DaimlerChrysler’s information systems use both technology and knowledge of the business to enable the company and its suppliers to respond instantly to changes in the marketplace or other events. These information systems give DaimlerChrysler the agility to monitor and react to data as events unfold, and they are intimately linked with systems of its suppliers and related companies. Managers can “see into” these systems and, when necessary, make adjustments on the fly to keep manufacturing and delivery processes aligned with customer needs.

          The agility exhibited by DaimlerChrysler is part of the transformation of business firms throughout the world into fully digital firms. Such digital firms use the Internet and networking technology to make data flow seamlessly among different parts of the organization; streamline the flow of work; and create electronic links with customers, suppliers, and other organizations.

          As a manager, you’ll need to know how information systems can make your business more competitive, efficient, and profitable. In this chapter we begin our investigation of information systems and organizations by describing information systems from both technical and behavioral perspectives and by surveying the changes they are bringing to organizations and management.

Why Information Systems?

We are in the midst of a swiftly moving river of technology and business innovations that is transforming the global business landscape. An entirely new Internet business culture is emerging with profound implications for the conduct of business. You can see this every day by observing how business people work using high-speed Internet connections for e-mail and information gathering, portable computers connected to wireless networks, cellular telephones connected to the Internet, and hybrid handheld devices delivering phone, Internet, and computing power to an increasingly mobile and global workforce.

           The emerging Internet business culture is a set of expectations that we all share. We have all come to expect online services for purchasing goods and services, we expect our business colleagues to be available by e-mail and cell phone, and we expect to be able to communicate with our vendors, customers, and employees any time of day or night over the Internet. We even expect our business partners around the world to be “fully connected.” Internet culture is global.

           In this text and in the business world, you’ll often encounter the term information technology. Information technology (abbreviated IT) refers to all of the computer-based information systems used by organizations and their underlying technologies. Briefly, information technologies and systems are revolutionizing the operation of firms, industries, and markets. The main objective of this book is to describe the nature of this transformation and to help you as a future manager take advantage of the emerging opportunities.

Why Information Systems Matter

Let’s start by examining why information systems and information technology (IT) are so important. There are four reasons why IT will make a difference to you as a manager throughout your career.

CAPITAL MANAGEMENT

Information technology has become the largest component of capital investment for firms in the United States and many industrialized societies. In 2005, U.S. firms alone will spend nearly $1.8 trillion on IT and telecommunications equipment and software. Investment in information technology has doubled as a percentage of total business investment since 1980, and now accounts for more than one-third of all capital invested in the United States and more than 50 percent of invested capital in information-intensive industries, such as finance, insurance, and real estate.

          Figure 1-1 shows that between 1980 and 2003, private business investment in information technology (hardware, software, and telecommunications equipment) grew from 19 percent to more than 35 percent of all domestic private business investment. If one included expenditures for managerial and organizational change programs and business and consulting services that are required to use this technology effectively, total information technology expenditures would rise above 50 percent of total private business investment.

FIGURE 1-1 Information technology capital investment Information technology capital investment, defined as hardware, software, and telecommunications equipment, expanded from 19 percent of all business investment to 35 percent during the period from 1980 to 2003. Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, Tables 5.2 and 5.8, 2004.

In the United States over 23 million managers and over 113 million workers in the labor force rely on information systems every day to conduct business (Statistical Abstract, 2003). In many industries, survival and even existence without extensive use of information systems is inconceivable. Obviously, all of e-commerce would be impossible without substantial IT investments, and firms such as Amazon, eBay, Google, E*Trade, or the world’s largest online university, the University of Phoenix, simply would not exist. Today’s service industries—finance, insurance, real estate as well as personal services such as travel, medicine, and education—could not operate without IT. Similarly, retail firms such as Wal-Mart and Sears and manufacturing firms such as General Motors and General Electric require IT to survive and prosper. Just like offices, telephones, filing cabinets, and efficient tall buildings with elevators were once of the foundations of business in the twentieth century, information technology is a foundation for business in the twenty-first century.

           There is a growing interdependence between a firm’s ability to use information technology and its ability to implement corporate strategies and achieve corporate goals (see Figure 1-2). What a business would like to do in five years often depends on what its systems will be able to do. Increasing market share, becoming the high-quality or low-cost producer, developing new products, and increasing employee productivity depend more and more on the kinds and quality of information systems in the organization. The more you understand about this relationship, the more valuable you will be as a manager.

FIGURE 1-2 The interdependence between organizations and information systems. In contemporary systems there is a growing interdependence between a firm’s information systems and its business capabilities. Changes in strategy, rules, and business processes increasingly require changes in hardware, software, databases, and telecommunications. Often, what the organization would like to do depends on what its systems will permit it to do.

