Lesson 1 - The Systems Concept and the Flow of Information

1. Introduction
This course on Management Information Systems covers a wide range of topics using the concept of systems approach. Extra emphasis will be given to the systems approach in this chapter as it is fundamental to all remaining chapters of this course. We all have an understanding of the term system and we use it often on ad-hoc basis in our conversations e.g. in reference to the education system, financial system, transport system etc. We need to have an explicit and clear understanding of the term in order to use it as a tool in management, especially to introduce Information Systems. A simple system will be advanced to a complex system by citing examples from human behaviour. It will then be related to the sophisticated structure of the firm. The distinction between the modern and the old firm is highlighted so as to identify the significance of information in the modern firm. Great emphasis is paid to the concept of information, especially the process of production of information at firm level. The concept of competitive advantage has changed the direction of firms especially after 1980s. The modern firm now relies very much on achieving competitive advantage making adjustments at the firm level. The modern firm is enthusiastic to employ Information Technology to plan its functions.

2. A simple system
Let us begin with the concept of a system. The easiest way of understanding a system is by learning about a refrigerator which is quite familiar to all of us. Figure 1.1 describes the mechanism of a refrigerator. The input is the electricity that goes into the system of the refrigerator. The electricity performs some functions in the black box 1 and produces a service (output). This system helps produce required level of cooling to preserve food. There are feedbacks in this system, three controlling points (valves), which monitor the structure. At point 1, the voltage level is set and checked and the variations in electricity voltage are controlled until the correct voltage is confirmed. (The stabilizer monitors the variation of voltage). At point 2, the electricity supply is controlled and monitored by itself to maintain the required cooling level set by the user at point 3. Once the required level is reached the system stops itself consuming

electricity. At point 3, the user sets different levels of cooling

We use the word black box to refer to a situation when the exact workings of a given system are not understood by or accessible to outsiders.

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(depending upon the required level of cooling for different types of foods). This system is an automated process and the refrigerator provides services uninterruptedly. Figure -1.1 System of Refrigerator- closed- loop

- Input(Electricity voltage)

-The system(Refrigerator with different Functions) 2

- Output(Preserving food by cooling)

A system is an organized collection of parts (or subsystems) that are highly integrated to accomplish an overall goal. The system has various inputs, which go through certain processes to produce certain outputs, which together, accomplish the overall desired goal for the system. So a system is usually made up of many smaller systems, or subsystems
There are varieties of systems which range from simple to advanced ones. The refrigerator is a simple, closed system. It is a closed-loop system. It has control elements and feedback loops (the lines going from points (1), (2) and (3) to input cell). The three control elements at points 1, 2 and 3 control the system and produce different levels of outputs. The feedback loops pass on new commands produced at the above three points back to the processing level.

3 Complicate Systems
The human body is a complicate system with different organs, each performing different tasks and integrating into the main system of the human body. There are many subsystems in it. For example, blood circulation is a subsystem which is controlled by the heart. The respiratory system is another which is coordinated by lungs, which in turn is interlinked with blood circulation. The nervous system is another which monitors and controls the body. Each subsystem has its own boundaries of sorts, and includes various inputs, processes, outputs and

outcomes geared to accomplish an overall goal for the subsystem. All the above CDCE-UNIVERSITY OF PERADENIYA Page 2

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subsystems are interwoven and produce a task for the human body to function. Other examples for such complex systems are driving a vehicle, mechanism in a market, social system prevailing in a village and internal organization of a firm. Figure 1.2 The Human Body A complicate system
The nervous system The respiratory system The blood circulation system

4. The Subsystems
The human body which is a natural system contains systems, subsystems and even subsubsystems. The order and arrangements of subsystems located in the human body produce different tasks that result in the production of an efficient human behaviour to work in a highly complex world order. Three such subsystems were identified in Figure 1.2. A subsystem is a system within a system. These are interconnected with some order or rules for them to perform collectively and efficiently. You can recognize that there are subsubsystems in each of the organs in the human body to support the subsystem and finally to the main system. In the blood circulatory subsystem, for example, the heart is one subsystem which performs a different function while another sub-subsystem of arteries carries blood to different points in the body. Sub-subsystems like liver, kidneys help the main sub-system, the blood circulatory system, to perform its functions efficiently. We should internalise the concept of systemic thinking for us to develop systemic insight into complex situations and problems in management or even problems that you come across in the home front. The system approach helps planning. Problems can be structured as systems for planning purposes. Different outcomes will be forecast by the system once the commands are changed

in the feedback system as in the case of changing command at point

3 in the refrigerator. The change in commands or even adding another subsystem into the system BBA 334 CDCE-UNIVERSITY OF PERADENIYA Page 3

changes the outcome that will be delivered. In the nervous system, if you need the mind to make better decisions, you will have to add the knowledge earning subsystem into it!

