Section 2.1: Full Text

Different Kinds of Systems
Four Major Types of Systems
Relationship of Systems to One Another

Mango has a core of designers and production facilities that can churn out new fashion styles at lightning speed. But Mango would not be able stock its stores so quickly with hot fashion trends without its powerful information systems. These information systems support finely tuned business processes that organize merchandise based on style and customer tastes to drive inventory replenishment.

          As a manager, you’ll want to know exactly how information systems can help your company. You’ll need to understand which types of information systems are available to businesses and what they can do for them.

          In this chapter, we first look at different ways of classifying information systems based on the organizational level, business functions, and business processes they support. We then briefly examine enterprise applications, which consist of enterprise systems, supply chain management systems, customer relationship management systems, and knowledge management systems. These enterprise applications span the entire firm, integrating information from multiple functions and business processes to enhance the performance of the organization as a whole.


Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs. Figure 2-1 illustrates one way to depict the kinds of systems found in an organization. In the illustration, the organization is divided into strategic, management, and operational levels and then is further divided into functional areas, such as sales and marketing, manufacturing and production, finance and accounting, and human resources. Systems are built to serve these different organizational interests (Anthony, 1965).

FIGURE 2-1 Types of information systems

Organizations can be divided into strategic, management, and operational levels and into four major functional areas: sales and marketing, manufacturing and production, finance and accounting, and human resources. Information systems serve each of these levels and functions.

Different Kinds of Systems

Three main categories of information systems serve different organizational levels: operational-level systems, management-level systems, and strategic-level systems. Operational-level systems support operational managers by keeping track of the elementary activities and transactions of the organization, such as sales, receipts, cash deposits, payroll, credit decisions, and the flow of materials in a factory. The principal purpose of systems at this level is to answer routine questions and to track the flow of transactions through the organization. How many parts are in inventory? What happened to Mr. Williams’s payment? To answer these kinds of questions, information generally must be easily available, current, and accurate. Examples of operational-level systems include a system to record bank deposits from automatic teller machines or one that tracks the number of hours worked each day by employees on a factory floor.

          Management-level systems serve the monitoring, controlling, decision-making, and administrative activities of middle managers. The principal question addressed by such systems is this: Are things working well? Management-level systems typically provide periodic reports rather than instant information on operations. An example is a relocation control system that reports on the total moving, house-hunting, and home financing costs for employees in all company divisions, noting wherever actual costs exceed budgets.

          Some management-level systems support nonroutine decision making. They tend to focus on less-structured decisions for which information requirements are not always clear. These systems often answer “what-if” questions: What would be the impact on production schedules if we were to double sales in the month of December? What would happen to our return on investment if a factory schedule were delayed for six months? Answers to these questions frequently require new data from outside the organization, as well as data from inside that cannot be easily drawn from existing operational-level systems.

          Strategic-level systems help senior management tackle and address strategic issues and long-term trends, both in the firm and in the external environment. Their principal concern is matching changes in the external environment with existing organizational capability. What will employment levels be in five years? What are the long-term industry cost trends, and where does our firm fit in? What products should we be making in five years?

          Information systems also serve the major business functions, such as sales and marketing, manufacturing and production, finance and accounting, and human resources. A typical organization has operational-, management-, and strategic-level systems for each functional area. For example, the sales function generally has a sales system on the operational level to record daily sales figures and to process orders. A management-level system tracks monthly sales figures by sales territory and reports on territories where sales exceed or fall below anticipated levels. A system to forecast sales trends over a five-year period serves the strategic level. We first describe the specific categories of systems serving each organizational level and their value to the organization. Then we show how organizations use these systems for each major business function.

Four Major Types of Systems

Figure 2-2 shows the specific types of information systems that correspond to each organizational level. The organization has executive support systems (ESS) at the strategic level; management information systems (MIS) and decision-support systems (DSS) at the management level; and transaction processing systems (TPS) at the operational level. Systems at each level in turn are specialized to serve each of the major functional areas. Thus, the typical systems found in organizations are designed to assist workers or managers at each level and in the functions of sales and marketing, manufacturing and production, finance and accounting, and human resources.


FIGURE 2-2 The four major types of information systems
This figure provides examples of TPS, DSS, MIS, and ESS, showing the level of the organization and business function that each supports.