PRODUCTIVITY

Today’s managers have very few tools at their disposal for achieving significant gains in productivity. IT is one of the most important tools along with innovations in organization and management, and in fact, these innovations need to be linked together. A substantial and growing body of research reported throughout this book suggests investment in IT plays a critical role in increasing the productivity of firms, and entire nations (Zhu et al., 2004).

          For instance, economists at the U.S. Federal Reserve Bank estimate that IT contributed to the lowering of inflation by 0.5 to 1 percentage point in the years from 1995 to 2000 (Greenspan, 2000). IT was a major factor in the resurgence in productivity growth in the United States, which began in 1995 and has continued until today at an average rate of 2.7 percent, up from 1.4 percent from 1973 to 1995 (Baily, 2002). Firms that invested wisely in information technology experienced continued growth in productivity and efficiency.

STRATEGIC OPPORTUNITY AND ADVANTAGE

If you want to take advantage of new opportunities in markets, develop new products, and create new services, chances are quite high you will need to make substantial investments in IT to realize these new business opportunities. If you want to achieve a strategic advantage over your rivals, to differentiate yourself from your competitors, IT is one avenue for achieving such advantages along with changes in business practices and management. We talk more about IT contributions to competitive strategy in Chapter 3. These advantages might not last forever, but then again most strategic advantages throughout history are short-lived. However, a string of short-lived competitive advantages is a foundation for long-term advantages in business, just as is true of any athletic sport or race.

In May 2003, Nicholas Carr, an editor at Harvard Business Review, wrote an article titled “IT Doesn’t Matter,” which stirred significant debate in the business community. Carr’s argument in a nutshell is that because every firm can purchase IT in the marketplace, because any advantage obtained by one company can easily be copied by another company, and because IT is now a commodity based on standards (such as the Internet) that all companies can freely use, it is no longer a differentiating factor in organizational performance.

           Carr argues that no firm can use IT to achieve a strategic edge over its competitors any more than it could with electricity, telephones, or other infrastructure. Therefore, Carr concludes, firms should reduce spending on IT, follow rather than lead IT in their industry, reduce risks by preparing for computer outages and security breaches, and avoid deploying IT in new ways.

           Most management information system (MIS) experts disagree. As we discuss later in this chapter and subsequent chapters throughout the book, research demonstrates that there is considerable variation in firms’ ability to use IT effectively. Many highly adept firms continually obtain superior returns on their investment in IT, whereas less adept firms do not.

           Copying innovations of other firms can be devilishly difficult, with much being lost in the translation. There is only one Dell, one Wal-Mart, one Amazon, and one eBay, and each of these firms has achieved a competitive advantage in its industry based in large part on unique ways of organizing work enabled by IT that have been very difficult to copy. If copying were so easy, we would expect to find much more powerful competition for these market leaders.

           Although falling prices for hardware and software and new computing and telecommunications standards such as the Internet have made the application of computers to business much easier than in the past, this does not signal the end of innovation or the end of firms developing strategic edges using IT. Far from the end of innovation, commoditization often leads to an explosion in innovation and new markets and products. For example, the abundance and availability of materials such as wood, glass, and steel during the last century made possible a continuing stream of architectural innovation.

           Likewise, the development of standards and lowering costs of computer hardware made possible new products and services such as the Apple iPod and iTunes, the Sony Walkman portable music player, RealMedia online streaming music, and the entire online content industry. Entirely new businesses and business models have emerged for the digital distribution of music, books, journals, and Hollywood films.

           Carr is surely correct in stating that not all investments in IT work out or have strategic value. Some are just needed to stay in business, to comply with government reporting requirements, and to satisfy the needs of customers and vendors. Perhaps the more important questions are how much does IT make a difference, and where can it best be deployed to make a competitive difference?

           We make a major effort in this book to suggest ways you as a manager and potential entrepreneur can use information technology and systems to create differentiation from your competitors and strategic advantage in the marketplace. As we describe throughout, to achieve any measure of “success,” investment in IT must be accompanied by significant changes in business operations and processes and changes in management culture, attitudes, and behavior. Absent these changes, investment in IT can be a waste of precious investor resources.

A combination of information technology innovations and a changing domestic and global business environment makes the role of IT in business even more important for managers than just a few years ago. The Internet revolution is not something that happened and then burst, but instead has turned out to be an ongoing, powerful source of new technologies with significant business implications for much of this century.

           There are five factors to consider when assessing the growing impact of IT in business firms both today and over the next ten years.

