CSE 50 Winter 2020 CASE STUDY ASSIGNMENT
Case Study 4: Fintech
Read the scenario below. Then read the steps described to deal with the task
assigned. Now read and analyze the “Fintech: Choosing a Cloud Services Provider”
case study in your class Reader in the context of this scenario and task.
Submit your report in format on the class Canvas website by no later than
11:59:59 pm on Tuesday, February 25, 2020.
Scenario:
You are a well-regarded, fast rising Project Manager in the Fintech IT department,
reporting directly to Joe Kwo, the CIO. Joe has asked you to lead the team evaluating
Fintech’s first cloud based project, which is described in the case study. The project
requires you to evaluate the three candidate cloud providers identified by your
team and then recommend to Joe which cloud provider will be the optimal fit for
Fintech and its customers. Joe has also asked that you summarize and justify your
findings in a report that he can distribute to Fintech’s executive committee for
approval of the project.
1) Analysis:
Start by doing an analysis of the project. You may use any resources available to you
(library, worldwide web, fellow classmates, textbooks, discussions with instructor
and/or TAs; discussions with experts in the field). This analysis is your working
document recording the research you have done for the Report. It can include white
board images or hand drawn diagrams (but please ensure that they are legible!) and
is the basis for any research you did for this case study. Your Analysis should be
attached to your Report as an appendix:
a. In 150 words or less, summarize the use case that your team is
applying to evaluate performance of each cloud provider. If you use
acronyms (e.g., ODBC, SSIS) provide a two sentence definition for each
acronym so that Fintech executives who are not experts in IT can
understand the meaning of the acronym (this may require you to do
some research)
b. To understand the differences between a Fintech datacenter
implementation of the proposed use case and the cloud
implementation of the use case, create a network diagram for each
system.
c. From b, list the hardware that a cloud implementation of the use case
would displace vs. a datacenter implementation.
d. List 4 additional benefits (beside the hardware savings identified in c)
that Fintech would gain by using a cloud provider rather than building
their own datacenter to support the use case.
CSE 50 Winter 2020 CASE STUDY ASSIGNMENT
e. Identify and list the top five requirements that a cloud provider has to
meet to be suitable for Fintech’s planned migration to the cloud; rank
these requirements (most critical requirement is ranked 1); justify
your requirements and their ranking by quoting the case study
f. Create a table with each provider as a column in the table and the five
requirements as rows. Score each provider on a scale of 1-5 for each
requirement (5: meets requirement fully; 1: cannot support the
requirement); include a TOTAL row containing the sum of scores in
each column. The provider with the highest score is most likely the
best provider.
2) Report for Joe Kwo:
Use your Analysis from Step 1 to write a formal Report for Joe Kwo that he can
distribute to the Fintech executive committee that reviews and approves capital
projects. Your report will be graded using the 6-element grading rubric presented in
class. You may refer to the Appendix in the text of your report whenever
appropriate (no need to repeat material in the Appendix in the text of your report).
Your report must be entirely your own work and contain at least the following:
1. Background:
Explain in 150 words or less why migrating to the cloud will be a
strategically sound decision for Fintech, using the results from
steps b, c and d of your Analysis to help justify your views.
2. Use Case Description:
Referring to your description of the Fintech use case used to
evaluate cloud providers in part a of your Analysis, describe in 150
words or less why this use case is appropriate for Fintech to
evaluate performance of cloud providers.
3. Fintech Requirements:
Briefly describe the 5 requirements you identified in part e of your
Analysis in 1 or 2 sentences each. (A table format would work well
for this)
4. Your Process:
In 150 words or less describe the criteria you used to score the
cloud providers in step f of your Analysis
5. Your Recommendation:
Identify the cloud provider that you conclude is the best fit for
Fintech’s cloud migration plans. In 150 words or less, explain why
you recommend this provider. Use results form step f of your
Analysis to help your explanation.
6. Appendix:
Add your Analysis from Step 1 as the Appendix to your report.
7. References:
Include all references that you used in researching this Case Study.
MANAGEMENT
INFORMATION SYSTEMS
MANAGING THE DIGITAL FIRM
SIXTEENTH EDITION
Kenneth C. Laudon
New York University
Jane P. Laudon
Azimuth Information Systems
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Library of Congress Cataloging-in-Publication Data
Names: Laudon, Kenneth C., author. | Laudon, Jane P. (Jane Price),
author.
Title: Management information systems: managing the digital firm / Kenneth
C. Laudon, New York University, Jane P. Laudon, Azimuth Information
Systems.
Description: Sixteenth edition. | New York, NY: Pearson, [2020] | Includes
bibliographical references and index.
Identifiers: LCCN 2018053013| ISBN 9780135191798 | ISBN 0135191793
Subjects: LCSH: Management information systems.
Classification: LCC T58.6 .L376 2020 | DDC 658.4/038011–dc23
LC record available at https://lccn.loc.gov/2018053013
ISBN 10: 0-13-519179-3
ISBN 13: 978-0-13-519179-8
http://www.pearsoned.com/permissions
https://lccn.loc.gov/2018053013
iii
ABOUT THE AUTHORS
Kenneth C. Laudon is a Professor of Information Systems at New York University’s Stern
School of Business. He holds a B.A. in Economics from Stanford and a Ph.D. from Columbia
University. He has authored 12 books dealing with electronic commerce, information sys-
tems, organizations, and society. Professor Laudon has also written more than 40 articles
concerned with the social, organizational, and management impacts of information systems,
privacy, ethics, and multimedia technology.
Professor Laudon’s current research is on the planning and management of large-scale in-
formation systems and multimedia information technology. He has received grants from the
National Science Foundation to study the evolution of national information systems at the
Social Security Administration, the IRS, and the FBI. Ken’s research focuses on enterprise
system implementation, computer-related organizational and occupational changes in large
organizations, changes in management ideology, changes in public policy, and understand-
ing productivity change in the knowledge sector.
Ken Laudon has testified as an expert before the United States Congress. He has been a
researcher and consultant to the Office of Technology Assessment (United States Congress),
the Department of Homeland Security, and the Office of the President, several executive
branch agencies, and Congressional Committees. Professor Laudon also acts as an in-house
educator for several consulting firms and as a
consultant on systems planning and strategy
to several Fortune 500 firms.
At NYU’s Stern School of Business, Ken
Laudon teaches courses on Managing the
Digital Firm, Information Technology and
Corporate Strategy, Professional Responsibility
(Ethics), and Electronic Commerce and Digital
Markets. Ken Laudon’s hobby is sailing.
Jane Price Laudon is a management con-
sultant in the information systems area and
the author of seven books. Her special inter-
ests include systems analysis, data manage-
ment, MIS auditing, software evaluation, and
teaching business professionals how to design
and use information systems.
Jane received her Ph.D. from Columbia University, her M.A. from Harvard University,
and her B.A. from Barnard College. She has taught at Columbia University and the New York
University Graduate School of Business. She maintains a lifelong interest in the languages
and civilizations of East Asia.
The Laudons have two daughters, Erica and Elisabeth, to whom this book is dedicated.
iv
BRIEF CONTENTS
PART ONE Organizations, Management, and the Networked
Enterprise 1
Chapter 1 Information Systems in Global Business Today 2
Chapter 2 Global E-business and Collaboration 40
Chapter 3 Information Systems, Organizations, and Strategy 78
Chapter 4 Ethical and Social Issues in Information Systems 120
PART TWO Information Technology Infrastructure 161
Chapter 5 IT Infrastructure and Emerging Technologies 162
Chapter 6 Foundations of Business Intelligence: Databases and Information
Management 210
Chapter 7 Telecommunications, the Internet, and Wireless Technology 250
Chapter 8 Securing Information Systems 294
PART THREE Key System Applications for the Digital Age 337
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise
Applications 338
Chapter 10 E-commerce: Digital Markets, Digital Goods 372
Chapter 11 Managing Knowledge and Artificial Intelligence 418
Chapter 12 Enhancing Decision Making 458
PART FOUR Building and Managing Systems 491
Chapter 13 Building Information Systems 492
Chapter 14 Managing Projects 532
Chapter 15 Managing Global Systems 564
Glossary G-1
Indexes I-1
v
COMPLETE CONTENTS
PART ONE Organizations, Management, and the Networked
Enterprise 1
Chapter 1 Information Systems in Global Business Today 2
Opening Case: PCL Construction: The New Digital Firm 3
1-1 How are information systems transforming business, and why are they
so essential for running and managing a business today? 5
How Information Systems Are Transforming Business 6 • What’s New in
Management Information Systems? 7
Interactive Session | Management Can You Run the Company
with Your iPhone? 9
Globalization Challenges and Opportunities: A Flattened World 11 • The
Emerging Digital Firm 12 • Strategic Business Objectives of Information
Systems 13
1-2 What is an information system? How does it work? What are its
management, organization, and technology components? Why
are complementary assets essential for ensuring that information
systems provide genuine value for organizations? 16
What Is an Information System? 16 • Dimensions of Information
Systems 18
Interactive Session | Technology UPS Competes Globally with Information
Technology 23
It Isn’t Just Technology: A Business Perspective on Information
Systems 24 • Complementary Assets: Organizational Capital and
the Right Business Model 26
1-3 What academic disciplines are used to study information systems,
and how does each contribute to an understanding of information
systems? 28
Technical Approach 28 • Behavioral Approach 29 • Approach of This
Text: Sociotechnical Systems 29
1-4 How will MIS help my career? 30
The Company 30 • Position Description 31 • Job Requirements 31 •
Interview Questions 31 • Author Tips 31
Review Summary 32 • Key Terms 33 • Review Questions 33 •
Discussion Questions 34
Hands-On MIS Projects 34
Collaboration and Teamwork Project 35
Case Study: Did Information Systems Cause Deutsche Bank to Stumble? 36
References: 39
vi Contents
Chapter 2 Global E-business and Collaboration 40
Opening Case: Enterprise Social Networking Helps Sanofi Pasteur
Innovate and Improve Quality 41
2-1 What are business processes? How are they related to information
systems? 43
Business Processes 43 • How Information Technology Improves Business
Processes 45
2-2 How do systems serve the different management groups in a business,
and how do systems that link the enterprise improve organizational
performance? 45
Systems for Different Management Groups 46 • Systems for Linking the
Enterprise 51
Interactive Session | Organizations Data Changes How NFL Teams Play the
Game and How Fans See It 52
• E-business, E-commerce, and E-government 55
2-3 Why are systems for collaboration and social business so important,
and what technologies do they use? 56
What Is Collaboration? 56 • What Is Social Business? 57 • Business
Benefits of Collaboration and Social Business 58 • Building a Collaborative
Culture and Business Processes 60 • Tools and Technologies for Collaboration
and Social Business 60
Interactive Session | Technology Videoconferencing: Something
for Everyone 62
2-4 What is the role of the information systems function in a business? 66
The Information Systems Department 66 • Organizing the Information
Systems Function 68
2-5 How will MIS help my career? 68
The Company 68 • Position Description 68 • Job Requirements 69 •
Interview Questions 69 • Author Tips 69
Review Summary 70 • Key Terms 71 • Review Questions 71 •
Discussion Questions 72
Hands-On MIS Projects 72
Collaboration and Teamwork Project 73
Case Study: Should Companies Embrace Social Business? 74
References: 77
Chapter 3 Information Systems, Organizations, and Strategy 78
Opening Case: Technology Helps Starbucks Find Better Ways to Compete 79
3-1 Which features of organizations do managers need to know about to
build and use information systems successfully? 81
What Is an Organization? 81 • Features of Organizations 84
3-2 What is the impact of information systems on organizations? 89
Economic Impacts 89 • Organizational and Behavioral Impacts 90 •
The Internet and Organizations 93 • Implications for the Design and
Understanding of Information Systems 93
Contents vii
3-3 How do Porter’s competitive forces model, the value chain model,
synergies, core competencies, and network economics help companies
develop competitive strategies using information systems? 94
Porter’s Competitive Forces Model 94 • Information System Strategies for
Dealing with Competitive Forces 96
Interactive Session | Organizations Digital Technology Helps Crayola Brighten
Its Brand 98
The Internet’s Impact on Competitive Advantage 100 • The Business Value
Chain Model 101
Interactive Session | Technology Smart Products—Coming Your Way 102
Synergies, Core Competencies, and Network-Based Strategies 105
3-4 What are the challenges posed by strategic information systems, and
how should they be addressed? 109
Sustaining Competitive Advantage 109 • Aligning IT with Business
Objectives 109 • Managing Strategic Transitions 110
3-5 How will MIS help my career? 111
The Company 111 • Position Description 111 • Job Requirements 111 •
Interview Questions 112 • Author Tips 112
Review Summary 112 • Key Terms 113 • Review Questions 113 •
Discussion Questions 114
Hands-On MIS Projects 114
Collaboration and Teamwork Project 115
Case Study: Grocery Wars 116
References: 118
Chapter 4 Ethical and Social Issues in Information Systems 120
Opening Case: Are Cars Becoming Big Brother on Wheels? 121
4-1 What ethical, social, and political issues are raised by information
systems? 123
A Model for Thinking about Ethical, Social, and Political Issues 124 • Five
Moral Dimensions of the Information Age 126 • Key Technology Trends that
Raise Ethical Issues 126
4-2 What specific principles for conduct can be used to guide ethical
decisions? 129
Basic Concepts: Responsibility, Accountability, and Liability 129 • Ethical
Analysis 129 • Candidate Ethical Principles 130 • Professional Codes of
Conduct 131 • Some Real-World Ethical Dilemmas 131
4-3 Why do contemporary information systems technology and the Internet
pose challenges to the protection of individual privacy and intellectual
property? 131
Information Rights: Privacy and Freedom in the Internet Age 132 • Property
Rights: Intellectual Property 138
4-4 How have information systems affected laws for establishing account-
ability and liability and the quality of everyday life? 142
Computer-Related Liability Problems 142 • System Quality: Data Quality and
System Errors 143 • Quality of Life: Equity, Access, and Boundaries 144
viii Contents
Interactive Session | Organizations Will Automation Kill Jobs? 148
Health Risks: RSI, CVS, and Cognitive Decline 149
Interactive Session | Technology How Harmful Are Smartphones? 151
4-5 How will MIS help my career? 152
The Company 152 • Position Description 152 • Job Requirements 152 •
Interview Questions 153 • Author Tips 153
Review Summary 153 • Key Terms 154 • Review Questions 154 •
Discussion Questions 155
Hands-On MIS Projects 155
Collaboration and Teamwork Project 156
Case Study: Facebook Privacy: Your Life for Sale 157
References: 160
PART TWO Information Technology Infrastructure 161
Chapter 5 IT Infrastructure and Emerging Technologies 162
Opening Case: PeroxyChem’s Cloud Computing Formula for
Success 163
5-1 What is IT infrastructure, and what are the stages and drivers of
IT infrastructure evolution? 165
Defining IT Infrastructure 165 • Evolution of IT Infrastructure 167 •
Technology Drivers of Infrastructure Evolution 171
5-2 What are the components of IT infrastructure? 175
Computer Hardware Platforms 176 • Operating System Platforms 178 •
Enterprise Software Applications 178 • Data Management and
Storage 179 • Networking/Telecommunications Platforms 179 •
Internet Platforms 179 • Consulting and System Integration Services 180
5-3 What are the current trends in computer hardware platforms? 180
The Mobile Digital Platform 180 • Consumerization of IT and BYOD 180
Interactive Session | Technology Is Business Ready for Wearable
Computers? 181
Quantum Computing 183 • Virtualization 183 • Cloud Computing 183
Interactive Session | Organizations Look to the Cloud 186
Edge Computing 188 • Green Computing 189 • High-Performance and
Power-Saving Processors 190
5-4 What are the current computer software platforms and trends? 190
Linux and Open Source Software 190 • Software for the Web: Java, HTML,
and HTML5 191 • Web Services and Service-Oriented Architecture 192 •
Software Outsourcing and Cloud Services 193
5-5 What are the challenges of managing IT infrastructure and
management solutions? 196
Dealing with Platform and Infrastructure Change 196 • Management and
Governance 197 • Making Wise Infrastructure Investments 197
Contents ix
5-6 How will MIS help my career? 200
The Company 200 • Position Description 200 • Job Requirements 200 •
Interview Questions 201 • Author Tips 201
Review Summary 201 • Key Terms 202 • Review Questions 203 •
Discussion Questions 204
Hands-On MIS Projects 204
Collaboration and Teamwork Project 205
Case Study: Is BYOD Good for Business? 206
References: 209
Chapter 6 Foundations of Business Intelligence: Databases and
Information Management 210
Opening Case: Data Management Helps the Charlotte Hornets Learn More
About Their Fans 211
6-1 What are the problems of managing data resources in a traditional file
environment? 213
File Organization Terms and Concepts 213 • Problems with the Traditional
File Environment 214
6-2 What are the major capabilities of database management systems
(DBMS), and why is a relational DBMS so powerful? 216
Database Management Systems 217 • Capabilities of Database Management
Systems 219 • Designing Databases 222 • Non-relational Databases,
Cloud Databases, and Blockchain 224
6-3 What are the principal tools and technologies for accessing
information from databases to improve business performance
and decision making? 227
The Challenge of Big Data 227 • Business Intelligence Infrastructure 228
Interactive Session | Technology Kraft Heinz Finds a New Recipe for
Analyzing Its Data 230
Analytical Tools: Relationships, Patterns, Trends 231 • Databases and
the Web 235
6-4 Why are information policy, data administration, and data quality
assurance essential for managing the firm’s data resources? 236
Establishing an Information Policy 236 • Ensuring Data Quality 237
Interactive Session | Organizations Databases Where the Data Aren’t
There 239
6-5 How will MIS help my career? 240
The Company 240 • Position Description 240 • Job Requirements 241 •
Interview Questions 241 • Author Tips 241
Review Summary 241 • Key Terms 242 • Review Questions 243 •
Discussion Questions 244
Hands-On MIS Projects 244
Collaboration and Teamwork Project 245
Case Study: How Reliable Is Big Data? 246
References: 248
x Contents
Chapter 7 Telecommunications, the Internet, and Wireless
Technology 250
Opening Case: Tour de France Wins with Wireless Technology 251
7-1 What are the principal components of telecommunications networks
and key networking technologies? 253
Networking and Communication Trends 253 • What Is a Computer
Network? 254 • Key Digital Networking Technologies 256
7-2 What are the different types of networks? 259
Signals: Digital Versus Analog 259 • Types of Networks 259 • Transmission
Media and Transmission Speed 261
7-3 How do the Internet and Internet technology work, and how do they
support communication and e-business? 261
What Is the Internet? 261 • Internet Addressing and Architecture 262
Interactive Session | Organizations Net Neutrality: The Battle Rages On 265
Internet Services and Communication Tools 267
Interactive Session | Management Monitoring Employees on Networks:
Unethical or Good Business? 270
The Web 271
7-4 What are the principal technologies and standards for wireless
networking, communication, and Internet access? 279
Cellular Systems 279 • Wireless Computer Networks and Internet Access 280 •
RFID and Wireless Sensor Networks 282
7-5 How will MIS help my career? 285
The Company 285 • Position Description 285 • Job Requirements 285 •
Interview Questions 286 • Author Tips 286
Review Summary 286 • Key Terms 287 • Review Questions 288 •
Discussion Questions 288
Hands-On MIS Projects 288
Collaboration and Teamwork Project 289
Case Study: Google, Apple, and Facebook Battle for Your Internet
Experience 290
References: 293
Chapter 8 Securing Information Systems 294
Opening Case: Hackers Target the U.S. Presidential Election: What
Happened? 295
8-1 Why are information systems vulnerable to destruction, error, and
abuse? 297
Why Systems are Vulnerable 298 • Malicious Software: Viruses, Worms, Trojan
Horses, and Spyware 299 • Hackers and Computer Crime 302 • Internal
Threats: Employees 306 • Software Vulnerability 307
8-2 What is the business value of security and control? 308
Legal and Regulatory Requirements for Electronic Records Management 308
Interactive Session | Technology Meltdown and Spectre Haunt the World’s
Computers 309
Electronic Evidence and Computer Forensics 311
Contents xi
8-3 What are the components of an organizational framework for security
and control? 312
Information Systems Controls 312 • Risk Assessment 313 • Security
Policy 314 • Disaster Recovery Planning and Business Continuity
Planning 315 • The Role of Auditing 315
8-4 What are the most important tools and technologies for safeguarding
information resources? 316
Identity Management and Authentication 316 • Firewalls, Intrusion Detection
Systems, and Anti-malware Software 318 • Securing Wireless Networks 320 •
Encryption and Public Key Infrastructure 320 • Securing Transactions with
Blockchain 322 • Ensuring System Availability 323 • Security Issues for
Cloud Computing and the Mobile Digital Platform 323
Interactive Session | Management How Secure Is the Cloud? 324
Ensuring Software Quality 326
8-5 How will MIS help my career? 327
The Company 327 • Position Description 327 • Job Requirements 327 •
Interview Questions 327 • Author Tips 328
Review Summary 328 • Key Terms 329 • Review Questions 330 •
Discussion Questions 330
Hands-On MIS Projects 330
Collaboration and Teamwork Project 332
Case Study: Is the Equifax Hack the Worst Ever—and Why? 333
References: 336
PART THREE Key System Applications for the Digital Age 337
Chapter 9 Achieving Operational Excellence and Customer Intimacy:
Enterprise Applications 338
Opening Case: Avon Beautifies Its Supply Chain 339
9-1 How do enterprise systems help businesses achieve operational
excellence? 341
What are Enterprise Systems? 341 • Enterprise Software 342 • Business
Value of Enterprise Systems 343
9-2 How do supply chain management systems coordinate planning,
production, and logistics with suppliers? 344
Interactive Session | Management Soma Bay Prospers with ERP in the
Cloud 345
The Supply Chain 346 • Information Systems and Supply Chain
Management 348 • Supply Chain Management Software 349 •
Global Supply Chains and the Internet 350 • Business Value of Supply
Chain Management Systems 352
9-3 How do customer relationship management systems help firms
achieve customer intimacy? 352
What Is Customer Relationship Management? 353 • Customer Relationship
Management Software 353 • Operational and Analytical CRM 357 •
Business Value of Customer Relationship Management Systems 357
xii Contents
9-4 What are the challenges that enterprise applications pose,
and how are enterprise applications taking advantage of new
technologies? 358
Enterprise Application Challenges 358
Interactive Session | Organizations Kenya Airways Flies High with Customer
Relationship Management 359
Next-Generation Enterprise Applications 361
9-5 How will MIS help my career? 363
The Company 363 • Position Description 363 • Job Requirements 363 •
Interview Questions 363 • Author Tips 364
Review Summary 364 • Key Terms 365 • Review Questions 365 •
Discussion Questions 366
Hands-On MIS Projects 366
Collaboration and Teamwork Project 367
Case Study: Clemens Food Group Delivers with New Enterprise
Applications 368
References: 370
Chapter 10 E-commerce: Digital Markets, Digital Goods 372
Opening Case: Youtube Transforms the Media Landscape 373
10-1 What are the unique features of e-commerce, digital markets, and
digital goods? 375
E-commerce Today 376 • The New E-commerce: Social, Mobile, Local 377 •
Why E-commerce Is Different 379 • Key Concepts in E-commerce: Digital
Markets and Digital Goods in a Global Marketplace 382
10-2 What are the principal e-commerce business and revenue
models? 385
Types of E-commerce 385 • E-commerce Business Models 386
Interactive Session | Organizations Uber: Digital Disruptor 389
E-commerce Revenue Models 390
10-3 How has e-commerce transformed marketing? 392
Behavioral Targeting 393 • Social E-commerce and Social Network
Marketing 396
Interactive Session | Management “Socializing” with Customers 399
10-4 How has e-commerce affected business-to-business transactions? 400
Electronic Data Interchange (EDI) 401 • New Ways of B2B Buying and
Selling 402
10-5 What is the role of m-commerce in business, and what are the most
important m-commerce applications? 404
Location-Based Services and Applications 405 • Other Mobile Commerce
Services 406
10-6 What issues must be addressed when building an e-commerce
presence? 406
Develop an E-commerce Presence Map 406 • Develop a Timeline:
Milestones 407
Contents xiii
10-7 How will MIS help my career? 408
The Company 408 • Job Description 408 • Job Requirements 409 •
Interview Questions 409 • Author Tips 409
Review Summary 410 • Key Terms 410 • Review Questions 411 •
Discussion Questions 412
Hands-On MIS Projects 412
Collaboration and Teamwork Project 413
Case Study: A Nasty Ending for Nasty Gal 414
References: 416
Chapter 11 Managing Knowledge and Artificial Intelligence 418
Opening Case: Machine Learning Helps Akershus University Hospital Make
Better Treatment Decisions 419
11-1 What is the role of knowledge management systems in
business? 421
Important Dimensions of Knowledge 422 • The Knowledge
Management Value Chain 423 • Types of Knowledge Management
Systems 426
11-2 What are artificial intelligence (AI) and machine learning? How do
businesses use AI? 427
Evolution of AI 427 • Major Types of AI 428 • Expert Systems 428 •
Machine Learning 430 • Neural Networks 432 • Genetic Algorithms 435 •
Natural Language Processing, Computer Vision Systems, and
Robotics 436 • Intelligent Agents 437
11-3 What types of systems are used for enterprise-wide knowledge
management, and how do they provide value for businesses? 438
Enterprise Content Management Systems 439 • Locating and Sharing
Expertise 440 • Learning Management Systems 441
11-4 What are the major types of knowledge work systems, and how
do they provide value for firms? 441
Knowledge Workers and Knowledge Work 441
Interactive Session | Management Sargent & Lundy Learns to Manage
Employee Knowledge 442
Requirements of Knowledge Work Systems 443 • Examples of Knowledge
Work Systems 444
Interactive Session | Technology The Reality of Virtual Reality 446
11-5 How will MIS help my career? 447
The Company 447 • Position Description 448 • Job Requirements 448 •
Interview Questions 448 • Author Tips 448
Review Summary 449 • Key Terms 450 • Review Questions 450 •
Discussion Questions 451
Hands-On MIS Projects 451
Collaboration and Teamwork Project 452
Case Study: Can Cars Drive Themselves—And Should They? 453
References: 456
xiv Contents
Chapter 12 Enhancing Decision Making 458
Opening Case: Big Data and the Internet of Things Drive Precision Agriculture 459
12-1 What are the different types of decisions, and how does the decision-
making process work? 461
Business Value of Improved Decision Making 461 • Types of Decisions 462 •
The Decision-Making Process 463
12-2 How do information systems support the activities of managers and
management decision making? 464
Managerial Roles 464 • Real-World Decision Making 466 • High-Velocity
Automated Decision Making 467
12-3 How do business intelligence and business analytics support decision
making? 468
What Is Business Intelligence? 468 • The Business Intelligence
Environment 468 • Business Intelligence and Analytics Capabilities 470
Interactive Session | Technology Siemens Makes Business Processes
More Visible 471
12-4 How do different decision-making constituencies in an organization
use business intelligence, and what is the role of information systems in
helping people working in a group make decisions more efficiently? 475
Decision Support for Operational and Middle Management 475 • Decision
Support for Senior Management: Balanced Scorecard and Enterprise
Performance Management Methods 478
Interactive Session | Management Anthem Benefits from More Business
Intelligence 480
Group Decision-Support Systems (GDSS) 481
12-5 How will MIS help my career? 482
The Company 482 • Position Description 482 • Job Requirements 482 •
Interview Questions 483 • Author Tips 483
Review Summary 483 • Key Terms 484 • Review Questions 485 •
Discussion Questions 485
Hands-On MIS Projects 485
Collaboration and Teamwork Project 486
Case Study: Is Predix GE’s Future? 487
References: 489
PART FOUR Building and Managing Systems 491
Chapter 13 Building Information Systems 492
Opening Case: Cameron International Builds a New System for Financial
Reporting 493
13-1 How does building new systems produce organizational change? 495
Systems Development and Organizational Change 495
Interactive Session | Organizations Carter’s Redesigns Its Business
Processes 497
Business Process Redesign 498
Contents xv
13-2 What are the core activities in the systems development
process? 502
Systems Analysis 502 • Systems Design 503 • Completing the Systems
Development Process 504
13-3 What are the principal methodologies for modeling and designing
systems? 507
Structured Methodologies 507 • Object-Oriented Development 509 •
Computer-Aided Software Engineering 511
13-4 What are alternative methods for building information
systems? 511
Traditional Systems Life Cycle 511 • Prototyping 512 • End-User
Development 514 • Application Software Packages, Software Services,
and Outsourcing 514
13-5 What are new approaches for system building in the digital
firm era? 517
Rapid Application Development (RAD), Agile Development, and DevOps 517 •
Component-Based Development and Web Services 518 • Mobile Application
Development: Designing for a Multiscreen World 519
13-6 How will MIS help my career? 520
The Company 520 • Position Description 520
Interactive Session | Technology Systems Development Is Different for
Mobile Apps 521
Job Requirements 522 • Interview Questions 522 • Author Tips 523
Review Summary 523 • Key Terms 524 • Review Questions 525 •
Discussion Questions 525
Hands-On MIS Projects 526
Collaboration and Teamwork Project 527
Case Study: Hitachi Consulting Moves Human Resources to the
Cloud 528
References: 530
Chapter 14 Managing Projects 532
Opening Case: Sound Project Management Helps Stepan Company Improve
Financial Planning and Reporting 533
14-1 What are the objectives of project management, and why is it so
essential in developing information systems? 535
Runaway Projects and System Failure 535 • Project Management
Objectives 536
14-2 What methods can be used for selecting and evaluating information
systems projects and aligning them with the firm’s business
goals? 537
Management Structure for Information Systems Projects 537 • Linking Systems
Projects to the Business Plan 538 • Portfolio Analysis 540 • Scoring
Models 541
14-3 How can firms assess the business value of information systems? 542
Information System Costs and Benefits 542 • Capital Budgeting for
Information Systems 542 • Limitations of Financial Models 543
xvi Contents
14-4 What are the principal risk factors in information systems projects, and
how can they be managed? 544
Dimensions of Project Risk 544 • Change Management and the Concept
of Implementation 545 • Controlling Risk Factors 547 • Designing for the
Organization 550 • Project Management Software Tools 551
Interactive Session | Management ConocoPhillips Implements a New System
for Access Control 552
14-5 How will MIS help my career? 553
The Company 553
Interactive Session | Technology Arup Moves Project Management to the
Cloud 554
Position Description 555 • Job Requirements 555 • Interview
Questions 556 • Author Tips 556
Review Summary 556 • Key Terms 557 • Review Questions 557 •
Discussion Questions 558
Hands-On MIS Projects 558
Collaboration and Teamwork Project 559
Case Study: Pennsylvania’s Unemployment Compensation Modernization
System: Unfinished Business 560
References: 562
Chapter 15 Managing Global Systems 564
Opening Case: New Systems Help Eli Lilly Standardize as a Global
Company 565
15-1 What major factors are driving the internationalization of
business? 567
Developing an International Information Systems Architecture 567 •
The Global Environment: Business Drivers and Challenges 569 • State
of the Art 572
15-2 What are the alternative strategies for developing global
businesses? 572
Global Strategies and Business Organization 573 • Global Systems to
Fit the Strategy 574 • Reorganizing the Business 575
15-3 What are the challenges posed by global information systems and
management solutions for these challenges? 575
A Typical Scenario: Disorganization on a Global Scale 576 • Global Systems
Strategy 576 • The Management Solution: Implementation 579
15-4 What are the issues and technical alternatives to be considered when
developing international information systems? 580
Computing Platforms and Systems Integration 581 • Connectivity 581 •
Software Localization 582
15-5 How will MIS help my career? 583
The Company 583
Interactive Session | Technology The Global Internet Goes Multimedia 584
Position Description 585 • Job Requirements 585 • Interview
Questions 585
Contents xvii
Interactive Session | Management AbbVie Builds a Global Systems
Infrastructure 586
Author Tips 587
Review Summary 588 • Key Terms 588 • Review Questions 589 •
Discussion Questions 589
Hands-On MIS Projects 589
Collaboration and Teamwork Project 590
Case Study: E-Commerce in China: Opportunities and Obstacles 591
References: 593
Glossary G-1
Indexes I-1
BUSINESS CASES AND INTERACTIVE SESSIONS
Here are some of the business firms you will find described in the cases and Interactive Sessions of
this book:
Chapter 1: Information Systems in Global Business Today
PCL Construction: The New Digital Firm
Can You Run the Company with Your iPhone?
