Chapter 1 foundations of information systems in business

MODULE 1: Business Driven MIS

MODULE 3: Enterprise MIS

MODULE 2: Technical Foundations

of MIS

module 1 Business Driven MIS

M OST COMPANIES TODAY rely heavily on the use of management information sys-

tems (MIS) to run various aspects of their businesses. Whether they need to order and ship

goods, interact with customers, or conduct other business functions, management information

systems are often the underlying infrastructure performing the activities. Management informa-

tion systems allow companies to remain competitive in today’s fast-paced world and especially

when conducting business on the Internet. Organizations must adapt to technological advances

and innovations to keep pace with today’s rapidly changing environment. Their competitors cer-

tainly will!

No matter how exciting technology is, successful companies do not use it simply for its own

sake. Companies should have a solid business reason for implementing technology. Using a

technological solution just because it is available is not a good business strategy.

The purpose of Module 1 is to raise your awareness of the vast opportunities made possible

by the tight correlation between business and technology. Business strategies and processes

should always drive your technology choices. Although awareness of an emerging technology

can sometimes lead us in new strategic directions, the role of information systems, for the most

part, is to support existing business strategies and processes.

Module 1: Business Driven MIS

CHAPTER 1: Management Information Systems: Business Driven MIS

CHAPTER 2: Decisions and Processes: Value Driven Business

CHAPTER 3: Ebusiness: Electronic Business Value

CHAPTER 4: Ethics and Information Security: MIS Business Concerns

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5

What’s in IT for me? This chapter sets the stage for the textbook. It starts from ground zero by providing a clear description of what information

is and how it fits into business operations, strategies, and systems. It provides an overview of how companies operate in

competitive environments and why they must continually define and redefine their business strategies to create competi-

tive advantages. Doing so allows them to survive and thrive. Information systems are key business enablers for successful

operations in competitive environments.

You, as a business student, must understand the tight correlation between business and technology. You must first rec-

ognize information’s role in daily business activities, and then understand how information supports and helps implement

global business strategies and competitive advantages. After reading this chapter, you should have a solid understanding of

business driven information systems and their role in managerial decision making and problem solving.

1

■ I d e n t i f y i n g C o m p e t i t i v e A d v a n t a g e s

■ T h e F i v e F o rc e s M o d e l — E v a l u a t i n g I n d u s t r y A t t r a c t i v e n e s s

■ T h e T h re e G e n e r i c S t r a t e g i e s — C h o o s i n g a B u s i n e s s F o c u s

■ Va l u e C h a i n A n a l y s i s — E x e c u t i n g B u s i n e s s S t r a t e g i e s

SECTION 1.2 Business Strategy

■ C o m p e t i n g i n t h e I n f o r m a t i o n A g e

■ T h e C h a l l e n g e : D e p a r t m e n t a l C o m p a n i e s

■ T h e S o l u t i o n : M a n a g e m e n t I n f o r m a t i o n S y s t e m s

SECTION 1.1 Business Driven MIS

C H

A P

T E

R O

U T

L IN

E

C H A P T E R

Management Information Systems: Business Driven MIS

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6 Information Systems in Orgs

3Business Driven MIS Module 1

opening case study

The World Is Flat: Thomas Friedman

Christopher Columbus proved in 1492 that the world is round. For centuries, sailors maneu-

vered the seas discovering new lands, new people, and new languages as nations began

trading goods around the globe. Then Thomas Friedman, a noted columnist for The New

York Times, published his book The World Is Flat.

Friedman argues that the world has become flat due to technological advances connecting

people in China, India, and the United States as if we were all next-door neighbors. Physicians

in India are reading X-rays for U.S. hospitals, and JetBlue Airways ticket agents take plane

reservations for the company from the comfort of their Utah homes. Technology has elimi-

nated some of the economic and cultural advantages developed countries enjoy, making the

world a level playing field for all participants. Friedman calls this Globalization 3.0.

Globalization 1.0 started when Christopher Columbus discovered the world is round and

the world shrank from large to medium. For the next several hundred years, countries domi-

nated by white men controlled business. Globalization 2.0 began around 1800, during the

Industrial Revolution, when the world went from medium to small. In this era international

companies dominated by white men controlled business. Globalization 3.0 began in early

2000, removing distance from the business equation, and the world has gone from small to

tiny. In this era, people of all colors from the four corners of the world will dominate busi-

ness. Farmers in remote villages in Nepal carry an iPhone to access the world’s knowledge

at, say, Wikipedia or the stock market closing prices at Bloomberg.

Outsourcing, or hiring someone from another country to complete work remotely, will

play an enormous role in this era. It has advantages and disadvantages. Outsourcing work

to countries where labor is cheap drives down production costs and allows companies to

offer lower prices to U.S. consumers. Having an accountant in China complete a U.S. tax

return is just as easy as driving to the H&R Block office on the corner, and probably far

cheaper. Calling an 800 number for service can connect consumers to an Indian, Canadian,

or Chinese worker on the other end of the line. Of course, outsourcing also eliminates some

U.S. manufacturing and labor jobs, causing pockets of unemployment. In fact, the United

States has outsourced several million service and manufacturing jobs to offshore, low-cost

producers.

Figure 1.1 shows Friedman’s list of forces that flattened the world. They converged

around the year 2000 and “created a flat world: a global, web-enabled platform for mul-

tiple forms of sharing knowledge and work, irrespective of time, distance, geography, and

increasingly, language.” Three powerful new economies began materializing at this time. In

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4 Chapter 1 Management Information Systems: Business Driven MIS

India, China, and the former Soviet Union, more than 3 billion new willing and able partici-

pants walked onto the business playing field. Business students will be competing for their

first jobs not only against other local students, but also against students from around the

country and around the globe.1

Friedman’s 10 Forces That Flattened the World

1. Fall of the Berlin Wall The events of November 9, 1989, tilted the worldwide balance of power toward democracies and free markets.

2. Netscape IPO The August 9, 1995, offering sparked massive investment in fiber- optic cables.

3. Work flow software The rise of applications from PayPal to VPNs enabled faster, closer coordination among far-flung employees.

4. Open sourcing Self-organizing communities, such as Linux, launched a collaborative revolution.

5. Outsourcing Migrating business functions to India saved money and a Third World economy.

6. Offshoring Contract manufacturing elevated China to economic prominence.

7. Supply chaining Robust networks of suppliers, retailers, and customers increased business efficiency.

8. In-sourcing Logistics giants took control of customer supply chains, helping mom-and-pop shops go global.

9. Informing Power searching allowed everyone to use the Internet as a “personal supply chain of knowledge.”

10. Wireless Wireless technologies pumped up collaboration, making it mobile and personal.

FIGURE 1.1

Thomas Friedman’s 10 Forces That Flattened the World

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8 Information Systems in Orgs

5Business Driven MIS Module 1

section 1.1 Business Driven MIS

L E A R N I N G O U T C O M E S

1.1 Describe the information age and the differences among data, information, business intelligence, and knowledge.

1.2 Identify the different departments in a company and why they must work together to achieve success.

1.3 Explain systems thinking and how management information systems enable business communications.

COMPETING IN THE INFORMATION AGE

Did you know that . . .