TABLE 1-1 The Changing Contemporary Business Environment

           Although “digital convergence” was predicted a decade ago, it is now an undeniable reality. Four massive industries are moving toward a common platform: the $1 trillion computer hardware and software industry in the United States, the $250 billion consumer electronics industry, the $1.6 trillion communications industry (traditional and wireless telephone networks), and the $900 billion content industry (from Hollywood movies, to music, text, and research industries). Although each industry has its favored platform, the outlines of the future are clear: a world of near universal, online, on-demand, and personalized information services from text messaging on cell phones, to games, education, and entertainment.

           The Internet is bringing about a convergence of technologies, roiling markets, entire industries, and firms in the process. Traditional boundaries and business relationships are breaking down, even as new ones spring up. Telephone networks are merging into the Internet, and cellular phones are becoming Internet access devices. Handheld storage devices such as iPods are emerging as potential portable game and entertainment centers. The Internet-connected personal computer is moving toward a role as home entertainment control center.

           Traditional markets and distribution channels are weakening and new markets are being created. For instance, the markets for music CDs and video DVDs and the music and video store industries are undergoing rapid change. New markets for online streaming media and for music and video downloads have materialized.

           Today, networking and the Internet are nearly synonymous with doing business. Firms’ relationships with customers, employees, suppliers, and logistic partners are becoming digital relationships. As a supplier, you cannot do business with Wal-Mart, or Sears, or most national retailers unless you adopt their well-defined digital technologies. As a consumer, you will increasingly interact with sellers in a digital environment. As an employer, you’ll be interacting more electronically with your employees and giving them new digital tools to accomplish their work.

           So much business is now enabled by or based upon digital networks that we use the terms electronic business and electronic commerce frequently throughout this text. Electronic business, or e-business, designates the use of Internet and digital technology to execute all of the activities in the enterprise. E-business includes activities for the internal management of the firm and for coordination with suppliers and other business partners. It also includes electronic commerce, or e-commerce. E-commerce is the part of e-business that deals with the buying and selling of goods and services electronically with computerized business transactions using the Internet, networks, and other digital technologies. It also encompasses activities supporting those market transactions, such as advertising, marketing, customer support, delivery, and payment.

           The technologies associated with e-commerce and e-business have also brought about similar changes in the public sector. Governments on all levels are using Internet technology to deliver information and services to citizens, employees, and businesses with which they work. E-government is the application of the Internet and related technologies to digitally enable government and public sector agencies’ relationships with citizens, businesses, and other arms of government. In addition to improving delivery of government services, e-government can make government operations more efficient and also empower citizens by giving them easier access to information and the ability to network electronically with other citizens. For example, citizens in some states can renew their driver’s licenses or apply for unemployment benefits online, and the Internet has become a powerful tool for instantly mobilizing interest groups for political action and fund-raising.

At the Orbitz Web site, visitors can make online reservations for airlines, hotels, rental cars, cruises, and vacation packages and obtain information on travel and leisure topics. Such online travel services are supplanting traditional travel agencies.

           In addition to these changes, there has also been a transformation in the management of the enterprise. The traditional business firm was—and still is—a hierarchical, centralized, structured arrangement of specialists who typically relied on a fixed set of standard operating procedures to deliver a mass-produced product (or service). The new style of business firm is a flattened (less hierarchical), decentralized, flexible arrangement of generalists who rely on nearly instant information to deliver mass-customized products and services uniquely suited to specific markets or customers.

           The traditional management group relied—and still relies—on formal plans, a rigid division of labor, and formal rules. The new manager relies on informal commitments and networks to establish goals (rather than formal planning), a flexible arrangement of teams and individuals working in task forces, and a customer orientation to achieve coordination among employees. The new manager appeals to the knowledge, learning, and decision making of individual employees to ensure proper operation of the firm. Once again, information technology makes this style of management possible.

GLOBALIZATION

A growing percentage of the American economy—and other advanced industrial economies in Europe and Asia—depends on imports and exports. Foreign trade, both exports and imports, accounts for more than 25 percent of the goods and services produced in the United States, and even more in countries such as Japan and Germany. Companies are also distributing core business functions in product design, manufacturing, finance, and customer support to locations in other countries where the work can be performed more cost effectively. The success of firms today and in the future depends on their ability to operate globally.

           Today, information systems provide the communication and analytic power that firms need to conduct trade and manage businesses on a global scale. Controlling the far-flung global corporation—communicating with distributors and suppliers, operating 24 hours a day in different national environments, coordinating global work teams, and servicing local and international reporting needs—is a major business challenge that requires powerful information system responses.

           Globalization and information technology also bring new threats to domestic business firms: Because of global communication and management systems, customers now can shop in a worldwide marketplace, obtaining price and quality information reliably 24 hours a day. To become competitive participants in international markets, firms need powerful information and communication systems.

