, products, and so forth.5 The information system gives Home Depot a competitive advantage by gathering, analyzing, and using information to better serve customers and plan for customers’ needs.

organizations often use the Internet as a worldwide network to communicate with one another. Computer networks (wired and wireless), database systems, POS systems,andradiofrequencyidentification(RFID)tagsare just a few examples of information technologies used to support information systems. The information box on Home Depot gives you an idea of how compa-nies use information technologies to stay competitive.

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to produce 200 automobiles in the next three weeks. Some decisions an MFIS supports are as follows:

• Improvingorderingdecisions

• Improvingproductcostcalculations

• Improvingspaceutilization

• Improvingthebidevaluationprocessusedwithvendors and suppliers

• Improvinganalysisofpricechangesanddiscounts

The goal of a financial information system (FIS) is to provide information to financial executives in a timely manner. An FIS is used to support the following decisions, among others:

• Improvingbudgetallocation

•Minimizingcapitalinvestmentrisks

•Monitoringcosttrends

•Managingcashflows

• Determiningportfolio structures

In addition, marketing infor-mation systems (MKISs) are used to improve marketing decisions. An effective MKIS should provide timely, accurate, and integrated information about the market-ing mix (price, promotion, place, and product). Some decisions an MKIS supports are as follows:

• Analyzingmarketshare,sales,and sales personnel

• Salesforecasting

• Priceandcostanalysisofitems sold

6.2 Using Information Technologies for a Competitive AdvantageMichael Porter, a professor at Harvard Business School, identified three strategies for competing in the market-place successfully:8

Wal-Mart Stores, Inc.

Wal-Mart, the largest retailer in the world (http://walmartstores.com), built the Wal-Mart Satellite Network, which is the largest private satellite communication system in the United States. It links branch stores with the home office in Benton-ville, Arkansas by using two-way voice and data and one-way video communi-cation. In addition to the POS systems used for many years, Wal-Mart uses the following information technologies to gain a competitive advantage:• Telecommunication is used to link stores with the central computer system

and then to suppliers’ computers. This system creates a seamless connec-tion among all parties.

• Network technologies are used to manage inventory and implement a just-in-time inventory system. As a result, products and services can be offered at the lowest possible prices.

• Wal-Mart uses an extranet, called RetailLink, to communicate with suppliers. Suppliers can use this extranet to review product sales records in all stores and track current sales figures and inventory levels.9 (Extranets are discussed in Chapter 7.)

• Electronic data interchange (EDI, discussed in Chapter 11) is used to stream-line the order-invoice-payment cycle, reduce paperwork, and improve accuracy.

• Wal-Mart is a major user of RFID technologies, which have improved its supply chain and inventory management systems.

Information technologies can help bottom-line and top-line strategies. The focus of a bottom-line strategy is improving efficiency by reducing overall costs. A top-line strategy focuses on generating new revenue by offering new products and services to customers or increasing revenue by selling existing products and services to new customers. For example, e-commerce businesses are adapting business models to reduce

•Overallcostleadership

•Differentiation

• Focus

Information systems can help organizations re-duce the cost of products and services and, if designed correctly, assist with differentiation and focus strategies, too. Throughout this book, you’ll see many case ex-amples of the cost savings organizations have achieved with information systems and technologies. For ex-ample, Wal-Mart has been using overall cost leadership strategies successfully (see the information box).

Information technologies can help bottom-line and top-line strategies.

distribution costs dramatically. A good example is anti-virus vendors using the Internet to distribute software. For a subscription fee of around $30, you can down-load the software and get updates for a year. Without the Internet for easy, inexpensive distribution, vendors couldn’t afford to offer software at such a low price.

As discussed in Chapter 11, many organizations use enterprise systems, such as supply chain management (SCM), customer relationship management (CRM), en-terpriseresourceplanning(ERP),andcollaborationsoft-ware, to reduce costs and improve customer service. The goal of these systems is to use information technologies to create the most efficient, effective link between suppliers andconsumers.AsuccessfulCRMprogram,forexample,helps improve customer service and create a long-term relationship between an organization and its customers.