■ The movie Avatar took more than four years to create and cost $450 million.

■ Lady Gaga’s real name is Stefani Joanne Angelina Germanotta.

■ Customers pay $2.6 million for a 30-second advertising time slot during the Super Bowl. 2

A fact is the confirmation or validation of an event or object. In the past, people pri- marily learned facts from books. Today, by simply pushing a button people can find out anything, from anywhere, at any time. We live in the information age , when infinite quantities of facts are widely available to anyone who can use a computer. The impact of information technology on the global business environment is equivalent to the printing press’s impact on publishing and electricity’s impact on productivity. College student startups were mostly unheard of before the information age. Now, it’s not at all unusual to read about a business student starting a multimillion-dollar company from his or her dorm room. Think of Mark Zuckerberg, who started Facebook from his dorm, or Michael Dell (Dell Computers) and Bill Gates (Microsoft), who both founded their legendary companies as college students.

You may think only students well versed in advanced technology can compete in the information age. This is simply not true. Many business leaders have created exceptional opportunities by coupling the power of the information age with traditional business methods. Here are just a few examples:

■ Amazon is not a technology company; its original business focus was to sell books, and it now sells nearly everything.

■ Netflix is not a technology company; its primary business focus is to rent videos.

■ Zappos is not a technology company; its primary business focus is to sell shoes, bags, clothing, and accessories.

Amazon’s founder, Jeff Bezos, at first saw an opportunity to change the way people purchase books. Using the power of the information age to tailor offerings to each customer and speed the payment process, he in effect opened millions of tiny virtual bookstores, each with a vastly larger selection and far cheaper product than traditional bookstores. The success of his original business model led him to expand Amazon to carry many other types of products. The founders of Netflix and Zappos have done the same thing for videos and shoes. All these entrepreneurs were business professionals, not technology experts. However, they understood enough about the information age to apply it to a particular business, creating innovative companies that now lead entire industries.

Students who understand business along with the power associated with the infor- mation age will create their own opportunities and perhaps even new industries, as co- founders Chris DeWolfe and Tom Anderson did with MySpace and Mark Zuckerberg did

LO. 1.1: Describe the information age and the differences among data, information, business intelligence, and knowledge.

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Business Driven Information Systems, Fourth Edition 9

BUSINESS DRIVEN DISCUSSION

Bill Gates, founder of Microsoft, stated that 20 years ago most people would rather have been a B student in New York City than a genius in China because the opportunities available to students in developed countries were limitless. Today, many argue that the opposite is now true due to technological advances making it easier to succeed as a genius in China than a B student in New York. As a group, discuss if you agree or disagree with Bill Gates statement. 3

View from a Flat World

APPLY YOUR KNOWLEDGE

6 Chapter 1 Management Information Systems: Business Driven MIS

with Facebook. Our primary goal in this course is to arm you with the knowledge you need to compete in the information age. The core drivers of the information age are:

■ Data

■ Information

■ Business intelligence

■ Knowledge (see Figure 1.2 )

Data

Data are raw facts that describe the characteristics of an event or object. Before the information age, managers manually collected and analyzed data, a time-consuming and complicated task without which they would have little insight into how to run their

FIGURE 1.2

The Differences among Data, Information, Business Intelligence, and Knowledge

Data Information Business Intelligence

Knowledge

•

•

• Data converted into a meaningful and useful context

• Information collected from multiple sources that analyzes patterns, trends, and relationships for strategic decision making

• The skills, experience, and expertise, coupled with information and intelligence, that creates a person’s intellectual resources.

• Choosing not to fire a sales representative who is underperforming knowing that person is experiencing family problems • Listing products that are about to expire first on the menu or creating them as a daily special to move the product

• Raw facts that describe the characteristics of an event or object

• Order date • Amount sold • Customer number • Quantity ordered

• Best-selling product • Best customer • Worst-selling product • Worst customer

• Lowest sales per week compared with the economic interest rates • Best-selling product by month compared to sports season and city team wins and losses

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10 Information Systems in Orgs

7Business Driven MIS Module 1

business. Lacking data, managers often found themselves making business decisions about how many products to make, how much material to order, or how many employ- ees to hire based on intuition or gut feelings. In the information age, successful manag- ers compile, analyze, and comprehend massive amounts of data daily, which helps them make more successful business decisions.

Figure 1.3 shows sales data for Tony’s Wholesale Company, a fictitious business that supplies snacks to stores. The data highlight characteristics such as order date, cus- tomer, sales representative, product, quantity, and profit. The second line in Figure 1.3 , for instance, shows that Roberta Cross sold 90 boxes of Ruffles to Walmart for $1,350, resulting in a profit of $450 (note that Profit 5 Sales 2 Costs). These data are useful for understanding individual sales; however, they do not provide us much insight into how Tony’s business is performing as a whole. Tony needs to answer questions that will help him manage his day-to-day operations such as:

■ Who are my best customers?

■ Who are my least-profitable customers?

■ What is my best-selling product?

■ What is my slowest-selling product?

■ Who is my strongest sales representative?

■ Who is my weakest sales representative?

What Tony needs, in other words, is not data but information.

Information

Information is data converted into a meaningful and useful context. Having the right information at the right moment in time can be worth a fortune. Having the wrong infor- mation at the right moment; or the right information at the wrong moment can be disas- trous. The truth about information is that its value is only as good as the people who use it. People using the same information can make different decisions depending on how they interpret or analyze the information. Thus information has value only insofar as the people using it do as well.

Tony can analyze his sales data and turn them into information to answer all the above questions and understand how his business is operating. Figures 1.4 and 1.5 , for instance, show us that Walmart is Roberta Cross’s best customer, and that Ruffles is Tony’s best product measured in terms of total sales. Armed with this information, Tony can identify and then address such issues as weak products and underperforming sales representatives.