Now Test your Progress: Do the following Continuous Assessment 1 5. Firm as a system Now let us move from the natural system of the human body to an artificial entity, say, a firm. A firm is an artificial entity made up of human and physical resources. Just like in the human body, these resources can be organized into a complex system, incorporating systems, subsystems and sub-subsystems. A complex system can be formed by combining humans with humans and humans with physical elements using the systems approach we learnt previously. The business systems approach considers a business as a system of interrelated factors of strategy, owners, investors, management, workers, finance, processes, products, suppliers, customers, and competitors. The primary goal of this system is to increase stakeholder value. This can be achieved through dynamic balancing of competing elements; the customer satisfaction, competitive market forces, internal cost and growth of the firm. Human elements work as a team in this organization, interacting with physical elements in achieving the above goals. The management determines the strategies and activities to achieve the goals.2 6. An example - a bank as a System Let us use an example of a hypothetical bank (assume that it exists in Sri Lanka!) to elaborate the concept of systems approach. (Throughout this course we use the bank as an example in discussing MIS). In relation to Figure 1.1, it is the bank vision (increase stakeholder value) that goes as an input into the bank system and it is processed at point (1) by the Board of Directors and is forwarded for implementation. This processed vision is implemented at different levels in the bank structure the black box. The problems arising at the level of implementation are fed

(http://www.1000advices.com/guru/business_success_balanced_wheel_vk.html).

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back at point (2) to the point (1). Finally, the revised version of vision helps produce a banking service. At point (3) the feedbacks of customers can also be directed to point (1) in the structure. Now Test your Progress: Do the following Continuous Assessment 2

7. A Conventional Firm and the Flow of Information A conventional firm may be understood by referring to an old firm in the banking industry. The conventional firm too performs functions as a system to increase its stakeholder value. The internal organization of this system comprises of people of different skill levels; skilled, semiskilled and unskilled, who perform different functions to produce banking services to the customers. There are managers, administrators, and people at operational level engaging in different activities. The tasks of each are defined and each is provided with certain authority and responsibility. There is a hierarchical structure of this organisation in delegating authority and responsibility within the firm. The authority (the power or right to give orders or make decisions) flows from the manager to the peon, from the top to the last level of an internal organization. The person at the top of the organization, the manager in the bank, delegates authority (transfers power) to his subordinates. The authority is distributed according to the tasks assigned to the individuals of the firm. Each carries some responsibility depending upon his capacity and the level of the internal organization he belongs to. In the bank the manager has overall responsibility to mobilize resources to achieve the goal of the bank. The decision making tasks are fundamental and these are performed at the managerial levels. These decisions are executed at the middle and operational levels of the organization. For example, the senior management of the bank decides on a new rate of interest (both buying and selling) and the middle level of management implements this decision through the operational level. People at the operational level lend and borrow money to/from the customers accordingly. The correct shape of the firm and the correct distribution of authority help better reach the overall objective of the firm. Let us look at the shape of an internal organizational structure with the hierarchical structure of the old firm. There are typically two types of hierarchical structures, tall and flat pyramidal BBA 334 CDCE-UNIVERSITY OF PERADENIYA Page 5

structures. Tall ones are common in the manufacturing organizations and flat ones in services industries. Figure 1.3 Flat (horizontal) hierarchy

Figure -1.2 Tall (pyramid) hierarchy

Chief Executive Board of Directors Executive Senior managers Managers Junior Managers Supervisors Assistants

The two pyramids above show how commands are passed through different levels of the organization. In figure 1.2 there is a long chain of command. In figure 1.3 it is only a short chain of command where the command goes quickly to the last level. In a structure with tall hierarchy each manager has a small number of employees under his control and they can be closely supervised. The information flows quite slowly in a tall hierarchy as it has to go through many levels. On the other hand, the flatter hierarchy has quicker travel of information between management and workers and therefore is less costly. Decision making is easier with relatively few managers. Now Test your Progress: Do the following Continuous Assessment 3