For differentiation strategies, organizations try to make their products and services different from their competitors. Apple has been successful with this strat-egy by designing its computers to look much different from PCs (offering computers in an assortment of bright colors, for example) and focusing on its computers’ high-resolution graphics and ease of use. As another example, Amazon.com has differentiated its Web site by using certain information technologies, such as personalization technologies (covered in more detail in Chapter 11) to recommend products to customers based on their previous purchases. Amazon.com also uses the 1-Click system for fast checkout. With this system, customers can enter credit card numbers and addresses once, and in subsequent visits simply click once to make a purchase, without having to enter information again.

With focus strategies, organizations concentrate on a specific market segment in an attempt to achieve a cost or differentiation advantage. Apple has also used this strategy to target iPhones to consumer users rather than business users. Similarly, Macintosh computers are mar-keted mainly to hobbyists and consumers. On the other hand, Research in Motion targets BlackBerry mostlyto business users. As another example, Abercrombie & Fitch targets high-end clothing to low-income customers, such as teenagers and young adults, while Nordstrom targets their high-end clothing to high-income custom-ers. Information technologies could assist these compa-

nies in reaching their target market segments more cost effectively.

Rememberthatfocusanddifferentiationstrategieswork only up to a certain point. Customers are often willing to pay more for a unique product or service or one with a specific focus. However, cost still plays a major role. If a product or service becomes too expensive, customers might not be willing to purchase it.

6.3 Porter’s Five Forces Model: Understanding the Business EnvironmentMichael Porter also created a comprehensive framework called the Five Forces Model for analyzing an organiza-tion, its position in the marketplace, and how information systems could be used to make it more competitive.8 The five forces are as follows (see Exhibit 1-2):

• Buyerpower

• Supplierpower

• Threatofsubstituteproductsorservices

• Threatofnewentrants

• Rivalryamongexistingcompetitors

Buyer power is high when customers have many choices and low when they have few choices. Typically, organizations try to limit buyers’ choices by offering services that make it difficult for customers to switch, which is essentially using a differentiation strategy. For example, Dell Computer was among the first to offer computer customization options to customers, and other computer manufac-turers followed suit. Gro-cery stores, such as Sams Club, offer club cards that encourage customers to shop by giving them big discounts, an example of overall cost leadership strategies. Similarly, air-lines and hotels offer free

Michael Porter’s Five Forces Model analyzes an organization, its position in the marketplace, and how information systems could be used to make it more competitive. The five forces include buyer power, supplier power, threat of substitute products or services, threat of new entrants, and rivalry among existing competitors.

Certain information technology tools, such as the Internet, have evened the playing field by giving customers more access to all sorts of data, such as being able to compare prices.

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power. For example, drug companies get patents for their products to reduce competition.

Threat of substitute products or services is high when many alterna-tives for an organization’s products or services are available. Some organi-zations add services to make them more distinct in the marketplace, such as Amazon.com’s person-alized recommendations. Other organizations add fees to discourage cus-tomers from switching to a competitor, such as cell phone companies adding charges for switching to another provider before the customer contract is up.

Threat of new entrants is low when du-

plicating a company’s product or service is difficult. Organizations often use focus strategies to ensure that this threat remains low. For example, developing a search engine that could compete successfully with Google would be difficult. In addition, organizations use information technologies to increase customer loyalty, as mentioned previously, which reduces the threat of new entrants. For instance, banks offer free bill paying to attract customers and keep them from switching to another bank; setting up a bill-paying service at another bank takes time that most custom-ers don’t want to spend. Similarly, after customizing their home pages with options offered by sites such as Yahoo! and Google, many users don’t want to repeat this process at a new site.

Rivalry among existing competitors is highwhenmany competitors occupy the same marketplace position and is low when there are few competitors. For example, online brokerage firms operate in a highly competitive environment, so they use information technologies to make their services more unique. The information box on Charles Schwab shows you how one company used this strategy.

7 Future Outlooksy examining factors related to de-signing, implementing, and using an information system, making the following predictions is possible:

• Hardwareandsoftwarecosts will continue to decline, so processing information will be less expensive in the future.

These cost savings should make information systems affordable for all organizations, regardless of their size and financial status.

• Artificialintelligenceandrelatedtechnologieswillcontinue to improve and expand, which will have an impact on information systems. For example, further development in natural language processing should make information systems easier to use.