A variable is a data characteristic that stands for a value that changes or varies over time. For example, in Tony’s data, price and quantity ordered can vary. Changing

FIGURE 1.3

Tony’s Snack Company DataOrder Date Customer

Sales Representative Product Qty

Unit Price

Total Sales

Unit Cost

Total Cost Profit

4-Jan Walmart PJ Helgoth Doritos 41 $24 $ 984 $18 $738 $246

4-Jan Walmart Roberta Cross Ruffles 90 $15 $1,350 $10 $900 $450

5-Jan Safeway Craig Schultz Ruffles 27 $15 $ 405 $10 $270 $135

6-Jan Walmart Roberta Cross Ruffles 67 $15 $1,005 $10 $670 $335

7-Jan 7-Eleven Craig Schultz Pringles 79 $12 $ 948 $ 6 $474 $474

7-Jan Walmart Roberta Cross Ruffles 52 $15 $ 780 $10 $520 $260

8-Jan Kroger Craig Schultz Ruffles 39 $15 $ 585 $10 $390 $195

9-Jan Walmart Craig Schultz Ruffles 66 $15 $ 990 $10 $660 $330

10-Jan Target Craig Schultz Ruffles 40 $15 $ 600 $10 $400 $200

11-Jan Walmart Craig Schultz Ruffles 71 $15 $1,065 $10 $710 $355

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8 Chapter 1 Management Information Systems: Business Driven MIS

FIGURE 1.4

Tony’s Data Sorted by Customer “Walmart” and Sales Representative “Roberta Cross”

Order Date Customer

Sales Representative Product Quantity

Unit Price

Total Sales Unit Cost

Total Cost Profit

26-Apr Walmart Roberta Cross Fritos 86 $ 19 $ 1,634 $ 17 $ 1,462 $ 172

29-Aug Walmart Roberta Cross Fritos 76 $ 19 $ 1,444 $ 17 $ 1,292 $ 152

7-Sep Walmart Roberta Cross Fritos 20 $ 19 $ 380 $ 17 $ 340 $ 40

22-Nov Walmart Roberta Cross Fritos 39 $ 19 $ 741 $ 17 $ 663 $ 78

30-Dec Walmart Roberta Cross Fritos 68 $ 19 $ 1,292 $ 17 $ 1,156 $ 136

7-Jul Walmart Roberta Cross Pringles 79 $ 18 $ 1,422 $ 8 $ 632 $ 790

6-Aug Walmart Roberta Cross Pringles 21 $ 12 $ 252 $ 6 $ 126 $ 126

2-Oct Walmart Roberta Cross Pringles 60 $ 18 $ 1,080 $ 8 $ 480 $ 600

15-Nov Walmart Roberta Cross Pringles 32 $ 12 $ 384 $ 6 $ 192 $ 192

21-Dec Walmart Roberta Cross Pringles 92 $ 12 $ 1,104 $ 6 $ 552 $ 552

28-Feb Walmart Roberta Cross Ruffles 67 $ 15 $ 1,005 $ 10 $ 670 $ 335

6-Mar Walmart Roberta Cross Ruffles 8 $ 15 $ 120 $ 10 $ 80 $ 40

16-Mar Walmart Roberta Cross Ruffles 68 $ 15 $ 1,020 $ 10 $ 680 $ 340

23-Apr Walmart Roberta Cross Ruffles 34 $ 15 $ 510 $ 10 $ 340 $ 170

4-Aug Walmart Roberta Cross Ruffles 40 $ 15 $ 600 $ 10 $ 400 $ 200

18-Aug Walmart Roberta Cross Ruffles 93 $ 15 $ 1,395 $ 10 $ 930 $ 465

5-Sep Walmart Roberta Cross Ruffles 41 $ 15 $ 615 $ 10 $ 410 $ 205

12-Sep Walmart Roberta Cross Ruffles 8 $ 15 $ 120 $ 10 $ 80 $ 40

28-Oct Walmart Roberta Cross Ruffles 50 $ 15 $ 750 $ 10 $ 500 $ 250

21-Nov Walmart Roberta Cross Ruffles 79 $ 15 $ 1,185 $ 10 $ 790 $ 395

29-Jan Walmart Roberta Cross Sun Chips 5 $ 22 $ 110 $ 18 $ 90 $ 20

12-Apr Walmart Roberta Cross Sun Chips 85 $ 22 $ 1,870 $ 18 $ 1,530 $ 340

16-Jun Walmart Roberta Cross Sun Chips 55 $ 22 $ 1,210 $ 18 $ 990 $ 220

1,206 $383 $20,243 $273 $14,385 $5,858

Sorting the data reveals the information that Roberta Cross’s total sales to Walmart were $20,243 resulting in a profit of $5,858. (Profit $5,858 5 Sales $20,243 2 Costs $14,385)

variables allows managers to create hypothetical scenarios to study future possibilities. Tony may find it valuable to anticipate how sales or cost increases affect profitability. To estimate how a 20 percent increase in prices might improve profits, Tony simply changes the price variable for all orders, which automatically calculates the amount of new prof- its. To estimate how a 10 percent increase in costs hurts profits, Tony changes the cost variable for all orders, which automatically calculates the amount of lost profits. Manip- ulating variables is an important tool for any business.

Business Intelligence

Business intelligence (BI) is information collected from multiple sources such as sup- pliers, customers, competitors, partners, and industries that analyzes patterns, trends, and relationships for strategic decision making. BI manipulates multiple variables and in some cases even hundreds of variables including such items as interest rates, weather conditions, and even gas prices. Tony could use BI to analyze internal data such as company sales, along with external data about the environment such as competitors, finances, weather, holidays, and even sporting events. Both internal and external vari- ables affect snack sales, and analyzing these variables will help Tony determine ordering levels and sales forecasts. For instance, BI can predict inventory requirements for Tony’s business for the week before the Super Bowl if, say, the home team is playing, average

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Tony’s Business Information Name Total Profit

Who is Tony’s best customer by total sales? Walmart $ 560,789

Who is Tony’s least-valuable customer by total sales? Walgreens $45,673

Who is Tony’s best customer by profit? 7-Eleven $ 324,550

Who is Tony’s least-valuable customer by profit? King Soopers $ 23,908

What is Tony’s best-selling product by total sales? Ruffles $ 232,500

What is Tony’s weakest-selling product by total sales? Pringles $ 54,890

What is Tony’s best-selling product by profit? Tostitos $ 13,050

What is Tony’s weakest-selling product by profit? Pringles $ 23,000

Who is Tony’s best sales representative by profit? R. Cross $1,230,980

Who is Tony’s weakest sales representative by profit? Craig Schultz $ 98,980

What is the best sales representative’s best-selling product by total profit? Ruffles $ 98,780

Who is the best sales representative’s best customer by total profit? Walmart $ 345,900

What is the best sales representative’s weakest-selling product by total profit? Sun Chips $ 45,600

Who is the best sales representative’s weakest customer by total profit? Krogers $ 56,050

FIGURE 1.5

Information Gained after Analyzing Tony’s Data

BUSINESS DRIVEN MIS

How can global warming be real when there is so much snow and cold weather? That’s what some people wondered after a couple of massive snowstorms bur- ied Washington, D.C. Politicians across the capital made jokes and built igloos as they disputed the existence of climate change. Some concluded the planet simply could not be warming with all the snow on the ground.