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8. What is information?
We use the terms data, information and knowledge loosely and interchangeably in our normal conversations. But more precisely, data are facts and figures which are raw, existing without much significance and meaning to the user. For example, data may be the units of electricity used in the production of services by the bank. This data needs to be processed to give it a value the value is the information. Another example, the total duration of telephone calls in the bank which has to be divided between different departments or sections of the bank. The rupee rate of telephone calls has to be applied to find the total cost on telephone calls incurred by each department in bank. This total cost on telephone has to be divided between direct use and indirect (overhead) use by different sections of the bank. The expenditure on direct and indirect use of telephone have to be divided by the number of services to find the unit direct cost and unit indirect cost of telephone calls in the production of bank services. The number of steps and methods that is adopted in finding the unit costs of telephone incurred by each department is referred to as processing of data. The number of telephone calls used by the bank to produce 1000 transactions does not have much meaning to anyone. But we can give lots of meanings and value to this figure by processing it. The processing adds values to any activity. For example, the processing of raw flour at the bakery turns it to a new product called bread. Value is added to flour at each level of production to convert flour into bread. Similarly processing of raw data adds value to it and creates information. When raw data is processed, the output is information. In the above example, the information is the unit direct and indirect costs of telephone usage in each department of the bank. This information provides lots of insight to the bank management. It is the knowledge about the cost of telephone used in the production of transactions and the cost pertaining to each department. The knowledge is thus the appropriate collection of information. The information and knowledge can then be used in decision-making regarding the lending rates, cost cutting strategies, addition of new technology to save cost of telephone and so forth.

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According to Russell Ackoff, a systems theorist and professor of organizational change:

1. Data: symbols 2. Information: data that are processed to be useful; provides answers to "who", "what", "where", and "when" questions 3. Knowledge: application of data and information; answers "how" questions 4. Understanding: appreciation of "why" 5. Wisdom: evaluated understanding. He shows the following diagram describing the process of the transformation of data into information and finally wisdom. The data in management is to be transformed into business information. Such information need to be transformed into business knowledge to answer how questions. The knowledge then will help understanding the issues faced by the strategic management. They form wisdom with such understanding of issues.

Thus, information may be facts, concepts, or instructions; any sort of knowledge which can be communicated. Information is a resource and it plays an important role in almost every human BBA 334 CDCE-UNIVERSITY OF PERADENIYA Page 8

activity. It has a very high price in the business world. Thus, the information industry has become the fastest growing industry in todays competitive business world. The developed countries are now moving away from industrial production towards knowledge production to become informative economies. Large business firms are formed to supply information and others to use the information; both earn huge profits in this information market. Information is an essential input in any production process. Information system is gathering, processing, storing and distributing information to support decision making and control in an organization. The up-down efficient flow of information within an organization helps make good decisions and speedily convey them to relevant parties in the organization. In practice there are different types of production of information. The manual dealing of data by statisticians, accountants, account clerks, clerical workers, and research workers of an organization is the conventional form of gathering, processing, storing and distributing information. This type of information processing can still be found in government departments and in some private business organizations. However it leads to slow processing and slow flow of information within the structure causing delays in decision making. The accuracy of information is also little guaranteed. Now Test your Progress: Do the following Continuous Assessment 4

9. Early focuses on information There is a history of more than a thousand years of search for devices that reduce the hard work of data processing. The accumulated knowledge in the field over this period resulted in the development of a differential analyser for computing by 1930. Again in 1947 the first high-speed electronic automatic computer was put into use. These have taken mankind to a new era; the computer era- the 2nd revolution in history. It was one of the most significant developments of our time because it enabled us to expand our knowledge in almost every field through limitless quantities of accurate, inexpensive computation performed at high speeds 3 The electronic data processing age which commenced in 1950s was the beginning of the information systems approach of data processing. Data processing was carried out by entering

http://ftp.arl.army.mil/~mike/comphist/61ordnance/chap1.html.

