What Is an Information System?

An information system can be defined technically as a set of interrelated components that collect (or retrieve), process, store, and distribute information to support decision making and control in an organization. In addition to supporting decision making, coordination, and control, information systems may also help managers and workers analyze problems, visualize complex subjects, and create new products.

           Information systems contain information about significant people, places, and things within the organization or in the environment surrounding it. By information we mean data that have been shaped into a form that is meaningful and useful to human beings. Data, in contrast, are streams of raw facts representing events occurring in organizations or the physical environment before they have been organized and arranged into a form that people can understand and use.

FIGURE 1-5 Data and information Raw data from a supermarket checkout counter can be processed and organized to produce meaningful information such as the total unit sales of dish detergent or the total sales revenue from dish detergent for a specific store or sales territory.

FIGURE 1-6 Functions of an information system An information system contains information about an organization and its surrounding environment. Three basic activities—input, processing, and output—produce the information organizations need. Feedback is output returned to appropriate people or activities in the organization to evaluate and refine the input. Environmental factors such as customers, suppliers, competitors, stockholders, and regulatory agencies interact with the organization and its information systems.

Using a handheld computer called a Delivery Information Acquisition Device (DIAD), UPS drivers automatically capture customers’ signatures along with pickup, delivery, and time-card information. UPS information systems use these data to track packages while they are being transported.

CEMEX: A DIGITAL FIRM IN THE MAKING Cemex, based in Monterrey, Mexico, is a 98-year-old company that sells cement and ready-mix concrete products. It has 53 plants around the globe in countries including the United States, Spain, Egypt, Colombia, and the Philippines, and is the world’s third largest cement and concrete manufacturer.            The concrete business is an asset-intensive, low-efficiency business with unpredictable demand. Cemex dispatchers used to take orders for 8,000 grades of mixed concrete and forwarded them to six regional mixing plants, each with its own fleet of trucks. Customers routinely changed half of their orders, sometimes only hours before delivery, and these orders might have to be rerouted because of weather change, traffic jams, or problems with building permits. Cemex’s phone lines were often jammed as customers, truckers, and dispatchers tried to get orders straight. Many orders were lost.            Until about 15 years ago, Cemex’s Information Technology Division was viewed as a support department for the sales function. Cemex did not have an adequate computing or telecommunications infrastructure. Only a few executives had personal computers and integrated systems were a distant dream.            Lorenzo Zambrano, a grandson of the founder of the company, took over the business in 1985 and decided to apply information technology to these problems. He and Cemex chief information officer Gelacio Iniguez developed a series of systems that would enable Cemex to manage unforecastable demand better than its competitors.            Zambrano and Iniguez used ideas gleaned from visits to U.S. companies such as FedEx, Exxon, and Houston’s 911 emergency dispatch system to see how other organizations anticipated demand for their services. They built a system linking Cemex delivery trucks to a Global Positioning System satellite to help dispatchers monitor the location, direction, and speed of every vehicle. This information helps Cemex send the right truck to deliver a specific grade of cement or redirect deliveries when prompted by last-minute changes.            