          Table 2-1 summarizes the features of the four types of information systems. It should be noted that each of the different systems may have components that are used by organizational levels and groups other than its main constituencies. A secretary may find information on an MIS, or a middle manager may need to extract data from a TPS.

TABLE 2-1 Characteristics of Information Processing Systems


Transaction processing systems (TPS) are the basic business systems that serve the operational level of the organization. A transaction processing system is a computerized system that performs and records the daily routine transactions necessary to conduct business. Examples are sales order entry, hotel reservation systems, payroll, employee record keeping, and shipping.

          At the operational level, tasks, resources, and goals are predefined and highly structured. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor according to predefined criteria. All that must be determined is whether the customer meets the criteria.

          Figure 2-3 depicts a payroll TPS, which is a typical accounting transaction processing system found in most firms. A payroll system keeps track of the money paid to employees. The master file is composed of discrete pieces of information (such as a name, address, or employee number) called data elements. Data are keyed into the system, updating the data elements. The elements on the master file are combined in different ways to make up reports of interest to management and government agencies and to send paychecks to employees. These TPS can generate other report combinations of existing data elements.

FIGURE 2-3 A symbolic representation for a payroll TPS

A payroll system is a typical accounting TPS that processes transactions such as employee time cards and changes in employee salaries and deductions. It keeps track of money paid to employees, withholding tax, and paychecks.

          Other typical TPS applications are identified in Figure 2-4. The figure shows that there are five functional categories of TPS: sales/marketing, manufacturing/production, finance/accounting, human resources, and other types of TPS that are unique to a particular industry. The United Parcel Service (UPS) package tracking system described in Chapter 1 is an example of a manufacturing TPS. UPS sells package delivery services; the TPS system keeps track of all of its package shipment transactions.

FIGURE 2-4 Typical applications of TPS

There are five functional categories of TPS: sales/marketing, manufacturing/production, finance/accounting, human resources, and other types of systems specific to a particular industry. Within each of these major functions are subfunctions. For each of these subfunctions (e.g., sales management) there is a major application system.

          Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it. Imagine what would happen to UPS if its package tracking system were not working! What would the airlines do without their computerized reservation systems?

          Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other types of systems. (For example, the payroll system illustrated here, along with other accounting TPS, supplies data to the company’s general ledger system, which is responsible for maintaining records of the firm’s income and expenses and for producing reports such as income statements and balance sheets.)


In Chapter 1, we define management information systems as the study of information systems in business and management. The term management information systems (MIS) also designates a specific category of information systems serving management-level functions. Management information systems (MIS) serve the management level of the organization, providing managers with reports and often online access to the organization’s current performance and historical records. Typically, MIS are oriented almost exclusively to internal, not environmental or external, events. MIS primarily serve the functions of planning, controlling, and decision making at the management level. Generally, they depend on underlying transaction processing systems for their data.

          MIS summarize and report on the company’s basic operations. The basic transaction data from TPS are compressed and are usually presented in long reports that are produced on a regular schedule. Figure 2-5 shows how a typical MIS transforms transaction level data from inventory, production, and accounting into MIS files that are used to provide managers with reports. Figure 2-6 shows a sample report from this system.

FIGURE 2-5 How management information systems obtain their data from the organization’s TPS

In the system illustrated by this diagram, three TPS supply summarized transaction data to the MIS reporting system at the end of the time period. Managers gain access to the organizational data through the MIS, which provides them with the appropriate reports.

FIGURE 2-6 A sample MIS report

This report showing summarized annual sales data was produced by the MIS in Figure 2-5.

          MIS usually serve managers primarily interested in weekly, monthly, and yearly results, although some MIS enable managers to drill down to see daily or hourly data if required. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a fast-food chain or, as illustrated in Figure 2-6, compare total annual sales figures for specific products to planned targets. These systems are generally not flexible and have little analytical capability. Most MIS use simple routines such as summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques.


Decision-support systems (DSS) also serve the management level of the organization. DSS help managers make decisions that are unique, rapidly changing, and not easily specified in advance. They address problems where the procedure for arriving at a solution may not be fully predefined in advance. Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors.

          Clearly, by design, DSS have more analytical power than other systems. They use a variety of models to analyze data, or they condense large amounts of data into a form in which they can be analyzed by decision makers. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly software. DSS are interactive; the user can change assumptions, ask new questions, and include new data.

