Chapter 2 E:Business: How Businesses Use Information Systems

Student Objectives
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Identify and describe the major features of a business that are important for understanding the role of information systems. Describe the information systems supporting the major business functions: sales and marketing, manufacturing and production, finance and accounting, and human resources. Evaluate the role played by systems serving the various levels of management in a business and their relationship to each other. Explain how enterprise applications collaboration and communication systems, and intranets improve organizational performance. Assess the role of the information systems function in a business.

Chapter Outline
Components of a Business Organizing a Business: Basic Business Functions Business Processes Managing a Business and Firm Hierarchies The Business Environment The Role of Information Systems in a Business 2.2 Types of Business Information Systems Systems from a Functional Perspective Systems from a Constituency Perspective Relationship of Systems to One Another 2.3 Systems That Span the Enterprise Enterprise Applications Intranets and Extranets E-Business, E-Commerce and E-Government 2.4 The Information Systems Function in Business The Information Systems Department Organizing the Information Systems Function 2.5 Hands-on MIS

Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. The page number for each key term is provided.

Business, 41 Business processes, 43 Chief information officer (CIO), 68 Chief knowledge officer (CKO), 68 Chief privacy officer (CPO), 68 Chief security officer (CSO), 68 Customer relationship management (CRM) systems, 62 Data workers, 45 Decision-support systems (DSS), 55 Electronic business (e-business), 67 Electronic commerce (e-commerce), 67 E-government, 67 End users, 68 Enterprise applications, 59 Enterprise systems, 59 Executive support systems (ESS), 57 Finance and accounting information systems, 50 Human resources information systems, 51

Information systems department, 67 Information systems managers, 68 Interorganizational system, 61 Knowledge management systems (KMS), 64 Knowledge workers, 45 Management information systems (MIS), 55 Manufacturing and production information systems, 49 Middle management, 45 Operational management, 45 Portal, 57 Production or service workers, 45 Programmers, 68 Sales and marketing information systems, 48 Senior management, 45 Supply chain management (SCM) systems, 61 Systems analysts, 68 Transaction processing systems (TPS), 54

Teaching Suggestions
The opening case, Information Systems Join the Tupperware Party, illustrates how much companies today rely on information systems for running their business, driving growth and profitability. Tupperwares unique business model using a dispersed, independent sales force requires a massive effort to gather, store, maintain, and disseminate data and information to its geographically separated users. Changing its corporate structure required it to change its inadequate information system. It had to find a way to reduce the workload on its sales force, improve communications, and provide the right information to the right users at the right time. Rather than staying with its old information technology infrastructure, Tupperware wisely chose to implement a completely new system that could help it automate more business processes and integrate functions into a single secure environment that was scalable. Using the Oracle Collaboration Suite and Oracle Portal software provided avenues for continued expansion of collaborative efforts among its sales force and between the sales reps and management. Following the new systems implementation, Tupperware immediately began enhancing the system to provide even more online collaboration and communication tools. This vignette is a great way to launch a discussion about the necessity of meeting users immediate needs while still leaving open the possibility of adding new features to a system at a later time.

Section 2.1, Components of a Business. Figure 2-1 may help students understand that every business, large and small, uses the same basic business processes. Referring back to this figure may help as you examine information needs for each functional area. You could have students select a business with which they are familiar and identify some of the business processes involved in each of the basic functional areas. Another good classroom exercise is to use Figure 2-4 to discuss how a business is affected by developments in its environment. Using a familiar business like Wal-Mart you can have one group of students research and address its immediate external environmental forces like customers, stockholders, suppliers, regulations, and competitors. Another group can examine Wal-Marts broader general environment (socioeconomic trends, political conditions, technological innovations, and global events). Interactive Session: Organizations: Toyota as Number One Case Study Questions 1. What are the basic principles of Toyotas production system? To which areas of the organization do these principles apply? Basic principles of Toyotas production system include: Eliminate waste while optimizing value Production planning is based on actual customer orders rather than best guesses Manufacture products without maintaining inventory Always improve These principles seem to apply to all of the companys production processes. Its business processes and information systems are based on the principles of just-in-time delivery, quality, and continuous improvement. Those principles allow Toyota to deliver value to the customer at a competitive price. 2. How is TPS interconnected with the culture at Toyota? Are TPS and Toyotas culture interdependent? Could one exist without the other? The Toyota Production System (TPS) seems to be interconnected with the companys culture because it is so integrated into everything the production division does. Jidoka enables line workers to stop production in order to immediately correct mistakes or defects. Monitoring software provides real-time alerts of malfunctions in equipment or robots. These types of built-in processes create an atmosphere of empowerment and send a strong message to workers that the corporations basic principles are indeed part of its culture. TPS and the companys culture seem to be interdependent. If TPS wasnt available, the workers wouldnt have the capability and processes available that give them the tools they need to meet cultural expectations. Its doubtful either could operate without the other. Processes must be in place to provide mechanism and avenues for workers to be able to stop