These comments frustrated Joseph Romm, a physicist and climate expert with the Center for American Progress. He spent weeks turning data into infor- mation and graphs to educate anyone who would listen as to why this reason- ing was incorrect. Climate change is all about analyzing data, turning it into information to detect trends. You cannot observe climate change by looking out the window; you have to review decades of weather data with advanced tools to really understand the trends.

Increasingly we see politicians, economists, and newscasters taking tough issues and boiling them down to simplistic arguments over what the data mean, each interpreting the data and spinning the data to support their views and agendas. You need to understand the data and turn them into useful infor- mation or else you will not understand when someone is telling the truth and when you are being lied to.

Brainstorm two or three types of data economists use to measure the economy. How do they turn the data into information? What issues do they encounter when attempting to measure the economy? As a manager, what do you need to understand when reading or listening to economic and business reports? 4

Manipulating the Data to Find Your Version of the Truth

APPLY YOUR KNOWLEDGE

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10 Chapter 1 Management Information Systems: Business Driven MIS

temperature is above 80 degrees, and the stock market is performing well. This is BI at its finest, incorporating all types of internal and external variables to anticipate business performance.

Top managers use BI to define the future of the business, analyzing markets, indus- tries, and economies to determine the strategic direction the company must follow to remain profitable. Tony will set the strategic direction for his firm, which might include introducing new flavors of potato chips or sport drinks as new product lines or schools and hospitals as new market segments.

Knowledge

Knowledge includes the skills, experience, and expertise, coupled with information and intelligence, that creates a person’s intellectual resources. Knowledge workers are indi- viduals valued for their ability to interpret and analyze information. Today’s workers are commonly referred to as knowledge workers and they use BI along with personal experi- ence to make decisions based on both information and intuition, a valuable resource for any company.

Imagine that Tony analyzes his data and finds his weakest sales representative for this period is Craig Schultz. If Tony considered only this information, he might con- clude that firing Craig was a good business decision. However, because Tony has knowledge about how the company operates, he knows Craig has been out on medi- cal leave for several weeks; hence, his sales numbers are low. Without this additional knowledge, Tony might have executed a bad business decision, delivered a negative message to the other employees, and sent his best sales representatives out to look for other jobs.

The key point in this scenario is that it is simply impossible to collect all the infor- mation about every situation, and yet without that, it can be easy to misunderstand the problem. Using data, information, business intelligence, and knowledge to make deci- sions and solve problems is the key to finding success in business. These core drivers of the information age are the building blocks of business systems.

BUSINESS DRIVEN ETHICS AND SECURITY

We live in the information age where the collection, storage, and use of data are hot topics. One example of inappropriate data handling occurred at a college where the monitoring of restrooms occurred every 15 seconds to observe the use of toilets, mirrors, and sinks. Students, faculty, and staff began complaining that the data collection was an invasion of their privacy and a violation of their rights.

Another example of inappropriate data handling occurred when a profes- sor of accounting at a college lost a flash drive containing information for more than 1,800 students, including Social Security numbers, grades, and names. Social Security numbers were included because the data went back to before 1993 when the college used Social Security numbers to identify students.

What types of student data does your college collect? What could happen if your professor lost a thumb drive with all of your personal information? What types of issues could you encounter if someone stole your personal data? What can your college do to ensure this type of data storage violation does not occur? 5

Information Issues in the

Information Age

APPLY YOUR KNOWLEDGE

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11Business Driven MIS Module 1

Finance Tracks strategic financial issues including money,

banking, credit, investments, and assets.

Human resources Maintains policies, plans,

and procedures for the effective management of

employees.

Sales Performs the function of

selling goods or services.

Operations management

Manages the process of converting or transforming or resources into goods or

services. Marketing

Supports sales by planning, pricing, and promoting goods or

services.

Accounting Records, measures, and

reports monetary transactions.

FIGURE 1.6

Departments Working Independently

THE CHALLENGE: DEPARTMENTAL COMPANIES

Companies are typically organized by department or functional area such as:

■ Accounting: Records, measures, and reports monetary transactions. ■ Finance: Deals with strategic financial issues including money, banking, credit,

investments, and assets.

■ Human resources: Maintains policies, plans, and procedures for the effective man- agement of employees.

■ Marketing: Supports sales by planning, pricing, and promoting goods or services. ■ Operations management: Manages the process of converting or transforming or

resources into goods or services.

■ Sales: Performs the function of selling goods or services (see Figure 1.6 ).

Each department performs its own activities. Sales and marketing focus on mov- ing goods or services into the hands of consumers; they maintain transactional data. Finance and accounting focus on managing the company’s resources and maintain monetary data. Operations management focuses on manufacturing and maintains production data, while human resources focuses on hiring and training people and maintains employee data. Although each department has its own focus and data, none can work independently if the company is to operate as a whole. It is easy to see how a

LO 1.2: Identify the different depart- ments in a company and why they must work together to achieve success.

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business decision made by one department can affect other departments. Marketing needs to analyze production and sales data to come up with product promotions and advertising strategies. Production needs to understand sales forecasts to determine the company’s manufacturing needs. Sales needs to rely on information from operations to understand inventory, place orders, and forecast consumer demand. All departments need to understand the accounting and finance departments’ information for budget- ing. For the firm to be successful, all departments must work together as a single unit sharing common information and not operate independently or in a silo (see Figure 1.7 ).

THE SOLUTION: MANAGEMENT INFORMATION SYSTEMS

You probably recall the old story of three blind men attempting to describe an elephant. The first man, feeling the elephant’s girth, said the elephant seemed very much like a wall. The second, feeling the elephant’s trunk, declared the elephant was like a snake. The third man felt the elephant’s tusks and said the elephant was like a tree or a cane. Companies that operate departmentally are seeing only one part of the elephant, a criti- cal mistake that hinders successful operation.

Successful companies operate cross-functionally, integrating the operations of all departments. Systems are the primary enabler of cross-functional operations. A system is a collection of parts that link to achieve a common purpose. A car is a good example of a system, since removing a part, such as the steering wheel or accelerator, causes the entire system to stop working.

Before jumping into how systems work, it is important to have a solid understand- ing of the basic production process for goods and services. Goods are material items or products that customers will buy to satisfy a want or need. Clothing, groceries, cell phones, and cars are all examples of goods that people buy to fulfill their needs. Services

LO 1.3: Explain systems thinking and how management informa- tion systems enable business communications.