The company has reduced average delivery time from three hours to 20 minutes, realizing huge savings in fuel, maintenance, and personnel costs. Cemex now uses 35 percent fewer trucks to deliver the same amount of cement. Customers are willing to pay premium prices to Cemex because they do not have to keep work crews idle waiting for cement deliveries to show up.            Cemex’s production facilities previously operated independently, without precise knowledge of customer demand. A satellite communications system called CemexNet now electronically links all the firm’s production facilities and coordinates them from a central clearinghouse. Dispatchers know the exact location, speed, and direction of all vehicles at all times and can quickly select the most optimal arrangement of trucks and mixing plant locations to fill an order.            Customers, distributors, and suppliers can use the Internet to place orders directly, check shipment delivery times, and review payment records without having to telephone a customer service representative. Zambrano and his managers now have access to almost every detail about Cemex operations within 24 hours, whereas competitors are working with month-old data.            Zambrano built a sophisticated executive information system that enables him to monitor closely from his laptop computer operations in the 35 countries where Cemex operates. If a region is colored green, it is doing well. Yellow signals a potential problem, and red indicates a real problem. Zambrano can then systematically dig down to find out the details of any area of interest. At that level of detail he can even read the e-mail exchanges about a production problem at an individual plant. Sometimes Zambrano will send an e-mail about production issues to plant workers to let them know he is watching.            Cemex’s profit margins are higher than its bigger rivals, Zurich-based Holcim Limited and Paris-based Lafarge SA, even as the company has expanded from a provincial Mexican cement maker to an international powerhouse. In addition to maximizing operational efficiency, Cemex saves by using petroleum coke for half of its fuel needs. Petroleum coke, also known as pet coke, is the blackened leftover from the oil-refining process. In the cement industry, energy accounts for up to 40 percent of operating costs.            Cemex also designed software to make it easier for company executives and plant managers to keep tabs on power use. Managers use the software to plan each month’s energy consumption, ensuring that conveyors, electric grinders, and other equipment run mainly during hours of off-peak electricity rates. As a result, Cemex cut its energy bills by 17 percent in the past four years.            Cemex’s productivity has outpaced all of its major rivals in Mexico, and production output has grown sixfold since 1985. In an industry known for tough price competition and thin profit margins, Cemex revenue has grown at a rate of 9 percent over the past decade. As an agile, efficient e-business, Cemex appears to have the right ingredients for staying ahead of the pack. Source: Andrew Rowsell-Jones, “The Best of Both Worlds,” CIO Australia, July 12, 2004; John Lyons, “Expensive Energy? Burn Other Stuff, One Firm Decides,”Wall Street Journal, September 1, 2004; www.cemex.com, accessed September 2, 2004; John Lyons, “Cemex Cemts Its Position with Agreement to Buy RMC,” Wall Street Journal, September 28, 2004; and Melba Newsome, “The Cement Mixer,” Context, December 2001/January 2002. To Think About: How did digital technology transform the way Cemex ran its business? It has been said that Cemex has refocused efforts from managing assets to managing information. Explain. To what extent is Cemex a digital firm?