• Computerliteracyoftypicalinformationsystemusers will improve, as computer basics are taught more often in more elementary schools.

mileage and points when customers use their services. Information systems can make managing these strate-gies easier and more cost effective.

By using these strategies, organizations try to combat the threat of new entrants or substitute prod-ucts by increasing customer loyalty. However, certain information technology tools, such as the Internet, have evened the playing field by giving customers more access to all sorts of data, such as being able to compare prices. This increased access to data increases buyers’ bargaining power and decreases supplier power, discussed next.

Supplier power—the opposite of buyer power—is high when customers have fewer options and low when customers have more options. Organizations might use information systems to make their products and services cheaper or offer more services to distinguish themselves from competitors (again, another use of a differentiation strategy). Boeing, for example, uses information technologies to offer unique products and services, which increases its power in the marketplace (a use of focus strategies; see the information box). In addition to information systems and technologies, organizations have other tools for increasing their

Exhibit 1-2 The Five Forces Model

Threat ofNew Entrants

Threat ofSubstitute Products

or Service

Substitutes

PotentialEntrants

Bargaining Powerof Buyers

Bargaining Powerof Suppliers

Suppliers Buyers

IndustryCompetitors

Rivalry AmongExisting

Competitors

• Networkingtechnologywill improve, so connecting computers will be easier, and sending information from one location to another will be faster. Compatibility issues between networks will become more manageable, and integrating voice, data, and images on the same transmission medium will improve communication quality and information delivery.

• Microcomputerswillcontinuetoimprove in power and quality, so most information system software will be able to run on microcom-puters without problems. This trend should make information systems more affordable, easier to maintain, and more appealing to organizations.

• Internetgrowthandacceptancewillcontinue, which will put small and large organizations on the same footing, regardless of their financial status. Internet growth will also make e-collaboration easier, despite geographical distances.

• Computercriminalswillbecomemore sophisticated, and protecting personal identity information will become more difficult.

The Industry Connection highlights Microsoft; its products and services are used widely in users’ daily lives.

Information Technology at Boeing

Boeing is the world’s leading aerospace company and the largest manufac-turer of commercial jetliners and military aircraft (www.boeing.com/companyoffices/aboutus/). Additionally, Boeing designs and manufactures electronic and defense systems, missiles, satellites, launch vehicles, and advanced infor-mation and communication systems.

Boeing uses intelligent information systems (discussed in Chapter 13) to stay ahead of the competition. These systems include artificial intelligence tech-nologies, such as neural networks, natural language processing, and expert systems that perform tasks usually car-ried out by human experts. Boeing uses these systems to develop and provide technology solutions and applications in information management, collaborative technologies, knowledge management, data and text mining, and natural lan-guage processing. For example, one solu-tion is a tool for communication between vehicle diagnostic systems and technical support databases and is used to collect information sent to airplane mechanics. Boeing also uses these systems internally to support its 787 program, commercial aviation services, the Multi-Mission Mari-time Aircraft program, and many mili-tary aircraft and space programs.10

Information Technologies at Charles Schwab

Charles Schwab Corporation, one of the largest U.S. finan-cial services firms, provides securities brokerage and finan-cial services for more than 8 million customers. Schwab was the first discount brokerage to offer automated, around-the-clock phone service and the capability to access current research on stocks and other securities.11

To stay ahead of competitors, Schwab uses a variety of information technologies, including the Internet for online stock trading, wired and wireless networks, automated data centers, and a comprehensive sales system, among others. Schwab has also developed a customer information system to help people make decisions on investments; this system helps Schwab reach other customers besides those who are already financially knowledgeable.12

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8 Chapter Summaryn this chapter, you have seen examples of uses for computers and information systems, learned the difference between computer literacy and information literacy, and reviewed transac-tion processing systems as one of the earliest applications of information technology. You have learned what a management information

system (MIS) is and its major components: data, data-base, process, and information. This chapter has also given you an overview of how information systems and information technologies are used in different areas of business and explained how companies can use Porter’s three competitive strategies and the Five Forces Model to gain a competitive advantage.

16 P a r t 2 : O p e r a t i o n s M a n a g e m e n t

Industry Connection

MicrOsOFt cOrpOratiOn*

Microsoft, founded in 1975, is the world’s largest software company and is involved in all aspects of desktop computing. It’s best known for Disk Operating System (DOS), Windows operating systems (OS), and office software suites such as Office. Some products and services Microsoft offers are the following:

* This information has been gathered from the Microsoft Web site and other promotional materials. For detailed information and updates, visit www.microsoft.com.