FIGURE 1.7

Departments Working Together

Accounting Monetary data

Finance Monetary data

Human resources Employee data

Marketing Transactional data

Sales Transactional data

Operations management Production data

Business Decisions

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are tasks performed by people that customers will buy to satisfy a want or need. Waiting tables, teaching, and cutting hair are all examples of services that people pay for to fulfill their needs (see Figure 1.8 ).

Production is the process where a business takes raw materials and processes them or converts them into a finished product for its goods or services. Just think about mak- ing a hamburger (see Figure 1.9 ). First, you must gather all of the inputs or raw mate- rials such as the bun, patty, lettuce, tomato, and ketchup. Second, you process the raw materials, so in this example you would need to cook the patty, wash and chop the let- tuce and tomato, and place all of the items in the bun. Finally, you would have your out- put or finished product—your hamburger! Productivity is the rate at which goods and services are produced based upon total output given total inputs. Given our previous example, if a business could produce the same hamburger with less expensive inputs

Cars

Groceries

Clothing

Teaching

Waiting tables

Cutting hair

GOODS Material items or products that customers will buy to

satisfy a want or need.

SERVICES Tasks performed by people

that customers will buy to satisfy a want or need.

FIGURE 1.8

Different Types of Goods and Services

Input OutputProcess

Lettuce, tomatoes, patty,

bun, ketchup

Cook the patty, put the ingredients

together Hamburger

FIGURE 1.9

Input, Process, Output Example

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14 Chapter 1 Management Information Systems: Business Driven MIS

or more hamburgers with the same inputs it would see a rise in productivity and possi- bly an increase in profits. Ensuring the input, process, and output of goods and services work across all of the departments of a company is where systems add tremendous value to overall business productivity.

Systems thinking is a way of monitoring the entire system by viewing multiple inputs being processed or transformed to produce outputs while continuously gathering feed- back on each part (see Figure 1.10 ). Feedback is information that returns to its original transmitter (input, transform, or output) and modifies the transmitter’s actions. Feed- back helps the system maintain stability. For example, a car’s system continuously moni- tors the fuel level and turns on a warning light if the gas level is too low. Systems thinking provides an end-to-end view of how operations work together to create a product or service. Business students who understand systems thinking are valuable resources because they can implement solutions that consider the entire process, not just a single component.

Management information systems (MIS) is a business function, like accounting and human resources, which moves information about people, products, and processes across the company to facilitate decision making and problem solving. MIS incorporates systems thinking to help companies operate cross-functionally. For example, to fulfill product orders, an MIS for sales moves a single customer order across all functional areas including sales, order fulfillment, shipping, billing, and finally customer service. Although different functional areas handle different parts of the sale, thanks to MIS, to the customer the sale is one continuous process. If one part of the company is experienc- ing problems, however, then, like the car without a steering wheel, the entire system fails. If order fulfillment packages the wrong product, it will not matter that shipping, billing, and customer service did their jobs right, since the customer will not be satisfied when he or she opens the package.

MIS can be an important enabler of business success and innovation. This is not to say that MIS equals business success and innovation, or that MIS represents business success and innovation. MIS is a tool that is most valuable when it leverages the talents of people who know how to use and manage it effectively. To perform the MIS func- tion effectively, almost all companies, particularly large and medium-sized ones, have an internal MIS department, often called information technology (IT), information sys- tems (IS), or management information systems (MIS). For the purpose of this text, we will refer to it as MIS.

MIS Department Roles and Responsibilities

MIS as a department is a relatively new functional area, having been around formally for about 40 years. Job titles, roles, and responsibilities often differ from company to com- pany, but the most common are displayed in Figure 1.11 .

While many companies may not have a different individual for each of these posi- tions, they must have top managers who take responsibility for all these areas.

FIGURE 1.10

Overview of Systems Thinking

Input Process Output

Feedback

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15Business Driven MIS Module 1

section 1.2 Business Strategy

L E A R N I N G O U T C O M E S

1.4 Explain why competitive advantages are temporary.

1.5 Describe Porter’s Five Forces Model and explain each of the five forces.

1.6 Compare Porter’s three generic strategies.

1.7 Demonstrate how a company can add value by using Porter’s value chain analysis.

IDENTIFYING COMPETITIVE ADVANTAGES

Running a company today is similar to leading an army; the top manager or leader ensures all participants are heading in the right direction and completing their goals and objectives. Companies lacking leadership quickly implode as employees head in differ- ent directions attempting to achieve conflicting goals. To combat these challenges, lead- ers communicate and execute business strategies (from the Greek word stratus for army and ago for leading). A business strategy is a leadership plan that achieves a specific set of goals or objectives as displayed in Figure 1.12 .

Good leaders also anticipate unexpected misfortunes, from strikes and economic recessions to natural disasters. Their business strategies build in buffers or slack,

LO 1.4: Explain why competitive advantages are temporary.

FIGURE 1.11

The Roles and Responsibilities of MIS

MIS Department Roles and Responsibilities

Chief information officer (CIO)

Chief knowledge officer (CKO) Responsible for collecting, maintaining, and distributing company knowledge.

Chief privacy officer (CPO)

Responsible for ensuring the ethical and legal use of information within a company.

Chief security officer (CSO)

Responsible for ensuring the security of business systems and developing strategies and safeguards against attacks by hackers and viruses.

Chief technology officer (CTO)

Responsible for ensuring the speed, accuracy, availability, and reliability of the MIS.

Responsible for (1) overseeing all uses of MIS and (2) ensuring that MIS strategically aligns with business goals and objectives.

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16 Chapter 1 Management Information Systems: Business Driven MIS

allowing the company the ability to ride out any storm and defend against competitive or environmental threats. Of course, updating business strategies is a continuous under- taking as internal and external environments rapidly change. Business strategies that match core company competencies to opportunities result in competitive advantages, a key to success!

A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. Competitive advantages provide the same product or service either at a lower price or with additional value that can fetch premium prices. Unfortunately, competitive advantages are typi- cally temporary, because competitors often quickly seek ways to duplicate them. In turn, organizations must develop a strategy based on a new competitive advantage. Ways that companies duplicate competitive advantages include acquiring the new technology, copying the business operations, and hiring away key employees. The introduction of Apple’s iPod and iTunes, a brilliant merger of technology, business, and entertainment, offers an excellent example.