production in order to correct errors or fix mistakes. TPS wouldnt work if the culture didnt support it. 3. Describe how information systems support each of the business processes described in this case. TPS supports Toyotas just-in-time supply chain system and its lean manufacturing philosophy several ways. It processes orders for car parts from suppliers only when theyre needed and in the configuration requested by the customer. The parts are delivered in the exact sequence needed by the assembly line. That requires sophisticated supply system software enabling constant communication between the manufacturer and supplier. Intranets and extranet platforms provide collaboration and communication portals between Toyota and its dealers and between dealers. The nets reduce wait times for customers and increase satisfaction with the company. Andons, visual controls that provide an up-to-the-minute look at how the production process is running, provide electronic dashboards, overhead displays, and plasma screens for managers at all levels. Supervisors and managers get accurate reports instantaneously about the status of the production line. Andons connected to the assembly line machinery provide workers and managers with current information about the status of production equipment. MIS In Action 1. Select another industry, such as the airline industry or banking, and apply the principles of TPS to that industry. For instance, if you choose a bank, what are some examples of waste that you could try to eliminate? How would Jidoka be implemented? What are some examples of Andons that could be used? How would information systems support these practices? What obstacles might prevent Kaizen from being successful? Answers will vary according to the industry students select. Regardless of the industry, the basic entities that should be addressed are: suppliers, customers, employees, invoices/payments, and products and services. 2. Some experts believe that lean manufacturing by itself is becoming less and less of a competitive advantage because there is a limit to how much waste you can remove from the production process. Go to www.industryweek.com (or use a search engine) and search for the article titled Toyotas Real Secret: Hint, Its Not TPS by John Teresko. Do you agree with the premise of the article? Why or why not? Based on the article and your reading of the case study, what strategies has Toyota implemented to counteract the notion that TPS and lean manufacturing do not offer unlimited opportunities for improvement? Tereskos article is well worth reading. Some of the important points he makes are: There is only so much waste that TPS can squeeze out of the production process before engineering of the products and processes becomes a critical constraint

 While the six major auto manufacturers are closer than ever on labor productivity, there remain larger gaps on several other manufacturing attributes, including capacity utilization. While Toyota still maintains its impressive performance in applying lean practices, less of that edge now comes from TPS and more comes from adopting lean product development practices. In turn, those best practices provide synergy to TPS. the central focus of the waste reduction process is on shortening the time from a vehicle concept to its showroom availability. Morgan and Liker emphasize Toyotas commitment to the importance of appropriately integrating people, processes, tools and technology to add value to the customer and society. Section 2.2, Types of Business Information Systems. This section guides students through the various kinds of information systems first from a functional perspective and then a constituency perspective. The key to effectively teaching this section is to ultimately tie the two perspectives together at the end. Systems from a Functional Perspective: Ask your students to compare the functional information systems with the divisions in their schools and colleges of business. This may help them to put information systems into perspective with their career goals. Encourage your students to review the tables appearing in this section for specific examples of how information systems are used within the functional areas at each organizational level. Table 2.1 (Sales and Marketing Information Systems), Table 2.2 (Manufacturing and Production Information Systems), Table 2.3 (Finance and Accounting Information Systems), and Table 2.4 (Human Resources Information Systems) provides examples of the different types of information systems and the management level supported by these systems. Functional Area Sales and Marketing Manufacturing and Production Finance and Accounting Human Resources Business Process Identifying customers Making customers aware of the product Selling the product Assembling the product Checking for quality Producing bills of materials Paying creditors Creating financial statements Managing cash accounts Hiring employees Evaluating employees job performance Enrolling employees in benefits plans

Systems from a Constituency Perspective: This section focuses on how information systems serve various management levels in companies. Its important that they understand how one system helps serve other systems and that ultimately, all of them serve the entire organization. Type of System Transaction Processing Systems (TPS) Management Information Systems (MIS) Decision Support Systems (DSS) Executive Support Systems (ESS) Information Inputs Transactions; daily events Summary transaction data; high-volume data; simple models Optimized for data analysis, analytic models and data analysis tools. Aggregate data; external, internal Information Outputs Detailed reports; lists; summaries Summary and exception reports Interactive; simulations; analysis Projections; responses to queries Users Operations personnel; first-line supervisors Middle managers Professionals, staff managers Senior managers

Its likely their main encounter will be with TPS systems when they first begin their careers. Stress the importance of accurate data at the TPS level since it serves as the basis for the other systems. Students may better understand decision-support systems if they think about them in ways that are familiar to them. Why do national retail chains open stores in certain locations and not others? How can a retail chain determine which type of clothing to stock at different geographic locations? Remind your students that DSS use internal and external data to perform what-if analyses to help them make better decisions according to the companys competitive strategy. Encourage students to understand the need to classify each system in two ways - organizational level and business function. This concept is central to the rest of the text and to their future business life. Therefore, you may need to spend a significant amount of time explaining the classifications and the reasons why the text classifies them this way. At the same time, understanding the relationships between the systems is also critical. Most importantly, students need to understand that each type of information system supports the different kinds of decisions made at each managerial level. Interactive Session: People: Googles New Search for the Best and the Brightest Case Study Questions 1. Did Googles traditional hiring practices create business problems? Explain your answer.

Its possible Googles traditional hiring practices did, in fact, create business problems. As Lazlo Bock, vice president of people operations says, grades and interviews are not totally reliable predictors of job performance. Google found it true that high academic performance did not always correlate to successful workersat least in some organizational cultures. 2. Is Googles quantitative approach to hiring a good solution to its employee recruiting problems? Why or why not? Quantitative assessments alone are not always the most successful approach either. Michael Mumford points out that companies should not always rely on oddball factors such as those compiled from Googles internal survey. Many companies have found they need a combination of quantitative and qualitative assessments. 3. What role does culture play in Googles hiring preferences? Google does indeed have a much different culture than many other companiestheir business model depends on it. The survey question about pet ownership points to that. Only those companies whose culture closely mirrors Googles should attempt to develop hiring practices that emulate Googles. 4. What kind of system or systems described in this chapter is discussed in this case? What are its inputs, processes, and outputs? Human resources systems are highlighted in this case at all three management levels: Identify manpower requirementssenior management Identify potential employeesmiddle management Monitor and analyze recruitmentmiddle management Track recruitmentoperational management Inputs: Job applications Manpower requests from operational supervisor Processes: Screen applications for those that match position requirements Match manpower requests with budgets Outputs: Applications that meet initial job requirements List of potential recruits that match position requirements 5. Create a list of ten questions that you think might be appropriate for Googles job applicant survey. Justify each question with a short explanation of why the answer would be useful.