UPS Competes Globally with Information Technology
Did Information Systems Cause Deutsche Bank to Stumble?
Chapter 2: Global E-business and Collaboration
Enterprise Social Networking Helps Sanofi Pasteur Innovate and Improve Quality
Data Changes How NFL Teams Play the Game and How Fans See It
Videoconferencing: Something for Everyone
Should Companies Embrace Social Business?
Chapter 3: Information Systems, Organizations, and Strategy
Technology Helps Starbucks Find Better Ways to Compete
Digital Technology Helps Crayola Brighten Its Brand
Smart Products—Coming Your Way
Grocery Wars
Chapter 4: Ethical and Social Issues in Information Systems
Are Cars Becoming Big Brother on Wheels?
Will Automation Kill Jobs?
How Harmful Are Smartphones?
Facebook Privacy: Your Life for Sale
Chapter 5: IT Infrastructure and Emerging Technologies
PeroxyChem’s Cloud Computing Formula for Success
Is Business Ready for Wearable Computers?
Look to the Cloud
Is BYOD Good for Business?
Chapter 6: Foundations of Business Intelligence: Databases and Information
Management
Data Management Helps the Charlotte Hornets Learn More About Their Fans
Kraft Heinz Finds a New Recipe for Analyzing Its Data
Databases Where the Data Aren’t There
How Reliable Is Big Data?
Chapter 7: Telecommunications, the Internet, and Wireless Technology
Tour de France Wins with Wireless Technology
Net Neutrality: The Battle Rages On
Monitoring Employees on Networks: Unethical or Good Business?
Google, Apple, and Facebook Battle for Your Internet Experience
Chapter 8: Securing Information Systems
Hackers Target the U.S. Presidential Election: What Happened?
Meltdown and Spectre Haunt the World’s Computers
How Secure Is the Cloud?
Is the Equifax Hack the Worst Ever—and Why?
Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise
Applications
Avon Beautifies Its Supply Chain
Soma Bay Prospers with ERP in the Cloud
Kenya Airways Flies High with Customer Relationship Management
Clemens Food Group Delivers with New Enterprise Applications
Chapter 10: E-commerce: Digital Markets, Digital Goods
Youtube Transforms the Media Landscape
Uber: Digital Disruptor
“Socializing” with Customers
A Nasty Ending for Nasty Gal
Chapter 11: Managing Knowledge and Artificial Intelligence
Machine Learning Helps Akershus University Hospital Make Better Treatment Decisions
Sargent & Lundy Learns to Manage Employee Knowledge
The Reality of Virtual Reality
Can Cars Drive Themselves—And Should They?
Chapter 12: Enhancing Decision Making
Big Data and the Internet of Things Drive Precision Agriculture
Siemens Makes Business Processes More Visible
Anthem Benefits from More Business Intelligence
Is Predix GE’s Future?
Chapter 13: Building Information Systems
Cameron International Builds a New System for Financial Reporting
Carter’s Redesigns Its Business Processes
Systems Development Is Different for Mobile Apps
Hitachi Consulting Moves Human Resources to the Cloud
Chapter 14: Managing Projects
Sound Project Management Helps Stepan Company Improve Financial Planning
and Reporting
ConocoPhillips Implements a New System for Access Control
Arup Moves Project Management to the Cloud
Pennsylvania’s Unemployment Compensation Modernization System: Unfinished Business
Chapter 15: Managing Global Systems
New Systems Help Eli Lilly Standardize as a Global Company
The Global Internet Goes Multimedia
AbbVie Builds a Global Systems Infrastructure
E-Commerce in China: Opportunities and Obstacles
xx
PREFACE
New To This Edition
Management Information Systems, 16th edition has new features and content to
make your MIS course more exciting, current, and relevant.
New Features
• New Career Opportunities section in each chapter, identified by ,
shows students specifically how this book can help them find a job and
build their careers. The last major section of each chapter presents a
description of an entry-level job for a recent college graduate based on a
real-world job description. The job requirements are related to the topics
covered in that chapter. The job description shows the required educa-
tional background and skills, lists business-related questions that might
arise during the job interview, and provides author tips for answering the
questions and preparing for the interview.
• New Conceptual Videos collection includes 45 conceptual videos of
3 to 5 minutes in length. Ken Laudon walks students through three of
the most important concepts in each chapter using a contemporary ani-
mation platform. Available only in the MyLab MIS digital edition.
• New Video Cases collection: 36 video cases (two or more per chapter)
and 10 additional instructional videos covering key concepts and experi-
ences in the MIS world. The video cases illustrate how real-world cor-
porations and managers are using information technology and systems.
Video Cases are listed at the beginning of each chapter.
• Learning Tracks: 49 Learning Tracks in MyLab MIS for additional cov-
erage of selected topics. This edition includes new Learning Tracks for
case-based reasoning and fuzzy logic.
New Topics
The 16th edition features all new opening, closing, and Interactive Session
cases. The text, figures, tables, and cases have been updated through September
2018 with the latest sources from industry and MIS research. New topics and
coverage include:
• Updated coverage of artificial intelligence (AI): Chapter 11 has
been rewritten to include new coverage of machine learning, “deep
learning,” natural language systems, computer vision systems, and
robotics, reflecting the surging interest in business uses of AI and
“intelligent” techniques.
• Big Data and the Internet of Things: In-depth coverage of big data, big
data analytics, and the Internet of Things (IoT) in Chapters 1, 6, 7, and 12.
Includes big data analytics, analyzing IoT data streams, Hadoop, in-memory
computing, nonrelational databases, data lakes, and analytic platforms.
Preface xxi
• Cloud Computing: Updated and expanded coverage of cloud
computing in Chapter 5 (IT infrastructure) with more detail on types
of cloud services, private and public clouds, hybrid clouds, managing
cloud services, and a new Interactive Session on using cloud services.
Cloud computing also covered in Chapter 6 (databases in the cloud),
Chapter 8 (cloud security), Chapter 9 (cloud-based CRM and ERP),
Chapter 10 (e-commerce), and Chapter 13 (cloud-based systems
development).
• Social, Mobile, Local: New e-commerce content in Chapter 10 describ-
ing how social tools, mobile technology, and location-based services are
transforming marketing and advertising.
• Social Business: Expanded coverage of social business, introduced in
Chapter 2 and discussed throughout the text. Detailed discussions of en-
terprise (internal corporate) social networking as well as social network-
ing in e-commerce.
• Machine learning
• Natural language processing
• Computer vision systems
• Robotics
• “Deep learning”
• Supervised learning
• Unsupervised learning
• Edge computing
• 5G networks
• General Data Protection Regulation (GDPR)
• Mobile device management (MDM)
• Office 365
• Blockchain
• Data lake
• Distributed database
• FinTech
The CORE Laudon text and MyLab MIS provide the most up-to-date and com-
prehensive overview of information systems used by business firms today.
After reading this book, we expect students will be able to participate in, and
even lead, management discussions of information systems for their firms and
understand how to use information technology in their jobs to achieve bottom-
line business results. Regardless of whether students are accounting, finance,
management, operations management, marketing, or information systems ma-
jors, the knowledge and information in this book will be valuable throughout
their business careers.
The MyLab MIS platform provides an interactive digital environment
that supports the unique strengths of our work. Our goal with Management
Information Systems: Managing the Digital Firm is to provide students with an
introduction to the MIS field that is authoritative, up-to-date, interactive, and
engaging for students and professors. The MyLab MIS edition extends these
xxii Preface
features to a digital platform that emphasizes videos, animations, interactive
quizzes, and student comprehension of concepts, theories, and issues. The
MyLab MIS environment reflects the new learning styles of students, which
are more social, interactive, and usable on digital devices such as smartphones
and tablets.
Reach Every Student with MyLab MIS
MyLab is the teaching and learning platform that empowers you to reach every
student. By combining trusted authors’ content with digital tools and a flex-
ible platform, MyLab MIS personalizes the learning experience and improves
results for each student. And with MIS Decision-Making Sims and auto-graded
Excel and Access Projects, students understand how MIS concepts will help
them succeed in their future careers.
Solving Teaching and Learning Challenges
The Laudon learning package is more current, real-world, and authoritative
than competitors. Laudon MIS16 and MyLab MIS help students understand MIS
concepts and issues through extensive use of examples of real-world compa-
nies, a wide variety of short and long text and video cases based on real-world
organizations, and numerous line art illustrations, interactive animations, and
hands-on software projects.
The Laudons are known for their outstanding real-world case studies, which
describe how well-known business firms are using IT to solve problems and
achieve objectives. Students are often asked to analyze the business problem
and propose alternative solutions. The Laudons also provide hands-on MIS
software and management decision-making problems in each chapter that are
based on real-world companies and business scenarios.
The Laudon text and learning package now has a very strong career focus,
which incentivizes students to learn by showing exactly how each chapter will
help them prepare for future jobs. In addition to Career Opportunities, MyLab
MIS features Career Resources, including how to incorporate MIS knowledge
into resumes, cover letters, and job interviews.
The MyLab MIS edition offers unique digital interactive features that hold
student attention spans longer and make learning more effective, including 45
animated conceptual learning modules that walk students through key con-
cepts in each chapter; 36 online video cases, and interactive quizzes. All of
this is available anytime, anywhere, on any digital device. The result is a com-
prehensive learning environment that will heighten student engagement and
learning in the MIS course.
The Core Text
The core text provides an overview of fundamental MIS concepts using an
integrated framework for describing and analyzing information systems. This
framework shows information systems composed of management, organiza-
tion, and technology elements and is reinforced in student projects and case
studies. The core text consists of 15 chapters with hands-on projects covering
the most essential topics in MIS. An important part of the core text is the Video
Preface xxiii
Case Study and Instructional Video Package: 36 video case studies (two to three
per chapter) plus 10 instructional videos that illustrate business uses of infor-
mation systems, explain new technologies, and explore concepts. Videos are
keyed to the topics of each chapter.
Chapter Organization
Each chapter contains the following elements:
• A Chapter Outline based on Learning Objectives
• Lists of all the Case Studies and Video Cases for each chapter
• A chapter-opening case describing a real-world organization to establish
the theme and importance of the chapter
• A diagram analyzing the opening case in terms of the management,
organization, and technology model used throughout the text
• Two Interactive Sessions with Case Study Questions
• A Career Opportunities section showing students how to use the text for
job hunting and career preparation
• A Review Summary keyed to the Student Learning Objectives
• A list of Key Terms that students can use to review concepts
• Review questions for students to test their comprehension of chapter
material
• Discussion questions raised by the broader themes of the chapter
• A series of Hands-on MIS Projects consisting of two Management
Decision Problems, a hands-on application software project, and a
project to develop Internet skills
• A Collaboration and Teamwork Project to develop teamwork and
presentation skills with options for using open source collaboration
tools
• A chapter-ending case study for students to apply chapter concepts
• Two assisted-graded writing questions with prebuilt grading rubrics
• Chapter references
A diagram accompanying
each chapter-opening case
graphically illustrates how
management, organization,
and technology elements
work together to create an
information system solution
to the business challenges
discussed in the case.
Business
Solutions
Management
Organization
Wireless Race Tracking
System
Technology
Information
System
Business
Problem
• Vast topographically challenging location
• Opportunities from new technology
• Revise race
tracking process
• Obtain external
data
• Monitor rider progress
and location
• Predict race outcome
• Generate rider profiles
• Generate real-time race statistics
• Increase fan involvement
• Expand fan bases
• Tracking sensors
• Mobile app
• Cloud computing
service
• Data analytics
• Social media
• Select race
technology
xxiv Preface
Student Learning-Focused
Student Learning Objectives are organized around a set of study questions to
focus student attention. Each chapter concludes with a Review Summary and
Review Questions organized around these study questions, and each major
chapter section is based on a Learning Objective.
Key Features
We have enhanced the text to make it more interactive, leading edge, and ap-
pealing to both students and instructors. The features and learning tools are
described in the following sections.
Business-Driven with Real-World Business Cases
and Examples
The text helps students see the direct connection between information systems
and business performance. It describes the main business objectives driving the
use of information systems and technologies in corporations all over the world:
operational excellence, new products and services, customer and supplier inti-
macy, improved decision making, competitive advantage, and survival. In-text
examples and case studies show students how specific companies use informa-
tion systems to achieve these objectives.
We use current (2018) examples from business and public organizations
throughout the text to illustrate the important concepts in each chapter. All
the case studies describe companies or organizations that are familiar to stu-
dents, such as Uber, the NFL, Facebook, Crayola, Walmart, Amazon, Google,
Starbucks, and GE.
Interactivity
There’s no better way to learn about MIS than by doing MIS! We provide dif-
ferent kinds of hands-on projects where students can work with real-world
business scenarios and data and learn firsthand what MIS is all about. These
projects heighten student involvement in this exciting subject.
• MyLab MIS Online Video Case Package. Students can watch short
videos online, either in-class or at home, and then apply the concepts of
the book to the analysis of the video. Every chapter contains at least two
business video cases that explain how business firms and managers are
using information systems and explore concepts discussed in the chap-
ter. Each video case consists of one or more videos about a real-world
company, a background text case, and case study questions. These video
cases enhance students’ understanding of MIS topics and the relevance of
MIS to the business world. In addition, there are 10 Instructional Videos
that describe developments and concepts in MIS keyed to respective
chapters.
• MyLab MIS Online Conceptual Videos. Forty-five video animations
where the authors walk students through three concepts from each
chapter.
• Interactive Sessions. Two short cases in each chapter have been
redesigned as Interactive Sessions to be used in the classroom (or on
Internet discussion boards) to stimulate student interest and active
learning. Each case concludes with case study questions. The case study
questions provide topics for class discussion, Internet discussion, or
written assignments.
Preface xxv
Case Study Questions
encourage students to
apply chapter concepts to
real-world companies in
class discussions, student
presentations, or writing
assignments.
CASE STUDY QUESTIONS
1. Analyze Crayola’s problem. What management,
organization, and technology factors contributed
to the problem?
2. What competitive strategies is Crayola pursu-
ing? How does digital technology support those
strategies?
3. What people issues did Crayola have to address in
designing its new technology-based products?
4. How has digital technology changed Crayola’s
business model and the way it runs its business?
Each chapter contains
two Interactive Sessions on
Management, Organizations,
and Technology using real-
world companies to illustrate
chapter concepts and issues.
98 Part One Organizations, Management, and the Networked Enterprise
INTERACTIVE SESSION ORGANIZATIONS
Digital Technology Helps Crayola Brighten Its Brand
Crayola is one of the world’s most beloved brands
for children and their parents. The Easton,
Pennsylvania–based company has been noted for
high-quality, non-toxic crayons, markers, pencils,
modeling clay, creative toys, and innovative art tools
that have inspired artistic creativity in children for
more than one hundred years. You can nd Cray-
ola products nearly everywhere, including schools,
ofces, supermarkets, drug stores, hospitals, theme
parks, airports, gas stations, and restaurants.
The Crayola crayon box became part of the col-
lective history and experiences of generations of
Americans, and a symbol of the color and fun of
childhood. But today, that Crayola crayon box is not
as iconic as in the past. The popularity of Crayola
crayons is under assault—not by Crayola’s traditional
competitors (Faber-Castelli, DixonTiconderoga, and
MEGA Brands), but by changing times.
There has been a profound technological and
cultural shift in how children play. Children and
their families are being bombarded with increasingly
sophisticated forms of entertainment, many of them
digitally based. Digital products are starting to sup-
plant physical ones in the world of children’s play as
well as in other areas of work and everyday life. With
the advent of computers and web-based learning, chil-
dren are leaving behind hand-held art supplies at an
increasingly younger age. The phenomenon is called
KGOY, standing for “Kids Growing Older Younger.” As
children reach the age of 4 or 5, when they become
old enough to play with a computer, they become less
interested in toys and crayons and prefer electronics
help children learn and play in colorful ways. The
question they asked was not, how can we sell more
crayons? Instead they asked, what kinds of experi-
ences and technologies should Crayola embrace?
Crayola has reframed its business model, introduced
a new innovation process for product development,
and created new products and revenue streams. The
company has been transformed from a manufacturer
of crayons and art tools into a trusted source of tools
and experiences for creative play.
Crayola is using digital technology, but not to re-
place its core crayon business. Instead, it’s integrat-
ing the old and the new. The company now offers a
new range of products like the iMarker, an all-in-one
digital pen, crayon, and pencil, designed for use with
the Color Studio HD iPad app. It’s like a traditional
coloring book, but includes new interactive sounds
and motion. Lights, Camera, Color! is another digital
application that allows kids to turn their favorite pho-
tos into digital coloring book pages. Tech toys such as
the Digital Light Designer, a 360-degree domed draw-
ing surface, encourage imaginations to run wild with
colored LED lights. Children can play updated ver-
sions of their favorite games or animate and save up to
–
ents are looking for toys that are less messy than tra-
ditional markers or ngerpaints. These digital toys are
“100 percent mess-proof,” and technology has helped
Crayola make its other products less messy as well.
In designing new digital products and experiences,
Crayola has drawn on its extensive knowledge of
child development. It understands how digital tech-
• Hands-On MIS Projects. Every chapter concludes with a Hands-On
MIS Projects section containing three types of projects: two Manage-
ment Decision Problems; a hands-on application software exercise
using Microsoft Excel, Access, or web page and blog creation tools; and
a project that develops Internet business skills. A Dirt Bikes USA run-
ning case in MyLab MIS provides additional hands-on projects for each
chapter.
• Collaboration and Teamwork Projects. Each chapter features a col-
laborative project that encourages students working in teams to use Google
Drive, Google Docs, or other open source collaboration tools. The first
team project in Chapter 1 asks students to build a collaborative Google site.
xxvi Preface
Chapter Learning Tracks
Chapter 1: Information Systems
in Global Business Today
How Much Does IT Matter?
Information Systems and Your Career
The Mobile Digital Platform
Chapter 2: Global E-business
and Collaboration
Systems from a Functional Perspective
IT Enables Collaboration and Teamwork
Challenges of Using Business Information Systems
Organizing the Information Systems Function
Occupational and Career Outlook for Information Systems Majors 2014–2020
Chapter 3: Information Systems,
Organizations, and Strategy
The Changing Business Environment for IT
Chapter 4: Ethical and Social
Issues in Information Systems
Developing a Corporate Code of Ethics for IT
Chapter 5: IT Infrastructure and
Emerging Technologies
How Computer Hardware Works
How Computer Software Works
Service Level Agreements
The Open Source Software Initiative
Comparing Stages in IT Infrastructure Evolution
Cloud Computing
Students practice using
software in real-world settings
for achieving operational
excellence and enhancing
decision making.
Improving Decision Making: Using Web Tools to Configure and Price an Automobile
Software skills: Internet-based software
Business skills: Researching product information and pricing
3-11 In this exercise, you will use software at car websites to �nd product information about a car of your
choice and use that information to make an important purchase decision. You will also evaluate two of
these sites as selling tools.
You are interested in purchasing a new Ford Escape (or some other car of your choice). Go to the website
of CarsDirect (www.carsdirect.com) and begin your investigation. Locate the Ford Escape. Research the vari-
ous Escape models, and choose one you prefer in terms of price, features, and safety ratings. Locate and read at
least two reviews. Surf the website of the manufacturer, in this case Ford (www.ford.com). Compare the infor-
mation available on Ford’s website with that of CarsDirect for the Ford Escape. Try to locate the lowest price for
the car you want in a local dealer’s inventory. Suggest improvements for CarsDirect.com and Ford.com.
Each chapter features a
project to develop Internet
skills for accessing informa-
tion, conducting research,
and performing online
calculations and analysis.
Customization and Flexibility
Our Learning Tracks and Video Cases in MyLab MIS give instructors the flexibil-
ity to provide in-depth coverage of the topics and additional cases they choose.
Video Cases and Instructional Videos are listed at the beginning of each chapter
as well as in the Preface.
Learning Tracks
There are 49 Learning Tracks in MyLab MIS available to instructors and
students. This supplementary content takes students deeper into MIS topics,
concepts, and debates and reviews basic technology concepts in hardware,
software, database design, telecommunications, and other areas.
Preface xxvii
Chapter Learning Tracks
Chapter 6: Foundations of
Business Intelligence: Databases
and Information Management
Database Design, Normalization, and Entity-Relationship Diagramming
Introduction to SQL
Hierarchical and Network Data Models
Chapter 7: Telecommunications,
the Internet, and Wireless
Technology
Broadband Network Services and Technologies
Cellular System Generations
Wireless Applications for Customer Relationship Management, Supply Chain Management,
and Healthcare
Introduction to Web 2.0
LAN Topologies
Chapter 8: Securing Information
Systems
The Booming Job Market in IT Security
The Sarbanes-Oxley Act
Computer Forensics
General and Application Controls for Information Systems
Management Challenges of Security and Control
Software Vulnerability and Reliability
Chapter 9: Achieving Opera-
tional Excellence and Customer
Intimacy: Enterprise Applications
SAP Business Process Map
Business Processes in Supply Chain Management and Supply Chain Metrics
Best-Practice Business Processes in CRM Software
Chapter 10: E-commerce: Digital
Markets, Digital Goods
E-commerce Challenges: The Story of Online Groceries
Build an E-commerce Business Plan
Hot New Careers in E-Commerce
E-commerce Payment Systems
Building an E-commerce Website
Chapter 11: Managing
Knowledge and Artificial
Intelligence
Challenges of Knowledge Management Systems
Case-Based Reasoning
Fuzzy Logic
Chapter 12: Enhancing Decision
Making
Building and Using Pivot Tables
Chapter 13: Building Information
Systems
Unified Modeling Language
Primer on Business Process Design and Documentation
Primer on Business Process Management
Fourth-Generation Languages
Chapter 14: Managing Projects Capital Budgeting Methods for Information Systems Investments
Enterprise Analysis (Business Systems Planning) and Critical Success Factors
Information Technology Investments and Productivity
Video Cases and Instructional Videos
Instructors can download step-by-step instructions for accessing the video cases
from the Instructor Resources Center.