In early 2000, Steve Jobs was fixated on developing video editing software when he sud- denly realized that millions of people were using computers to listen to music, a new trend in the industry catapulted by illegal online services such as Napster. Jobs was worried that he was looking in the wrong direction and had missed the opportunity to jump on the online music bandwagon. He moved fast, however, and within four months he had devel- oped the first version of iTunes for the Mac. Jobs’ next challenge was to make a portable iTunes player that could hold thousands of songs and be completely transportable. Within nine months the iPod was born. With the combination of iTunes and iPod, Apple created a significant competitive advantage in the marketplace. Many firms began following Apple’s lead by creating portable music players to compete with the iPod. In addition, Apple con- tinues to create new and exciting products to gain competitive advantages, such as its iPad, a larger version of the iPod that functions more as a computer than a music player. 6

Decreasing costs

Attracting new

customers

Increasing sales

Increasing customer

loyalty

Business strategies Leadership plans that achieve a specific set of goals or objectives

Entering new

markets

Developing new

products or services

FIGURE 1.12

Examples of Business Strategies

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20 Information Systems in Orgs

BUSINESS DRIVEN GLOBALIZATION

According to the Economic Policy Institute, over the past decade the United States has lost an estimated 2.4 million factory jobs to China. Factories in South Korea, Taiwan, and China are producing toys, toothpaste, running shoes, com- puters, appliances, and cars. For a long time U.S. firms did not recognize these products as competition; they regarded Asia’s high-tech products as second- rate knockoffs and believed Asian countries maintained a “factory culture”— they could imitate but not innovate.

In hindsight, it is obvious that once these countries did begin designing and creating high-end products, they would have obvious competitive advantages, with high-value research and development coupled with low-cost manufac- turing of unbeatable goods and services. Asia is now on the rise in all indus- tries from wind turbines to high-speed bullet trains. According to Bloomberg Businessweek ’s ranking of the most innovative companies, 15 of the top 50 are Asian, up from just 5 in 2006. In fact, for the first time, the majority of the top 25 are based outside the United States.

How do you, as a business student, view these statistics? What type of global business climate will you be competing in when you graduate? If you wanted to gather competitive intelligence about the job market, where would you look and what types of data would you want to analyze? What can you do to create personal competitive advantages to differentiate yourself when searching for a job? 7

The Competitive Landscape for Students

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17Business Driven MIS Module 1

When a company is the first to market with a competitive advantage, it gains a par- ticular benefit, such as Apple did with its iPod. This first-mover advantage occurs when a company can significantly increase its market share by being first with a new competi- tive advantage. FedEx created a first-mover advantage by developing its customer self- service software, which allows people to request parcel pickups, print mailing slips, and track parcels online. Other parcel delivery companies quickly began creating their own online services. Today, customer self-service on the Internet is a standard feature of the parcel delivery business.

Competitive intelligence is the process of gathering information about the competi- tive environment, including competitors’ plans, activities, and products, to improve a company’s ability to succeed. It means understanding and learning as much as possible as soon as possible about what is occurring outside the company to remain competitive. Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not send its sales representatives into grocery stores just to stock shelves; they carry hand- held computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain competitive intelligence on every- thing from how well competing products are selling to the strategic placement of its own products. 8

Managers use three common tools to analyze competitive intelligence and develop competitive advantages including:

1. The Five Forces Model (for evaluating industry attractiveness). 2. The three generic strategies (for choosing a business focus). 3. Value chain analysis (for executing business strategies).

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Threat of Substitute Products or Services

The power of customers to purchase alternatives

Rivalry among Existing Competitors

The power of competitors

Buyer Power The power of customers

to drive down prices

Threat of New Entrants The power of competitors to

enter a market

Supplier Power The power of suppliers

to drive up prices of materials

FIGURE 1.13

Porter’s Five Forces Model

18 Chapter 1 Management Information Systems: Business Driven MIS

THE FIVE FORCES MODEL—EVALUATING INDUSTRY ATTRACTIVENESS

Michael Porter, a university professor at Harvard Business School, identified the follow- ing pressures that can hurt potential sales:

■ Knowledgeable customers can force down prices by pitting rivals against each other.

■ Influential suppliers can drive down profits by charging higher prices for supplies.

■ Competition can steal customers.

■ New market entrants can steal potential investment capital.

■ Substitute products can steal customers.

Formally defined, Porter’s Five Forces Model analyzes the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry. Its purpose is to combat these competitive forces by identifying oppor- tunities, competitive advantages, and competitive intelligence. If the forces are strong, they increase competition; if the forces are weak, they decrease competition. This sec- tion details each of the forces and its associated MIS business strategy (see Figure 1.13 ). 9

Buyer Power

Buyer power is the ability of buyers to affect the price they must pay for an item. Fac- tors used to assess buyer power include number of customers, their sensitivity to price, size of orders, differences between competitors, and availability of substitute products. If buyer power is high, customers can force a company and its competitors to compete on price, which typically drives prices down.

One way to reduce buyer power is by manipulating switching costs , costs that make customers reluctant to switch to another product or service. Switching costs include financial as well as intangible values. The cost of switching doctors, for instance, includes the powerful intangible components of having to build relationships with the new doctor and nurses, as well as transferring all your medical history. With MIS, however, patients can store their medical records on DVDs or thumb drives, allowing easy transferability. The Internet also lets patients review websites for physician referrals, which takes some of the fear out of trying someone new. 10

LO 1.5: Describe Porter’s Five Forces Model and explain each of the five forces.

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19Business Driven MIS Module 1

Companies can also reduce buyer power with loyalty programs , which reward custom- ers based on their spending. The airline industry is famous for its frequent-flyer programs, for instance. Because of the rewards travelers receive (free airline tickets, upgrades, or hotel stays), they are more likely to be loyal to or give most of their business to a single company. Keeping track of the activities and accounts of many thousands or millions of customers covered by loyalty programs is not practical without large-scale business systems, however. Loyalty programs are thus a good example of using MIS to reduce buyer power. 11

Supplier Power

A supply chain consists of all parties involved, directly or indirectly, in obtaining raw materials or a product. In a typical supply chain, a company will be both a supplier (to customers) and a customer (of other suppliers), as illustrated in Figure 1.14 . Supplier power is the suppliers’ ability to influence the prices they charge for supplies (including materials, labor, and services). Factors used to appraise supplier power include number of suppliers, size of suppliers, uniqueness of services, and availability of substitute prod- ucts. If supplier power is high, the supplier can influence the industry by:

■ Charging higher prices.

■ Limiting quality or services.

■ Shifting costs to industry participants. 12

Typically, when a supplier raises prices, the buyers will pass on the increase to their customers by raising prices on the end product. When supplier power is high, buyers lose revenue because they cannot pass on the raw material price increase to their customers. Some powerful suppliers, such as pharmaceutical companies, can exert a threat over an entire industry when substitutes are limited and the product is critical to the buyers. Patient who need to purchase cancer-fighting drugs have no power over price and must pay whatever the drug company asks because there are few available alternatives.