Obviously answers will vary according to students thought processes, attitudes and experiences. Potential questions might be: What are your experiences in other companies: The question evaluates how well applicants fit in with the company culture. If you had an extra day off, what would you do: shows creativity, highlights personal goals, determines environmental influences. What is your favorite type of vacation: determines creativity and willingness to take risks. What is your favorite past-time: evaluates if the potential employee is able to break away from work and recharge his/her energies. 6. If you were applying for a job at Google, how would you want to be evaluated? Which evaluation techniques do you think favor your strengths? Which techniques might expose your weaknesses? This is a very subjective question for which there is no right or wrong answer. Each student (hopefully) will answer this question differently. MIS In Action Explore the Google Jobs page at http://www.google.com/intl/en/jobs/index.html, and then answer the following questions: 1. What resources does Google provide for prospective employees on its Web site? Copied from Googles Web page: Chances are you have a good idea of where you want to go in life. At Google, we've designed a culture that helps you get there. From our flexible, projectbased approach to corporate structure to our innovative perks and benefits, we do everything we can to make sure our employees not only have great jobs, but great lives. Into being challenged? Into having fun? Want to change the world? If the answer is yes, then you've come to the right place. Google is not a conventional company, and we don't intend to become one. True, we share attributes with the world's most successful organizations a focus on innovation and smart business practices comes to mind but even as we continue to grow, we're committed to retaining a small-company feel. At Google, we know that every employee has something important to say, and that every employee is integral to our success. And where else can a newbie unabashedly and unflinchingly skate over a corporate officer during a roller hockey game? Google has offices around the globe, from Bangalore to Zurich, but regardless of where we are, we nurture an invigorating, positive environment by hiring talented, local people who share our commitment to creating search perfection and want to have a great time doing it. Googlers thrive in small, focused teams and high-energy environments, believe in the ability of technology to change the world, and are as passionate about their lives as they are about their

work. 2. Find a Google job listing that interests you and determine whether you will have the necessary skills to interview for the job when you graduate. What skills are you lacking? How did the job posting make you feel about your chances of landing the job you want? Answers will vary from student to student. Use this question and the next to engage in discussions about job expectations, career goals, and how corporate information systems can help meet those ideas. 3. Imagine that you are preparing for a job interview at Google. Use the companys Web site to learn about the company and come up with three questions that you can ask your interviewer about the company. List your three questions along with links to the pages of the Web site that inspired your questions and descriptions of the content of those pages. Students answers will obviously vary. This could definitely be a fun question.

Section 2.3, Systems That Span the Enterprise. This section helps you tie together the information in the previous section. That is, functional areas need information from the four different types of information systems according to the type of decisions each managerial level makes. Enterprise applications: Central to this section is the need to coordinate activities, decisions, and knowledge across the firms different levels, functions, and business units. Enterprise systems use a single central data repository in order to supply all users with a consolidated view of employees, customers, suppliers, and vendors. The key to effectively using enterprise systems is to eliminate redundancy and duplication in not just the information systems but also in business processes. Supply chain management systems: Students should understand the importance of a business managing its relationships with suppliers through a free-flowing exchange of information. The concept may seem foreign to those students who think a company is a closed entity and shouldnt share data or information with anyone outside the organization. A review of a typical supply chain may be helpful: sourcing, producing, and delivering goods and services. It may also be helpful to engage the students in an exercise that lists all the entities involved in producing and delivering goods and services. Customer relationship management systems: Ask students how many times theyve quit doing business with a company because of poor customer service. Ask them how many times theyve had to supply a business with the same information simply because they talked to a different department in the company. Discuss how important it is for every functional area in a business to have the same consolidated view of its customers to avoid these kinds of problems. Knowledge management systems: Few, if any, students have probably had any experience with these systems. Point out that businesses are beginning to realize how much expertise and

experience is locked away in employees heads and that its imperative to find a way to capture that information. Moreover, its important that businesses find a way to make the expertise and experience available to a wide range of users. On the other hand, students should understand that employees are very reluctant to impart with their individual knowledge due to fear or selfpreservation. Intranets and Extranets: As Internet-based technologies continue to expand the basic platforms for disseminating information, smaller businesses that cannot afford to implement enterprise applications can turn to intranets and extranets. Your difficulty will be getting students to understand the difference between the two since they operate basically the same way. Intranets are limited to internal users; extranets are available to external users as well as internal users. Both are an inexpensive way to quickly disseminate information and data across functional lines and organizational boundaries. Collaboration and communication systems: Students have probably used most of these systems without even realizing their increasing value to companies. Your task is to relate these everincreasing common technologies to business processes and needs. Discuss how they can use cell phones, instant messaging, social networking sites, and wikis in a business setting to accomplish tasks more quickly and more easily with team members. E-business, e-commerce, and e-government: Have students give examples of their own experiences with of each of these. Students are most often confused between e-business and ecommerce. Stress that e-business refers to the use of digital technology and the Internet to execute major business processes while e-commerce is more narrowly centered on the buying and selling of goods and services over the Internet. Section 2.4. The Information Systems Function in Business. If possible, arrange a session with the schools information systems department to allow students to see first-hand how such a center works and who is responsible for running the systems. Have the IS staff and students participate in a Question and Answer forum about how typical processes are handled. Many students have a better appreciation of how these complex centers work when they actually see a center in operation rather than just reading about it. Stress to students that in all but the smallest of firms these systems are critical to the operational efficiency and sheer survival in a very competitive marketplace. Most importantly, students should understand that the IS staff is responsible for the well-being of all users in an organization. Users and the IS staff are teammates not polarizing opposites. Section 2.5. Hands-on MIS Analyzing Financial Performance: Dirt Bikes U.S.A. Software skills: Spreadsheet charts and formulas Business skills: Financial statement analysis