RISE OF THE INFORMATION ECONOMY

The United States, Japan, Germany, and other major industrial powers are being transformed from industrial economies to knowledge-and information-based service economies, whereas manufacturing has been moving to lower-wage countries. In a knowledge-and information-based economy, knowledge and information are key ingredients in creating wealth.

           The knowledge and information revolution began at the turn of the twentieth century and has gradually accelerated. By 1976, the number of white-collar workers employed in offices surpassed the number of farm workers, service workers, and blue-collar workers employed in manufacturing (see Figure 1-3). Today, most people no longer work on farms or in factories but instead are found in sales, education, health care, banks, insurance firms, and law firms; they also provide business services, such as copying, computer programming, or making deliveries. These jobs primarily involve working with, distributing, or creating new knowledge and information. In fact, knowledge and information work now account for a significant 60 percent of the U.S. gross national product and nearly 55 percent of the labor force.

FIGURE 1-3 The growth of the information economy Since the beginning of the twentieth century, the United States has experienced a steady decline in the number of farm workers and blue-collar workers who are employed in factories. At the same time, the country is experiencing a rise in the number of white-collar workers who produce economic value using knowledge and information. Source: U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, 2003, Table 615; and Historical Statistics of the United States, Colonial Times to 1970, Vol. 1, Series D, pp. 182–232..

           In knowledge-and information-based economies, the market value of many firms is based largely on intangible assets, such as proprietary knowledge, information, unique business methods, brands, and other “intellectual capital.” Physical assets, such as buildings, machinery, tools, and inventory, now account for less than 20 percent of the market value of many public firms in the United States (Lev, 2001).

           Knowledge and information provide the foundation for valuable new products and services, such as credit cards, overnight package delivery, or worldwide reservation systems. Knowledge- and information-intense products, such as computer games, require a great deal of knowledge to produce, and knowledge is used more intensively in the production of traditional products as well. In the automobile industry, for instance, both design and production now rely heavily on knowledge and information technology.

EMERGENCE OF THE DIGITAL FIRM

All of the changes we have just described, coupled with equally significant organizational redesign, have created the conditions for a fully digital firm. The digital firm can be defined along several dimensions. A digital firm is one in which nearly all of the organization’s significant business relationships with customers, suppliers, and employees are digitally enabled and mediated. Core business processes are accomplished through digital networks spanning the entire organization or linking multiple organizations.

           Business processes refer to the set of logically related tasks and behaviors that organizations develop over time to produce specific business results and the unique manner in which these activities are organized and coordinated. Developing a new product, generating and fulfilling an order, creating a marketing plan, and hiring an employee are examples of business processes, and the ways organizations accomplish their business processes can be a source of competitive strength. (A detailed discussion of business processes can be found in Chapter 2.)

           Key corporate assets—intellectual property, core competencies, and financial and human assets—are managed through digital means. In a digital firm, any piece of information required to support key business decisions is available at any time and anywhere in the firm.

           Digital firms sense and respond to their environments far more rapidly than traditional firms, giving them more flexibility to survive in turbulent times. Digital firms offer extraordinary opportunities for more global organization and management. By digitally enabling and streamlining their work, digital firms have the potential to achieve unprecedented levels of profitability and competitiveness. DaimlerChrysler, described earlier, illustrates some of these qualities. Electronically integrating key business processes with suppliers has made this company much more agile and adaptive to customer demands and changes in its supplier network.

           Figure 1-4 illustrates a digital firm making intensive use of Internet and digital technology for electronic business. Information can flow seamlessly among different parts of the company and between the company and external entities—its customers, suppliers, and business partners. More and more organizations are moving toward this digital firm vision.

FIGURE 1-4 Electronic business and electronic commerce in the emerging digital firm Companies can use Internet technology for e-commerce transactions with customers and suppliers, for managing internal business processes, and for coordinating with suppliers and other business partners. E-business includes e-commerce as well the management and coordination of the enterprise.

         A few firms, such as Cisco Systems or Dell Computers, are close to becoming fully digital firms, using the Internet to drive every aspect of their business. In most other companies, a fully digital firm is still more vision than reality, but this vision is driving them toward digital integration. Firms are continuing to invest heavily in information systems that integrate internal business processes and build closer links with suppliers and customers.

         The Window on Organizations describes such a digital firm in the making. Cemex, a world-leading global cement and construction materials firm, has achieved impressive results through ruthless focus on operational excellence. Management took an enterprise-wide view of its business processes and developed a series of information systems to turn the company into a lean, efficient, agile machine that could instantly respond to changes in customer orders, weather, and other last-minute events.