Using MIS to find alternative products is one way of decreasing supplier power. Can- cer patients can now use the Internet to research alternative medications and practices, something that was next to impossible just a few decades ago. Buyers can also use MIS to form groups or collaborate with other buyers, increasing the size of the buyer group and reducing supplier power. For a hypothetical example, the collective group of 30,000 students from a university has far more power over price when purchasing laptops than a single student. 13

Threat of Substitute Products or Services

The threat of substitute products or services is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose. For example, travelers have numerous substitutes for airline transportation including automobiles, trains, and boats. Technology even makes videoconferencing and virtual meetings possible, eliminating the need for some business travel. Ideally, a company would like to be in a market in which there are few substitutes for the products or ser- vices it offers.

Polaroid had this unique competitive advantage for many years until it forgot to observe competitive intelligence. Then the firm went bankrupt when people began tak- ing digital pictures with everything from video cameras to cell phones.

A company can reduce the threat of substitutes by offering additional value through wider product distribution. Soft-drink manufacturers distribute their products through

FIGURE 1.14

Traditional Supply Chain

Suppliers Company Customers

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20 Chapter 1 Management Information Systems: Business Driven MIS

vending machines, gas stations, and convenience stores, increasing the availability of soft drinks relative to other beverages. Companies can also offer various add-on services, making the substitute product less of a threat. For example, iPhones include capabilities for games, videos, and music, making a traditional cell phone less of a substitute. 14

Threat of New Entrants

The threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to joining a market. An entry barrier is a feature of a product or service that customers have come to expect and entering competi- tors must offer the same for survival. For example, a new bank must offer its customers an array of MIS-enabled services, including ATMs, online bill paying, and online account monitoring. These are significant barriers to new firms entering the banking market. At one time, the first bank to offer such services gained a valuable first-mover advantage, but only temporarily, as other banking competitors developed their own MIS services. 15

Rivalry among Existing Competitors

Rivalry among existing competitors is high when competition is fierce in a market and low when competitors are more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased com- petition in almost every industry. The retail grocery industry is intensively competitive. Kroger, Safeway, and Albertsons in the United States compete in many different ways, essentially trying to beat or match each other on price. Most supermarket chains have implemented loyalty programs to provide customers special discounts while gathering valuable information about their purchasing habits. In the future, expect to see grocery stores using wireless technologies that track customer movements throughout the store to determine purchasing sequences.

Product differentiation occurs when a company develops unique differences in its products or services with the intent to influence demand. Companies can use differenti- ation to reduce rivalry. For example, while many companies sell books and videos on the Internet, Amazon differentiates itself by using customer profiling. When a customer vis- its Amazon.com repeatedly, Amazon begins to offer products tailored to that particular customer based on his or her profile. In this way, Amazon has reduced its rivals’ power by offering its customers a differentiated service.

To review, the Five Forces Model helps managers set business strategy by identify- ing the competitive structure and economic environment of an industry. If the forces are strong, they increase competition; if the forces are weak, they decrease it (see Figure 1.15 ). 16

Analyzing the Airline Industry

Let us bring Porter’s five forces together to look at the competitive forces shaping an industry and highlight business strategies to help it remain competitive. Assume a shipping company is deciding whether to enter the commercial airline industry. If

FIGURE 1.15

Strong and Weak Examples of Porter’s Five Forces

Weak Force: Decreases Competition or Few Competitors

Strong Force: Increases Competition or Lots of Competitors

Buyer Power An international hotel chain purchasing milk

A single consumer purchasing milk

Supplier Power A company that makes airline engines

A company that makes pencils

Threat of Substitute Products or Services

Cancer drugs from a pharmaceutical company

Coffee from McDonald’s

Threat of New Entrants A professional hockey team A dog walking business

Rivalry among Existing Competitors

Department of Motor Vehicles A coffee shop

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BUSINESS DRIVEN INNOVATION

Is there anything more frustrating than waiting in line at the post office? Not only are those lines frustrating, but they are also unprofitable. The U.S. Postal Service has faced multibillion-dollar losses every year for the past few years, making for one of the greatest challenges in its history.

What is killing the post office? Perhaps it is Stamps.com , a website that allows you to customize and print your own stamps 24 hours a day. Getting married? Place a photo of the happy couple right on the stamp for the invitations. Starting a business? Place your business logo on your stamps. Stamps.com even keeps track of a customer’s postal spending and can recommend optimal delivery methods. Plus, Stamps.com gives you postage discounts you can’t get at the post office or with a postage meter.

Evaluate the U.S. Postal Service using Porter’s Five Forces Model. How could the Postal Service create new products and services to help grow its business? What types of competitive advantages can you identify for the Postal Service? 18

Fixing the Post Office

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21Business Driven MIS Module 1

performed correctly, an analysis of the five forces should determine that this is a highly risky business strategy because all five forces are strong. It will thus be difficult to gener- ate a profit.

■ Buyer power: Buyer power is high because customers have many airlines to choose from and typically make purchases based on price, not carrier.

■ Supplier power: Supplier power is high since there are limited plane and engine manufacturers to choose from, and unionized workforces (suppliers of labor) restrict airline profits.

■ Threat of substitute products or services: The threat of substitute products is high from many transportation alternatives including automobiles, trains, and boats, and from transportation substitutes such as videoconferencing and virtual meetings.

■ Threat of new entrants: The threat of new entrants is high because new airlines are continuously entering the market, including sky taxies offering low-cost on-demand air taxi service.

■ Rivalry among existing competitors: Rivalry in the airline industry is high, and websites such as Travelocity.com force them to compete on price (see Figure 1.16 ). 17

FIGURE 1.16

Five Forces Model in the Airline Industry

Strong (High) Force: Increases Competition or Lots of Competitors

Buyer Power Many airlines for buyers to choose from forcing competition based on price

Supplier Power Limited number of plane and engine manufacturers to choose from along with unionized workers

Threat of Substitute Products or Services

Many substitutes including cars, trains, and busses. Even substitutes to travel such as video conferencing and virtual meetings.

Threat of New Entrants Many new airlines entering the market all the time including the latest sky taxis.

Rivalry among Existing Competitors Intense competition–many rivals.

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THE THREE GENERIC STRATEGIES—CHOOSING A BUSINESS FOCUS

Once top management has determined the relative attractiveness of an industry and decided to enter it, the firm must formulate a strategy for doing so. If our sample com- pany decided to join the airline industry, it could compete as a low-cost, no-frills airline or as a luxury airline providing outstanding service and first-class comfort. Both options offer different ways of achieving competitive advantages in a crowded marketplace. The low-cost operator saves on expenses and passes the savings along to customers in the form of low prices. The luxury airline spends on high-end service and first-class com- forts and passes the costs on to the customer in the form of high prices.