Chapter Video
Chapter 1: Information Systems in Global
Business Today
Business in the Cloud: Facebook, Google, and eBay Data Centers
UPS Global Operations with the DIAD and Worldport
Instructional Video: Tour IBM’s Raleigh Data Center
Chapter 2: Global E-business and
Collaboration
Walmart’s Retail Link Supply Chain
CEMEX: Becoming a Social Business
Instructional Video: US Foodservice Grows Market with Oracle CRM on Demand
Chapter 3: Information Systems,
Organizations, and Strategy
GE Becomes a Digital Firm: The Emerging Industrial Internet
National Basketball Association: Competing on Global Delivery with Akamai
OS Streaming
Chapter 4: Ethical and Social Issues in
Information Systems
What Net Neutrality Means for You
Facebook and Google Privacy: What Privacy?
The United States vs. Terrorism: Data Mining for Terrorists and Innocents
Instructional Video: Viktor Mayer Schönberger on the Right to Be Forgotten
Chapter 5: IT Infrastructure and Emerging
Technologies
Rockwell Automation Fuels the Oil and Gas Industry with the Internet of
Things (IoT)
ESPN.com: The Future of Sports Coverage in the Cloud
Netflix: Building a Business in the Cloud
http://ESPN.com
xxviii Preface
Chapter Video
Chapter 6: Foundations of Business
Intelligence: Databases and Information
Management
Dubuque Uses Cloud Computing and Sensors to Build a Smarter City
Brooks Brothers Closes in on Omnichannel Retail
Maruti Suzuki Business Intelligence and Enterprise Databases
Chapter 7: Telecommunications, the Internet,
and Wireless Technology
Telepresence Moves out of the Boardroom and into the Field
Virtual Collaboration with IBM Sametime
Chapter 8: Securing Information Systems Stuxnet and Cyberwarfare
Cyberespionage: The Chinese Threat
Instructional Video: Sony PlayStation Hacked; Data Stolen from 77 Million Users
Instructional Video: Meet the Hackers: Anonymous Statement on Hacking SONY
Chapter 9: Achieving Operational
Excellence and Customer Intimacy:
Enterprise Applications
Life Time Fitness Gets in Shape with Salesforce CRM
Instructional Video: GSMS Protects Products and Patients by Serializing Every Bottle
of Drugs
Chapter 10: E-commerce: Digital Markets,
Digital Goods
Walmart Takes on Amazon: A Battle of IT and Management Systems
Groupon: Deals Galore
Etsy: A Marketplace and Community
Instructional Video: Walmart’s eCommerce Fulfillment Center Network
Instructional Video: Behind the Scenes of an Amazon Warehouse
Chapter 11: Managing Knowledge and
Artificial Intelligence
How IBM’s Watson Became a Jeopardy Champion
Alfresco: Open Source Document Management and Collaboration
Chapter 12: Enhancing Decision Making PSEG Leverages Big Data and Business Analytics Using GE’s Predix Platform
FreshDirect Uses Business Intelligence to Manage Its Online Grocery
Business Intelligence Helps the Cincinnati Zoo Work Smarter
Chapter 13: Building Information Systems IBM: Business Process Management in a SaaS Environment
IBM Helps the City of Madrid with Real-Time BPM Software
Instructional Video: Workflow Management Visualized
Instructional Video: BPM: Business Process Management Customer Story
Chapter 14: Managing Projects Blue Cross Blue Shield Smarter Computing Project
NASA Project Management Challenges
Chapter 15: Managing Global Systems Daum Runs Oracle Apps on Linux
Lean Manufacturing and Global ERP: Humanetics and Global Shop
Developing Career Skills
For students to succeed in a rapidly changing job market, they should be aware
of their career options and how to go about developing a variety of skills. With
MyLab MIS and Management Information Systems: Managing the Digital Firm,
we focus on developing these skills in the following ways.
Career Opportunities and Resources
Every student who reads this text wants to know: How will this book help my ca-
reer? Our new Career Opportunities feature shows how to use this text and MyLab
MIS as tools for job-hunting and career-building. Job interviewers will typically
ask about why you want the job, along with your ability to communicate, multi-
task, work in a team, show leadership, solve problems, and meet goals. These are
general skills and behaviors you’ll need to succeed in any job, and you should be
prepared to provide examples from your course work and job experiences that
demonstrate these skills. But there are also business knowledge and professional
skills that employers will ask you about. Career Opportunities will show you how
to use what you have learned in this text to demonstrate these skills.
Video Cases and Instructional Videos (Continued)
Preface xxix
Chapter Career Opportunity Job Description
1. Business Information Systems in Your Career Financial Client Support and Sales Assistant
2. Global E-business and Collaboration Entry Level Sales Support Specialist
3. Information Systems, Organizations, and Strategy Entry Level Business Development Representative
4. Ethical and Social Issues in Information Systems Junior Privacy Analyst
5. IT Infrastructure and Emerging Technologies Entry Level IT Consultant
6. Foundations of Business Intelligence: Databases and
Information Management
Entry Level Data Analyst
7. Telecommunications, the Internet, and Wireless Technology Automotive Digital Advisor
8. Securing Information Systems Entry Level Identity Access and Management Support Specialist
9. Achieving Operational Excellence and Customer Intimacy:
Enterprise Applications
Manufacturing Management Trainee
10. E-Commerce: Digital Markets, Digital Goods Junior E-Commerce Data Analyst
11. Managing Knowledge and Artificial Intelligence AI Technology Sales Assistant
12. Improving Decision Making Entry Level Data Analyst
13. Building Information Systems Entry Level Junior Business Systems Analyst
14. Managing Projects IT Project Management Assistant
15. Managing Global Systems Global Data Services Sales and Marketing Trainee
The Career Opportunities section, identified by this icon is the last
major section of each chapter under the heading “How will MIS help my ca-
reer?”. There you will find a description of an entry-level job for a recent
college graduate based on a real-world job description from major online job
sites related to the topics covered in that chapter. The name of the company
offering the job and its location have been changed. Each chapter’s job post-
ing describes the required educational background and specific job skills, and
suggests some of the business-related questions that might arise during the
job interview. The authors provide tips for answering the questions and pre-
paring for the interview. Career Opportunities also show where students can
find out more information about the technical and business knowledge re-
quired for the job in this text and on the web and social media.
Below are the job descriptions used in this edition based on postings from
both large and small businesses. A few of these jobs call for an MIS major,
others for MIS course work, but many postings are not that specific. Some
require some previous internship or job experience, but many are entry-level
positions suitable for new college graduates, and some of these positions
provide on-the-job training. However, all require knowledge of business
information systems and applications and the ability to work in a digital
environment.
Students can use Career Opportunities to shape their resumes and career plans
as well as to prepare for interviews. For instructors, Career Opportunities are po-
tential projects for student research and in-class discussion.
In MyLab MIS we have provided additional Career Resources, including job-
hunting guides and instructions on how to build a Digital Portfolio demonstrating
the business knowledge, application software proficiency, and Internet skills ac-
quired from using the text. The portfolio can be included in a resume or job appli-
cation or used as a learning assessment tool for instructors.
xxx Preface
Instructor Teaching Resources
Chapter Title
Chapter 1 Information Systems in Global Business Today
Chapter 2 Global E-Business and Collaboration
Chapter 3 Information Systems, Organizations, and Strategy
Chapter 4 Ethical and Social Issues in Information Systems
Chapter 5 IT Infrastructure and Emerging Technologies
Chapter 6 Foundations of Business Intelligence: Databases and Information Management
Chapter 7 Telecommunications, the Internet, and Wireless Technology
Chapter 8 Securing Information Systems
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications
Chapter 10 E-Commerce: Digital Markets, Digital Goods
Chapter 11 Managing Knowledge and Artificial Intelligence
Chapter 12 Enhancing Decision Making
Chapter 13 Building Systems
Chapter 14 Managing Projects
Chapter 15 Managing Global Systems
Supplements available to instructors
at www.pearsonhighered.com/laudon
Features of the Supplement
Instructor’s Manual • Chapter-by-chapter summaries
• Examples and activities not in the main book
• Teaching outlines
• Teaching tips
• Solutions to all questions and problems in the book
Test Bank
authored by Professor Kenneth Laudon,
New York University
The authors have worked closely with skilled test item writers to ensure that
higher-level cognitive skills are tested. Test bank multiple-choice questions
include questions on content but also include many questions that require
analysis, synthesis, and evaluation skills.
AACSB Assessment Guidelines
As a part of its accreditation activities, the AACSB has developed an
Assurance of Learning Program designed to ensure that schools do in
fact teach students what they promise. Schools are required to state a
clear mission, develop a coherent business program, identify student
learning objectives, and then prove that students do in fact achieve the
objectives.
We have attempted in this book to support AACSB efforts to encourage
assessment-based education. The end papers of this edition identify student
learning objectives and anticipated outcomes for our Hands-On MIS projects.
The authors will provide custom advice on how to use this text in colleges with
different missions and assessment needs. Please e-mail the authors or contact
your local Pearson representative for contact information.
Computerized TestGen TestGen allows instructors to:
• Customize, save, and generate classroom tests
• Edit, add, or delete questions from the Test Item Files
• Analyze test results
• Organize a database of tests and student results
Table of Contents Overview
http://www.pearsonhighered.com/laudon
Preface xxxi
Supplements available to instructors
at www.pearsonhighered.com/laudon
Features of the Supplement
PowerPoints
authored by Professor Kenneth Laudon,
New York University
The authors have prepared a comprehensive collection of 50 PowerPoint slides
for each chapter to be used in your lectures. Many of these slides are the same
as used by Ken Laudon in his MIS classes and executive education presenta-
tions. Each of the slides is annotated with teaching suggestions for asking
students questions, developing in-class lists that illustrate key concepts, and
recommending other firms as examples in addition to those provided in the
text. The annotations are like an Instructor’s Manual built into the slides and
make it easier to teach the course effectively.
PowerPoints meet accessibility standards for students with disabilities.
Features include but are not limited to:
• Keyboard and Screen Reader access
• Alternative text for images
• High color contrast between background and foreground colors
Acknowledgments
The production of any book involves valued contributions from a number of
persons. We would like to thank all of our editors for encouragement, insight,
and strong support for many years. We thank our editor, Samantha McAfee
Lewis and Content Producer, Faraz Sharique Ali for their role in managing the
project.
Our special thanks go to our supplement authors for their work, including
the following MyLab MIS content contributors: Roberta M. Roth, University
of Northern Iowa; Gipsi Sera, Indiana University; Robert J. Mills, Utah State
University; and John Hupp, Columbus State University. We are indebted to
Erica Laudon for her contributions to Career Opportunities and to Megan Miller
for her help during production.
Special thanks to colleagues at the Stern School of Business at New
York University; to Professor Werner Schenk, Simon School of Business,
University of Rochester; to Professor Mark Gillenson, Fogelman College of
Business and Economics, University of Memphis; to Robert Kostrubanic,
Indiana-Purdue University Fort Wayne; to Professor Ethné Swartz,
Department of Information Management and Business Analytics, Feliciano
School of Business; to Professor Detlef Schoder of the University of Cologne;
to Professor Walter Brenner of the University of St. Gallen; to Professor Lutz
Kolbe of the University of Gottingen; and to Professor Donald Marchand of
the International Institute for Management Development who provided ad-
ditional suggestions for improvement. Thank you to Professor Ken Kraemer,
University of California at Irvine, and Professor John King, University of
Michigan, for more than a decade-long discussion of information systems
and organizations. And a special remembrance and dedication to Professor
Rob Kling, University of Indiana, for being our friend and colleague over so
many years.
We also want to especially thank all our reviewers whose suggestions helped
improve our texts. Reviewers for recent editions include:
Brad Allen, Plymouth State University
Wanda Curtsinger, Texas A&M University
Dawit Demissie, University of Albany
Anne Formalarie, Plymouth State University
Bin Gu,University of Texas–Austin
http://www.pearsonhighered.com/laudon
xxxii Preface
Essia Hamouda, University of California–Riverside
Linda Lau, Longwood University
Kimberly L. Merritt, Oklahoma Christian University
James W. Miller, Dominican University
Fiona Nah, University of Nebraska–Lincoln
M. K. Raja, University of Texas Arlington
Thomas Schambach, Illinois State University
Shawn Weisfeld, Florida Institute of Technology
1
Organizations,
Management, and the
Networked Enterprise
PART ONE introduces the major themes of this book, raising a series of important questions:
What is an information system, and what are its management, organization, and technology
dimensions? Why are information systems so essential in businesses today? Why are sys-
tems for collaboration and social business so important? How can information systems help
businesses become more competitive? What broader ethical and social issues are raised by
widespread use of information systems?
PART ONE
CHAPTER 1
Information Systems in Global
Business Today
CHAPTER 2
Global E-business and Collaboration
CHAPTER 3
Information Systems, Organizations,
and Strategy
CHAPTER 4
Ethical and Social Issues in
Information Systems
2
MyLab MIS
Discussion Questions: 1-4, 1-5, 1-6; Hands-on MIS Projects: 1-7, 1-8, 1-9, 1-10;
Writing Assignments: 1-16, 1-17; eText with Conceptual Animations
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
1-1 How are information systems
transforming business, and why are
they so essential for running and
managing a business today?
1-2 What is an information system?
How does it work? What are its
management, organization, and
technology components? Why are
complementary assets essential
for ensuring that information
systems provide genuine value for
organizations?
1-3 What academic disciplines are used
to study information systems, and
how does each contribute to an
understanding of information systems?
1-4 How will MIS help my career?
CHAPTER CASES
PCL Construction: The New Digital Firm
Can You Run the Company with Your iPhone?
UPS Competes Globally with Information
Technology
Did Information Systems Cause Deutsche
Bank to Stumble?
VIDEO CASES
Business in the Cloud: Facebook, Google,
and eBay Data Centers
UPS Global Operations with the DIAD and
Worldport
Instructional Video:
Tour IBM’s Raleigh Data Center
C
H
A
P
T
E
R
1 Information Systems in Global Business Today
3
Many people think the most widely used tool in a construction project is a hammer, but it is more likely a filing cabinet or fax machine. The construction industry has traditionally been very paper-intensive and
manual. A complex project such as a large building requires hundreds of archi-
tectural drawings and design documents, which can change daily. Costly delays
because of difficulty locating and accessing the documents and other project
information could make or break a project. Now that’s changing, and PCL Con-
struction is at the forefront. Information technology has transformed the way
this business works, and it is a prime example of the new digital firm.
PCL is a group of independent general contracting construction companies,
with over 4,400 employees in the United States, Canada, and Australia. The
organization is active in the commercial, institu-
tional, multifamily residential, renewable energy,
heavy industrial, historical restoration, and civil
construction sectors. PCL has corporate headquar-
ters in Edmonton, Alberta, Canada and a United
States head office in Denver, Colorado.
At a PCL job site, you’ll now see employees using
mobile devices, including smartphones, tablets, and
laptops, to access important information from PCL
systems or input data. Electronic touch-screen kiosks
throughout the job site and electronic plan rooms
provide access to digitized, updated blueprints so
team members don’t have to waste time tracking
down paper versions.
In the past, on-site trailers used to house large
paper blueprints for a project. Each time a project
team member wanted to view plans, that person
had to visit a trailer. With up to 800 active construction projects running simul-
taneously, PCL had trouble keeping project documentation up to date. Informa-
tion on paper forms to track small changes to project specifications or work
requirements might not reach project decision makers until 30–40 days from
the time it was recorded. By then, it was too late—decisions were made “from
the gut” rather than based on facts.
PCL Construction plans are now in digital form, or the paper versions are
scanned for digital storage. Digitized plans can be revised much more rapidly.
By performing much of the design and planning work on the computer, PCL
is able to identify and resolve conflicts and constructability issues early in
the construction process to help keep projects ahead of schedule and within
budget.
PCL Construction: The New Digital Firm
© Ndoeljindoel/123RF
4 Part One Organizations, Management, and the Networked Enterprise
PCL implemented Project Document Controls (PDC) to facilitate collabora-
tion among project team members. A secure project-based website provides
real-time storage and management of information in a single shared accessible
location. Construction contractors, subcontractors, consultants, suppliers, and
clients can work from the same documents wherever they are. PCL uses its
own proprietary project management system for budgeting, costing, forecast-
ing, subcontractor tracking, production, and reporting. The project manage-
ment system is linked to other PCL systems, including the People and Projects
database, client management and accounting systems, and the BEST Estimat-
ing system. BEST Estimating is PCL’s in-house estimating program for creating
lump sum and unit price estimates and providing accurate resource and cost
information.
PCL started moving its computing work to Microsoft Azure Cloud, which hosts
the hardware and software for running some of PCL’s applications in remote
computing centers managed by Microsoft. Staff working on PCL projects can
access information from cloud-based systems at any time and location using
mobile devices as well as conventional desktop machines and an Internet con-
nection. PCL saves 80 percent of the cost of backing up its corporate data by
using the Azure platform. Azure Cloud also hosts a real-time analytics dashboard
to monitor project performance in terms of quality, safety, schedule, and cost.
The data are displayed visually as bar graphs or pie charts to construction field
staff, project managers, and executives, and colors ranging from red to orange
to green display performance ratings.
Sources: “Technology and Innovation,” pcl.com, accessed February 9, 2018; “PCL: Capitalizing
on the Cloud,” itworldcanada.com, accessed February 9, 2018; Brian Jackson, “PCL Construc-
tors Reach New Heights with Real-time Analytics Solution in the Cloud,” IT World Canada,
November 9, 2017.
PCL Construction’s experience shows how essential information systems are today. PCL operates construction projects in numerous distributed locations
in an industry that has been traditionally very paper-intensive. Processing and
accessing the large number of documents and other information required by
construction projects was excessively costly and time-consuming, driving up
costs. PCL used leading-edge information technology to digitize documents and
streamline business processes for documenting, tracking, and analyzing projects.
The information flows that drive PCL’s business have become largely digital,
making use of mobile tools and a cloud computing infrastructure. PCL Construc-
tion has become a leading example of a digital firm.
The chapter-opening diagram calls attention to important points raised by this
case and this chapter. To reduce time and costs and improve customer service
in a heavily paper-based industry, PCL management chose to use information
technology to increase the precision and efficiency of key business activities for
designing, costing, budgeting, and monitoring a construction project. These tech-
nologies include mobile devices (phones, tablets, laptops), touch screen kiosks,
cloud computing services, the Internet, and software for creating models, man-
aging documents, monitoring project progress, budgeting, estimating costs, and
http://pcl.com
Index
Chapter 1 Information Systems in Global Business Today 5
displaying key project performance indicators on a digital dashboard. The use of
leading-edge digital technologies to drive business operations and management
decisions is a key topic today in the MIS world and will be discussed throughout
this text.
It is also important to note that deploying information technology has changed
the way PCL Construction runs its business. To effectively use all of its new digi-
tal tools, PCL had to redesign jobs and procedures for gathering, inputting, and
accessing information, for designing, budgeting, and calculating costs, and for
monitoring project progress. These changes had to be carefully planned to make
sure they enhanced efficiency, service, and profitability.
Here are some questions to think about: How did information technology
change operations at PCL construction? What was the role of mobile technology
and cloud computing?
1-1 How are information systems transforming
business, and why are they so essential for
running and managing a business today?
It’s not business as usual in the United States or the rest of the global economy
anymore. In 2017, American businesses spent nearly $1 trillion on informa-
tion systems hardware, software, and telecommunications equipment. In addi-
tion, they spent another $143 billion on business and management consulting
and services—much of which involves redesigning firms’ business operations
to take advantage of these new technologies. In fact, most of the business value
of IT investment derives from these organizational, management, and cultural
changes inside firms (Saunders and Brynjolfsson, 2016). Figure 1.1 shows that
between 1999 and 2017, private business investment in information technology
consisting of hardware, software, and communications equipment grew from 21
to 33 percent of all invested capital.
Business
Solutions
Management
Organization
Technology
Information
System
Business
Challenges
• Widespread operations
• Paper-intensive processes
• Revise job functions
• Revise business
processes
• Mobile devices
• Touch screen kiosks
• Microsoft Azure Cloud
• Virtual design and
project management
software
• Analytics dashboard
Project Management System
• Support budgeting, costing,
forecasting, subcontractor
tracking, and production
• Monitor project performance
Virtual Design
• Create digital models of structures
Analytics Dashboard
• Reduce costs
• Improve service
• Devise technology
strategy
• Monitor projects
6 Part One Organizations, Management, and the Networked Enterprise
As managers, most of you will work for firms that are intensively using
information systems and making large investments in information technol-
ogy. You will certainly want to know how to invest this money wisely. If you
make wise choices, your firm can outperform competitors. If you make poor
choices, you will be wasting valuable capital. This book is dedicated to help-
ing you make wise decisions about information technology and information
systems.
How Information Systems Are Transforming Business
You can see the results of this large-scale spending around you every day by
observing how people conduct business. Changes in technology and new innova-
tive business models have transformed social life and business practices. More
than 269 million Americans have mobile phones (81 percent of the population),
and 230 million of these people access the Internet using smartphones and tab-
lets. Fifty-five percent of the entire population now uses tablet computers, whose
sales have soared. Two hundred million Americans use online social networks;
175 million use Facebook, while 54 million use Twitter. Smartphones, social
networking, texting, e-mailing, and webinars have all become essential tools of
business because that’s where your customers, suppliers, and colleagues can be
found (eMarketer, 2018).
By June 2017, more than 140 million businesses worldwide had dot-com Inter-
net sites registered. Today, 220 million Americans shop online, and 190 million
will purchase online. In 2017, FedEx moved about 16 million packages daily in
220 countries and territories around the world, mostly overnight, and the United
Parcel Service (UPS) moved more than 28 million packages daily. Businesses are
using information technology to sense and respond to rapidly changing customer
demand, reduce inventories to the lowest possible levels, and achieve higher
FIGURE 1.1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT
Information technology capital investment, defined as hardware, software, and communications
equipment, grew from 21 to 33 percent of all invested capital between 1999 and 2017.
Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, Table 5.3.6. Real Private
Fixed Investment by Type, Chained Dollars (2018).
0
21%
33%
500
1000
Total Investment
IT InvestmentIn
ve
st
m
en
t
(b
ill
io
ns
)
1500
2000
2500
3000
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Chapter 1 Information Systems in Global Business Today 7
levels of operational efficiency. Supply chains have become more fast-paced,
with companies of all sizes depending on just-in-time inventory to reduce their
overhead costs and get to market faster.
As newspaper print readership continues to decline, in 2017 more than 180
million people read a newspaper online, and millions more read other news
sites. Online digital newspaper readership is growing at 10 percent annually,
about twice as fast as the Internet itself. About 128 million people watch a
video online every day, 85 million read a blog, and 30 million post to blogs,
creating an explosion of new writers and new forms of customer feedback
that did not exist five years ago (eMarketer, 2018). Social networking site
Facebook attracted 214 million monthly visitors in 2018 in the United States
and more than 2 billion worldwide. Businesses are using social networking
tools to connect their employees, customers, and managers worldwide. Most
Fortune 500 companies now have Facebook pages, Twitter accounts, and Tum-
blr sites.
E-commerce and Internet advertising continue to expand. Google’s U.S. online
ad revenues surpassed $32 billion in 2017, and Internet advertising continues to
grow at more than 20 percent a year in the United States, reaching more than
$107 billion in revenues in 2018 (eMarketer, 2018).
New federal security and accounting laws requiring many businesses to
keep e-mail messages for five years, coupled with existing occupational and
health laws requiring firms to store employee chemical exposure data for
up to 60 years, are spurring the annual growth of digital information at the
estimated rate of 5 exabytes annually, equivalent to 37,000 new Libraries of
Congress.
What’s New in Management Information Systems?
Plenty. In fact, there’s a whole new world of doing business using new tech-
nologies for managing and organizing. What makes the MIS field the most
exciting area of study in schools of business is the continuous change in tech-
nology, management, and business processes. Five changes are of paramount
importance.
IT Innovations. A continuing stream of information technology innovations
is transforming the traditional business world. Examples include the
emergence of cloud computing, the growth of a mobile digital business
platform based on smartphones and tablet computers, big data and the
Internet of Things (IoT), business analytics, machine learning systems,
and the use of social networks by managers to achieve business objec-
tives. Most of these changes have occurred in the past few years. These
innovations are enabling entrepreneurs and innovative traditional firms
to create new products and services, develop new business models, and
transform the day-to-day conduct of business. In the process, some old
businesses, even industries, are being destroyed while new businesses are
springing up.
New Business Models. For instance, the emergence of online video ser-
vices for streaming or downloading, such as Netflix, Apple iTunes, and
Amazon, has forever changed how premium video is distributed and even
created. Netflix in 2018 attracted more than 125 million subscribers world-
wide to what it calls the “Internet TV revolution.” Netflix has moved into
premium TV show production with nearly 1,000 original shows such as
American Vandal, Suburra, The Crown, Friends From College, No Country For
Old Men, House of Cards, and Orange Is the New Black, challenging cable
8 Part One Organizations, Management, and the Networked Enterprise
and broadcast producers of TV shows, and potentially disrupting cable
network dominance of TV show production. Apple’s iTunes now accounts
for 67 percent of movie and TV show downloads and has struck deals
with major Hollywood studios for recent movies and TV shows. A growing
trickle of viewers are unplugging from cable and using only the Internet for
entertainment.
E-commerce Expansion. E-commerce generated about $700 billion in
revenues in 2017 and is estimated to grow to nearly $950 billion by 2020.
E-commerce is changing how firms design, produce, and deliver their prod-
ucts and services. E-commerce has reinvented itself again, disrupting the
traditional marketing and advertising industry and putting major media and
content firms in jeopardy. Facebook and other social networking sites such
as YouTube, Twitter, and Tumblr, along with Netflix, Apple Music, and many
other media firms, exemplify the new face of e-commerce in the twenty-first
century. They sell services. When we think of e-commerce, we tend to think
of selling physical products. While this iconic vision of e-commerce is still
very powerful and the fastest-growing form of retail in the United States,
growing up alongside is a whole new value stream based on selling services,
not goods. It’s a services model of e-commerce. Growth in social commerce
is spurred by powerful growth of the mobile platform: 85 percent of Face-
book’s users access the service from mobile phones and tablets. Informa-
tion systems and technologies are the foundation of this new services-based
e-commerce. Mobile e-commerce hit $229 billion in 2017 and is growing at 30
percent a year.