UPS COMPETES GLOBALLY WITH INFORMATION TECHNOLOGY United Parcel Service (UPS), the world’s largest air and ground package-distribution company, started out in 1907 in a closet-sized basement office. Jim Casey and Claude Ryan—two teenagers from Seattle with two bicycles and one phone— promised the “best service and lowest rates.” UPS has used this formula successfully for more than 90 years and is now the world’s largest ground and air package-distribution company.            Today UPS delivers more than 13.6 million parcels and documents each day in the United States and more than 200 other countries and territories. The firm has been able to maintain leadership in small-package delivery services despite stiff competition from FedEx and Airborne Express by investing heavily in advanced information technology. During the past decade, UPS has poured billions of dollars into technology and systems to boost customer service while keeping costs low and streamlining its overall operations.            Using a handheld computer called a Delivery Information Acquisition Device (DIAD), a UPS driver can automatically capture customers’ signatures along with pickup, delivery, and time-card information. The driver then places the DIAD into the UPS truck’s vehicle adapter, an information-transmitting device that is connected to the cellular telephone network. Package tracking information is then transmitted to UPS’s computer network for storage and processing in UPS’s main computers in Mahwah, New Jersey, and Alpharetta, Georgia. From there, the information can be accessed worldwide to provide proof of delivery to customers or to respond to customer queries.            Through its automated package tracking system, UPS can monitor packages throughout the delivery process. At various points along the route from sender to receiver, bar-code devices scan shipping information on the package label; the information is then fed into the central computer. Customer service representatives can check the status of any package from desktop computers linked to the central computers and are able to respond immediately to inquiries from customers. UPS customers can also access this information from the company’s Web site using their own computers or wireless devices such as pagers and cell phones.            Anyone with a package to ship can access the UPS Web site to track packages, check delivery routes, calculate shipping rates, determine time in transit, and schedule a pickup. Businesses anywhere can use the Web site to arrange UPS shipments and bill the shipments to the company’s UPS account number or to a credit card. The data collected at the UPS Web site are transmitted to the UPS central computer and then back to the customer after processing. UPS also provides tools that enable customers such Cisco Systems to embed UPS functions, such as tracking and cost calculations, into their own Web sites so that they can track shipments without visiting the UPS site.            A capability called UPS Campus Ship allows employees in multiple offices of a business to process and ship from their computers and have shipping procedures controlled by a central administrator set up by the business. Morris, Schneider and Prior LLC, a top law firm serving the financial services industry, uses this capability to track and control shipping costs. This firm is constantly sending time-sensitive documents from three different locations to clients throughout the United States. UPS tools automate the allocation and reporting of this firm’s shipping costs and even itemize and detail shipping expenses for each client.            Information technology helps UPS reinvent itself and keep growing. UPS is now leveraging its decades of expertise managing its own global delivery network to manage logistics and supply chain management for other companies. It created a UPS Supply Chain Solutions division that provides a complete bundle of standardized services to subscribing companies at a fraction of what it would cost to build their own systems and infrastructure. These services include supply chain design and management, freight forwarding, customs brokerage, mail services, multimodal transportation, and financial services, in addition to logistics services.            Birkenstock Footprint Sandals is one of many companies benefiting from these services. Birkenstock’s German plants pack shoes in crates that are bar-coded with their U.S. destination. UPS contracts with ocean carriers in Rotterdam to transport the shoe crates across the Atlantic to New Jersey ports instead of routing them through the Panama Canal to Birkenstock’s California warehouses. UPS trucks whisk each incoming shipment to a UPS distribution hub and, within hours, to 3,000 different retailers. By handing this work over to UPS, Birkenstock has cut the time to get its shoes to stores by half. Along the way, UPS uses bar-code scanning to keep track of every shipment until the merchant signs off on it. UPS also handles Internet orders for Jockey International, laptop repairs for Toshiba America, and X-ray machine installation in Europe for Philips Medical Systems. Source: Dean Foust, “Big Brown’s New Bag,” and “Online Extra: UPS’s Eskew on ‘the Next Logical Step,’ ” BusinessWeek, July 19, 2004; Galen Gruman, “UPS vs. FedEx: Head-to-Head on Wireless ” and “New Technologies Hit Mainstream,” CIO Magazine, June 1, 2004; “Paper Trail,” RoundUPS, Fall 2004; and Todd R.Weiss, “UPS Delivers New Package Checkin System for Customers,” Computerworld, April 9, 2003. To Think About: What are the inputs, processing, and outputs of UPS’s package tracking system? What technologies are used? How are these technologies related to UPS’s business strategy? How do UPS’s systems provide value for the company and its customers? What would happen if these technologies were not available?