Porter has identified three generic business strategies for entering a new market: (1) broad cost leadership, (2) broad differentiation, and (3) focused strategy. Broad strat- egies reach a large market segment, while focused strategies target a niche or unique market with either cost leadership or differentiation. Trying to be all things to all people is a recipe for disaster, since doing so makes it difficult to project a consistent image to the entire marketplace. For this reason, Porter suggests adopting only one of the three generic strategies illustrated in Figure 1.17 . 19

Figure 1.18 applies the three strategies to real companies, demonstrating the relation- ships among strategies (cost leadership versus differentiation) and market segmentation (broad versus focused).

■ Broad market and low cost: Walmart competes by offering a broad range of prod- ucts at low prices. Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.

■ Broad market and high cost: Neiman Marcus competes by offering a broad range of differentiated products at high prices. Its business strategy offers a variety of specialty and upscale products to affluent consumers.

LO 1.6: Compare Porter’s three generic strategies.

FIGURE 1.18

Examples of Porter’s Three Generic Strategies

Walmart Neiman Marcus

Payless Shoes Tiffany & Co.

Low Cost High Cost

Cost Strategy

Broad Market

Narrow Market

Competitive Scope

FIGURE 1.17

Porter’s Three Generic Strategies

Cost Leadership Differentiation

Focused Strategy

Low Cost High Cost

Cost Strategy

Broad Market

Narrow Market

Competitive Scope

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26 Information Systems in Orgs

BUSINESS DRIVEN DEBATE

Apple sold 300,000 units of its highly anticipated iPad in the first 15 hours it was available for sale. Hundreds of thousands of Apple devotees flocked to stores during Passover and Easter to be the first to obtain the new device, even though it is neither a phone nor a laptop computer and many people are still wonder- ing what it’s for.

The controversy over the usefulness of Apple’s portable tablet began as soon as Apple announced the device was heading to market. At first glance, the iPad is little more than a touch screen the size of a slim book, with a few control but- tons along the edges and a home button at the bottom. Shrink it, and it would look like an iPod Touch. What is the value of this device? That’s the question everyone wants to answer.

The iPad’s modest features might represent an entirely new way of con- suming media—video, web pages, music, pictures, and even books. Break into groups and review the current value of the iPad for business. Find three exam- ples of the ways businesses are using, or could use, the iPad. Do you consider it the next revolutionary device or just an overpriced music player? 20

The iPad— Greatest Product in History or Just Another Gadget?

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23Business Driven MIS Module 1

■ Narrow market and low cost: Payless competes by offering a specific product, shoes, at low prices. Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which also sells low-cost shoes, by offering a far big- ger selection of sizes and styles.

■ Narrow market and high cost: Tiffany & Co. competes by offering a differentiated product, jewelry, at high prices. Its business strategy allows it to be a high-cost pro- vider of premier designer jewelry to affluent consumers.

VALUE CHAIN ANALYSIS—EXECUTING BUSINESS STRATEGIES

Firms make profits by taking raw inputs and applying a business process to turn them into a product or service that customers find valuable. A business process is a standard- ized set of activities that accomplish a specific task, such as processing a customer’s order. Once a firm identifies the industry it wants to enter and the generic strategy it will focus on, it must then choose the business processes required to create its products or services. Of course, the firm will want to ensure the processes add value and create competitive advantages. To identify these competitive advantages, Michael Porter cre- ated value chain analysis , which views a firm as a series of business processes that each add value to the product or service.

Value chain analysis is a useful tool for determining how to create the greatest pos- sible value for customers (see Figure 1.19 ). The goal of value chain analysis is to identify processes in which the firm can add value for the customer and create a competitive advantage for itself, with a cost advantage or product differentiation.

The value chain groups a firm’s activities into two categories, primary value activities, and support value activities. Primary value activities , shown at the bottom of the value chain in Figure 1.19 , acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services.

1. Inbound logistics: acquires raw materials and resources and distributes to manufac- turing as required.

2. Operations: transforms raw materials or inputs into goods and services. 3. Outbound logistics: distributes goods and services to customers.

LO 1.7 Demonstrate how a company can add value by using Porter’s value chain analysis.

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FIGURE 1.19

The Value Chain

Support Value

Activities

Primary Value

Activities

Firm infrastructure (3.1%)

Human resource management (7.1%)

Technology development (and R&D) (4.2%)

Procurement (27%)

Receive and

store raw materials

(5.2%)

Make the product or

service (40.3%)

Deliver the product or

service (6.6%)

Market and sell the

product or service (4.3%)

Service after

the sale (2.2%)

Value Added

24 Chapter 1 Management Information Systems: Business Driven MIS

4. Marketing and sales: promotes, prices, and sells products to customers. 5. Service: Provides customer support after the sale of goods and services. 21

Support value activities , along the top of the value chain in Figure 1.19 , include firm infrastructure, human resource management, technology development, and procure- ment. Not surprisingly, these support the primary value activities.

■ Firm infrastructure: includes the company format or departmental structures, envi- ronment, and systems.

■ Human resource management: provides employee training, hiring, and compensation.

■ Technology development: applies MIS to processes to add value. ■ Procurement: purchases inputs such as raw materials, resources, equipment, and

supplies.

It is easy to understand how a typical manufacturing firm takes raw materials such as wood pulp and transforms it into paper. Adding value in this example might include using high-quality raw materials or offering next-day free shipping on any order. How, though, might a typical service firm take raw inputs such as time, knowledge, and MIS and transform them into valuable customer service knowledge? A hotel might use MIS to track customer reservations and then inform front-desk employees when a loyal cus- tomer is checking in so the employee can call the guest by name and offer additional services, gift baskets, or upgraded rooms. Examining the firm as a value chain allows managers to identify the important business processes that add value for customers and then find MIS solutions that support them.

When performing a value chain analysis, a firm could survey customers about the extent to which they believe each activity adds value to the product or service. This step generates responses the firm can measure, shown as percentages in Figure 1.20 , to describe how each activity adds (or reduces) value. Then the competitive advan- tage decision for the firm is whether to (1) target high value-adding activities to further enhance their value, (2) target low value-adding activities to increase their value, or (3) perform some combination of the two.

MIS adds value to both primary and support value activities. One example of a primary value activity facilitated by MIS is the development of a marketing campaign management system that could target marketing campaigns more efficiently, thereby reducing marketing costs. The system would also help the firm better pinpoint tar- get market needs, thereby increasing sales. One example of a support value activity facilitated by MIS is the development of a human resources system that could more efficiently reward employees based on performance. The system could also identify