• Windows—The most popular operating system for PCs and PC-compatible computers

• Windows XP and Windows Vista—Two widely used OSs for PCs

• Windows Server 2003 and Server 2008—Widely used server operating systems used in network environments

• Office—The most widely used office suite; includes Word, Excel, Access, and PowerPoint

• Internet Explorer—A popular Web browser

• Expression Web (replacing FrontPage)—Code-named Quartz, an HTML editor and Web design program for developing Web pages and other HTML applications

• MSN—An Internet portal combining Web services and free Web-based e-mail (Hotmail)

• SharePoint Server—Microsoft’s new groupware for facilitating information sharing and content management

• SQL Server 2005—A widely used database management system

• Xbox—A video game system

• Visual Studio—A graphical programming language, mostly used for Web applications

• Zune—A portable media player and software; includes Zune Marketplace, which provides online music, video, and podcast downloads

• e-Wallet and Passport—Electronic payment systems used by many e-commerce sites

Microsoft’s future plans include incorporating voice-enabled computing into the next generation of Windows products.

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iproblems, activities, and Discussions

Federal Express, founded in1971, handles an average of 3 million package-tracking requests every day (http://about.fedex.designcdt.com). To stay ahead in a highly competitive industry, Federal Express focuses on customer service by maintaining a comprehensive Web site, FedEx.com., to assist customers and reduce costs. For example, every request for information handled at the Web site instead of going to the call center saves roughly $1.87. Federal Express has reported that customer calls have decreased by 83,000 per day since 2000, which saves the company $57.56 million per year. In addition, each package-tracking request costs Federal Express three cents; by using the Web site instead of the call center to handle these requests, costs have been reduced from more than $1.36 billion per year to $21.6 million per year. Another technology for improving customer service is Ship Manager, an application installed on customers’ sites so that users can weigh packages, determine

shipping charges, and print shipping labels. Customers can also link their invoicing, billing, accounting, and inventory systems to Ship Manager.13

However, Federal Express still spends almost $326 million per year on its call center to reduce customers’ frustration when the Web site is down or when customers have difficulty using it. Federal Express uses customer relationship

management software called Clarify in its call centers to make customer service representatives’ jobs easier and more efficient and speed up response time.14

Answer the following questions:

1. Is technology alone enough to ensure high-quality customer service?

2. What are Federal Express’s estimated annual savings from using information technology?

Using information technologies at federal express

casestudy

1. What are the differences between information literacy and computer literacy?

2. Which type of data gives you more options in making decisions: aggregated data or disaggregated data? Why?

3. Describe the difference between data and information.

4. What are the necessary qualities of information in an information system, and why are they important?

5. ResearchFacebookandTwitter,twopopularsocialnetworking sites. Write a two-page report on how these sites are used for business and personal pur-poses. In addition, explain how law enforcement per-sonnel use these sites to track down some criminals.

6. Researchthecapabilitiesofalogisticsinformationsystem(LIS)andwriteatwo-pagereport,explain-ingwhatkindofdecisionsanLIScouldimproveandwhattypesofdataanLISshouldcollect.

7. ResearchMichaelPorter’sthreecompetitivestrate-gies, and write a two-page report on them, including two examples of companies that have used these strategies and how information technologies helped to carry out each strategy.

8. Improvements in artificial intelligence technologies will result in a decline in computer crimes. True or False?

9. Organizations often use focus strategies to ensure that the threat of new entrants remains low. True or False?

10. Which of the following best describe the components of an information system?

a. Database, data, process, and decisions

b. Data, process, information, and decisions

c. Data, database, process, and information

d. None of the above

Key terms

business intelligence (BI) (6)

computer literacy (6)

data (8)

database (8)

information (8)

information literacy (6)

information technologies (10)

Five Forces Model (13)

management information system (MIS) (6)

process (8)

transaction processing system (TPS) (6)

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Fundamentals of Information Systems Part 1 Chapter 14ltrpress.cengage.com/mis/Chapter01.pdf · Fundamentals of Information Systems Part 1 Chapter 1 ... mation systems and explains