Management Changes. The management of business firms has changed:
With new mobile smartphones, high-speed wireless Wi-Fi networks, and
tablets, remote salespeople on the road are only seconds away from their
managers’ questions and oversight. Management is going mobile. Manag-
ers on the move are in direct, continuous contact with their employees.
The growth of enterprise-wide information systems with extraordinarily
rich data means that managers no longer operate in a fog of confusion but
instead have online, nearly instant access to the really important informa-
tion they need for accurate and timely decisions. In addition to their pub-
lic uses on the web, social networking tools, wikis, and blogs are becoming
important corporate tools for communication, collaboration, and information
sharing.
Changes in Firms and Organizations. Compared to industrial organiza-
tions of the previous century, new fast-growing twenty-first-century business
firms put less emphasis on hierarchy and structure and more emphasis on
employees taking on multiple roles and tasks and collaborating with others on
a team. They put greater emphasis on competency and skills rather than posi-
tion in the hierarchy. They emphasize higher-speed and more-accurate deci-
sion making based on data and analysis. They are more aware of changes in
technology, consumer attitudes, and culture. They use social media to enter
into conversations with consumers and demonstrate a greater willingness to
listen to consumers, in part because they have no choice. They show better
understanding of the importance of information technology in creating and
managing business firms and other organizations. To the extent organizations
and business firms demonstrate these characteristics, they are twenty-first-
century digital firms.
You can see some of these trends at work in the Interactive Session on Man-
agement. Millions of managers rely heavily on the mobile digital platform
to coordinate suppliers and shipments, satisfy customers, and manage their
employees. A business day without these mobile devices or Internet access
would be unthinkable.
9 Part Two Information Technology Infrastructure Chapter 1 Information Systems in Global Business Today 9
Can you run the company just by using your iPhone?
Perhaps not entirely, but there are many business
functions today that can be performed using an
iPhone, iPad, or Android mobile device. Smartphones
and tablets have become all-in-one tools that help
managers and employees work more efficiently,
packing a powerful, networked computer into a
pocket-size device. With a tap or flick of a finger,
these mobile devices can access the Internet or serve
as a telephone, camera, music or video player, an
e-mail and messaging machine, and, increasingly, a
gateway into corporate systems. New software appli-
cations for document sharing, collaboration, sales,
order processing, inventory management, schedul-
ing, and production monitoring make these devices
even more versatile business tools.
Network Rail runs, maintains, and develops the
rail tracks, signaling, bridges, tunnels, level cross-
ings, and many key stations for most of the rail
network in England, Scotland, and Wales. Keeping
trains running on time is one of its top priorities. To
maintain 20,000 miles of track safely and efficiently,
skilled workers must be equipped with appropriate
tools and work across thousands of sites throughout
the rail network, 24 hours a day. Network Rail uses
a group of custom apps for its 22,000 iPhone and
iPad devices to streamline maintenance operations,
quickly capture incident data, and immediately share
critical information.
Several apps help Network Rail improve railway per-
formance and safety. The Close Call app helps employ-
ees report hazards as they are found so problems can
be addressed quickly. The MyWork app gives mainte-
nance teams all the information they need to start and
complete repair tasks. The Sentinel app allows field
managers to electronically scan ID cards to verify that
workers are qualified to perform specific tasks.
The iPhone and iPad apps provide maintenance
technicians with current technical data, GPS loca-
tions, and streamlined reports, replacing cumber-
some reference books and rain-soaked paperwork
that slowed the repair process. Many service calls
start with hazardous conditions reported by Network
Rail employees themselves. Rather than waiting
hours to fill out a report at the depot, workers can
take pictures of dangerous situations right away,
using the Close Call app to describe situations and
upload photos to the call center. Once provided with
the hazard’s GPS coordinates, the call center will
usually schedule repairs within 24 hours.
MyWork gives maintenance workers a simple
overview of all of the jobs each team needs to com-
plete during a specific shift. This mobile app clusters
jobs by location, skills required, and opening and
closing times. Using precise map coordinates, work-
ers can find sites easily and finish jobs more quickly.
By electronically delivering daily job schedules to
over 14,000 maintenance staff members, MyWork
has enabled them to complete over a half a million
work orders to date while minimizing interruptions.
British Airways is the largest airline in the United
Kingdom, with operations in more than 200 airports
worldwide. The airline has found many ways to use
the iPad to improve customer service and operational
efficiency. The airline has created more than 40 cus-
tom apps for over 17,000 iPads for its workforce that
have transformed the way it does business.
Unforeseen disruptions can create long lines of
passengers seeking flight information and rebooking.
The FlightReact app used by British Airways mobi-
lizes agents to scan a boarding pass, review the cus-
tomer’s booking, look up alternate flight options, and
rebook and reticket passengers—all within four min-
utes. iBanner allows agents to identify passengers
transferring onto a specific flight, while iTranslate
enables staff to communicate easily with travelers
speaking any language.
Inside the airport, iPads and iPhones communi-
cate with low-energy wireless Bluetooth signals from
iBeacon, notifying customers of Wi-Fi access, gate
locations, and flight updates. Beyond the terminal,
mobile apps are helping British Airways to improve
the aircraft turnaround process. British Airways has
more than 70 planes at London Heathrow Terminal,
five turning around at once, and each requiring a
team of around 30 people. To shorten and streamline
this process can generate huge business benefits.
Loading luggage and cargo onto an aircraft is one
of the most complex parts of the turnaround pro-
cess, requiring detailed communications between
the turnaround manager (TRM), who coordinates
and manages the services around the aircraft during
INTERACTIVE SESSION MANAGEMENT
Can You Run the Company with Your iPhone?
departure and arrival, the offsite Centralized Load
Control (CLC) team, and the pilot. With iPads run-
ning the iLoad Direct app, turnaround managers are
able to monitor the aircraft loading process and share
data with pilots and back-office staff in real time.
TRMs can receive and input real-time data about
the aircraft load’s contents, weight, and distribution.
These data are essential to help the pilot calculate
the right amount of fuel and position the plane for
take-off. By streamlining communications between
the ground crew, the CLC team, and the pilot, iLoad
Direct and iPad speed up the pace at which aircraft
become airborne. These mobile tools have helped
British Airways achieve an industry-leading bench-
mark for aircraft turnaround.
CASE STUDY QUESTIONS
1. What kinds of applications are described here?
What business functions do they support? How do
they improve operational efficiency and decision
making?
2. Identify the problems that the business in
this case study solved by using mobile digital
devices.
In addition to facilitating managerial work, mobile
devices are helping rank-and-file employees man-
age their work lives more effectively. Shyft is one of
several smartphone apps that allow workers to share
information, make schedule changes, and report
labor violations. Thousands of employees at chains
like Starbucks and Old Navy are using these apps to
view their schedules and swap shifts when they’ve
got a scheduling conflict or need extra work.
Sources: “British Airways: Transforming the Travel Experience from
Start to Finish,” Apple at Work, www.apple.com, accessed February 7,
2018; www.networkrail.co.uk,accessed September 2, 2018; “Network
Rail,” iPhone in Business, www.apple.com, accessed January 4, 2017;
and Lauren Weber, “Apps Empower Employees, Ease Scheduling,”
Wall Street Journal, January 3, 2017.
3. What kinds of businesses are most likely to benefit
from equipping their employees with mobile digi-
tal devices such as iPhones and iPads?
4. One company deploying iPhones has stated, “The
iPhone is not a game changer, it’s an industry
changer. It changes the way that you can interact
with your customers” and “with your suppliers.”
Discuss the implications of this statement.
10 Part One Organizations, Management, and the Networked Enterprise
iPhone and iPad
Applications for Business
1. Salesforce
2. Cisco WebEx Meetings
3. SAP Business One
4. iWork
5. Evernote
6. Adobe Acrobat Reader
7. Oracle Business
Intelligence Mobile
8. Dropbox
Whether it’s attending an online meeting, checking orders, working with files and
documents, or obtaining business intelligence, Apple’s iPhone and iPad offer unlimited
possibilities for business users. A stunning multitouch display, full Internet browsing, and
capabilities for messaging, video and audio transmission, and document management
make each an all-purpose platform for mobile computing.
© Mama_mia/Shutterstock
http://www.apple.com
http://www.networkrail.co.uk,accessed
http://www.apple.com
Chapter 1 Information Systems in Global Business Today 11
Globalization Challenges and Opportunities:
A Flattened World
In 1492, Columbus reaffirmed what astronomers were long saying: the world
was round and the seas could be safely sailed. As it turned out, the world was
populated by peoples and languages living in isolation from one another, with
great disparities in economic and scientific development. The world trade that
ensued after Columbus’s voyages has brought these peoples and cultures closer.
The “industrial revolution” was really a worldwide phenomenon energized
by expansion of trade among nations and the emergence of the first global
economy.
In 2005, journalist Thomas Friedman wrote an influential book declaring the
world was now “flat,” by which he meant that the Internet and global communi-
cations had greatly reduced the economic and cultural advantages of developed
countries. Friedman argued that the United States and European countries were
in a fight for their economic lives, competing for jobs, markets, resources, and
even ideas with highly educated, motivated populations in low-wage areas in
the less-developed world (Friedman, 2007). This “globalization” presents both
challenges and opportunities for business firms.
A significant percentage of the economy of the United States and other
advanced industrial countries in Europe and Asia depends on imports and
exports. In 2017, about 30 percent of the $20 trillion U.S. economy resulted
from foreign trade, both imports and exports. In Europe and Asia, the number
exceeded 50 percent. Many Fortune 500 U.S. firms derive more than half their
revenues from foreign operations. Tech companies are particularly dependent
on offshore revenue: 80 percent of Intel’s revenues in 2017 came from overseas
sales of its microprocessors, while Apple got 60 percent of its revenue outside
of the United States. Eighty percent of the toys sold in the United States are
manufactured in China, while about 90 percent of the PCs manufactured in
China use American-made Intel or Advanced Micro Design (AMD) chips. The
microprocessor chips are shipped from the United States to China for assembly
into devices.
It’s not just goods that move across borders. So too do jobs, some of them
high-level jobs that pay well and require a college degree. In the past decade,
the United States lost 7 million manufacturing jobs to offshore, low-wage pro-
ducers. But manufacturing is now a very small part of U.S. employment (less
than 12 percent of the labor force and declining). In a normal year, about
300,000 service jobs move offshore to lower-wage countries. Many of the jobs
are in less-skilled information system occupations, but some are “tradable ser-
vice” jobs in architecture, financial services, customer call centers, consulting,
engineering, and even radiology. Yet at the same time the United States has
lost so many jobs, it has added 33 million new service jobs.
The U.S. economy creates more than 3.5 million new jobs in a normal,
non-recessionary year. Although only 1.1 million private sector jobs were created
in 2011 due to slow economic recovery, by 2017, the U.S. economy was adding
more than 2 million new jobs annually for the third straight year. Employment
in information systems and the other service occupations is expanding rapidly,
and wages are stable. Outsourcing may have accelerated the development of new
systems worldwide, as these systems could be maintained and developed in low-
wage countries. In part this explains why the job market for MIS and computer
science graduates is growing rapidly in the United States.
The challenge for you as a business student is to develop high-level skills
through education and on-the-job experience that cannot be outsourced.
12 Part One Organizations, Management, and the Networked Enterprise
The challenge for your business is to avoid markets for goods and services that
can be produced offshore much less expensively. The opportunities are equally
immense. Throughout this book you will find examples of companies and indi-
viduals who either failed or succeeded in using information systems to adapt to
this new global environment.
What does globalization have to do with management information systems?
That’s simple: everything. The emergence of the Internet into a full-blown inter-
national communications system has drastically reduced the costs of operating
and transacting on a global scale. Communication between a factory floor in
Shanghai and a distribution center in Rapid City, South Dakota, is now instant
and virtually free. Customers can now shop in a worldwide marketplace, obtain-
ing price and quality information reliably 24 hours a day. Firms producing goods
and services on a global scale achieve extraordinary cost reductions by find-
ing low-cost suppliers and managing production facilities in other countries.
Internet service firms, such as Google and eBay, are able to replicate their busi-
ness models and services in multiple countries without having to redesign their
expensive fixed-cost information systems infrastructure. Briefly, information
systems enable globalization.
The Emerging Digital Firm
All of the changes we have just described, coupled with equally significant orga-
nizational redesign, have created the conditions for a fully digital firm. A digital
firm can be defined along several dimensions. A digital firm is one in which
nearly all of the organization’s significant business relationships with customers,
suppliers, and employees are digitally enabled and mediated. Core business pro-
cesses are accomplished through digital networks spanning the entire organiza-
tion or linking multiple organizations.
Business processes refer to the set of logically related tasks and behaviors
that organizations develop over time to produce specific business results and the
unique manner in which these activities are organized and coordinated. Devel-
oping a new product, generating and fulfilling an order, creating a marketing
plan, and hiring an employee are examples of business processes, and the ways
organizations accomplish their business processes can be a source of competitive
strength. (A detailed discussion of business processes can be found in Chapter 2.)
Key corporate assets—intellectual property, core competencies, and financial
and human assets—are managed through digital means. In a digital firm, any
piece of information required to support key business decisions is available at
any time and anywhere in the firm.
Digital firms sense and respond to their environments far more rapidly than
traditional firms, giving them more flexibility to survive in turbulent times. Digi-
tal firms offer extraordinary opportunities for more-flexible global organization
and management. In digital firms, both time shifting and space shifting are
the norm. Time shifting refers to business being conducted continuously, 24/7,
rather than in narrow “work day” time bands of 9 a.m. to 5 p.m. Space shifting
means that work takes place in a global workshop as well as within national
boundaries. Work is accomplished physically wherever in the world it is best
accomplished.
Many firms, such as Cisco Systems, 3M, and GE (see the Chapter 12 ending
case), are close to becoming digital firms, using the Internet to drive every
aspect of their business. Most other companies are not fully digital, but they
are moving toward close digital integration with suppliers, customers, and
employees.
Chapter 1 Information Systems in Global Business Today 13
Strategic Business Objectives of Information Systems
What makes information systems so essential today? Why are businesses invest-
ing so much in information systems and technologies? In the United States, more
than 25 million business and financial managers, and 36 million professional
workers in the labor force rely on information systems to conduct business.
Information systems are essential for conducting day-to-day business in the
United States and most other advanced countries as well as achieving strategic
business objectives.
Entire sectors of the economy are nearly inconceivable without substan-
tial investments in information systems. E-commerce firms such as Amazon,
eBay, Google, and E*Trade simply would not exist. Today’s service industries—
finance, insurance, and real estate as well as personal services such as travel,
medicine, and education—could not operate without information systems.
Similarly, retail firms such as Walmart and Target and manufacturing firms
such as General Motors and GE require information systems to survive and
prosper. Just as offices, telephones, filing cabinets, and efficient tall buildings
with elevators were once the foundations of business in the twentieth cen-
tury, information technology is a foundation for business in the twenty-first
century.
There is a growing interdependence between a firm’s ability to use informa-
tion technology and its ability to implement corporate strategies and achieve
corporate goals (see Figure 1.2). What a business would like to do in five years
often depends on what its systems will be able to do. Increasing market share,
becoming the high-quality or low-cost producer, developing new products, and
increasing employee productivity depend more and more on the kinds and qual-
ity of information systems in the organization. The more you understand about
this relationship, the more valuable you will be as a manager.
Specifically, business firms invest heavily in information systems to achieve
six strategic business objectives: operational excellence; new products, services,
FIGURE 1.2 THE INTERDEPENDENCE BETWEEN ORGANIZATIONS AND
INFORMATION SYSTEMS
In contemporary systems, there is a growing interdependence between a firm’s information
systems and its business capabilities. Changes in strategy, rules, and business processes
increasingly require changes in hardware, software, databases, and telecommunications.
Often, what the organization would like to do depends on what its systems will permit it to do.
Hardware
Information
System
Business
Firm
Software
Business Strategic
Objectives
Business Processes Data Management
Telecommunications
14 Part One Organizations, Management, and the Networked Enterprise
and business models; customer and supplier intimacy; improved decision mak-
ing; competitive advantage; and survival.
Operational Excellence
Businesses continuously seek to improve the efficiency of their operations in
order to achieve higher profitability. Information systems and technologies are
some of the most important tools available to managers for achieving higher
levels of efficiency and productivity in business operations, especially when
coupled with changes in business practices and management behavior.
Walmart, the largest retailer on earth, exemplifies the power of informa-
tion systems coupled with state-of-the-art business practices and supportive
management to achieve world-class operational efficiency. In fiscal year 2018,
Walmart achieved over $500 billion in sales—nearly one-tenth of retail sales in
the United States—in large part because of its Retail Link system, which digitally
links its suppliers to every one of Walmart’s stores. As soon as a customer pur-
chases an item, the supplier monitoring the item knows to ship a replacement
to the shelf. Walmart is the most efficient retail store in the industry, achieving
sales of more than $600 per square foot, compared with its closest competitor,
Target, at $425 per square foot and other large general merchandise retail firms
producing less than $200 per square foot.
New Products, Services, and Business Models
Information systems and technologies are a major enabling tool for firms to
create new products and services as well as entirely new business models. A
business model describes how a company produces, delivers, and sells a prod-
uct or service to create wealth.
Today’s music industry is vastly different from the industry a decade ago.
Apple Inc. transformed an old business model of music distribution based on
vinyl records, tapes, and CDs into an online, legal distribution model based on
its own iPod technology platform. Apple has prospered from a continuing stream
of innovations, including the iTunes music service, the iPad, and the iPhone.
Customer and Supplier Intimacy
When a business really knows its customers and serves them well, the custom-
ers generally respond by returning and purchasing more. This raises revenues
and profits. Likewise with suppliers, the more a business engages its suppli-
ers, the better the suppliers can provide vital inputs. This lowers costs. How to
really know your customers or suppliers is a central problem for businesses with
millions of offline and online customers.
The Mandarin Oriental in Manhattan and other high-end hotels exemplify
the use of information systems and technologies to achieve customer inti-
macy. These hotels use computers to keep track of guests’ preferences, such as
their preferred room temperature, check-in time, frequently dialed telephone
numbers, and television programs, and store these data in a large data reposi-
tory. Individual rooms in the hotels are networked to a central network server
computer so that they can be remotely monitored and controlled. When a
customer arrives at one of these hotels, the system automatically changes the
room conditions, such as dimming the lights, setting the room temperature, or
selecting appropriate music, based on the customer’s digital profile. The hotels
also analyze their customer data to identify their best customers and to develop
individualized marketing campaigns based on customers’ preferences.
JCPenney exemplifies the benefits of information systems–enabled sup-
plier intimacy. Every time a dress shirt is bought at a JCPenney store in the
Chapter 1 Information Systems in Global Business Today 15
United States, the record of the sale appears immediately on computers in
Hong Kong at the TAL Apparel Ltd. supplier, a contract manufacturer that pro-
duces one in eight dress shirts sold in the United States. TAL runs the numbers
through a computer model it developed and then decides how many replace-
ment shirts to make and in what styles, colors, and sizes. TAL then sends the
shirts to each JCPenney store, bypassing completely the retailer’s warehouses. In
other words, JCPenney’s shirt inventory is near zero, as is the cost of storing it.
Improved Decision Making
Many business managers operate in an information fog bank, never really having
the right information at the right time to make an informed decision. Instead,
managers rely on forecasts, best guesses, and luck. The result is over- or under-
production of goods and services, misallocation of resources, and poor response
times. These poor outcomes raise costs and lose customers. In the past decade,
information systems and technologies have made it possible for managers to use
real-time data from the marketplace when making decisions.
For instance, Verizon Corporation, one of the largest telecommunications
companies in the United States, uses a web-based digital dashboard to provide
managers with precise real-time information on customer complaints, network
performance for each locality served, and line outages or storm-damaged lines.
Using this information, managers can immediately allocate repair resources to
affected areas, inform consumers of repair efforts, and restore service fast.
Competitive Advantage
When firms achieve one or more of these business objectives—operational
excellence; new products, services, and business models; customer/supplier
intimacy; and improved decision making—chances are they have already
achieved a competitive advantage. Doing things better than your competitors,
charging less for superior products, and responding to customers and suppliers
in real time all add up to higher sales and higher profits that your competitors
cannot match. Apple Inc., Walmart, and UPS, described later in this chapter,
are industry leaders because they know how to use information systems for
this purpose.
Survival
Business firms also invest in information systems and technologies because
they are necessities of doing business. Sometimes these “necessities” are driven
by industry-level changes. For instance, after Citibank introduced the first
automated teller machines (ATMs) in the New York region in 1977 to attract
customers through higher service levels, its competitors rushed to provide
ATMs to their customers to keep up with Citibank. Today, virtually all banks
in the United States have regional ATMs and link to national and international
ATM networks, such as CIRRUS. Providing ATM services to retail banking cus-
tomers is simply a requirement of being in and surviving in the retail banking
business.
There are many federal and state statutes and regulations that create a legal
duty for companies and their employees to retain records, including digital
records. For instance, the Toxic Substances Control Act (1976), which regulates
the exposure of U.S. workers to more than 75,000 toxic chemicals, requires firms
to retain records on employee exposure for 30 years. The Sarbanes-Oxley Act
(2002), which was intended to improve the accountability of public firms and
their auditors, requires certified public accounting firms that audit public com-
panies to retain audit working papers and records, including all e-mails, for five
16 Part One Organizations, Management, and the Networked Enterprise
years. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010),
which was intended to strengthen regulation of the banking industry, requires
firms to retain all records for 10 years. Many other pieces of federal and state
legislation in health care, financial services, education, and privacy protection
impose significant information retention and reporting requirements on U.S.
businesses. Firms turn to information systems and technologies to provide the
capability to respond to these challenges.
1-2 What is an information system? How
does it work? What are its management,
organization, and technology components?
Why are complementary assets essential
for ensuring that information systems
provide genuine value for organizations?
So far we’ve used information systems and technologies informally without defin-
ing the terms. Information technology (IT) consists of all the hardware and
software that a firm needs to use in order to achieve its business objectives. This
includes not only computer machines, storage devices, and handheld mobile
devices but also software, such as the Windows or Linux operating systems, the
Microsoft Office desktop productivity suite, and the many thousands of com-
puter programs that can be found in a typical large firm. “Information systems”
are more complex and can be best understood by looking at them from both a
technology and a business perspective.
What Is an Information System?
An information system can be defined technically as a set of interrelated
components that collect (or retrieve), process, store, and distribute information
to support decision making and control in an organization. In addition to sup-
porting decision making, coordination, and control, information systems may
also help managers and workers analyze problems, visualize complex subjects,
and create new products.
Information systems contain information about significant people, places,
and things within the organization or in the environment surrounding it. By
information we mean data that have been shaped into a form that is meaning-
ful and useful to human beings. Data, in contrast, are streams of raw facts rep-
resenting events occurring in organizations or the physical environment before
they have been organized and arranged into a form that people can understand
and use.
A brief example contrasting information and data may prove useful. Super-
market checkout counters scan millions of pieces of data from bar codes, which
describe each product. Such pieces of data can be totaled and analyzed to provide
meaningful information, such as the total number of bottles of dish detergent
sold at a particular store, which brands of dish detergent were selling the most
rapidly at that store or sales territory, or the total amount spent on that brand of
dish detergent at that store or sales region (see Figure 1.3).
Three activities in an information system produce the information that orga-
nizations need to make decisions, control operations, analyze problems, and
Chapter 1 Information Systems in Global Business Today 17
FIGURE 1.3 DATA AND INFORMATION
Raw data from a supermarket checkout counter can be processed and organized to produce
meaningful information, such as the total unit sales of dish detergent or the total sales revenue
from dish detergent for a specific store or sales territory.
Data
Info
rma
tion
Sales Region: Northwest
Store: Superstore #122
331
$9,231.24
ITEM NO. DESCRIPTION
Brite Dish Soap 7,156
UNITS SOLD
YTD SALES
331 Brite Dish Soap 1.29
863 BL Hill Coffee 4.69
173 Meow Cat .79
331 Brite Dish Soap 1.29
663 Country Ham 3.29
524 Fiery Mustard 1.49
113 Ginger Root .85
331 Brite Dish Soap 1.29
.
.
.
Information
System
create new products or services. These activities are input, processing, and out-
put (see Figure 1.4). Input captures or collects raw data from within the organi-
zation or from its external environment. Processing converts this raw input into
a meaningful form. Output transfers the processed information to the people
who will use it or to the activities for which it will be used. Information systems
also require feedback, which is output that is returned to appropriate members
of the organization to help them evaluate or correct the input stage.
In PCL’s project management system, input includes the names and addresses
of contractors and subcontractors, project names and identification numbers,
project activities, labor costs, materials costs, and start and completion dates
for project activities. Computers store these data and process them to calculate
how much each project activity and the entire project will cost and estimated
completion time. The system provides meaningful information such as the
size, cost, and duration of all projects under PCL management, projects over
and under budget, and projects and project activities that are late or on time.
Although computer-based information systems use computer technology
to process raw data into meaningful information, there is a sharp distinction
between a computer and a computer program on the one hand and an infor-
mation system on the other. Computers and related software programs are the
technical foundation, the tools and materials, of modern information systems.
Computers provide the equipment for storing and processing information. Com-
puter programs, or software, are sets of operating instructions that direct and
control computer processing. Knowing how computers and computer programs
work is important in designing solutions to organizational problems, but comput-
ers are only part of an information system.
A house is an appropriate analogy. Houses are built with hammers, nails, and
wood, but these do not make a house. The architecture, design, setting, land-
scaping, and all of the decisions that lead to the creation of these features are
part of the house and are crucial for solving the problem of putting a roof over
one’s head. Computers and programs are the hammers, nails, and lumber of
computer-based information systems, but alone they cannot produce the infor-
mation a particular organization needs. To understand information systems, you
18 Part One Organizations, Management, and the Networked Enterprise
must understand the problems they are designed to solve, their architectural
and design elements, and the organizational processes that lead to the solutions.
Dimensions of Information Systems
To fully understand information systems, you must understand the broader orga-
nization, management, and information technology dimensions of systems (see
Figure 1.5) and their power to provide solutions to challenges and problems in
the business environment. We refer to this broader understanding of informa-
tion systems, which encompasses an understanding of the management and
organizational dimensions of systems as well as the technical dimensions of
systems, as information systems literacy. Computer literacy, in contrast,
focuses primarily on knowledge of information technology.