1. What are Dirt Bikes best- and worst-performing products? What is the proportion of domestic to international sales? Have international sales grown relative to domestic sales? 2. Are sales (revenues) growing steadily, and, if so, at what rate? What is the cost of goods sold compared to revenues? Is it increasing or decreasing? Are the firms gross and net margins increasing or decreasing? Are the firms operating expenses increasing or decreasing? Is the firm heavily in debt? Does it have assets to pay for expenses and to finance the development of new products and information systems? 3. (Optional) Use electronic presentation software to summarize your analysis of Dirt Bikess performance for management. The spreadsheet solution file for these answers is named: Ess8ch02 Running Case Solution.xls. The spreadsheet solution file for this case uses a line chart to show the 5-year trend in Dirt Bikess total sales and a stacked column chart of 5-year sales trends to show how much international and domestic sales contribute to the total. One can see from these graphs that sales dipped slightly during 2004 but that overall, sales have been growing. The portion of overall sales represented by international sales has not changed significantly, suggesting that there may be opportunities for Dirt Bikes to grow its international sales. The income statement data show a continuing rise in operating expenses and cost of goods sold and combined with declines in gross and net margins. Dirt Bikes needs some way to bring down its costs, and new information systems might help. The balance sheet shows that Dirt Bikes has sufficient assets so that it could afford to invest in new product development and new information systems. Improving Decision Making: Use a Spreadsheet to Select Suppliers Software skills: Spreadsheet date functions, data filtering, DAVERAGE functions. Business skills: Analyzing supplier performance and pricing. You run a company that manufactures aircraft components. You have many competitors who are trying to offer lower prices and better service to customers, and you are trying to determine if you can benefit from better supply chain management. At the www.prenhall.com/Laudon Web site for Chapter 2, you can find a spreadsheet file that contains a list of all of the items that your firm has ordered from its suppliers during the past three months. The fields in the spreadsheet file include vendor name, vendor identification number, purchasers order number, item identification number and item description (for each item ordered from the vendor), cost per item, number of units of the item ordered, total cost of each order, vendors accounts payable terms, promised shipping date, promised transit time, and actual arrival date for each order. Prepare a recommendation of how you can use the data in this spreadsheet database to improve your decisions about selecting suppliers. Some criteria to consider for identifying preferred suppliers include the suppliers track record for on-time deliveries, suppliers

offering the best accounts payable terms, and suppliers offering lower pricing when the same item can be provided by multiple suppliers. Use your spreadsheet software to prepare reports to support your recommendations. Although the format of the students answers will vary, a suggested solution can be found in the Microsoft Excel File named: Ess8ch02_solutionfile.xls. This exercise requires some student knowledge of spreadsheet database functions. At a minimum, students should know how to sort the database by various criteria such as item description, item cost, vendor number, vendor, name, or A/P terms. Students may need to be told that A/P Terms is expressed as the number of days that the customer has to pay the vendor for a purchase. In other words, 30 designates net 30 days. The vendor that allows customers the longest amount of time to pay for an order would, of course, offer the most favorable payment terms. Students will need to add additional columns for calculating the actual delivery time for each order and the number of days the delivery is late. The Actual Delivery Time can be calculated by subtracting the Promised Ship Date from the Arrival Date. The number of days late can be calculated by subtracting the Promised Transit Time from the Actual Delivery Time. If the number of days late is negative, it indicates that the order arrived early. These numbers are useful when trying to determine who is the vendor with the best on-time delivery track record. Students can use the DAVERAGE function to determine the average delivery time for each vendor. Students can also use one of the database functions to determine the vendor with the best accounts payable terms. To determine the vendor with the lowest prices for the same item when it is supplied by multiple vendors, students can filter the database using the item description. This filtered list can then be sorted by item cost and vendor number.

Achieving Operational Excellence: Using Internet Software to Plan Efficient Transportation Routes In this exercise, you will use the same online software tool that businesses use to map out their transportation routes and select the most efficient route. The MapQuest (www.mapquest.com) Web site includes interactive capabilities for planning a trip. The software on this site can calculate the distance between two points and provide itemized driving direction to any location. You have just started working as a dispatcher for Cross-Country Transport, a new trucking and delivery service based in Cleveland, Ohio. Your first assignment is to plan a delivery of office equipment and furniture from Elkhart, Indiana (at the corner of E. Indiana Ave. and Prairie Street) to Hagerstown, Maryland (corner of Eastern blvd. N. and Potomac Ave.). To guide your trucker, you need to know the most efficient route between the two cities. Use MapQuest to find the route that is the shortest distance between the two cities. Use MapQuest again to find the route that takes the least time. Compare the results. Which route should Cross-Country use?

Obviously the shortest amount of time is more cost effective than the shortest distance since theres only a difference of 27.05 miles. Saving the 27 miles will take 2 hours, 24 minutes longer. Encourage students to use the Advanced Tools option to quickly change back and forth between shortest time and shortest distance. Only to show how convenient these kinds of online tools are, ask students to use a regular map and calculator to draw out the two routes. (Lots of ughs!) Shortest Distance: 10 hours, 11 min; 506.56 miles Shortest time: 8 hours, 35 minutes; 533.61 miles