          An interesting, small, but powerful DSS is the voyage-estimating system of a subsidiary of a large American metals company that exists primarily to carry bulk cargoes of coal, oil, ores, and finished products for its parent company. The firm owns some vessels, charters others, and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and port expenses. Technical details include a myriad of factors, such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading patterns (location of cargo for different ports).

        The system can answer questions such as the following: Given a customer delivery schedule and an offered freight rate, which vessel should be assigned at what rate to maximize profits? What is the optimal speed at which a particular vessel can optimize its profit and still meet its delivery schedule? What is the optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia? Figure 2-7 illustrates the DSS built for this company. The system operates on a powerful desktop personal computer, providing a system of menus that makes it easy for users to enter data or obtain information.

FIGURE 2-7 Voyage-estimating decision-support system
This DSS operates on a powerful PC. It is used daily by managers who must develop bids on shipping contracts.

          This voyage-estimating DSS draws heavily on analytical models. Other types of DSS are less model-driven, focusing instead on extracting useful information to support decision making from massive quantities of data. For example, Intrawest—the largest ski operator in North America—collects and stores vast amounts of customer data from its Web site, call center, lodging reservations, ski schools, and ski equipment rental stores. It uses special software to analyze these data to determine the value, revenue potential, and loyalty of each customer so managers can make better decisions on how to target their marketing programs. The system segments customers into seven categories based on needs, attitudes, and behaviors, ranging from “passionate experts” to “value-minded family vacationers.” The company then e-mails video clips that would appeal to each segment to encourage more visits to its resorts.

          Sometimes you’ll hear DSS systems referred to as business intelligence systems because they focus on helping users make better business decisions. You’ll learn more about them in Chapter 13.

Executive Support Systems

Senior managers use executive support systems (ESS) to help them make decisions. ESS serve the strategic level of the organization. They address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution.

           ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. For example, the CEO of Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the United States, has an ESS that provides on his desktop a minute-to-minute view of the firm’s financial performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory.

          ESS employ the most advanced graphics software and can present graphs and data from many sources. Often the information is delivered to senior executives through a portal, which uses a Web interface to present integrated personalized business content from a variety of sources. You will learn more about other applications of portals in Chapters 4, 11, and 12.

          Unlike the other types of information systems, ESS are not designed primarily to solve specific problems. Instead, ESS provide a generalized computing and communications capacity that can be applied to a changing array of problems. Although many DSS are designed to be highly analytical, ESS tend to make less use of analytical models.

          Questions ESS assist in answering include the following: In what business should we be? What are the competitors doing? What new acquisitions would protect us from cyclical business swings? Which units should we sell to raise cash for acquisitions? Figure 2-8 illustrates a model of an ESS. It consists of workstations with menus, interactive graphics, and communications capabilities that can be used to access historical and competitive data from internal corporate systems and external databases such as Dow Jones News/Retrieval or Standard & Poor’s. Because ESS are designed to be used by senior managers who often have little, if any, direct contact or experience with computer-based information systems, they incorporate easy-to-use graphic interfaces. More details on leading-edge applications of DSS and ESS can be found in Chapter 13.

FIGURE 2-8 Model of a typical executive support system
This system pools data from diverse internal and external sources and makes them available to executives in an easy-to-use form.

Relationship of Systems to One Another

Figure 2-9 illustrates how the systems serving different levels in the organization are related to one another. TPS are typically a major source of data for other systems, whereas ESS are primarily a recipient of data from lower-level systems. The other types of systems may exchange data with each other as well. Data may also be exchanged among systems serving different functional areas. For example, an order captured by a sales system may be transmitted to a manufacturing system as a transaction for producing or delivering the product specified in the order or to a MIS for financial reporting.

FIGURE 2-9 Interrelationships among systems
The various types of systems in the organization have interdependencies. TPS are major producers of information that is required by the other systems, which, in turn, produce information for other systems. These different types of systems have been loosely coupled in most organizations.

         It is definitely advantageous to integrate these systems so that information can flow easily between different parts of the organization and provide management with an enterprise-wide view of how the organization is performing as a whole. But integration costs money, and integrating many different systems is extremely time consuming and complex. This is a major challenge for large organizations, which are typically saddled with hundreds, even thousands of different applications serving different levels and business functions. Each organization must weigh its needs for integrating systems against the difficulties of mounting a large-scale systems integration effort. Section 2.3 and Chapter 11 treat this issue in greater detail.