Managers and business firms invest in information technology and systems because they provide real economic value to the business. The decision to build or maintain an information system assumes that the returns on this investment will be superior to other investments in buildings, machines, or other assets. These superior returns will be expressed as increases in productivity, as increases in revenues (which will increase the firm’s stock market value), or perhaps as superior long-term strategic positioning of the firm in certain markets (which produce superior revenues in the future).

           There are also situations in which firms invest in information systems to cope with governmental regulations or other environmental demands. For instance, one of the major ways firms can comply with the reporting requirements of the recent Sarbanes-Oxley Act or the Health Insurance Portability and Accountability Act (HIPAA) is to build a document management system that can trace the flow of virtually all material documents it uses (see Chapter 12).

           In some cases, firms are required to invest in information systems simply because such investments are required to stay in business. For instance, some small banks may be forced to invest in automatic teller machine (ATM) networks or offer complex banking services requiring large technology investments simply because it is a “cost of doing business.” Nevertheless, it is assumed that most information systems investments will be justified by favorable returns.

           We can see that from a business perspective, an information system is an important instrument for creating value for the firm. Information systems enable the firm to increase its revenue or decrease its costs by providing information that helps managers make better decisions or that improves the execution of business processes. For example, the information system for analyzing supermarket checkout data illustrated in Figure 1-5 can increase firm profitability by helping managers make better decisions on which products to stock and promote in retail supermarkets and as a result increase business value.

           Every business has an information value chain, illustrated in Figure 1-7, in which raw information is systematically acquired and then transformed through various stages that add value to that information. The value of an information system to a business, as well as the decision to invest in any new information system, is, in large part, determined by the extent to which the system will lead to better management decisions, more efficient business processes, and higher firm profitability. Although there are other reasons why systems are built, their primary purpose is to contribute to corporate value.

FIGURE 1-7 The business information value chain From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability.

           The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organizational and management solution, based on information technology, to a challenge posed by the environment. Every chapter in this book begins with short case study that illustrates this concept. A diagram at the beginning of each chapter illustrates the relationship between a changing business environment and resulting management and organizational decisions to use IT as a solution to challenges generated by the business environment.

           To fully understand information systems, a manager must understand the broader organization, management, and information technology dimensions of systems (see Figure 1-8) and their power to provide solutions to challenges and problems in the business environment. We refer to this broader understanding of information systems, which encompasses an understanding of the management and organizational dimensions of systems as well as the technical dimensions of systems, as information systems literacy. Information systems literacy includes a behavioral as well as a technical approach to studying information systems. Computer literacy, in contrast, focuses primarily on knowledge of information technology.

FIGURE 1-8 Information systems are more than computers Using information systems effectively requires an understanding of the organization, management, and information technology shaping the systems. An information system creates value for the firm as an organizational and management solution to challenges posed by the environment.

           Review the diagram at the beginning of the chapter that reflects this expanded definition of an information system. The diagram shows how DaimlerChrysler’s production and supplier systems solve the business challenge presented by a fierce array of competitors and rapidly changing consumer preferences. These systems create value for DaimlerChrysler by making its production, supply chain, and quality control processes more efficient and cost effective. The diagram also illustrates how management, technology, and organizational elements work together to create the systems.

           Each chapter of this text begins with a diagram similar to this one to help you analyze the chapter-opening case. You can use this diagram as a starting point for analyzing any information system or information system problem you encounter.

Let’s examine each of the dimensions of information systems—organizations, management, and information technology.

ORGANIZATIONS

Information systems are an integral part of organizations. Indeed, for some companies, such as credit reporting firms, without an information system, there would be no business. The key elements of an organization are its people, structure, business processes, politics, and culture. We introduce these components of organizations here and describe them in greater detail in Chapters 2 and 3.

           Organizations are composed of different levels and specialties. Their structures reveal a clear-cut division of labor. Experts are employed and trained for different functions. The major business functions, or specialized tasks performed by business organizations, consist of sales and marketing, manufacturing and production, finance and accounting, and human resources (see Table 1-2).

TABLE 1-2 Major Business Functions

           Chapter 2 provides more detail on these business functions and the ways in which they are supported by information systems. Each chapter of this text concludes with a Make IT Your Business section showing how chapter topics relate to each of these functional areas. The section also provides page numbers in each chapter where these functional examples can be found.

           An organization coordinates work through a structured hierarchy and through its business processes, which we defined earlier. The hierarchy arranges people in a pyramid structure of rising authority and responsibility. The upper levels of the hierarchy consist of managerial, professional, and technical employees, whereas the lower levels consist of operational personnel.

           Most organizations’ business processes include formal rules that have been developed over a long time for accomplishing tasks. These rules guide employees in a variety of procedures, from writing an invoice to responding to customer complaints. Some of these procedures have been formalized and written down, but others are informal work practices, such as a requirement to return telephone calls from coworkers or customers, that are not formally documented. Many business processes are incorporated into information systems, such as how to pay a supplier or how to correct an erroneous bill.