The field of management information systems (MIS) tries to achieve this
broader information systems literacy. MIS deals with behavioral issues as well as
technical issues surrounding the development, use, and impact of information
systems used by managers and employees in the firm.
Let’s examine each of the dimensions of information systems—organizations,
management, and information technology.
Organizations
Information systems are an integral part of organizations. Indeed, for some com-
panies, such as credit reporting firms, there would be no business without an
information system. The key elements of an organization are its people, structure,
FIGURE 1.4 FUNCTIONS OF AN INFORMATION SYSTEM
An information system contains information about an organization and its surrounding
environment. Three basic activities—input, processing, and output—produce the
information organizations need. Feedback is output returned to appropriate people or
activities in the organization to evaluate and refine the input. Environmental actors, such
as customers, suppliers, competitors, stockholders, and regulatory agencies, interact with
the organization and its information systems.
ENVIRONMENT
Feedback
INFORMATION SYSTEM
Suppliers Customers
Stockholders CompetitorsRegulatory
Agencies
ORGANIZATION
Input Output
Processing
Classify
Arrange
Calculate
Chapter 1 Information Systems in Global Business Today 19
business processes, politics, and culture. We introduce these components of
organizations here and describe them in greater detail in Chapters 2 and 3.
Organizations have a structure that is composed of different levels and spe-
cialties. Their structures reveal a clear-cut division of labor. Authority and
responsibility in a business firm are organized as a hierarchy, or a pyramid
structure. The upper levels of the hierarchy consist of managerial, profes-
sional, and technical employees, whereas the lower levels consist of opera-
tional personnel.
Senior management makes long-range strategic decisions about products
and services as well as ensures financial performance of the firm. Middle
management carries out the programs and plans of senior management, and
operational management is responsible for monitoring the daily activities of
the business. Knowledge workers, such as engineers, scientists, or architects,
design products or services and create new knowledge for the firm, whereas
data workers, such as secretaries or clerks, assist with scheduling and com-
munications at all levels of the firm. Production or service workers actually
produce the product and deliver the service (see Figure 1.6).
Experts are employed and trained for different business functions. The major
business functions, or specialized tasks performed by business organizations,
consist of sales and marketing, manufacturing and production, finance and
accounting, and human resources (see Table 1.1). Chapter 2 provides more detail
on these business functions and the ways in which they are supported by infor-
mation systems.
An organization coordinates work through its hierarchy and through its
business processes. Most organizations’ business processes include formal rules
that have been developed over a long time for accomplishing tasks. These rules
guide employees in a variety of procedures, from writing an invoice to respond-
ing to customer complaints. Some of these business processes have been written
down, but others are informal work practices, such as a requirement to return
telephone calls from coworkers or customers, that are not formally documented.
Information systems automate many business processes. For instance, how a
FIGURE 1.5 INFORMATION SYSTEMS ARE MORE THAN COMPUTERS
Using information systems effectively requires an understanding of the organization,
management, and information technology shaping the systems. An information system
creates value for the firm as an organizational and management solution to challenges
posed by the environment.
Organizations Technology
Information
Systems
Management
20 Part One Organizations, Management, and the Networked Enterprise
customer receives credit or how a customer is billed is often determined by an
information system that incorporates a set of formal business processes.
Each organization has a unique culture, or fundamental set of assumptions,
values, and ways of doing things, that has been accepted by most of its members.
You can see organizational culture at work by looking around your university or
college. Some bedrock assumptions of university life are that professors know
more than students, that the reason students attend college is to learn, and that
classes follow a regular schedule.
Parts of an organization’s culture can always be found embedded in its infor-
mation systems. For instance, UPS’s first priority is customer service, which is an
aspect of its organizational culture that can be found in the company’s package
tracking systems, which we describe in this section.
Different levels and specialties in an organization create different interests
and points of view. These views often conflict over how the company should
be run and how resources and rewards should be distributed. Conflict is the
basis for organizational politics. Information systems come out of this cauldron
of differing perspectives, conflicts, compromises, and agreements that are a
FIGURE 1.6 LEVELS IN A FIRM
Business organizations are hierarchies consisting of three principal levels: senior
management, middle management, and operational management. Information systems
serve each of these levels. Scientists and knowledge workers often work with middle
management.
Senior
Management
Middle Management
Scientists and knowledge workers
Operational Management
Production and service workers
Data workers
TABLE 1.1 MAJOR BUSINESS FUNCTIONS
FUNCTION PURPOSE
Sales and marketing Selling the organization’s products and services
Manufacturing and production Producing and delivering products and services
Finance and accounting Managing the organization’s financial assets and
maintaining the organization’s financial records
Human resources Attracting, developing, and maintaining the organization’s
labor force; maintaining employee records
Chapter 1 Information Systems in Global Business Today 21
natural part of all organizations. In Chapter 3, we examine these features of
organizations and their role in the development of information systems in
greater detail.
Management
Management’s job is to make sense out of the many situations faced by orga-
nizations, make decisions, and formulate action plans to solve organizational
problems. Managers perceive business challenges in the environment, they set
the organizational strategy for responding to those challenges, and they allocate
the human and financial resources to coordinate the work and achieve success.
Throughout, they must exercise responsible leadership. The business informa-
tion systems described in this book reflect the hopes, dreams, and realities of
real-world managers.
But managers must do more than manage what already exists. They must also
create new products and services and even re-create the organization from time
to time. A substantial part of management responsibility is creative work driven
by new knowledge and information. Information technology can play a power-
ful role in helping managers design and deliver new products and services and
redirecting and redesigning their organizations. Chapter 12 treats management
decision making in detail.
Information Technology
Information technology is one of many tools managers use to cope with change.
Computer hardware is the physical equipment used for input, processing, and
output activities in an information system. It consists of the following: comput-
ers of various sizes and shapes (including mobile handheld devices); various
input, output, and storage devices; and telecommunications devices that link
computers together.
Computer software consists of the detailed, preprogrammed instructions
that control and coordinate the computer hardware components in an infor-
mation system. Chapter 5 describes the contemporary software and hardware
platforms used by firms today in greater detail.
Data management technology consists of the software governing the orga-
nization of data on physical storage media. More detail on data organization and
access methods can be found in Chapter 6.
Networking and telecommunications technology, consisting of both phys-
ical devices and software, links the various pieces of hardware and transfers data
from one physical location to another. Computers and communications equip-
ment can be connected in networks for sharing voice, data, images, sound, and
video. A network links two or more computers to share data or resources, such
as a printer.
The world’s largest and most widely used network is the Internet. The Inter-
net is a global “network of networks” that uses universal standards (described in
Chapter 7) to connect millions of networks in more than 230 countries around
the world.
The Internet has created a new “universal” technology platform on which to
build new products, services, strategies, and business models. This same tech-
nology platform has internal uses, providing the connectivity to link different
systems and networks within the firm. Internal corporate networks based on
Internet technology are called intranets. Private intranets extended to autho-
rized users outside the organization are called extranets, and firms use such
networks to coordinate their activities with other firms for making purchases,
collaborating on design, and other interorganizational work. For most business
22 Part One Organizations, Management, and the Networked Enterprise
firms today, using Internet technology is both a business necessity and a com-
petitive advantage.
The World Wide Web is a service provided by the Internet that uses uni-
versally accepted standards for storing, retrieving, formatting, and display-
ing information in a page format on the Internet. Web pages contain text,
graphics, animations, sound, and video and are linked to other web pages.
By clicking on highlighted words or buttons on a web page, you can link to
related pages to find additional information and links to other locations on
the web. The web can serve as the foundation for new kinds of information
systems such as UPS’s web-based package tracking system described in the
Interactive Session.
All of these technologies, along with the people required to run and man-
age them, represent resources that can be shared throughout the organization
and constitute the firm’s information technology (IT) infrastructure. The
IT infrastructure provides the foundation, or platform, on which the firm can
build its specific information systems. Each organization must carefully design
and manage its IT infrastructure so that it has the set of technology services it
needs for the work it wants to accomplish with information systems. Chapters 5
through 8 of this book examine each major technology component of informa-
tion technology infrastructure and show how they all work together to create
the technology platform for the organization.
The Interactive Session on Technology describes some of the typical tech-
nologies used in computer-based information systems today. UPS invests heav-
ily in information systems technology to make its business more efficient and
customer oriented. It uses an array of information technologies, including bar
code scanning systems, wireless networks, large mainframe computers, hand-
held computers, the Internet, and many different pieces of software for track-
ing packages, calculating fees, maintaining customer accounts, and managing
logistics.
Let’s identify the organization, management, and technology elements in
the UPS package tracking system we have just described. The organization
element anchors the package tracking system in UPS’s sales and production
functions (the main product of UPS is a service—package delivery). It speci-
fies the required procedures for identifying packages with both sender and
recipient information, taking inventory, tracking the packages en route, and
providing package status reports for UPS customers and customer service
representatives.
The system must also provide information to satisfy the needs of managers
and workers. UPS drivers need to be trained in both package pickup and delivery
procedures and in how to use the package tracking system so that they can work
efficiently and effectively. UPS customers may need some training to use UPS
in-house package tracking software or the UPS website.
UPS’s management is responsible for monitoring service levels and costs and
for promoting the company’s strategy of combining low cost and superior ser-
vice. Management decided to use computer systems to increase the ease of
sending a package using UPS and of checking its delivery status, thereby reduc-
ing delivery costs and increasing sales revenues.
The technology supporting this system consists of handheld computers,
bar code scanners, desktop computers, wired and wireless communications
networks, UPS’s data center, storage technology for the package delivery data,
UPS in-house package tracking software, and software to access the World Wide
Web. The result is an information system solution to the business challenge
Chapter 5 IT Infrastructure and Emerging Technologies 23 Chapter 1 Information Systems in Global Business Today 23
Acquisition Device (DIAD), which can access a wire-
less cell phone network. As soon as the driver logs
on, his or her day’s route is downloaded onto the
handheld. The DIAD also automatically captures
customers’ signatures along with pickup and delivery
information. Package tracking information is then
transmitted to UPS’s computer network for storage
and processing. From there, the information can be
accessed worldwide to provide proof of delivery to
customers or to respond to customer queries. It usu-
ally takes less than 60 seconds from the time a driver
presses “complete” on the DIAD for the new informa-
tion to be available on the web.
Through its automated package tracking system,
UPS can monitor and even reroute packages through-
out the delivery process. At various points along the
route from sender to receiver, bar code devices scan
shipping information on the package label and feed
data about the progress of the package into the cen-
tral computer. Customer service representatives are
able to check the status of any package from desk-
top computers linked to the central computers and
respond immediately to inquiries from customers.
UPS customers can also access this information from
the company’s website using their own computers
or mobile phones. UPS now has mobile apps and a
mobile website for iPhone, BlackBerry, and Android
smartphone users.
Anyone with a package to ship can access the UPS
website to track packages, check delivery routes, cal-
culate shipping rates, determine time in transit, print
labels, and schedule a pickup. The data collected at
the UPS website are transmitted to the UPS central
computer and then back to the customer after pro-
cessing. UPS also provides tools that enable custom-
ers, such Cisco Systems, to embed UPS functions,
such as tracking and cost calculations, into their own
websites so that they can track shipments without
visiting the UPS site.
UPS is now leveraging its decades of expertise
managing its own global delivery network to manage
logistics and supply chain activities for other
companies. It created a UPS Supply Chain Solutions
division that provides a complete bundle of standard-
ized services to subscribing companies at a fraction
of what it would cost to build their own systems and
infrastructure. These services include supply chain
design and management, freight forwarding, customs
United Parcel Service (UPS) started out in 1907 in a
closet-sized basement office. Jim Casey and Claude
Ryan—two teenagers from Seattle with two bicycles
and one phone—promised the “best service and
lowest rates.” UPS has used this formula successfully
for more than a century to become the world’s largest
ground and air package-delivery company. It’s a global
enterprise with more than 454,000 employees, over
112,000 vehicles, and the world’s ninth-largest airline.
Today, UPS delivers 5.1 billion packages and docu-
ments in more than 220 countries and territories.
The firm has been able to maintain leadership in
small-package delivery services despite stiff competi-
tion from FedEx and the U.S. Postal Service by invest-
ing heavily in advanced information technology. UPS
spends more than $1 billion each year to maintain
a high level of customer service while keeping costs
low and streamlining its overall operations.
It all starts with the scannable bar-coded label
attached to a package, which contains detailed infor-
mation about the sender, the destination, and when
the package should arrive. Customers can download
and print their own labels using special software pro-
vided by UPS or by accessing the UPS website. Before
the package is even picked up, information from the
“smart” label is transmitted to one of UPS’s computer
centers in Mahwah, New Jersey, or Alpharetta, Geor-
gia, and sent to the distribution center nearest its
final destination.
Dispatchers at this center download the label
data and use special routing software called ORION
to create the most efficient delivery route for each
driver that considers traffic, weather conditions, and
the location of each stop. Each UPS driver makes
an average of 100 stops per day. In a network with
55,000 routes in the United States alone, shaving
even one mile off each driver’s daily route translates
into big savings: $50 million per year. These savings
are critical as UPS tries to boost earnings growth as
more of its business shifts to less-profitable
e-commerce deliveries. UPS drivers who used to drop
off several heavy packages a day at one retailer now
make many stops scattered across residential neigh-
borhoods, delivering one lightweight package per
household. The shift requires more fuel and more
time, increasing the cost to deliver each package.
The first thing a UPS driver picks up each day is
a handheld computer called a Delivery Information
INTERACTIVE SESSION TECHNOLOGY
UPS Competes Globally with Information Technology
brokerage, mail services, multimodal transportation,
and financial services in addition to logistics services.
CandleScience, based in Durham, North Carolina,
is an industry leader in the candle and soap supply
industry, providing raw materials such as waxes,
wicks, and fragrances to candle makers around the
world. UPS worked with CandleScience to accurately
model shipping rates for the company and its cus-
tomers and to add a freight shipping option capabil-
ity to its website. UPS also helped CandleScience
identify the optimal location for a new warehouse
for its West Coast customers. The new West Coast
warehouse in Sparks, Nevada lets the company reach
some of its largest customers faster, more efficiently
and less expensively.
CASE STUDY QUESTIONS
3. What strategic business objectives do UPS’s
information systems address?
4. What would happen if UPS’s information systems
were not available?
1. What are the inputs, processing, and outputs of
UPS’s package tracking system?
2. What technologies are used by UPS? How are these
technologies related to UPS’s business strategy?
of providing a high level of service with low prices in the face of mounting
competition.
It Isn’t Just Technology: A Business Perspective
on Information Systems
Managers and business firms invest in information technology and systems
because they provide real economic value to the business. The decision to
build or maintain an information system assumes that the returns on this
investment will be superior to other investments in buildings, machines,
or other assets. These superior returns will be expressed as increases in
productivity, as increases in revenues (which will increase the firm’s
stock market value), or perhaps as superior long-term strategic positioning
of the firm in certain markets (which will produce superior revenues in the
future).
We can see that from a business perspective, an information system is an
important instrument for creating value for the firm. Information systems enable
the firm to increase its revenue or decrease its costs by providing information
that helps managers make better decisions or that improves the execution of
business processes. For example, the information system for analyzing super-
market checkout data illustrated in Figure 1.3 can increase firm profitability
by helping managers make better decisions as to which products to stock and
promote in retail supermarkets.
Every business has an information value chain, illustrated in Figure 1.7,
in which raw information is systematically acquired and then transformed
Sources: Paul Ziobro, “UPS’s $20 Billion Problem: Operations Stuck in
the 20th Century,” Wall Street Journal, June 15, 2018; www.ups.com,
accessed February 7, 2018; “Igniting Growth with CandleScience,” UPS
Compass, May 2017; and “Stars and Stripes Flying High,” UPS Com-
pass, December 2017.
UPS provides both financial and shipping advice
and services to Flags of Valor, a small business based in
Ashton, Virginia, which sells hundreds of hand-crafted
wooden flags each day to online customers. Using UPS
Quantum View Manage® technology, the staff can
view and monitor outbound packages and immedi-
ately respond to customer questions about order sta-
tus. UPS Capital®, the financial service division of UPS,
showed the company how to protect its cash flow and
assets by moving to a comprehensive insurance plan.
24 Part One Organizations, Management, and the Networked Enterprise
http://www.ups.com
Chapter 1 Information Systems in Global Business Today 25
through various stages that add value to that information. The value of an
information system to a business, as well as the decision to invest in any
new information system, is, in large part, determined by the extent to
which the system will lead to better management decisions, more efficient
business processes, and higher firm profitability. Although there are other
reasons why systems are built, their primary purpose is to contribute to
corporate value.
The business perspective calls attention to the organizational and managerial
nature of information systems. An information system represents an organiza-
tional and management solution, based on information technology, to a challenge
or problem posed by the environment. Every chapter in this book begins with a
short case study that illustrates this concept. A diagram at the beginning of each
chapter illustrates the relationship between a business challenge and resulting
management and organizational decisions to use IT as a solution to challenges
generated by the business environment. You can use this diagram as a starting
point for analyzing any information system or information system problem you
encounter.
Review the diagram at the beginning of this chapter. The diagram shows
how PCL’s systems solved the business problem of inefficiencies created by a
far-flung, highly paper-intensive business. These systems provided a solution
that takes advantage of opportunities provided by new wireless digital technol-
ogy and the Internet. PCL digitally enabled its key business processes for plan-
ning, designing, and monitoring its construction projects. These systems have
been essential in improving PCL’s overall business performance. The diagram
also illustrates how management, technology, and organizational elements work
together to create the systems.
FIGURE 1.7 THE BUSINESS INFORMATION VALUE CHAIN
From a business perspective, information systems are part of a series of value-adding activities for
acquiring, transforming, and distributing information that managers can use to improve decision
making, enhance organizational performance, and, ultimately, increase firm profitability.
Business Processes
Information Processing Activities
Business Value
Management Activities
Supply
Chain
Management
Enterprise
Management
Customer
Management
Knowledge
Management
Coordinating
Firm
Profitability
and
Strategic
PositionTransfor-
mation
into Business
Systems
Data
Collection
and
Storage
Dissemination
Planning Controlling Modeling and
Decision
Making
26 Part One Organizations, Management, and the Networked Enterprise
Complementary Assets: Organizational Capital
and the Right Business Model
Awareness of the organizational and managerial dimensions of information systems
can help us understand why some firms achieve better results from their informa-
tion systems than others. Studies of returns from information technology invest-
ments show that there is considerable variation in the returns firms receive (see
Figure 1.8). Some firms invest a great deal and receive a great deal (quadrant 2);
others invest an equal amount and receive few returns (quadrant 4). Still other firms
invest little and receive much (quadrant 1), whereas others invest little and receive
little (quadrant 3). This suggests that investing in information technology does not
by itself guarantee good returns. What accounts for this variation among firms?
The answer lies in the concept of complementary assets. Information technol-
ogy investments alone cannot make organizations and managers more effective
unless they are accompanied by supportive values, structures, and behavior pat-
terns in the organization and other complementary assets. Business firms need
to change how they do business before they can really reap the advantages of
new information technologies.
Complementary assets are those assets required to derive value from a pri-
mary investment (Teece, 1998). For instance, to realize value from automobiles
requires substantial complementary investments in highways, roads, gasoline
stations, repair facilities, and a legal regulatory structure to set standards and
control drivers.
Research indicates that firms that support their technology investments
with investments in complementary assets, such as new business models, new
business processes, management behavior, organizational culture, or training,
receive superior returns, whereas those firms failing to make these comple-
mentary investments receive less or no returns on their information technology
investments (Brynjolfsson, 2005; Brynjolfsson and Hitt, 2000; Laudon, 1974).
These investments in organization and management are also known as
organizational and management capital.
FIGURE 1.8 VARIATION IN RETURNS ON INFORMATION TECHNOLOGY
INVESTMENT
Although, on average, investments in information technology produce returns far above
those returned by other investments, there is considerable variation across firms.
Source: Brynjolfsson, Erik and Lorin M. Hitt. “Beyond Computation: Information Technology, Organizational Transformation, and Business
Performance.” Journal of Economic Perspectives 14, No. 4 (2000).
IT Capital Stock (relative to industry average)
Productivity
(relative to
industry
average)
.25
.12 .25 1.0 4.0 8.0
.5
1.0
2.0
4.0
1 2
3 4
Chapter 1 Information Systems in Global Business Today 27
Table 1.2 lists the major complementary investments that firms need to
make to realize value from their information technology investments. Some
of this investment involves tangible assets, such as buildings, machinery,
and tools. However, the value of investments in information technology
depends to a large extent on complementary investments in management
and organization.
Key organizational complementary investments are a supportive business
culture that values efficiency and effectiveness, an appropriate business model,
efficient business processes, decentralization of authority, highly distributed
decision rights, and a strong information system (IS) development team.
Important managerial complementary assets are strong senior management
support for change, incentive systems that monitor and reward individual inno-
vation, an emphasis on teamwork and collaboration, training programs, and a
management culture that values flexibility and knowledge.
Important social investments (not made by the firm but by the society at
large, other firms, governments, and other key market actors) are the Internet
and the supporting Internet culture, educational systems, network and com-
puting standards, regulations and laws, and the presence of technology and
service firms.
Throughout the book, we emphasize a framework of analysis that consid-
ers technology, management, and organizational assets and their interactions.
Perhaps the single most important theme in the book, reflected in case stud-
ies and exercises, is that managers need to consider the broader organization
and management dimensions of information systems to understand current
problems as well as to derive substantial above-average returns from their infor-
mation technology investments. As you will see throughout the text, firms that
TABLE 1.2 COMPLEMENTARY SOCIAL, MANAGERIAL, AND
ORGANIZATIONAL ASSETS REQUIRED TO OPTIMIZE RETURNS
FROM INFORMATION TECHNOLOGY INVESTMENTS
Organizational assets Supportive organizational culture that values efficiency and effectiveness
Appropriate business model
Efficient business processes
Decentralized authority
Distributed decision-making rights
Strong IS development team
Managerial assets Strong senior management support for technology investment and change
Incentives for management innovation
Teamwork and collaborative work environments
Training programs to enhance management decision skills
Management culture that values flexibility and knowledge-based
decision making.
Social assets The Internet and telecommunications infrastructure
IT-enriched educational programs raising labor force computer literacy
Standards (both government and private sector)
Laws and regulations creating fair, stable market environments
Technology and service firms in adjacent markets to assist implementation
28 Part One Organizations, Management, and the Networked Enterprise
can address these related dimensions of the IT investment are, on average,
richly rewarded.
1-3 What academic disciplines are used to study
information systems, and how does
each contribute to an understanding
of information systems?
The study of information systems is a multidisciplinary field. No single theory
or perspective dominates. Figure 1.9 illustrates the major disciplines that con-
tribute problems, issues, and solutions in the study of information systems.
In general, the field can be divided into technical and behavioral approaches.
Information systems are sociotechnical systems. Though they are composed
of machines, devices, and “hard” physical technology, they require substan-
tial social, organizational, and intellectual investments to make them work
properly.
Technical Approach
The technical approach to information systems emphasizes mathematically based
models to study information systems as well as the physical technology and for-
mal capabilities of these systems. The disciplines that contribute to the technical
approach are computer science, management science, and operations research.
Computer science is concerned with establishing theories of computability,
methods of computation, and methods of efficient data storage and access. Man-
agement science emphasizes the development of models for decision-making
and management practices. Operations research focuses on mathematical tech-
niques for optimizing selected parameters of organizations, such as transporta-
tion, inventory control, and transaction costs.
FIGURE 1.9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS
The study of information systems deals with issues and insights contributed from
technical and behavioral disciplines.
MIS
Operations
Research
Sociology
Psychology Economics
Management
Science
Computer
Science
Technical
Approaches
Behavioral
Approaches
Chapter 1 Information Systems in Global Business Today 29
Behavioral Approach
An important part of the information systems field is concerned with behavioral
issues that arise in the development and long-term maintenance of information
systems. Issues such as strategic business integration, design, implementation,
utilization, and management cannot be explored usefully with the models used
in the technical approach. Other behavioral disciplines contribute important
concepts and methods.
For instance, sociologists study information systems with an eye toward
how groups and organizations shape the development of systems and also how
systems affect individuals, groups, and organizations. Psychologists study infor-
mation systems with an interest in how human decision makers perceive and
use formal information. Economists study information systems with an interest
in understanding the production of digital goods, the dynamics of digital markets,
and how new information systems change the control and cost structures within
the firm.
The behavioral approach does not ignore technology. Indeed, information
systems technology is often the stimulus for a behavioral problem or issue. But
the focus of this approach is generally not on technical solutions. Instead, it
concentrates on changes in attitudes, management and organizational policy,
and behavior.
Approach of This Text: Sociotechnical Systems
Throughout this book, you will find a rich story with four main actors: sup-
pliers of hardware and software (the technologists); business firms making
investments and seeking to obtain value from the technology; managers
and employees seeking to achieve business value (and other goals); and
the contemporary legal, social, and cultural context (the firm’s environ-
ment). Together these actors produce what we call management information
systems.
The study of management information systems (MIS) arose to focus on the
use of computer-based information systems in business firms and government
agencies. MIS combines the work of computer science, management science, and
operations research with a practical orientation toward developing system solu-
tions to real-world problems and managing information technology resources.
It is also concerned with behavioral issues surrounding the development, use,
and impact of information systems, which are typically discussed in the fields
of sociology, economics, and psychology.
Our experience as academics and practitioners leads us to believe that no
single approach effectively captures the reality of information systems. The
successes and failures of information systems are rarely all technical or all
behavioral. Our best advice to students is to understand the perspectives of
many disciplines. Indeed, the challenge and excitement of the information sys-
tems field are that it requires an appreciation and tolerance of many different
approaches.
The view we adopt in this book is best characterized as the sociotech-
nical view of systems. In this view, optimal organizational performance is
achieved by jointly optimizing both the social and technical systems used in
production.
Adopting a sociotechnical systems perspective helps to avoid a purely
technological approach to information systems. For instance, the fact that infor-
mation technology is rapidly declining in cost and growing in power does not
30 Part One Organizations, Management, and the Networked Enterprise
necessarily or easily translate into productivity enhancement or bottom-line
profits. The fact that a firm has recently installed an enterprise-wide finan-
cial reporting system does not necessarily mean that it will be used, or used
effectively. Likewise, the fact that a firm has recently introduced new business
procedures and processes does not necessarily mean employees will be more
productive in the absence of investments in new information systems to enable
those processes.
In this book, we stress the need to optimize the firm’s performance as a
whole. Both the technical and behavioral components need attention. This
means that technology must be changed and designed in such a way as to fit
organizational and individual needs. Sometimes, the technology may have
to be “de-optimized” to accomplish this fit. For instance, mobile phone users
adapt this technology to their personal needs, and as a result manufacturers
quickly seek to adjust the technology to conform to user expectations. Organi-
zations and individuals must also be changed through training, learning, and
planned organizational change to allow the technology to operate and prosper.