Review Questions
1.What are the major features of a business that are important for understanding the role of information systems? Define a business and describe the major business functions. A business is a formal organization whose aim is to produce products or provide services for a profit. That is, to sell products at a price greater than the costs of production. Every business, large or small, has these four major functions: Manufacturing and production; sales and marketing; human resources; and finance and accounting. Define business processes and describe the role they play in organizations. A business process is a logically related set of activities that define how specific business tasks are performed. Business processes are the ways in which organizations coordinate and organize work activities, information, and knowledge to produce their valuable products or services. Business processes for the manufacturing and production area include product assembling, quality checking, and producing bills of materials. For the sales and marketing area, business processes include identifying customers, making customers aware of the product, and selling the product. For finance and accounting, business processes includes paying creditors, creating financial statements, and managing cash accounts. For human resources, business processes include hiring employees, evaluating employees job performance, and enrolling employees in benefits plans. Identify and describe the different levels in a business firm and their information needs. From highest to lowest, the three levels of the organizational hierarchy are senior, middle, and operational management. Senior managers need summary information that quickly informs them about the overall performance of the firm, such as gross sales revenues, sales by product group and region, and overall profitability. Middle managers need more specific information on the results of specific functional areas and departments of the firm, such as sales contacts by the sales force, production

statistics for specific factories or product lines, employment levels and costs, and sales revenues for each month or even each day. o Knowledge workers, such as engineers, scientists, or architects, design products or services and create new knowledge for the firm. They may need access to external scientific databases or internal databases with organizational knowledge. Operational managers need transaction-level information, such as the number of parts in inventory each day or the number of hours logged on Tuesday by each employee. o Production or service workers actually produce the product and deliver the service. Production workers need access to information from production machines. Service workers need access to customer records so they can take orders and answer questions from customers. Types of information systems include transaction processing at the operational level, decisionsupport systems and management information systems at the middle level, and executive support systems at the senior level. Explain why environments are important for understanding a business. Business environments are constantly changing. New developments in technology, politics, customer preferences, and regulations happen all the time. In general, when businesses fail, it is often because they failed to respond adequately to changes in their environments. A firm must monitor changes in its environment and share information with key entities in that environment in order to stay in business. External business environmental forces include: technology and science; economy, international change, and politics. Internal business environmental forces include: customers, suppliers, stockholders, regulations, and competitors. 2.How do information systems support the major business functions: sales and marketing, manufacturing and production, finance and accounting, and human resources? List and describe the information systems serving each of the major functional areas of a business. Sales and marketing information systems help the firm identify customers for the organizations products and services, develop products and services to meet customers needs, promote the products and services, sell the products and services, and provide ongoing customer support. Specific sales and marketing information systems include order processing, pricing analysis, and sales trend forecasting. Manufacturing and production information systems provide information for planning, product development, production or service scheduling, and controlling the flow of products and services. Specific manufacturing and production information systems include machine control, production planning, and facilities location.

 Finance and accounting information systems track an organizations financial assets and the flow of funds. Financial and accounting systems include accounts receivable, budgeting, and profit planning. Human resources information systems maintain employee records; track employee skills, job performance, and training. They support planning for employee compensation, including pensions and benefits, legal and regulatory requirements, and career development. Systems include training and development, compensation analysis, and human resources planning. 3.How do systems serve the various levels of management in a business and how are these systems related? Describe the characteristics of transaction processing systems (TPS) and the role they play in a business. Transaction processing systems (TPS) are computerized systems that perform and record daily routine transactions necessary in conducting business; they serve the organizations operational level. The principal purpose of systems at this level is to answer routine questions and to track the flow of transactions through the organization. At the operational level, tasks, resources, and goals are predefined and highly structured. Managers need TPS to monitor the status of internal operations and the firms relationship with its external environment. TPS are major producers of information for other types of systems. Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firms demise and perhaps that of other firms linked to it. Describe the characteristics of MIS and explain how MIS differ from TPS and from DSS. Middle management needs systems to help with monitoring, controlling, decision-making, and administrative activities. MIS provide middle managers with reports on the organizations current performance. This information is used to monitor and control the business and predict future performance. MIS summarize and report the companys basic operations using data supplied by TPSs. The basic transaction data from TPS are compressed and usually presented in reports that are produced on a regular schedule. MIS serve managers primarily interested in weekly, monthly, and yearly results, although some MIS enable managers to drill down to see daily or hourly data if required. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. MIS systems generally are not flexible and have little analytical capability. Most MIS use simple routines, such as summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques.

Examples include sales and profit per customer and per region, relocation summary and analysis, inventory control, capital investment analysis, and even a report on students who were here in the autumn but did not to return in the spring. MIS differs from TPS in that MIS deals with summarized and compressed data from the TPS. While MIS have an internal orientation, DSS will often use data from external sources, as well as data from TPS and MIS. DSS supports what-if analyses rather than a long-term structured analysis of MIS. MIS are generally not flexible and provide little analytical capabilities. In contrast, DSS are designed for analytical purposes and are flexible. Describe the characteristics of DSS and explain how DSS differ from ESS. Decision-support systems (DSS) support nonroutine decision-making for middle managers. DSS provide sophisticated analytical models and data analysis tools to support semistructured and unstructured decision-making activities. DSS use data from TPS, MIS, and external sources, in condensed form, allowing decision makers to perform what-if analysis. DSS focus on problems that are unique and rapidly changing; procedures for arriving at a solution may not be fully predefined. DSS are designed so that users can work with them directly; these systems include interactive, user-friendly software. Executive support systems help senior managers address strategic issues and long-term trends, both in the firm and in the external environment. ESS address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS provide a generalized computing and communications capacity that can be applied to a changing array of problems. ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from information from internal MIS and DSS. ESS are designed for ease-of-use and rely heavily on graphical presentations of data. Describe the relationship between TPS, MIS, DSS, and ESS. Ideally, all four systems use the same basic data. TPS are a major source of internal data for other systems, especially MIS and DSS. Internal data from TPS and MIS combine with external data to provide a source of analysis for DSS and ESS. All four systems are designed to give managers of all organizational levels and complete, consolidated view of the firm. 4.How do enterprise applications, collaboration and communication systems, and intranets improve organizational performance? Explain how enterprise applications improve organizational performance.