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computing inputs into the computer in a punched card form and output was as punch cards or paper reports. These helped the business world in a variety of ways4. The introduction of silicon chip circuits into the computers in 1964 was the next milestone in the development of the computer-based information processing system. The computer-based information processing system entered into business when information for management gained popularity among large businesses. There was a demand for fast processing hardware and software applicable in the area of business management, especially for Management Information Systems (MIS). The computer industry became a most profitable venture. With the springing up of the internet in the 1980s, the computer-based information processing system passed through another landmark. 10. The New Business Environment and the Modern Firm The modern firm emerged in this new business environment. Its new business environment is featured in Figure 1.4. It operates in a highly complex economic- social- political environment. There are many factors that influence the behaviour of the modern firm. These include the financial institutions, suppliers, customers, labour unions, shareholders, competitors, the government and global community. These institutions in the environment supply resources to the firm as indicated in arrows from the outer circle in Figure 1.4. The resources come into the system in the form of the personnel, material, machines, money and information. The most important resource is the information which regularly carries signals from the customers, global community, financial institutions, suppliers, government, labour unions, and the shareholders to the modern firm. Some signals may be unfavourable like trade union actions, government tax policies, and others may be favourable like high share prices, higher demand from the customers and foreign markets etc. Now Test your Progress: Do the following Continuous Assessment 5

Increased cash flow, Ease of billing electronically (support is available), Lower administrative, postage and handling costs, Added efficiency and Accurate claims filingdata is received precisely as input by the suppliers office, eliminating the chance of processing errors etc.

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11. How should the modern firm respond to signals? The middle circle in Figure 1.4 illustrates the structural adjustments in the modern firm in responding to signals coming from the external environment. It has added new institutions in its structure to suit with the changing environment. The new structure comprises management, organisation and technology; the precise alliance of these in the internal structure helps absorb pressures coming from the external environment. Figure 1.4 The Business Environment of the Modern Firm
Sharehold ers / owners Labour unions Competito rs

Organisatio n
Supplier s

Management
Custome rs

The Moder n Firm

Technolog y
Financial Institutio ns Govt.

Global communi ty.

12. Competitive Advantage Porters (1985) concept of competitive advantage gained popularity in the 1980s and thereafter in the era of globalisation. He emphasised the importance of change in management so as to earn competitive advantage at the new world market environment. A firm can restructure its resources and management practices to achieve two types of advantages, namely, cost advantages and differentiation advantages. If the firm can deliver the same product at a lower cost than its competitors the firm can earn cost advantage and generate profits higher than its competitors. Also, if the firm can introduce the same product with some differentiations compared to the

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products of the competitors, the firm can earn differentiation advantage and generate profits higher than competitors. On one hand, research on management is increasingly concentrated on this new concept of competitive advantage, developing new management techniques to use in firms. One such new approach is the concept of strategic management. It is an approach of formulating, implementing and evaluating decisions that will enable an organization to achieve its objectives (we will be discussing this concept in later chapters). On the other hand, the large firm sector is investing a large sum on Research & Development (R&D) to invent new products and technology for the society. The special feature of these new products has been that they are embedded with a large component of information technology. The computer revolutionised the production processes, adding Information technology (IT) as a resource component in production functions. The Information systems (IS) now assist management to achieve strategic advantages in competitive businesses. Information Systems approach in business is a fast spreading management concept today. Management now relies very much on computer-based information processing systems to administer, program and forecast activities of the firm. With the use of computer-based information processing systems the firms are now operating in networks which are vertically and horizontally integrated by Information Systems. In these extended networks, the information flows fast helping quick decision making and implementation. The Information Systems have hastened the flow of information within the structure. At the same time, the hierarchical structure of the modern firm has become flat as many low level jobs disappear with computer technology (e.g. robots have replaced production workers, automated data entry has replaced many secretaries) and, therefore, some levels of the pyramid have disappeared altogether. The modern organizational structure takes the form of a flat (horizontal) hierarchy as in Figure 1.3 above. Now Test your Progress: Do the following Continuous Assessment 6

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13. Summary This chapter provides an introduction to the systems approach explaining how a system works in reality. It describes in detail how a simple system and a complex system work. There are subsystems and sub-subsystems in a system which helps functioning of the total system. This is described using the human body model. Just as a natural human body system operates successfully with the help of subsystems, an artificial system with subsystems would similarly successfully work in an organization. In particular, an Information System in an organization was elaborated. During this discussion a historical note was provided to the concept of computer-based information process system. The next chapter will pay attention to the adoptability of the concept of systems approach in Information Technology, especially in Information Systems. Attempt will be made to introduce Systems approach to a complex situation where the firm now interacts with the environment. The concepts of open-loop-system and Management Information Systems (MIS) will be introduced in the next chapter.

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