Figure 1.10 illustrates this process of mutual adjustment in a sociotechnical
system.
1-4 How will MIS help my career?
Here is how Chapter 1 and this text can help you find an entry-level job as a
financial client support and sales assistant.
The Company
Power Financial Analytics Data Services, a data and software company serving
the financial industry with offices in New York City, Atlanta, Los Angeles, and
Chicago, is looking to fill an entry-level position for a financial client support
and sales assistant. The company has 1,600 employees, many of whom are
consultants showing clients how to work with its powerful financial analytics
software and data products.
FIGURE 1.10 A SOCIOTECHNICAL PERSPECTIVE ON INFORMATION
SYSTEMS
In a sociotechnical perspective, the performance of a system is optimized when both
the technology and the organization mutually adjust to one another until a satisfactory
fit is obtained.
TECHNOLOGY ORGANIZATION
Final
Design of
Organization
Final
Design of
Technology
Alternative
3
Alternative
3
Alternative
2
Alternative
2
Alternative
1
Alternative
1
Chapter 1 Information Systems in Global Business Today 31
Position Description
The financial client support and sales assistant will be part of a team in the
company’s consulting services. Consulting teams combine a thorough under-
standing of finance and technology with specific expertise in Power Finan-
cial Analytics Data Services software and assist clients in a variety of ways.
The company provides on-the-job training in its software and consulting meth-
ods. Job responsibilities include:
• Supporting Financial Analytics Data Services applications.
• Helping the team create custom models and screens.
• Training clients in their offices and at seminars.
• Providing expert consultation to clients by telephone and on-site.
Job Requirements
• Recent college graduate or investment professional with one to two years
of experience. Applicants with backgrounds in finance, MIS, economics,
accounting, business administration, and mathematics are preferred
• Knowledge of or interest in learning about financial markets
• Sound working knowledge of spreadsheets
• Very strong communication and interpersonal skills
• Strong desire to learn in rapidly changing environment
Interview Questions
1. What is your background in finance? What courses did you take? Have you
ever worked in the financial industry? What did you do there?
2. What is your proficiency level with spreadsheet software? What work
have you done with Excel spreadsheets? Can you show examples of your
work?
3. Are you able to discuss current trends in the financial industry and how they
impact Power Financial’s business model and client base?
4. Did you ever work with clients? Can you give examples of how you provided
client service or support?
5. Can you give us an example of a finance-related problem or other business
problem that you helped solve? Did you do any writing and analysis? Can
you provide examples?
Author Tips
1. Use the web to learn about financial markets and the financial industry.
2. Use the web to research the company, its financial products, and the tools
and services it offers customers. Learn what you can about its consulting
services. Additionally, examine the company’s social medial channels, such
as LinkedIn and Facebook, for trends and themes.
3. Inquire exactly how you would be using spreadsheets for this job.
Provide examples of how you used spreadsheets to solve problems in the class-
room or for a job assignment. Show the spreadsheet work you did in finance.
4. Bring examples of your writing (including some from your Digital Portfolio
described in MyLab MIS) demonstrating your analytical skills and project
experience. Be prepared to discuss how you helped customers solve a
business problem or the business problem solving you did for your courses.
32 Part One Organizations, Management, and the Networked Enterprise
REVIEW SUMMARY
1-1 How are information systems transforming business, and why are they so essential for running and
managing a business today?
E-mail, online conferencing, smartphones, and tablet computers have become essential tools for
conducting business. Information systems are the foundation of fast-paced supply chains. The Internet
allows many businesses to buy, sell, advertise, and solicit customer feedback online. Organizations are
trying to become more competitive and efficient by digitally enabling their core business processes
and evolving into digital firms. The Internet has stimulated globalization by dramatically reducing the
costs of producing, buying, and selling goods on a global scale. New information system trends include
the emerging mobile digital platform, big data, and cloud computing.
Information systems are a foundation for conducting business today. In many industries, survival
and the ability to achieve strategic business goals are difficult without extensive use of information
technology. Businesses today use information systems to achieve six major objectives: operational excel-
lence; new products, services, and business models; customer/supplier intimacy; improved decision
making; competitive advantage; and day-to-day survival.
1-2 What is an information system? How does it work? What are its management, organization, and
technology components? Why are complementary assets essential for ensuring that information
systems provide genuine value for organizations?
From a technical perspective, an information system collects, stores, and disseminates information
from an organization’s environment and internal operations to support organizational functions and
decision making, communication, coordination, control, analysis, and visualization. Information sys-
tems transform raw data into useful information through three basic activities: input, processing, and
output.
From a business perspective, an information system provides a solution to a problem or challenge
facing a firm and represents a combination of management, organization, and technology elements.
The management dimension of information systems involves issues such as leadership, strategy, and
management behavior. The technology dimension consists of computer hardware, software, data man-
agement technology, and networking/telecommunications technology (including the Internet). The
organization dimension of information systems involves issues such as the organization’s hierarchy,
functional specialties, business processes, culture, and political interest groups.
In order to obtain meaningful value from information systems, organizations must support their
technology investments with appropriate complementary investments in organizations and manage-
ment. These complementary assets include new business models and business processes, supportive
organizational culture and management behavior, and appropriate technology standards, regulations,
and laws. New information technology investments are unlikely to produce high returns unless busi-
nesses make the appropriate managerial and organizational changes to support the technology.
1-3 What academic disciplines are used to study information systems, and how does each contribute
to an understanding of information systems?
The study of information systems deals with issues and insights contributed from technical and
behavioral disciplines. The disciplines that contribute to the technical approach focusing on formal mod-
els and capabilities of systems are computer science, management science, and operations research.
The disciplines contributing to the behavioral approach focusing on the design, implementation, man-
agement, and business impact of systems are psychology, sociology, and economics. A sociotechnical
view of systems considers both technical and social features of systems and solutions that represent
the best fit between them.
Chapter 1 Information Systems in Global Business Today 33
Key Terms
Business functions, 19
Business model, 14
Business processes, 12
Complementary assets, 26
Computer hardware, 21
Computer literacy, 18
Computer software, 21
Culture, 20
Data, 16
Data management technology, 21
Data workers, 19
Digital firm, 12
Extranets, 21
Feedback, 17
Information, 16
Information system, 16
Information systems literacy, 18
Information technology (IT), 16
Information technology (IT) infrastructure, 22
Input, 17
Internet, 21
Intranets, 21
Knowledge workers, 19
Management information systems (MIS), 18
Middle management, 19
Network, 21
Networking and telecommunications
technology, 21
Operational management, 19
Organizational and management capital, 26
Output, 17
Processing, 17
Production or service workers, 19
Senior management, 19
Sociotechnical view, 29
World Wide Web, 22
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
1-1 How are information systems transforming
business, and why are they so essential for
running and managing a business today?
• Describe how information systems have
changed the way businesses operate and
their products and services.
• Identify three major new information system
trends.
• Describe the characteristics of a digital firm.
• Describe the challenges and opportunities of
globalization in a “flattened” world.
• List and describe six reasons why informa-
tion systems are so important for business
today.
1-2 What is an information system? How does it work?
What are its management, organization, and tech-
nology components? Why are complementary
assets essential for ensuring that information sys-
tems provide genuine value for organizations?
• Define an information system and describe
the activities it performs.
• List and describe the organizational, manage-
ment, and technology dimensions of infor-
mation systems.
• Distinguish between data and information
and between information systems literacy
and computer literacy.
• Explain how the Internet and the World Wide
Web are related to the other technology com-
ponents of information systems.
• Define complementary assets and describe
their relationship to information technology.
• Describe the complementary social, mana-
gerial, and organizational assets required to
optimize returns from information technol-
ogy investments.
1-3 What academic disciplines are used to study
information systems, and how does each
contribute to an understanding of information
systems?
• List and describe each discipline that
contributes to a technical approach to
information systems.
• List and describe each discipline that contrib-
utes to a behavioral approach to information
systems.
• Describe the sociotechnical perspective on
information systems.
34 Part One Organizations, Management, and the Networked Enterprise
Discussion Questions
1-4 Information systems are too important to be
left to computer specialists. Do you agree?
Why or why not?
1-5 If you were setting up the website for a
Major League Baseball team, what manage-
ment, organization, and technology issues
might you encounter?
1-6 What are some of the organizational,
managerial, and social complementary assets
that help make UPS’s information systems so
successful?
Hands-On MIS Projects
The projects in this section give you hands-on experience in analyzing financial reporting and inventory manage-
ment problems, using data management software to improve management decision making about increasing sales,
and using Internet software for researching job requirements. Visit MyLab MIS to access this chapter’s Hands-On
MIS Projects.
Management Decision Problems
1-7 Snyders of Hanover, which sells about 80 million bags of pretzels, snack chips, and organic snack
items each year, had its financial department use spreadsheets and manual processes for much of its
data gathering and reporting. Snyder’s financial analyst would spend the entire final week of every
month collecting spreadsheets from the heads of more than 50 departments worldwide. She would
then consolidate and reenter all the data into another spreadsheet, which would serve as the com-
pany’s monthly profit-and-loss statement. If a department needed to update its data after submitting
the spreadsheet to the main office, the analyst had to return the original spreadsheet, then wait for the
department to resubmit its data before finally submitting the updated data in the consolidated document.
Assess the impact of this situation on business performance and management decision making.
1-8 Dollar General Corporation operates deep-discount stores offering housewares, cleaning supplies,
clothing, health and beauty aids, and packaged food, with most items selling for $1. Its business model
calls for keeping costs as low as possible. The company has no automated method for keeping track of
inventory at each store. Managers know approximately how many cases of a particular product the store
is supposed to receive when a delivery truck arrives, but the stores lack technology for scanning the
cases or verifying the item count inside the cases. Merchandise losses from theft or other mishaps have
been rising and now represent more than 3 percent of total sales. What decisions have to be made before
investing in an information system solution?
Improving Decision Making: Using Databases to Analyze Sales Trends
Software skills: Database querying and reporting
Business skills: Sales trend analysis
1-9 In this project, you will start out with raw transactional sales data and use Microsoft Access database
software to develop queries and reports that help managers make better decisions about product pricing,
sales promotions, and inventory replenishment. In MyLab MIS, you can find a Store and Regional Sales
Database developed in Microsoft Access. The database contains raw data on weekly store sales of com-
puter equipment in various sales regions. The database includes fields for store identification number,
sales region, item number, item description, unit price, units sold, and the weekly sales period when the
sales were made. Use Access to develop some reports and queries to make this information more useful
for running the business. Sales and production managers want answers to the following questions:
• Which products should be restocked?
• Which stores and sales regions would benefit from a promotional campaign and additional marketing?
• When (what time of year) should products be offered at full price, and when should discounts be used?
You can easily modify the database table to find and report your answers. Print your reports and results of
queries.
MyLab MIS
MyLab MIS
MyLab MIS
Chapter 1 Information Systems in Global Business Today 35
Improving Decision Making: Using the Internet to Locate Jobs Requiring Information
Systems Knowledge
Software skills: Internet-based software
Business skills: Job searching
1-10 Visit a job-posting website such as Monster.com. Spend some time at the site examining jobs for
accounting, finance, sales, marketing, and human resources. Find two or three descriptions of jobs
that require some information systems knowledge. What information systems knowledge do these jobs
require? What do you need to do to prepare for these jobs? Write a one- to two-page report summarizing
your findings.
Collaboration and Teamwork Project
Selecting Team Collaboration Tools
1-11 Form a team with three or four classmates and review the capabilities of Google Drive and Google
Sites for your team collaboration work. Compare the capabilities of these two tools for storing team
documents, project announcements, source materials, work assignments, illustrations, electronic
presentations, and web pages of interest. Learn how each works with Google Docs. Explain why Google
Drive or Google Sites is more appropriate for your team. If possible, use Google Docs to brainstorm and
develop a presentation of your findings for the class. Organize and store your presentation using the
Google tool you have selected.
http://Monster.com
Deutsche Bank AG, founded in 1870, is one of the world’s top financial companies, with 2,425 branches worldwide. It offers a
range of financial products and services, including
retail and commercial banking, foreign exchange,
and services for mergers and acquisitions. The
bank provides products for mortgages, consumer
finance, credit cards, life insurance, and corporate
pension plans; financing for international trade;
and customized wealth management services for
wealthy private clients. Deutsche Bank is also the
largest bank in Germany, and plays a central role
in German economic life. In many ways, Deutsche
Bank is the embodiment of the global financial
system.
Deutsche Bank has the world’s largest portfolio
of derivatives, valued at about $46 trillion. A finan-
cial derivative is a contract between two or more
parties whose value is dependent upon or derived
from one or more underlying assets, such as stocks,
bonds, commodities, currencies, and interest rates.
Although Deutsche Bank had survived the 2008
banking crisis, which was partly triggered by flawed
derivatives, it is now struggling with seismic changes
in the banking industry, including recent regulatory
change. The bank was forced to pay $7.2 billion to
resolve U.S. regulator complaints about its sale of
toxic mortgage securities that contributed to the 2008
financial crisis.
In addition, the Commodity Futures Trading
Commission (CFTC) charged that Deutsche Bank
submitted incomplete and untimely credit default
swap data, failed to properly supervise employees
responsible for swap data reporting, and lacked an
adequate business continuity and disaster recov-
ery plan. (A credit default swap is a type of credit
insurance contract in which an insurer promises to
compensate an insured party [such as a bank] for
losses incurred when a debtor [such as a corpora-
tion] defaults on a debt and that can be purchased
or sold by either party on the financial market.
Credit default swaps are very complex financial
instruments.)
The CFTC complained that on April 16, 2016,
Deutsche Bank’s swap data reporting system expe-
rienced a system outage that prevented Deutsche
Bank from reporting any swap data for multiple
asset classes for approximately five days. Deutsche
Bank’s subsequent efforts to end the system outage
repeatedly exacerbated existing reporting problems
and led to the discovery and creation of new report-
ing problems.
For example, Deutsche Bank’s swap data
reported before and after the system outage
revealed persistent problems with the integrity
of certain data fields, including numerous invalid
legal entity identifiers. (A legal entity identifier
[LEI] is an identification code to uniquely iden-
tify all legal entities that are parties to financial
transactions.) The CFTC complaint alleged that
a number of these reporting problems persist
today, affecting market data that is made avail-
able to the public as well as data that is used by
the CFTC to evaluate systemic risk throughout the
swaps markets. The CFTC complaint also alleged
that Deutsche Bank’s system outage and subse-
quent reporting problems occurred in part because
Deutsche Bank failed to have an adequate business
continuity and disaster recovery plan and other
appropriate supervisory systems in place.
In addition to incurring high costs associated with
coping with regulators and paying fines, Deutsche
Bank was a very unwieldy and expensive bank to
operate. U.S. regulators have identified Deutsche
Bank’s antiquated technology as one reason why
the bank was not always able to provide the correct
information for running its business properly and
responding to regulators. Poor information systems
may have even contributed to the 2008 financial cri-
sis. Banks often had trouble untangling the complex
financial products they had bought and sold to deter-
mine their underlying value.
Banks, including Deutsche Bank, are intensive
users of information technology, and they rely on
technology to spot misconduct. If Deutsche Bank
was such an important player in the German and
world financial systems, why were its systems not up
to the job?
It turns out that Deutsche Bank, like other leading
global financial companies, had undergone decades
of mergers and expansion. When these banks merged
or acquired other financial companies, they often
did not make the requisite (and often far-reaching)
changes to integrate their information systems with
Did Information Systems Cause Deutsche Bank to
Stumble?
CASE STUDY
36 Part One Organizations, Management, and the Networked Enterprise
Chapter 1 Information Systems in Global Business Today 37
those of their acquisitions. The effort and costs
required for this integration, including coordination
across many management teams, were too great. So
the banks left many old systems in place to handle
the workload for each of their businesses. This cre-
ated what experts call “spaghetti balls” of overlapping
and often incompatible technology platforms and
software programs. These antiquated legacy systems
were designed to handle large numbers of transac-
tions and sums of money, but they were not well
suited to managing large bank operations. They often
did not allow information to be shared easily among
departments or provide senior management with a
coherent overview of bank operations.
Deutsche Bank had more than 100 different book-
ing systems for trades in London alone and no com-
mon set of codes for identifying clients in each of
these systems. Each of these systems might use a
different number or code for identifying the same
client, so it would be extremely difficult or impos-
sible to show how the same client was treated in all
of these systems. Individual teams and traders each
had their own incompatible platforms. The bank
had employed a deliberate strategy of pitting teams
against each other to spur them on, but this further
encouraged the use of different systems because
competing traders and teams were reluctant to share
their data. Yet the bank ultimately had to reconcile
the data from these disparate systems, often by hand,
before trades could be processed and recorded.
This situation has made it very difficult for banks
to undertake ambitious technology projects for the
systems that they need today or to comply with
regulatory requirements. U.S. regulators criticized
Deutsche Bank for its inability to provide essential
information because of its antiquated technology.
Regulators are demanding that financial institutions
improve the way they manage risk. The banks are
under pressure to make their aging computer systems
comply, but the IT infrastructures at many traditional
financial institutions are failing to keep up with these
regulatory pressures or with changing consumer
expectations. Deutsche Bank and its peers must also
adapt to new innovative technology competitors such
as Apple that are muscling into banking services.
In July 2015, John Cryan became Deutsche
Bank’s CEO. He tried to reduce costs and improve
efficiency, laying off thousands of employees. He
focused on overhauling Deutsche Bank’s fragmented,
antiquated information systems, which are a major
impediment to controlling costs and finding new
sources of profit and growth. Cryan noted that the
bank’s cost base was swollen by poor and ineffective
business processes, inadequate technology, and too
many tasks being handled manually. He has called
for standardizing the bank’s systems and procedures,
eliminating legacy software, standardizing and
enhancing data, and improving reporting.
Cryan appointed technology specialist Kim
Hammonds as chief operating officer to oversee
reengineering the bank’s information systems and
operations. Hammonds had been Deutsche Bank’s
global chief information officer and, before that,
chief information officer at Boeing. Hammonds
observed that Deutsche Bank’s information systems
operated by trial and error, as if her former employer
Boeing launched aircraft into the sky, watched them
crash, and then tried to learn from the mistakes.
In February 2015, Deutsche Bank announced a
10-year, multibillion-dollar deal with Hewlett-Packard
(HP) to standardize and simplify its IT infrastructure,
reduce costs, and create a more modern and agile
technology platform for launching new products and
services. Deutsche Bank would migrate to a cloud
computing infrastructure where it would run its
information systems in HP’s remote computer cen-
ters. HP would provide computing services, hosting,
and storage. Deutsche Bank would still be in charge
of application development and information security
technologies, which it considers as proprietary and
crucial for competitive differentiation.
Deutsche Bank is withdrawing from high-risk cli-
ent relationships, improving its control framework,
and automating manual reconciliations. To modern-
ize its IT infrastructure, the bank is reducing the
number of its individual operating systems that
control the way a computer works from 45 to four,
replacing scores of outdated computers, and replacing
antiquated software applications. Thousands of appli-
cations and functions will be shifted from Deutsche
Bank’s mainframes to HP’s cloud computing services.
Automating manual processes will promote efficiency
and better control. These improvements are expected
to reduce “run the bank” costs by 800 million euros.
Eliminating 6,000 contractors will create total savings
of 1 billion euros. Deutsche Bank has also opened
four technology centers to work with financial tech-
nology startups to improve its technology.
Despite all of these efforts, Deutsche Bank
has struggled to regain profitability and stability.
In early April 2018 the bank’s supervisory board
replaced Cryan with Christian Sewing, a longtime
insider who had been in charge of the bank’s wealth
management division and its branch network in
Germany. During his tenure, Cryan was unable
to restore profitability. In February 2018 the bank
reported a loss of €735 million, or about $900 mil-
lion, for 2017, which represented its third consecu-
tive annual loss.
Deutsche Bank has not been the only major bank
to be hampered by system problems. IT shortcom-
ings were one reason Banco Santander’s U.S. unit in
2016 failed the U.S. Federal Reserve’s annual “stress
tests,” which gauge how big banks would fare in a
new financial crisis. A 2015 Accenture consultants’
report found that only 6 percent of board of direc-
tor members and 3 percent of CEOs at the world’s
largest banks had professional technology experi-
ence. Financial technology innovations, security,
IT resilience, and technology implications of regu-
latory changes are now all critical issues for bank
boards of directors, but many lack the knowledge
to assess these issues and make informed decisions
about strategy, investment, and how best to allocate
technology resources.
Sources: Jack Ewing, “Deutsche Bank Replaces CEO Amid Losses
and Lack of Direction,” New York Times, April 8, 2018; Charles
Riley, “Deutsche Bank Hasn’t Made a Profit in Three Years,”
CNN Money, February 2, 2018; Anna Irrera, “Deutsche Bank
Launches Tech Startup Lab in New York City,” Reuters, March
21, 2017; Geoffrey Smith, “Things You Should Know About the
Deutsche Bank Train Wreck,” Fortune, September 28, 2016;
Hayley McDowell, “System Outage Sees Deutsche Bank Charged
over Reporting Failures,” The Trade News, August 19, 2016; Derek
du Preez, “US Regulator Charges Deutsche Bank over Mul-
tiple Systems Failures,” Diginomica, August 19, 2016; Kat Hall,
“Deutsche Bank’s Creaking IT Systems Nervously Eyeing Bins,”
The Register, October 27, 2015; Martin Arnold and Tom Braith-
waite, “Banks’ Ageing IT Systems Buckle Under Strain,” Financial
Times, June 18, 2015; Martin Arnold, “Deutsche Bank to Rip Out
IT Systems Blamed for Problems,” Financial Times, October 26,
2015; Ben Moshinsky, “Deutsche Bank Has a Technology Prob-
lem,” Business Insider, October 20, 2015; Edward Robinson and
Nicholas Comfort, “Cryan’s Shakeup at Deutsche Bank Sees Tech
Restart,” Bloomberg, December 20, 2015; and Accenture, “Bank
Boardrooms Lack Technology Experience, Accenture Global
Research Finds,” October 28, 2015.
CASE STUDY QUESTIONS
1-12 Identify the problem described in this case
study. What management, organization, and
technology factors contributed to this problem?
1-13 What was the role of information technology
at Deutsche Bank? How was IT related to the
bank’s operational efficiency, decision-making
capability, and business strategy?
1-14 Was Deutsche Bank using technology
effectively to pursue its business strategy?
Explain your answer.
1-15 What solution for Deutsche Bank was
proposed? How effective do you think it will
be? Explain your answer.
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
1-16 What are the strategic objectives that firms try to achieve by investing in information systems and
technologies? For each strategic objective, give an example of how a firm could use information systems to
achieve that objective.
1-17 Describe the complementary assets that firms need in order to optimize returns from their information system
investments. For each type of complementary asset, give an example of a specific asset a firm should have.
38 Part One Organizations, Management, and the Networked Enterprise
Chapter 1 Information Systems in Global Business Today 39
Chapter 1 References
Baldwin, Richard. The Great Convergence: Information Technology
and the New Globalization. Cambridge, MA: Harvard
University Press (2016.)
Brynjolfsson, Erik. “VII Pillars of IT Productivity.” Optimize (May
2005).
Brynjolfsson, Erik, and Lorin M. Hitt. “Beyond Computation:
Information Technology, Organizational Transformation, and
Business Performance.” Journal of Economic Perspectives 14,
No. 4 (2000).
Bureau of Economic Analysis. National Income and Product
Accounts. www.bea.gov, accessed June 19, 2018.
Chae, Ho-Chang, Chang E. Koh, and Victor Prybutok. “Information
Technology Capability and Firm Performance: Contradictory
Findings and Their Possible Causes.” MIS Quarterly 38, No. 1
(March 2014).
Dedrick, Jason, Vijay Gurbaxani, and Kenneth L. Kraemer.
“Information Technology and Economic Performance: A
Critical Review of the Empirical Evidence.” Center for
Research on Information Technology and Organizations,
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31, 2018.”
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Review 47, No. 4 (Summer 2006).
Lamb, Roberta, Steve Sawyer, and Rob Kling. “A Social Informatics
Perspective of Socio-Technical Networks.” http://lamb.cba.
hawaii.edu/pubs (2004).
Laudon, Kenneth C. Computers and Bureaucratic Reform. New York:
Wiley (1974).
Lev, Baruch. “Intangibles: Management, Measurement, and
Reporting.” The Brookings Institution Press (2001).
McKinsey Global Institute. “Digital America: A Tale of the Haves
and Have-Mores” (December 2015).
Mithas, Sunil, and Roland T. Rust. “How Information Technology
Strategy and Investments Influence Firm Performance: Con-
jecture and Empirical Evidence.” MIS Quarterly (March 2016).
Morris, Betsy. “From Music to Maps: How Apple’s IPhone Changed
Business.” Wall Street Journal (June 27, 2017).
Nevo, Saggi, and Michael R. Wade. “The Formation and Value of
IT-Enabled Resources: Antecedents and Consequences of
Synergistic Relationships.” MIS Quarterly 34, No. 1 (March
2010).
Otim, Samual, Kevin E. Dow, Varun Grover, and Jeffrey A. Wong.
“The Impact of Information Technology Investments on
Downside Risk of the Firm: Alternative Measurement of the
Business Value of IT.” Journal of Management Information
Systems 29, No. 1 (Summer 2012).
Ren, Fei, and Sanjeev Dewan. “Industry-Level Analysis of
Information Technology Return and Risk: What Explains the
Variation?” Journal of Management Information Systems 21,
No. 2 (2015).
Ross, Jeanne W., and Peter Weill. “Four Questions Every CEO
Should Ask About IT.” Wall Street Journal (April 25, 2011).
Sabherwal, Rajiv, and Anand Jeyaraj. “Information Technology
Impacts on Firm Performance: An Extension of Kohli and
Devaraj (2003).” MIS Quarterly (December 2015).
Sampler, Jeffrey L., and Michael J. Earl. “What’s Your Information
Footprint?” MIT Sloan Management Review (Winter 2014).
Saunders, Adam, and Erik Brynjolfsson. “Valuing Information
Technology Related Intangible Assets.” MIS Quarterly (March
2016).
Shanks, Ryan, Sunit Sinha, and Robert J. Thomas. “Managers and
Machines, Unite!” Accenture (2015).
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http://www.bea.gov
http://lamb.cba.hawaii.edu/pubs
http://lamb.cba.hawaii.edu/pubs
40
MyLab MIS
Discussion Questions: 2-5, 2-6, 2-7; Hands-on MIS Projects: 2-8, 2-9, 2-10, 2-11;
Writing Assignments: 2-16, 2-17; eText with Conceptual Animations
CHAPTER CASES
Enterprise Social Networking Helps Sanofi
Pasteur Innovate and Improve Quality
Data Changes How NFL Teams Play the
Game and How Fans See It
Videoconferencing: Something for Everyone
Should Companies Embrace Social Business?