An organization operates in an ever-increasing competitive and global environment. The successful organization focuses on the efficient execution of its processes, customer service, and speed to market. Enterprise applications provide an organization with a consolidated view of its operations across different functions, levels, and business units. Enterprise applications allow an organization to efficiently exchange information among its functional areas, business units, suppliers, and customers. Define enterprise systems and describe how they change the way an organization works? Enterprise systems integrate the key business processes of an organization into a single central data repository. This makes it possible for information that was previously fragmented in different systems to be shared across the firm and for different parts of the business to work more closely together. This changes the work flow of an organization: Information flows seamlessly throughout an organization, improving coordination, efficiency, and decision making. Gives companies the flexibility to respond rapidly to customer requests while producing and stocking only that inventory necessary to fulfill existing orders. Increases customer satisfaction by improving product shipments, minimizing costs, and improving a firms performance. Improves decision making by improving the quality of information for all levels of management. That leads to better analyses of overall business performance, more accurate sales and production forecasts, and higher profitability. Define supply chain management systems and describe how they benefit businesses. In short, supply chain management systems help businesses better manage relationships with their suppliers. Objective of SCM: get the right amount of products from the companies source to their point of consumption with the least amount of time and with the lowest cost. SCM provide information to help suppliers, purchasing firms, distributors, and logistics companies share information about orders, production, inventory levels, and delivery of products and services so that they can source, produce, and deliver goods and services efficiently. SCM helps organizations achieve great efficiencies by automating parts of these processes or by helping organizations rethink and streamline these processes. SCM is important to a business because through its efficiency it can coordinate, schedule, and control the delivery of products and services to customers. Business benefits include: (Table 2.5) Decide when and what to produce, store, and move Rapidly communicate orders Track the status of orders Check inventory availability and monitor inventory levels Reduce inventory, transportation, and warehousing costs Track shipments

 Plan production based on actual customer demand Rapidly communicate changes in product design Define customer relationship management systems and describe how they benefit businesses. Customer relationship management systems enable a business to better manage its relationships with existing and potential customers. With the growth of the Web, potential customers can easily comparison shop for retail and wholesale goods and even raw materials, so treating customers better has become very important. Business benefits include: CRM systems provide information to coordinate all the business processes that deal with customers in sales, marketing, and service to optimize revenue, customer satisfaction, and customer retention. This information helps firms identify, attract, and retain the most profitable customers; provide better service to existing customers; and increase sales. CRM systems consolidate customer data from multiple sources and provide analytical tools for answering questions such as: What is the value of a particular customer to the firm over his/her lifetime? CRM tools integrate a businesss customer-related processes and consolidate customer information from multiple communication channels, giving the customer a consolidated view of the company. Detailed and accurate knowledge of customers and their preferences helps firms increase the effectiveness of their marketing campaigns and provide higher-quality customer service and support. Describe the role of knowledge management systems in the enterprise. Knowledge management systems enable organizations to better manage processes for capturing and applying knowledge and expertise. These systems collect all relevant knowledge and experience in the firm, and make it available wherever and whenever it is needed to improve business processes and management decisions. They also link the firm to external sources of knowledge. KMS support processes for acquiring, storing, distributing, and applying knowledge, as well as processes for creating new knowledge and integrating it into the organization. KMS include enterprise-wide systems for managing and distributing documents, graphics, and other digital knowledge objects; systems for creating corporate knowledge directories of employees with special areas of expertise; office systems for distributing knowledge and information; and knowledge work systems to facilitate knowledge creation. KMS use intelligent techniques that codify knowledge and experience for use by other members of the organization and tools for knowledge discovery that recognize patterns and important relationships in large pools of data. List and describe the various types of collaboration and communication systems.

In an increasingly globalized economy, more jobs are becoming interaction jobs. These kinds of jobs require face-to-face interaction with other employees, managers, vendors, and customers. They require systems that allow the interaction workers to communicate, collaborate and share ides. Enterprise-wide information systems businesses can use to for interaction jobs include: Internet-based collaboration environments like Lotus Notes, Groove, and WebEx provide online storage space for documents, team communications (separated from email), calendars, and audio-visual tools members can use to meet face-to-face. Email and Instant Messaging (IM) are still reliable methods for communicating whenever and wherever around the globe. Cell phones and wireless handhelds give professionals and other employees an easy way to talk with one another, with customers and vendors, and with managers. These devices have grown exponentially in sheer numbers and in applications available. Social networking is no longer just social. Businesses are realizing the value of providing easy ways for interaction workers to share ideas and collaborate with each other. Wikis are ideal tools for storing and sharing company knowledge and insights. They are often easier to use and cheaper than more proprietary knowledge management systems. They also provide a more dynamic and current repository of knowledge than other systems. Explain how intranets and extranets help firms integrate information and business processes. Because intranets and extranets share the same technology and software platforms as the Internet, they are easy and inexpensive ways for companies to increase integration and expedite the flow of information within the company (intranets alone) and with customers and suppliers (extranets). They provide ways to distribute information and store corporate policies, programs, and data. Both types of nets can be customized by users and provide a single point of access to information from several different systems. Businesses can connect the nets to transaction processing systems easily and quickly. Interfaces between the nets and TPS, MIS, DSS, and ESS systems provide input and output for users.
5.What is the role of the information systems function in a business?

Describe how the information systems function supports a business. The information systems departments is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firms IT infrastructure.