           Organizations require many different kinds of skills and people. In addition to managers, knowledge workers (such as engineers, architects, or scientists) design products or services and create new knowledge, and data workers (such as secretaries, bookkeepers, or clerks) process the organization’s paperwork. Production or service workers (such as machinists, assemblers, or packers) actually produce the organization’s products or services.

           Each organization has a unique culture, or fundamental set of assumptions, values, and ways of doing things, that has been accepted by most of its members. Parts of an organization’s culture can always be found embedded in its information systems. For instance, the United Parcel Service’s concern with placing service to the customer first is an aspect of its organizational culture that can be found in the company’s package tracking systems.

           Different levels and specialties in an organization create different interests and points of view. These views often conflict. Conflict is the basis for organizational politics. Information systems come out of this cauldron of differing perspectives, conflicts, compromises, and agreements that are a natural part of all organizations. In Chapter 3 we examine these features of organizations and their role in the development of information systems in greater detail.

MANAGEMENT

TECHNOLOGY

DaimlerChrysler’s Extended Enterprise Network is an extranet for suppliers to access a series of internal company applications. Internet technology standards make it possible for DaimlerChrysler to link to the systems of many different companies.

COMPLEMENTARY ASSETS AND ORGANIZATIONAL CAPITAL

Awareness of the organizational and managerial dimensions of information systems can help us understand why some firms achieve better results from their information systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive (see Figure 1-9). Some firms invest a great deal and receive a great deal (quadrant 2); others invest an equal amount and receive few returns (quadrant 4). Still other firms invest little and receive much (quadrant 1), whereas others invest little and receive little (quadrant 3). This suggests that investing in information technology does not by itself guarantee good returns. What accounts for this variation among firms?

FIGURE 1-9 Variation in returns on information technology investment Although, on average, investments in information technology produce returns far above those returned by other investments, there is considerable variation across firms. Source: Based on Brynjolfsson and Hitt (2000).

           The answer lies in the concept of complementary assets. Information technology investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Complementary assets are those assets required to derive value from a primary investment (Teece, 1998). For instance, to realize value from automobiles requires substantial complementary investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory structure to set standards and control drivers.

           Recent research on business information technology investment indicates that firms that support their technology investments with investments in complementary assets, such as new business processes, management behavior, organizational culture, or training, receive superior returns, whereas those firms failing to make these complementary investments receive less or no returns on their information technology investments (Brynjolfsson, 2003; Brynjolfsson and Hitt, 2000; Davern and Kauffman, 2000; Laudon, 1974; Marchand, 2004). These investments in organization and management are also known as organizational and management capital.

           Table 1-3 lists the major complementary investments that firms need to make to realize value from their information technology investments. Some of this investment involves tangible assets, such as buildings, machinery, and tools. However, the value of investments in information technology depends to a large extent on complementary investments in management and organization.

TABLE 1-3 Complementary Social, Managerial, and Organizational Assets Required to Optimize Returns from Information Technology Investments

           Key organizational complementary investments are a supportive business culture that values efficiency and effectiveness, efficient business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team.

           Important managerial complementary assets are strong senior management support for change, incentive systems that monitor and reward individual innovation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge.

           Important social investments (not made by the firm but by the society at large, other firms, governments, and other key market actors) are the Internet and the supporting Internet culture, educational systems, network and computing standards, regulations and laws, and the presence of technology and service firms.

           Throughout the book we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Perhaps the single most important theme in the book, reflected in case studies, vignettes, and exercises, is that managers need to consider the broader organization and management dimensions of information systems to understand current problems as well as to derive substantial above-average returns from their information technology investments. As you will see throughout the text, firms that can address these related dimensions of the IT investment are, on average, richly rewarded.

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