VIDEO CASES
Walmart’s Retail Link Supply Chain
CEMEX: Becoming a Social Business
Instructional Video:
U.S. Foodservice Grows Market with Oracle
CRM on Demand
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
2-1 What are business processes? How are
they related to information systems?
2-2 How do systems serve the different
management groups in a business, and
how do systems that link the enterprise
improve organizational performance?
2-3 Why are systems for collaboration and
social business so important, and what
technologies do they use?
2-4 What is the role of the information
systems function in a business?
2-5 How will MIS help my career?
Global E-business and Collaboration2CHAPTER
41
Sanofi Pasteur is the vaccines division of the multinational pharmaceutical company Sanofi and the largest company in the world devoted entirely to vaccines. It is headquartered in Lyon, France, has nearly 15,000 em-
ployees worldwide, and produces more than 1 billion doses of vaccine per year
to inoculate more than 500 million people around the globe. Sanofi Pasteur’s
corporate vision is to work toward a world where no one suffers or dies from
a vaccine-preventable disease. Every day the company invests more than € 1
million in research and development. Collaboration, sharing information, ongo-
ing innovation, and rigorous pursuit of quality are essential for Sanofi Pasteur’s
business success and commitment to improving the health of the world’s
population.
Until recently, the company lacked appropri-
ate tools to encourage staff to have dialogues,
share ideas, and work with other members of the
company, including people that they might not
know. As a large, centralized firm with a tradi-
tional hierarchical culture, initiatives were pri-
marily driven from the top down. The company
wanted to give employees more opportunities
to experiment and innovate on their own, and
adopted Microsoft Yammer as the platform for
this change. Ideas for improvement can come
from anywhere in the organization and through
Yammer can be shared everywhere.
Microsoft Yammer is an enterprise social net-
working platform for internal business uses,
although it can also create external networks
linking to suppliers, customers, and others outside the organization. Yammer
enables employees to create groups to collaborate on projects and share and
edit documents, and includes a news feed to find out what’s happening within
the company. A People Directory provides a searchable database of contact in-
formation, skills, and expertise. Yammer can be accessed through the web using
desktop and mobile devices, and can be integrated with other Microsoft tools
such as SharePoint and Office 365, to make other applications more “social.”
(SharePoint is Microsoft’s platform for collaboration, document sharing, and
document management. Office 365 is Microsoft’s online service for its desktop
productivity applications such as word processing, spreadsheet, electronic pre-
sentations, and data management.)
How has Sanofi Pasteur benefited from becoming more “social”? Employees
are using Yammer to share updates, ask for feedback, and connect volunteers
to improvement initiatives. A recent project involving Yammer resulted in
Enterprise Social Networking Helps Sanofi
Pasteur Innovate and Improve Quality
© Rawpixel.com/Shutterstock
http://Rawpixel.com/Shutterstock
42 Part One Organizations, Management, and the Networked Enterprise
a 60 percent simplification of a key quality process at one manufacturing
site, saving the company thousands of Euros, and reducing overall end-to-
end process time. Through Yammer, employees spread the word about this
improvement to other locations around the globe.
Using Yammer, Sanofi employees set up activist networks for change in large
manufacturing sites. Each group has attracted more than 1,000 people. These
networks help create a more collegial, personal culture that helps people feel
comfortable about making suggestions for improvements and working with
other groups across the globe. They also provide management with observa-
tions about policies and procedures across departments and hierarchies that
can be used to redesign the firm’s manufacturing and business processes to
increase quality and cost-effectiveness. For example, a building operator shared
his ideas about how to reduce waste when managing a specific material in his
production facility. The new procedure for handling the material saved his fa-
cility more than 100,000 Euros per year and became a global best practice at all
Sanofi Pasteur production sites. Yammer-powered communities raised aware-
ness of health, safety, and attention to detail, and more attention to these issues
helped reduce human errors by 91 percent.
Sources: “Yammer Collaboration Helps Sanofi Pasteur Improve Quality, Make More Life-
Saving Vaccines,” www.microsoft.com, January 24, 2017; www.sanofipasteur.us, accessed
February 4, 2018; and Jacob Morgan, “Three Ways Sanofi Pasteur Encourages Collaboration,”
Forbes, October 20, 2015.
Sanofi Pasteur’s experience illustrates how much organizations today rely on information systems to improve their performance and remain competitive.
It also shows how much systems supporting collaboration and teamwork make
a difference in an organization’s ability to innovate, execute, grow profits, and,
in this case, provide important social benefits.
The chapter-opening diagram calls attention to important points raised
by this case and this chapter. Sanofi Pasteur is a knowledge-intensive company
that prizes innovation, but it was hampered by hierarchical top-down processes
that prevented employees and managers from freely sharing information and
innovating. This impacted the company’s ability to create and deliver new
leading-edge products and maintain its high quality standards.
Sanofi Pasteur management found that the best solution was to deploy new
technology to move from a hierarchical corporate knowledge and work envi-
ronment to one that actively engaged employees and enabled them to obtain
more knowledge from colleagues. The company took advantage of Microsoft
Yammer’s social tools to increase employee collaboration and engagement.
There is more effective sharing of employee knowledge, and the company has
become more innovative and cost-efficient.
New technology alone would not have solved Sanofi Pasteur’s problem. To
make the solution effective, Sanofi Pasteur had to change its organizational
culture and business processes for knowledge dissemination and collaborative
work, and the new technology made these changes possible.
http://www.microsoft.com
http://www.sanofipasteur.us
Chapter 2 Global E-business and Collaboration 43
Management
Organization
Technology
Enterprise Social Networking
• Hierarchical top-down processes
• Large geographically dispersed
workforce
• Redesign
knowledge and
collaboration
processes
• Change organizational
culture
• MIcrosoft Yammer
• Provide new channels
for knowledge
acquisition, innovation,
and collaboration
• Improve productivity
• Reduce costs
• Increase innovation
• Improve quality
• Develop knowledge-
sharing strategy
and goals
Information
System
Business
Problem
Business
Solutions
Here are some questions to think about: How are collaboration and employee
engagement keeping Sanofi Pasteur competitive and quality-conscious? How
did using Yammer change the way work was performed at Sanofi Pasteur?
2-1 What are business processes? How are
they related to information systems?
In order to operate, businesses must deal with many different pieces of infor-
mation about suppliers, customers, employees, invoices, and payments, and of
course their products and services. They must organize work activities that use
this information to operate efficiently and enhance the overall performance of
the firm. Information systems make it possible for firms to manage all their in-
formation, make better decisions, and improve the execution of their business
processes.
Business Processes
Business processes, which we introduced in Chapter 1, refer to the manner
in which work is organized, coordinated, and focused to produce a valuable
product or service. Business processes are the collection of activities required
to produce a product or service. These activities are supported by flows of mate-
rial, information, and knowledge among the participants in business processes.
Business processes also refer to the unique ways in which organizations coor-
dinate work, information, and knowledge, and the ways in which management
chooses to coordinate work.
To a large extent, the performance of a business firm depends on how well
its business processes are designed and coordinated. A company’s business pro-
cesses can be a source of competitive strength if they enable the company to
innovate or to execute better than its rivals. Business processes can also be
liabilities if they are based on inefficient ways of working that impede organi-
zational responsiveness and efficiency. The chapter-opening case describing
Sanofi Pasteur’s improvements in knowledge-sharing processes clearly illus-
trates these points, as do many of the other cases in this text.
44 Part One Organizations, Management, and the Networked Enterprise
Every business can be seen as a collection of business processes, some of
which are part of larger encompassing processes. For instance, uses of mentor-
ing, wikis, blogs, and videos are all part of the overall knowledge management
process. Many business processes are tied to a specific functional area. For
example, the sales and marketing function is responsible for identifying cus-
tomers, and the human resources function is responsible for hiring employees.
Table 2.1 describes some typical business processes for each of the functional
areas of business.
Other business processes cross many different functional areas and require
coordination across departments. For instance, consider the seemingly simple
business process of fulfilling a customer order (see Figure 2.1). Initially, the
sales department receives a sales order. The order passes first to accounting
to ensure the customer can pay for the order either by a credit verification or
request for immediate payment prior to shipping. Once the customer credit is
TABLE 2.1 EXAMPLES OF FUNCTIONAL BUSINESS PROCESSES
FUNCTIONAL AREA BUSINESS PROCESS
Manufacturing and production Assembling the product
Checking for quality
Producing bills of materials
Sales and marketing Identifying customers
Making customers aware of the product
Selling the product
Finance and accounting Paying creditors
Creating financial statements
Managing cash accounts
Human resources Hiring employees
Evaluating employees’ job performance
Enrolling employees in benefits plans
Generate
order
Assemble
product
Ship
product
Manufacturing
and
Production
Accounting
Sales
Generate
invoice
Check
credit
Submit
order
Approve
credit
FIGURE 2.1 THE ORDER FULFILLMENT PROCESS
Fulfilling a customer order involves a complex set of steps that requires the close
coordination of the sales, accounting, and manufacturing functions.
Chapter 2 Global E-business and Collaboration 45
established, the production department pulls the product from inventory or pro-
duces the product. Then the product is shipped (and this may require working
with a logistics firm, such as UPS or FedEx). A bill or invoice is generated by the
accounting department, and a notice is sent to the customer indicating that the
product has shipped. The sales department is notified of the shipment and pre-
pares to support the customer by answering calls or fulfilling warranty claims.
What at first appears to be a simple process, fulfilling an order, turns out to be
a very complicated series of business processes that require the close coordina-
tion of major functional groups in a firm. Moreover, to efficiently perform all
these steps in the order fulfillment process requires a great deal of information.
The required information must flow rapidly within the firm from one decision
maker to another; with business partners, such as delivery firms; and with the
customer. Computer-based information systems make this possible.
How Information Technology Improves
Business Processes
Exactly how do information systems improve business processes? Information
systems automate many steps in business processes that were formerly per-
formed manually, such as checking a client’s credit or generating an invoice
and shipping order. But today, information technology can do much more. New
technology can actually change the flow of information, making it possible for
many more people to access and share information, replacing sequential steps
with tasks that can be performed simultaneously, and eliminating delays in de-
cision making. New information technology frequently changes the way a busi-
ness works and supports entirely new business models. Downloading a Kindle
e-book from Amazon, buying a computer online at Best Buy, and download-
ing a music track from iTunes are entirely new business processes based on
new business models that would be inconceivable without today’s information
technology.
That’s why it’s so important to pay close attention to business processes, both
in your information systems course and in your future career. By analyzing
business processes, you can achieve a very clear understanding of how a busi-
ness actually works. Moreover, by conducting a business process analysis, you
will also begin to understand how to change the business by improving its pro-
cesses to make it more efficient or effective. Throughout this book, we examine
business processes with a view to understanding how they might be improved
by using information technology to achieve greater efficiency, innovation, and
customer service.
2-2 How do systems serve the different
management groups in a business, and
how do systems that link the enterprise
improve organizational performance?
Now that you understand business processes, it is time to look more closely
at how information systems support the business processes of a firm. Because
there are different interests, specialties, and levels in an organization, there are
different kinds of systems. No single system can provide all the information an
organization needs.
46 Part One Organizations, Management, and the Networked Enterprise
A typical business organization has systems supporting processes for each
of the major business functions—sales and marketing, manufacturing and pro-
duction, finance and accounting, and human resources. You can find exam-
ples of systems for each of these business functions in the Learning Tracks
for this chapter. Functional systems that operate independently of each other
are becoming a thing of the past because they cannot easily share informa-
tion to support cross-functional business processes. Many have been replaced
with large-scale cross-functional systems that integrate the activities of related
business processes and organizational units. We describe these integrated cross-
functional applications later in this section.
A typical firm also has different systems supporting the decision-making
needs of each of the main management groups we described in Chapter 1.
Operational management, middle management, and senior management each
use systems to support the decisions they must make to run the company. Let’s
look at these systems and the types of decisions they support.
Systems for Different Management Groups
A business firm has systems to support different groups or levels of manage-
ment. These systems include transaction processing systems and systems for
business intelligence.
Transaction Processing Systems
Operational managers need systems that keep track of the elementary activi-
ties and transactions of the organization, such as sales, receipts, cash deposits,
payroll, credit decisions, and the flow of materials in a factory. Transaction
processing systems (TPS) provide this kind of information. A transaction pro-
cessing system is a computerized system that performs and records the daily
routine transactions necessary to conduct business, such as sales order entry,
hotel reservations, payroll, employee record keeping, and shipping.
The principal purpose of systems at this level is to answer routine questions
and to track the flow of transactions through the organization. How many parts
are in inventory? What happened to Mr. Smith’s payment? To answer these
kinds of questions, information generally must be easily available, current, and
accurate.
At the operational level, tasks, resources, and goals are predefined and highly
structured. The decision to grant credit to a customer, for instance, is made by
a lower-level supervisor according to predefined criteria. All that must be deter-
mined is whether the customer meets the criteria.
Figure 2.2 illustrates a TPS for payroll processing. A payroll system keeps
track of money paid to employees. An employee time sheet with the employ-
ee’s name, social security number, and number of hours worked per week rep-
resents a single transaction for this system. Once this transaction is input into
the system, it updates the system’s master file (or database—see Chapter 6) that
permanently maintains employee information for the organization. The data
in the system are combined in different ways to create reports of interest to
management and government agencies and to send paychecks to employees.
Managers need TPS to monitor the status of internal operations and the
firm’s relations with the external environment. TPS are also major producers
of information for the other systems and business functions. For example,
the payroll system illustrated in Figure 2.2, along with other accounting TPS,
supplies data to the company’s general ledger system, which is responsible
for maintaining records of the firm’s income and expenses and for producing
Chapter 2 Global E-business and Collaboration 47
reports such as income statements and balance sheets. It also supplies em-
ployee payment history data for insurance, pension, and other benefits calcu-
lations to the firm’s human resources function and employee payment data
to government agencies such as the U.S. Internal Revenue Service and Social
Security Administration.
Transaction processing systems are often so central to a business that TPS
failure for a few hours can lead to a firm’s demise and perhaps that of other
firms linked to it. Imagine what would happen to UPS if its package tracking
system was not working! What would the airlines do without their computer-
ized reservation systems?
Systems for Business Intelligence
Firms also have business intelligence systems that focus on delivering in-
formation to support management decision making. Business intelligence
is a contemporary term for data and software tools for organizing, analyz-
ing, and providing access to data to help managers and other enterprise
users make more informed decisions. Business intelligence addresses the
decision-making needs of all levels of management. This section provides a
brief introduction to business intelligence. You’ll learn more about this topic
in Chapters 6 and 12.
Business intelligence systems for middle management help with monitoring,
controlling, decision-making, and administrative activities. In Chapter 1, we
defined management information systems as the study of information systems
in business and management. The term management information systems
(MIS) also designates a specific category of information systems serving middle
Employee Data To General Ledger
To government agencies
Employee paychecks
Employee/File
Database
Payroll
System
Management
reports
Online
queries
Employee Number
Name
Address
Pay rate
Gross pay
Federal tax
FICA
Medicare
State tax
Net pay
Earnings (YTD)
Payroll data on master file
FIGURE 2.2 A PAYROLL TPS
A TPS for payroll processing captures employee payment transaction data (such as a
time card). System outputs include online and hard-copy reports for management and
employee paychecks.
48 Part One Organizations, Management, and the Networked Enterprise
management. MIS provide middle managers with reports on the organization’s
current performance. This information is used to monitor and control the busi-
ness and predict future performance.
MIS summarize and report on the company’s basic operations using data
supplied by transaction processing systems. The basic transaction data from
TPS are compressed and usually presented in reports that are produced on a
regular schedule. Today, many of these reports are delivered online. Figure 2.3
shows how a typical MIS transforms transaction-level data from inventory, pro-
duction, and accounting into MIS files that are used to provide managers with
reports. Figure 2.4 shows a sample report from this system.
Transaction Processing Systems Management Information Systems
Order
file
Production
master
file
Accounting
files
Managers
MIS FILES
Sales
data
Unit
product
cost data
Product
change
data
Expense
data
Reports
Order
processing
system
Materials
resource
planning
system
General
ledger
system
MIS
Online Displays
and Dashboards
FIGURE 2.3 HOW MANAGEMENT INFORMATION SYSTEMS OBTAIN THEIR DATA FROM
THE ORGANIZATION’S TPS
In the system illustrated by this diagram, three TPS supply summarized transaction data to the MIS
reporting system at the end of the time period. Managers gain access to the organizational data through
the MIS, which provides them with the appropriate reports.
PRODUCT
CODE
PRODUCT
DESCRIPTION
SALES
REGION
Carpet Cleaner
TOTAL
Northeast
South
Midwest
West
4469
Consolidated Consumer Products Corporation Sales by Product and Sales Region: 2019
ACTUAL
SALES
4,066,700
3,778,112
4,867,001
4,003,440
16,715,253
PLANNED
4,800,000
3,750,000
4,600,000
4,400,000
17,550,000
ACTUAL
versus
PLANNED
0.85
1.01
1.06
0.91
0.95
Room Freshener
TOTAL
Northeast
South
Midwest
West
5674 3,676,700
5,608,112
4,711,001
4,563,440
18,559,253
3,900,000
4,700,000
4,200,000
4,900,000
17,700,000
0.94
1.19
1.12
0.93
1.05
FIGURE 2.4 SAMPLE MIS REPORT
This report, showing summarized annual sales data, was produced by the MIS in Figure 2.3.
Chapter 2 Global E-business and Collaboration 49
MIS typically provide answers to routine questions that have been specified
in advance and have a predefined procedure for answering them. For instance,
MIS reports might list the total pounds of lettuce used this quarter by a fast-
food chain or, as illustrated in Figure 2.4, compare total annual sales figures for
specific products to planned targets. These systems generally are not flexible
and have little analytical capability. Most MIS use simple routines, such as sum-
maries and comparisons, as opposed to sophisticated mathematical models or
statistical techniques.
Other types of business intelligence systems support more non-routine de-
cision making. Decision-support systems (DSS) focus on problems that are
unique and rapidly changing, for which the procedure for arriving at a solution
may not be fully predefined in advance. They try to answer questions such as
these: What would be the impact on production schedules if we were to double
sales in the month of December? What would happen to our return on invest-
ment if a factory schedule were delayed for six months?
Although DSS use internal information from TPS and MIS, they often bring
in information from external sources, such as current stock prices or product
prices of competitors. These systems are employed by “super-user” managers
and business analysts who want to use sophisticated analytics and models to
analyze data.
An interesting, small, but powerful DSS is the voyage-estimating system
of a large global shipping company that transports bulk cargoes of coal, oil,
ores, and finished products. The firm owns some vessels, charters others,
and bids for shipping contracts in the open market to carry general cargo. A
voyage-estimating system calculates financial and technical voyage details.
Financial calculations include ship/time costs (fuel, labor, capital), freight
rates for various types of cargo, and port expenses. Technical details include
myriad factors, such as ship cargo capacity, speed, port distances, fuel and
water consumption, and loading patterns (location of cargo for different
ports).
The system can answer questions such as the following: Given a customer
delivery schedule and an offered freight rate, which vessel should be assigned
at what rate to maximize profits? What is the optimal speed at which a particu-
lar vessel can optimize its profit and still meet its delivery schedule? What is the
optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia?
Figure 2.5 illustrates the DSS built for this company. The system operates on a
powerful desktop personal computer, providing a system of menus that makes
it easy for users to enter data or obtain information.
The voyage-estimating DSS we have just described draws heavily on models.
Other business intelligence systems are more data-driven, focusing instead on
extracting useful information from very large quantities of data. For example,
large ski resort companies such as Intrawest and Vail Resorts collect and store
large amounts of customer data from call centers, lodging and dining reserva-
tions, ski schools, and ski equipment rental stores. They use special software
to analyze these data to determine the value, revenue potential, and loyalty
of each customer to help managers make better decisions about how to target
their marketing programs.
Business intelligence systems also address the decision-making needs of se-
nior management. Senior managers need systems that focus on strategic issues
and long-term trends, both in the firm and in the external environment. They
are concerned with questions such as: What will employment levels be in five
years? What are the long-term industry cost trends? What products should we
be making in five years?
50 Part One Organizations, Management, and the Networked Enterprise
Executive support systems (ESS) help senior management make these
decisions. They address nonroutine decisions requiring judgment, evaluation,
and insight because there is no agreed-on procedure for arriving at a solution.
ESS present graphs and data from many sources through an interface that is
easy for senior managers to use. Often the information is delivered to senior
executives through a portal, which uses a web interface to present integrated
personalized business content.
ESS are designed to incorporate data about external events, such as new tax
laws or competitors, but they also draw summarized information from internal
MIS and DSS. They filter, compress, and track critical data, displaying the data
of greatest importance to senior managers. Increasingly, such systems include
business intelligence analytics for analyzing trends, forecasting, and “drilling
down” to data at greater levels of detail.
For example, the chief operating officer (COO) and plant managers at
Valero, the world’s largest independent petroleum refiner, use a Refining
Dashboard to display real-time data related to plant and equipment reli-
ability, inventory management, safety, and energy consumption. With the
displayed information, the COO and his team can review the performance
of each Valero refinery in the United States and Canada in terms of how
each plant is performing compared to the production plan of the firm. The
headquarters group can drill down from executive level to refinery level and
individual system-operator level displays of performance. Valero’s Refining
Dashboard is an example of a digital dashboard, which displays on a sin-
gle screen graphs and charts of key performance indicators for managing a
company. Digital dashboards are becoming an increasingly popular tool for
management decision makers.
The Interactive Session on Organizations describes examples of several of
these types of systems that the NFL (National Football League) and its teams
use. Note the types of systems illustrated by this case and the role they play in
improving both operations and decision making.
Ship file (e.g.,
speed, capacity)
Analytical
models
database
Port distance
restrictions file
Fuel consumption
cost file
Ship charter hire
history cost file
Port
expense file
PC
Online
queries
FIGURE 2.5 VOYAGE-ESTIMATING DECISION-SUPPORT SYSTEM
This DSS operates on a powerful PC. It is used daily by managers who must develop
bids on shipping contracts.
Chapter 2 Global E-business and Collaboration 51
Retail Chain
36.9%
Web Only
37.9%
Consumer Brand
Manufacturer
11.6%
Catalog/Call Center
13.6%
$10$0 $20 $30 $40 $50
ROI (in Dollars)
Social networking sites
Direct mail (postal)
Internet other
Display ads
Online catalogs
Search engine (keywords
and context marketing)
Commercial e-mail
DR magazine
DR newspaper
Telephone marketing
Mobile Internet
Radio
Television $6.62
$8.28
$10.08
$8.42
$10.26
$12.45
$12.26
$12.57
$16.75
$19.57
$19.86
$21.90
$42.08
Sales Revenue
Media Utilization
Year
0
500
1000
1500
2000
2010 2011 2012 201420132009
H
o
ur
s/
ye
ar
Media Channel
Te
lev
isi
on
Ra
dio
Int
er
ne
t
Da
ily
ne
ws
pa
pe
rs
Re
co
rd
ed
m
us
ic
Bo
ok
s
Vid
eo
ga
me
s
1800
1600
1400
1200
1000
800
600
400
200
0
1607
124 115
751
552
125 108149
197 184
Ou
t o
f h
om
e m
ed
ia
(B
ox
O
�c
e)
Ho
me
vi
de
o
M
ag
az
ine
s
Sales by Type 2019 Returns on Investment
10
155
0 20
Average Quantity
$100
$50
$200
$150
$0 $250
Average Amount
A digital dashboard
delivers comprehensive
and accurate information
for decision making, often
using a single screen. The
graphical overview of key
performance indicators
helps managers quickly
spot areas that need
attention.
Systems for Linking the Enterprise
Reviewing all the different types of systems we have just described, you might
wonder how a business can manage all the information in these different sys-
tems. You might also wonder how costly it is to maintain so many different
systems. And you might wonder how all these different systems can share in-
formation and how managers and employees are able to coordinate their work.
In fact, these are all important questions for businesses today.
Enterprise Applications
Getting all the different kinds of systems in a company to work together has
proven a major challenge. Typically, corporations are put together both through
normal “organic” growth and through acquisition of smaller firms. Over a period
of time, corporations end up with a collection of systems, most of them older,
and face the challenge of getting them all to “talk” with one another and work
together as one corporate system. There are several solutions to this problem.
One solution is to implement enterprise applications, which are systems
that span functional areas, focus on executing business processes across the
firm, and include all levels of management. Enterprise applications help busi-
nesses become more flexible and productive by coordinating their business
processes more closely and integrating groups of processes so they focus on
efficient management of resources and customer service.
There are four major enterprise applications: enterprise systems, supply
chain management systems, customer relationship management systems,
and knowledge management systems. Each of these enterprise applications
integrates a related set of functions and business processes to enhance the
52 Part One Organizations, Management, and the Networked Enterprise
All professional sports teams today collect detailed
data on player and team performance, fan behavior,
and sales, and increasingly use these data to drive deci-
sions about every aspect of the business—marketing,
ticketing, player evaluation, and TV and digital media
deals. This includes the National Football League
(NFL), which is increasingly turning to data to improve
how its players and teams perform and how fans expe-
rience the game.
Since 2014 the NFL has been capturing player
movement data on the field by putting nickel-sized
radio frequency identification (RFID) tags beneath
players’ shoulder pads to track every move they
make. The information the sensors gather is used
by NFL teams to improve their training and strat-
egy, by commentators on live game broadcasts, and
by fans attending games or using the NFL app on
the Xbox One.
The NFL’s player tracking system is based on
the Zebra Sports Solution developed by Zebra
Technologies, a Chicago-based firm specializing in
tracking technology that includes the bar codes on
groceries and other consumer goods and radio fre-
quency identification (RFID) technology. The Zebra
Sports Solution system records players’ speed, direc-
tion, location on the field, how far they ran on a play,
and how long they were sprinting, jogging, or walk-
ing. The system can also determine what formation
a team was in and how players’ speed or acceleration
affects their on-field performance. Want to know how
hard Eli Manning is throwing passes or the force with
which a ball arrives in the hands of receiver Odell
Beckham? The system knows how to do all that.
NFL players have RFID chips in their left and
right shoulder pads that transmit data to 20 radio
receivers strategically located in the lower and
upper levels of stadiums to collect data about how
each player moves, using metrics such as velocity,
speed in miles per hour, and distance traveled. From
there the data are transmitted to an on-site server
computer, where Zebra’s software matches an RFID
tag to the correct player or official. The football also
has a sensor transmitting location data. The data are
generated in real-time as the game is being played.
Each sensor transmits its location about 25 times
per player.