Compare the roles played by programmers, systems analysts, information systems managers, the chief information officer (CIO), chief security officer (CSO), chief knowledge officer (CKO) and chief privacy officer (CPO). Programmers are highly trained technical specialists who write the software instructions for computers. Systems analysts constitute the principal liaisons between the information systems groups and the rest of the organization. The systems analysts job is to translate business problems and requirements into information requirements and systems. Information systems managers lead teams of programmers and analysts, project managers, physical facility managers, telecommunications mangers, or database specialists. Chief information officer (CIO) is a senior manager who oversees the use of information technology in the firm. Chief security officer (CSO) is responsible for information systems security in the firm and has the principle responsibility for enforcing the firms information security policy. The CSO is responsible for educating and training users and IS specialists about security, keeping managmeent aware of security threats and breakdowns, and maintaining the tools and policies chosen to implement security. Chief knowledge officer (CKO) helps design programs and systems to find new sources of knowledge or to make better use of existing knowledge in organizational and management processes. Chief privacy officer (CPO) ensures an organization complies with existing data privacy laws.

Discussion Questions
1. How could information systems be used to support the order fulfillment process illustrated in Figure 2-2? What are the most important pieces of information these systems should capture? Explain your answer. Todays systems are built to electronically coordinate all the business functions in an enterprise. The sales function begins the process by completing a sales order, electronically inputting the data into the system. The sales system updates daily sales totals and decreases inventory. The accounting department electronically receives the order and runs a credit check. If the credit is not approved, system sends an exception notification to an accounting specialist and the sales person. If credit is approved, the order is sent to the manufacturing and production system and product assembly begins. When the product is completed, electronic shipping documents are prepared and logistics is notified. When the product is shipped, electronic notifications are sent to Sales, Manufacturing and Production, Accounting, and the customer. The system electronically bills the customer. 2. Adopting an enterprise application is a key business decision as well as a technology decision. Do you agree? Why or why not? Who should make this decision?

Adopting an enterprise application is certainly a key business decision for companies today. In order to survive and remain competitive, firms have little choice but to adopt these systems. Along with the software to accomplish key objectives, firms require appropriate technology platforms. A decision of this magnitude generally falls to senior/strategic managers who make strategic decisions to ensure the long-term survival of the company. Enterprise applications, such as enterprise systems, supply chain management systems, customer relationship management systems, and knowledge management systems, are designed to support organization-wide process coordination and integration to help an organization operate efficiently. They span multiple functions and business processes and may be tied to the business processes of other organizations. Enterprise systems integrate the key internal business processes of a firm into a single software system so information flows throughout the organization, thereby improving coordination, efficiency, and decision making. Supply chain management systems help a firm manage its relationship with suppliers to optimize the planning, sourcing, manufacturing, and delivery of products and services. Customer relationship management systems use information systems to coordinate all of the business processes surrounding a firms interactions with its customers, optimizing firm revenues and improving customer satisfaction. Knowledge management systems help firms optimize the processes of creating, sharing, and distributing knowledge which improves business processes and management decisions. Intranets (internal users only) and extranets (suppliers, customers, and internal users) use Internet technology and standards to assemble information from various systems and present it to the user in a Web page format.

Video Case Questions

You will find a video case illustrating some of the concepts in this chapter on the Laudon Web site at www.prenhall.com/laudon along with questions to help you analyze the case.

Teamwork: Describing Management Decisions and Systems

With a group of three or four other students, find a description of a senior manager of a corporation in Business Week, Forbes, Fortune, or other business magazines. Write a description of the kinds of decisions this manager has to make and the kind of information that manager would need for those decisions. Suggest how information systems could supply this information. If possible, use presentation software to present your findings to the class. As students will select different companies, group answers will vary. General comments for facilitating project preparation are provided below.

Clearly, students would not list TPS as a system that would be used by a senior manager. It would be acceptable if they listed a senior manager as one holding a position within the Management Level Systems or the Strategic Level Systems. That would depend on their interpretation of the term senior manager. What should be identifable in the answer is that the Executive Senior Manager is mainly focused on the long-term direction and viability of the company. A few things that students might mention would be that a senior executive would be concentrating on issues such as plant expansion or closures, foreign market opportunities, or new markets at home, changes in market trends and interest rates, overall economic outlook, changes in stocks prices, threats or opportunities that may be taking place in the market, and political changes.

Business Problem-Solving Case: JetBlue Hits Turbulence

1. What types of information systems and business functions are described in this case? o o o

Transaction processing system: ticket sales, baggage handling reservation system Management information system: system for managing planes, crews, and scheduling Decision support system: no evidence of one Executive support system: no evidence of one Communication system: evidence of one but it proved to be inadequate

There wasnt any evidence of integrated systems like enterprise applications, customer relationship management, or knowledge management systems. 2. What is JetBlues business model? How do its information systems support this business model? JetBlues business model is to provide a luxurious flying experience at a very low price. Simplicity was JetBlues mantra. It used a very lean, non-union workforce, flew only one type of plane from one vendor allowing it to standardize flight operations and maintenance procedures, and streamlined its business processes to a bare-bones minimum. Its information systems were also simplified to a single vendor that provided a technology framework in which the supporting staff could develop systems in-house rather than use outsourcing or consultants. JetBlue spent only 1.5 percent of its revenue on information technology, as opposed to the 5 percent spent by competitors. 3. What was the problem experienced by JetBlue in this case? What people, organization, and technology factors were responsible for the problem? First, its obvious that only spending 1.5 percent of revenue versus 5 percent like its competitors was a big mistake. Its easy to reduce spending if the company doesnt implement systems it needs in time of crisis. The real problem JetBlue experienced wasnt with the weatherthat was only a contributing factor. Here is a list of the real problems:

 Transaction processing systems were not scalable. The TPS JetBlue used was good for normal traffic and normal business conditions. However, the reservation system was not adequate to handle the increased number of customers using it when flights were cancelled. No management information system was available to manage the crews. No adequate communication system was available for crews to call and get new assignments. Crews were stranded for days without any way for the company to contact them. The department responsible for allocating pilots and crews to flights was too small to handle the extra workload created during the crises. There wasnt any system in place to manage the stranded, lost, or unclaimed baggage. In addition to an inadequate reservation system, the company did not employ enough people to staff its phones to handle the surge in telephone calls from customers. The Web site was not scalable; people that called the company were directed to the Web site. Unfortunately, it couldnt handle the surge either. The lack of a decision support system prevented JetBlue from managing its crew assignments. 4. Evaluate JetBlues response to the crisis. What solutions did the airline come up with? How were these solutions implemented? Do you think that JetBlue found the correct solutions and implemented them correctly? What other solutions can you think of that JetBlue hasnt tried? Response: JetBlues CEO David G. Neelemans initial response and visibility was commendable in that he didnt try to hide the problem and accepted responsibility and accountability. He admitted management wasnt strong enough and its systems were inadequate to handle the crisis. Solutions: The company purchased new software to improve communications with pilots and crew members. It trained 100 employees from its corporate office to serve as backups for departments that didnt have enough staffing. It created a customer bill of rights to enforce standards for customer treatment and airline behavior. It changed its operational philosophy to accommodate inclement weather situations. Recommendations: Further increase the number and type of information systems in the company: decision support systems for crew management; transaction processing system for baggage; more scalable Web site for reservations and customer communications. 5. How well is JetBlue prepared for the future? Are the problems described in this case likely to be repeated? Which of Jetblues business processes are most vulnerable to breakdowns? How much will a customer bill of rights help? Its very likely JetBlue could experience similar problems in the next crisis unless it ramps up

its information systems. The company prided itself on a lean-and-mean, simplified information technology infrastructure. Yet, its the very lack of IT infrastructure that caused many of its problems. Theres a reason why its competitors are spending 3.5 percent more of their revenue on information systemstheyre necessary. Except perhaps crew management, most of the same problems are likely to re-occur and are most vulnerable to breakdown: reservations, baggage, plane maintenance, and communications. The new customer bill of rights is a step in the right direction as far as sales and marketing and customer relations are concerned. But it wont mean much if the company doesnt create the proper infrastructure to support the policy in the next crisis.

Chapter Summary
Section2.1: Components of a Business A business is a formal complex organization that seeks to produce products or services for a profit. Businesses have specialized functions, such as finance and accounting, human resources, manufacturing and production, and sales and marketing. Business organizations are arranged hierarchically in levels composed of senior management, middle management, and operational management. A business process is a logically related set of activities that define how specific business tasks are performed, and a business can be viewed as a collection of business processes. Business firms must deal with their environment. A firm must respond to political shifts, respond to changes in the overall economy, keep track of new technologies, and respond to changes in the global business environment. In its immediate task environment, a firm needs to track and share information with suppliers, customers, stockholders, regulators, and logistic partners. Section 2.2: Types of Business Information Systems At each level of the organization, information systems support the major functional areas of the business. Sales and marketing systems help the firm identify customers for the firms products or services, develop products and services to meet customers needs, promote the products and services, sell the products and services, and provide ongoing customer support. Manufacturing and production systems deal with the planning, development, and production of products or services, and control the flow of production. Finance and accounting systems keep track of the firms financial assets and fund flows. Human resources systems maintain employee records; track employee skills, job performance, and training; and support planning for employee compensation and career development. There are four major types of information systems in contemporary organizations serving operational, middle, and senior management. Systems serving operational management are: (1) transaction processing systems (TPS), such as payroll or order processing, that track the flow of the daily routine transactions necessary to conduct business. (2) MIS and (3) DSS provide middle management with reports and access to the organizations current performance and historical records. Most MIS reports condense information from TPS and are not highly analytical. DSS support management decisions when these decisions are unique, rapidly changing, and not specified easily in advance. They have more advanced analytical models and data analysis capabilities than MIS and often draw on information from external as well as internal sources. (4) ESS support senior management by providing data of greatest importance to senior management decision makers, often in the form of graphs and charts delivered via portals. They have limited

analytical capabilities but can draw on sophisticated graphics software and many sources of internal and external information. Section 2.3: Systems That Span the Enterprise Enterprise applications, such as enterprise systems, supply chain management systems, customer relationship management systems, and knowledge management systems are designed to support organization-wide process coordination and integration so that the organization can operate efficiently. They span multiple functions and business processes and may be tied to the business processes of other organizations. Enterprise systems integrate the key internal business processes of a firm into a single software system so that information can flow throughout the organization, improve coordination, efficiency, and decision making. Supply chain management systems help the firm manage its relationship with suppliers to optimize the planning, sourcing, manufacturing, and delivery of products and services. Customer relationship management uses information systems to coordinate all of the business processes surrounding the firms interactions with its customers to optimize firm revenue and customer satisfaction. Knowledge management systems enable firms to optimize the creation, sharing, and distribution of knowledge to improve business processes and management decisions. Intranets and extranets use Internet technology and standards to assemble information from various systems and present it to the user in a Web page format. Extranets make portions of private corporate intranets available to outsiders. Section 2.4: The Information Systems Function in Business The information systems department is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firms IT infrastructure. The information systems department consists of specialists, such as programmers, systems analysts, project leaders, and information systems managers, and is often headed by a CIO. There are alternative ways of organizing the IT function within a firm. A very small company will not have a formal information systems group. Large companies will have a separate information systems department, which may be organized along several different lines, depending on the nature and interests of the firm. Each functional area of the business may have its own information systems department, overseen by a corporate CIO. The information systems function may be run as a separate department similar to the other functional departments. A third arrangement found in very large firms with multiple divisions and product lines is to have an information systems department for each division reporting to a high-level central information systems group and CIO.