It takes just two seconds for data to be received
by the motion sensors, analyzed, and pushed out
to remote cloud computers run by Amazon Web
Services for the NFL. From the NFL cloud comput-
ers, the data are shared with fans, broadcasters,
and NFL teams. The data captured by the NFL are
displayed to fans using the NFL Next Gen Stats web-
site, NFL social media channels, and the NFL app
on Windows 10 and the Xbox One. The data are also
transmitted to the giant display screens in the arena
to show fans during the game.
The data have multiple uses. NFL teams use them
to evaluate player and team performance and to
analyze tactics, such as whether it might be better to
press forward or to punt in a particular fourth-down
situation. Data transmitted to broadcasters, to sta-
dium screens, to Next Gen Stats, and to the Next Gen
Stats feature of Microsoft’s Xbox One NFL app help
create a deeper fan experience that gets fans more
involved in the game.
Some of the statistics fans can now see on Next
Gen Stats include Fastest Ball Carriers, Longest
Tackles, Longest Plays, Passing Leaders, Rushing
Leaders, and Receiving Leaders. Next Gen Stats also
features charts for individual players and videos
that explain the differences and similarities be-
tween players, teams, and games based on the data.
While the data may be entertaining for fans, they
could prove strategic for the teams. Data markers for
each play are recorded, including type of offense,
type of defense, whether there was a huddle, all
movement during the play, and the yard line where
the ball was stopped. The NFL runs custom-created
analytics to deliver visualizations of the data to each
team within 24 hours of the game, via a custom-built
web portal. The system displays charts and graphs as
well as tabular data to let teams have more insight.
Each NFL team may also hire its own data analyst
to wring even more value from the data. The data
are giving NFL fans, teams, coaches, and players a
deeper look into the game they love.
Sources: Jason Hiner, “How the NFL and Amazon Unleashed ‘Next
Gen Stats’ to Grok Football Games,” TechRepublic, February 2, 2018;
Teena Maddox, “Super Bowl 52: How the NFL and US Bank Stadium
Are Ready to Make Digital History,” TechRepublic, February 1, 2018;
Brian McDonough, “How the NFL’s Data Operation Tracks Every
Move on the Field,” Information Management, December 7, 2016;
www.zebra.com, accessed March 15, 2017; and Mark J. Burns,
“Zebra Technologies, NFL Revamp Partnership For Third Season,”
SportTechie, September 6, 2016.
INTERACTIVE SESSION ORGANIZATIONS
Data Changes How NFL Teams Play the Game and How Fans See It
http://www.zebra.com
Chapter 2 Global E-business and Collaboration 53
3. How do the data about teams and players cap-
tured by the NFL help NFL football teams and the
NFL itself make better decisions? Give examples
of two decisions that were improved by the sys-
tems described in this case.
4. How did using data help the NFL and its teams
improve the way they run their business?
CASE STUDY QUESTIONS
1. What kinds of systems are illustrated in this case
study? Where do they obtain their data? What
do they do with the data? Describe some of the
inputs and outputs of these systems.
2. What business functions do these systems support?
Explain your answer.
Sales and
Marketing
FUNCTIONAL
AREAS
Manufacturing
and Production
Finance and
Accounting
Human
Resources
Knowledge
Management
Systems
Processes
Processes
Enterprise
Systems
Customers,
Distributors
Suppliers,
Business Partners
Processes
Supply
Chain
Management
Systems
Customer
Relationship
Management
Systems
FIGURE 2.6 ENTERPRISE APPLICATION ARCHITECTURE
Enterprise applications automate processes that span multiple business functions and
organizational levels and may extend outside the organization.
performance of the organization as a whole. Figure 2.6 shows that the archi-
tecture for these enterprise applications encompasses processes spanning the
entire organization and, in some cases, extending beyond the organization to
customers, suppliers, and other key business partners.
Enterprise Systems Firms use enterprise systems, also known as enter-
prise resource planning (ERP) systems, to integrate business processes in man-
ufacturing and production, finance and accounting, sales and marketing, and
human resources into a single software system. Information that was previously
54 Part One Organizations, Management, and the Networked Enterprise
fragmented in many different systems is stored in a single comprehensive data
repository where it can be used by many different parts of the business.
For example, when a customer places an order, the order data flow auto-
matically to other parts of the company that are affected by them. The order
transaction triggers the warehouse to pick the ordered products and schedule
shipment. The warehouse informs the factory to replenish whatever has been
depleted. The accounting department is notified to send the customer an in-
voice. Customer service representatives track the progress of the order through
every step to inform customers about the status of their orders. Managers are
able to use firmwide information to make more-precise and timely decisions
about daily operations and longer-term planning.
Supply Chain Management Systems Firms use supply chain management
(SCM) systems to help manage relationships with their suppliers. These systems
help suppliers, purchasing firms, distributors, and logistics companies share infor-
mation about orders, production, inventory levels, and delivery of products and
services so they can source, produce, and deliver goods and services efficient-
ly. The ultimate objective is to get the right amount of their products from their
source to their point of consumption in the least amount of time and at the lowest
cost. These systems increase firm profitability by lowering the costs of moving and
making products and by enabling managers to make better decisions about how to
organize and schedule sourcing, production, and distribution.
Supply chain management systems are one type of interorganizational
system because they automate the flow of information across organizational
boundaries. You will find examples of other types of interorganizational informa-
tion systems throughout this text because such systems make it possible for firms
to link digitally to customers and to outsource their work to other companies.
Customer Relationship Management Systems Firms use customer relation-
ship management (CRM) systems to help manage their relationships with their
customers. CRM systems provide information to coordinate all of the business pro-
cesses that deal with customers in sales, marketing, and service to optimize rev-
enue, 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.
Knowledge Management Systems Some firms perform better than others be-
cause they have better knowledge about how to create, produce, and deliver prod-
ucts and services. This firm knowledge is unique, is difficult to imitate, and can be
leveraged into long-term strategic benefits. Knowledge management systems
(KMS) enable organizations to better manage processes for capturing and apply-
ing 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.
We examine enterprise systems and systems for supply chain management
and customer relationship management in greater detail in Chapter 9. We dis-
cuss collaboration systems that support knowledge management in this chapter
and cover other types of knowledge management applications in Chapter 11.
Intranets and Extranets
Enterprise applications create deep-seated changes in the way the firm con-
ducts its business, offering many opportunities to integrate important business
Chapter 2 Global E-business and Collaboration 55
data into a single system. They are often costly and difficult to implement.
Intranets and extranets deserve mention here as alternative tools for increas-
ing integration and expediting the flow of information within the firm and with
customers and suppliers.
Intranets are simply internal company websites that are accessible only by
employees. The term intranet refers to an internal network, in contrast to the
Internet, which is a public network linking organizations and other external
networks. Intranets use the same technologies and techniques as the larger
Internet, and they often are simply a private access area in a larger company
website. Likewise with extranets, which are company websites that are acces-
sible to authorized vendors and suppliers and are often used to coordinate the
movement of supplies to the firm’s production apparatus.
For example, Six Flags, which operates 18 theme parks throughout North
America, maintains an intranet for its 1900 full-time employees that provides
company-related news and information on each park’s day-to-day operations, in-
cluding weather forecasts, performance schedules, and details about groups and
celebrities visiting the parks. The company also uses an extranet to broadcast
information about schedule changes and park events to its 30,000 seasonal em-
ployees. We describe the technology for intranets and extranets in more detail
in Chapter 7.
E-business, E-commerce, and E-government
The systems and technologies we have just described are transforming firms’
relationships with customers, employees, suppliers, and logistic partners into
digital relationships using networks and the Internet. So much business is now
enabled by or based upon digital networks that we use the terms electronic busi-
ness and electronic commerce frequently throughout this text.
Electronic business, or e-business, refers to the use of digital technology
and the Internet to execute the major business processes in the enterprise.
E-business includes activities for the internal management of the firm and
for coordination with suppliers and other business partners. It also includes
electronic commerce, or e-commerce.
E-commerce is the part of e-business that deals with the buying and selling of
goods and services over the Internet. It also encompasses activities supporting
those market transactions, such as advertising, marketing, customer support,
security, delivery, and payment.
The technologies associated with e-business have also brought about simi-
lar changes in the public sector. Governments on all levels are using Internet
technology to deliver information and services to citizens, employees, and busi-
nesses with which they work. E-government refers to the application of the
Internet and networking technologies to digitally enable government and pub-
lic sector agencies’ relationships with citizens, businesses, and other arms of
government.
In addition to improving delivery of government services, e-government
makes government operations more efficient and also empowers citizens by
giving them easier access to information and the ability to network electroni-
cally with other citizens. For example, citizens in some states can renew their
driver’s licenses or apply for unemployment benefits online, and the Internet
has become a powerful tool for instantly mobilizing interest groups for political
action and fundraising.
56 Part One Organizations, Management, and the Networked Enterprise
2-3 Why are systems for collaboration and social
business so important, and what technologies
do they use?
With all these systems and information, you might wonder how it is possible to
make sense of them. How do people working in firms pull it all together, work
toward common goals, and coordinate plans and actions? In addition to the
types of systems we have just described, businesses need special systems to
support collaboration and teamwork.
What Is Collaboration?
Collaboration is working with others to achieve shared and explicit goals.
Collaboration focuses on task or mission accomplishment and usually takes
place in a business or other organization and between businesses. You collabo-
rate with a colleague in Tokyo who has expertise on a topic about which you
know nothing. You collaborate with many colleagues in publishing a company
blog. If you’re in a law firm, you collaborate with accountants in an accounting
firm in servicing the needs of a client with tax problems.
Collaboration can be short-lived, lasting a few minutes, or longer term, de-
pending on the nature of the task and the relationship among participants.
Collaboration can be one-to-one or many-to-many.
Employees may collaborate in informal groups that are not a formal part
of the business firm’s organizational structure, or they may be organized into
formal teams. Teams have a specific mission that someone in the business as-
signed to them. Team members need to collaborate on the accomplishment
of specific tasks and collectively achieve the team mission. The team mission
might be to “win the game” or “increase online sales by 10 percent.” Teams are
often short-lived, depending on the problems they tackle and the length of time
needed to find a solution and accomplish the mission.
Collaboration and teamwork are more important today than ever for a vari-
ety of reasons.
• Changing nature of work. The nature of work has changed from factory manu-
facturing and pre-computer office work where each stage in the production
process occurred independently of one another and was coordinated by
supervisors. Work was organized into silos. Within a silo, work passed from
one machine tool station to another, from one desktop to another, until the
finished product was completed. Today, jobs require much closer coordina-
tion and interaction among the parties involved in producing the service or
product. A report from the consulting firm McKinsey & Company estimated
that 41 percent of the U.S. labor force is now composed of jobs where interac-
tion (talking, e-mailing, presenting, and persuading) is the primary value-
adding activity (McKinsey, 2012). Even in factories, workers today often work
in production groups, or pods.
• Growth of professional work. “Interaction” jobs tend to be professional jobs
in the service sector that require close coordination and collaboration.
Professional jobs require substantial education and the sharing of informa-
tion and opinions to get work done. Each actor on the job brings specialized
expertise to the problem, and all the actors need to take one another into
account in order to accomplish the job.
• Changing organization of the firm. For most of the industrial age, managers
organized work in a hierarchical fashion. Orders came down the hierarchy,
and responses moved back up the hierarchy. Today, work is organized into
Chapter 2 Global E-business and Collaboration 57
groups and teams, and the members are expected to develop their own meth-
ods for accomplishing the task. Senior managers observe and measure results
but are much less likely to issue detailed orders or operating procedures. In
part, this is because expertise and decision-making power have been pushed
down in organizations.
• Changing scope of the firm. The work of the firm has changed from a single
location to multiple locations—offices or factories throughout a region, a na-
tion, or even around the globe. For instance, Henry Ford developed the first
mass-production automobile plant at a single Dearborn, Michigan factory.
In 2017, Ford employed 202,000 people at about 67 locations worldwide.
With this kind of global presence, the need for close coordination of design,
production, marketing, distribution, and service obviously takes on new im-
portance and scale. Large global companies need to have teams working on a
global basis.
• Emphasis on innovation. Although we tend to attribute innovations in busi-
ness and science to great individuals, these great individuals are most likely
working with a team of brilliant colleagues. Think of Bill Gates and Steve
Jobs (founders of Microsoft and Apple), both of whom are highly regarded
innovators and both of whom built strong collaborative teams to nurture
and support innovation in their firms. Their initial innovations derived from
close collaboration with colleagues and partners. Innovation, in other words,
is a group and social process, and most innovations derive from collabora-
tion among individuals in a lab, a business, or government agencies. Strong
collaborative practices and technologies are believed to increase the rate and
quality of innovation.
• Changing culture of work and business. Most research on collaboration sup-
ports the notion that diverse teams produce better outputs faster than
individuals working on their own. Popular notions of the crowd (“crowd-
sourcing” and the “wisdom of crowds”) also provide cultural support for
collaboration and teamwork.
What Is Social Business?
Many firms today enhance collaboration by embracing social business—the
use of social networking platforms, including Facebook, Twitter, and internal
corporate social tools—to engage their employees, customers, and suppliers.
These tools enable workers to set up profiles, form groups, and “follow” each
other’s status updates. The goal of social business is to deepen interactions with
groups inside and outside the firm to expedite and enhance information shar-
ing, innovation, and decision making.
A key word in social business is conversations. Customers, suppliers, employ-
ees, managers, and even oversight agencies continually have conversations
about firms, often without the knowledge of the firm or its key actors (employ-
ees and managers).
Supporters of social business argue that if firms could tune in to these con-
versations, they would strengthen their bonds with consumers, suppliers, and
employees, increasing their emotional involvement in the firm.
All of this requires a great deal of information transparency. People need to
share opinions and facts with others quite directly, without intervention from
executives or others. Employees get to know directly what customers and other
employees think, suppliers will learn very directly the opinions of supply chain
partners, and even managers presumably will learn more directly from their
employees how well they are doing. Nearly everyone involved in the creation
of value will know much more about everyone else.
58 Part One Organizations, Management, and the Networked Enterprise
If such an environment could be created, it is likely to drive operational ef-
ficiencies, spur innovation, and accelerate decision making. If product design-
ers can learn directly about how their products are doing in the market in real
time, based on consumer feedback, they can speed up the redesign process. If
employees can use social connections inside and outside the company to cap-
ture new knowledge and insights, they will be able to work more efficiently and
solve more business problems.
Table 2.2 describes important applications of social business inside and out-
side the firm. This chapter focuses on enterprise social business—its internal
corporate uses. Chapters 7 and 10 describe social business applications relating
to customers and suppliers outside the company.
Business Benefits of Collaboration
and Social Business
Much of the research on collaboration has been anecdotal, but there is a gen-
eral belief among both business and academic communities that the more a
business firm is “collaborative,” the more successful it will be, and that collabo-
ration within and among firms is more essential than in the past. MIT Sloan
Management Review’s research found that a focus on collaboration is central to
how digitally advanced companies create business value and establish competi-
tive advantage (Kiron, 2017). A global survey of business and information sys-
tems managers found that investments in collaboration technology produced
organizational improvements that returned more than four times the amount
of the investment, with the greatest benefits for sales, marketing, and research
and development functions (Frost and Sullivan, 2009). McKinsey & Company
consultants predict that social technologies used within and across enterprises
could potentially raise the productivity of interaction workers by 20 to 25 per-
cent (McKinsey Global Institute, 2012).
Table 2.3 summarizes some of the benefits of collaboration and social busi-
ness that have been identified. Figure 2.7 graphically illustrates how collabora-
tion is believed to affect business performance.
TABLE 2.2 APPLICATIONS OF SOCIAL BUSINESS
SOCIAL BUSINESS APPLICATION DESCRIPTION
Social networks Connect through personal and business profiles
Crowdsourcing Harness collective knowledge to generate new ideas
and solutions
Shared workspaces Coordinate projects and tasks; co-create content
Blogs and wikis Publish and rapidly access knowledge; discuss
opinions and experiences
Social commerce Share opinions about purchasing on social platforms
File sharing Upload, share, and comment on photos, videos,
audio, text documents
Social marketing Use social media to interact with customers; derive
customer insights
Communities Discuss topics in open forums; share expertise
Chapter 2 Global E-business and Collaboration 59
TABLE 2.3 BUSINESS BENEFITS OF COLLABORATION AND SOCIAL
BUSINESS
BENEFIT RATIONALE
Productivity People interacting and working together can
capture expert knowledge and solve problems
more rapidly than the same number of people
working in isolation from one another. There will
be fewer errors.
Quality People working collaboratively can communicate
errors and corrective actions faster than if they
work in isolation. Collaborative and social
technologies help reduce time delays in design
and production.
Innovation People working collaboratively can come up with
more innovative ideas for products, services, and
administration than the same number working in
isolation from one another. There are advantages
to diversity and the “wisdom of crowds.”
Customer service People working together using collaboration and
social tools can solve customer complaints and
issues faster and more effectively than if they
were working in isolation from one another.
Financial performance (profitability,
sales, and sales growth)
As a result of all of the above, collaborative firms
have superior sales, sales growth, and financial
performance.
Collaboration Capability
• Open culture
• Decentralized structure
• Breadth of collaboration
Collaboration Technology
• Use of collaboration
and social technology
for implementation and
operations
• Use of collaborative
and social technology
for strategic planning
Firm Performance
Collaboration
Quality
FIGURE 2.7 REQUIREMENTS FOR COLLABORATION
Successful collaboration requires an appropriate organizational structure and culture
along with appropriate collaboration technology.
60 Part One Organizations, Management, and the Networked Enterprise
Building a Collaborative Culture and
Business Processes
Collaboration won’t take place spontaneously in a business firm, especially in
the absence of supportive culture or business processes. Business firms, espe-
cially large firms, had a reputation in the past for being “command and control”
organizations where the top leaders thought up all the really important mat-
ters and then ordered lower-level employees to execute senior management
plans. The job of middle management supposedly was to pass messages back
and forth, up and down the hierarchy.
Command and control firms required lower-level employees to carry out
orders without asking too many questions, with no responsibility to improve
processes, and with no rewards for teamwork or team performance. If your
work group needed help from another work group, that was something for
the bosses to figure out. You never communicated horizontally, always verti-
cally, so management could control the process. Together, the expectations
of management and employees formed a culture, a set of assumptions about
common goals and how people should behave. Many business firms still oper-
ate this way.
A collaborative business culture and business processes are very different.
Senior managers are responsible for achieving results but rely on teams of
employees to achieve and implement the results. Policies, products, designs,
processes, and systems are much more dependent on teams at all levels of
the organization to devise, to create, and to build. Teams are rewarded for
their performance, and individuals are rewarded for their performance in
a team. The function of middle managers is to build the teams, coordinate
their work, and monitor their performance. The business culture and busi-
ness processes are more “social.” In a collaborative culture, senior manage-
ment establishes collaboration and teamwork as vital to the organization,
and it actually implements collaboration for the senior ranks of the business
as well.
Tools and Technologies for Collaboration
and Social Business
A collaborative, team-oriented culture won’t produce benefits without informa-
tion systems in place to enable collaboration and social business. Currently
there are hundreds of tools designed to deal with the fact that, in order to suc-
ceed in our jobs, we are all much more dependent on one another, our fellow
employees, customers, suppliers, and managers. Some of these tools are expen-
sive, but others are available online for free (or with premium versions for a
modest fee). Let’s look more closely at some of these tools.
E-mail and Instant Messaging (IM)
E-mail and instant messaging (including text messaging) have been major
communication and collaboration tools for interaction jobs. Their software
operates on computers, mobile phones, tablets, and other wireless devices
and includes features for sharing files as well as transmitting messages. Many
instant messaging systems allow users to engage in real-time conversations
with multiple participants simultaneously. In recent years, e-mail use has
declined, with messaging and social media becoming preferred channels of
communication.
Chapter 2 Global E-business and Collaboration 61
Wikis
Wikis are a type of website that makes it easy for users to contribute and edit
text content and graphics without any knowledge of web page development or
programming techniques. The most well-known wiki is Wikipedia, the largest
collaboratively edited reference project in the world. It relies on volunteers,
makes no money, and accepts no advertising.
Wikis are very useful tools for storing and sharing corporate knowledge and
insights. Enterprise software vendor SAP AG has a wiki that acts as a base of
information for people outside the company, such as customers and software
developers who build programs that interact with SAP software. In the past,
those people asked and sometimes answered questions in an informal way on
SAP online forums, but that was an inefficient system, with people asking and
answering the same questions over and over.
Virtual Worlds
Virtual worlds, such as Second Life, are online 3-D environments populated
by “residents” who have built graphical representations of themselves known
as avatars. Companies like IBM, Cisco, and Intel Corporations use the online
world for meetings, interviews, guest speaker events, and employee training.
Real-world people represented by avatars meet, interact, and exchange ideas
at these virtual locations using gestures, chat box conversations, and voice
communication.
Collaboration and Social Business Platforms
There are now suites of software products providing multifunction platforms
for collaboration and social business among teams of employees who work to-
gether from many different locations. The most widely used are Internet-based
audio conferencing and video conferencing systems, cloud collaboration ser-
vices such as Google’s online services and tools, corporate collaboration systems
such as Microsoft SharePoint and IBM Notes, and enterprise social networking
tools such as Salesforce Chatter, Microsoft Yammer, Jive, Facebook Workplace,
and IBM Connections.
Virtual Meeting Systems In an effort to reduce travel expenses and enable
people in different locations to meet and collaborate, many companies, both large
and small, are adopting videoconferencing and web conferencing technologies.
Companies such as Heinz, GE, and PepsiCo are using virtual meeting systems for
product briefings, training courses, and strategy sessions.
A videoconference allows individuals at two or more locations to com-
municate simultaneously through two-way video and audio transmissions.
High-end videoconferencing systems feature telepresence technology, an
integrated audio and visual environment that allows a person to give the ap-
pearance of being present at a remote location (see the Interactive Session
on Technology). Free or low-cost Internet-based systems such as Skype group
videoconferencing, Amazon Chime, and Zoom are of lower quality, but still
useful for smaller companies. Apple’s FaceTime is useful for one-to-one
videoconferencing. Some of these tools are available on mobile devices.
Companies of all sizes are finding web-based online meeting tools such as
Cisco WebEx, Skype for Business, GoTo Meeting, and Adobe Connect especially
helpful for training and sales presentations. These products enable participants
to share documents and presentations in conjunction with audioconferencing
and live video.
62 Part One Organizations, Management, and the Networked Enterprise
When it comes to collaboration, videoconferenc-
ing is becoming a tool of choice for organizations
of all sizes. In the past, videoconferencing was lim-
ited to the very largest companies that could afford
dedicated videoconference rooms and expensive
networking and software for this purpose. Today,
videoconferencing has been democratized. There’s
something for everyone.
The cost of the technology has radically fallen;
global Internet and desktop transmission of video
and audio data is affordable. There are inexpensive
mobile and desktop tools as well as high-end video-
conferencing and telepresence systems to manage
business processes and to connect and collaborate
with others—even customers—around the globe.
The current generation of telepresence platforms
provide much more than video collaboration, with
the ability to coordinate multiple rich data streams
that integrate digital information from mobile, desk-
top, and video, create a collaborative environment,
and move the information to where managers and
professionals are making decisions. Cisco’s IX5000
immersive telepresence system is an example. It of-
fers leading-edge telepresence, but it’s much more
affordable and easier to use than in the past. Three
4K ultra high-definition cameras clustered discreetly
above three 70-inch LCD screens provide crisp,
high-definition video. Theater-quality sound ema-
nates from 18 custom speakers and one powerful
sub-woofer, creating a high-quality lifelike collabora-
tion experience for 8 to 18 people. The camera and
graphic processors are able to capture the whole
room in fine detail, so you can stand up and move
around or go the whiteboard. Images can be cropped
to show participants seated behind their tables, but
when someone stands up, the crop is removed to
show both standing and sitting participants.
Installing the IX500 system requires no special
changes to a room, and it needs only half the power,
installation time, and data transmission capacity
(bandwidth) as previous telepresence systems. A
6-seat IX5000 studio lists for $299,000, while the
18-seat studio costs $339,000.
Produban, Grupo Santander’s technology company
specializing in the continuous design and operation
of IT infrastructures, adopted the IX5000 system to
bring people together to make better decisions faster.
Grupo Santander is a Spanish banking group and one
of the largest banks in the world, with over 188,000
employees serving more than 125 million customers
and operations across Europe, Latin America, North
America, Africa, and Asia. Produban is responsible
for the entire IT infrastructure of this sprawling
global company and also provides expertise to 120
other companies in IT infrastructure design and ser-
vices. Produban has over 5,500 employees working
in 9 different countries.
With 50 percent less power usage, 50 percent less
data transmission capacity and half the installation
time of earlier systems (only 8 hours), the IX5000
has reduced the total cost of purchasing and operat-
ing the telepresence system by 30 percent over 3
years. Lower overall costs enable Produban to set up
video rooms in more locations, so more teams can
benefit. Produban is intent on using videoconferenc-
ing throughout the entire corporation.
King County, Washington, which includes the
city of Seattle and has 14,000 employees, opted for
a less-sophisticated but more-affordable solution.
In 2016 it started using Logitech’s SmartDock audio
and video videoconferencing and collaboration sys-
tem to hold meetings, interview job candidates, and
handle other tasks. SmartDock is a user-friendly
touch-screen control console to launch and manage
audio and video calls in any meeting space, large or
small. It has an embedded Microsoft Surface Pro tab-
let running a special version of Skype for Business,
called Skype Room System, and works with Office
for Business productivity tools and qualified devices,
including Logitech ConferenceCams. With Logitech
SmartDock, people can start meetings with a single
touch, then instantly project to the display in the
room and share with remote participants via their
Skype for Business clients on a smartphone or lap-
top. Participants can share content in a meeting and
view and edit documents in real time. An embedded
motion sensor activates the system when anyone
is in the room. Prices range from $1,999 to $3,999,
depending on the size of the meeting room and the
need for webcams.
In the past, King County had used a variety of sys-
tems and technologies for videoconferencing and col-
laboration. They were time consuming for the county’s
IT staff to administer and had limited capabilities and
INTERACTIVE SESSION TECHNOLOGY
Videoconferencing: Something for Everyone
Chapter 2 Global E-business and Collaboration 63
1. Compare the capabilities of Cisco’s IX5000 telepres-
ence and the Logitech SmartDock systems. How do
they promote collaboration and innovation?
2. Why would a company like Produban want to
invest in a high-end telepresence system such
as Cisco’s IX5000? How is videoconferencing
technology and telepresence related to Produban’s
business model and business strategy?
3. Why would King County, Washington want to
implement the Logitech SmartDock system? What
business benefits did it obtain from using this
technology?
features. Teams couldn’t connect remotely and estab-
lish multipoint connections with smartphones and
tablets. King County’s IT staff might spend 20 minutes
or more setting up a videoconferencing system, which
often relied on legacy technology from multiple ven-
dors along with computer monitors and outdated
VGA-quality TV sets. King County received multiple
requests to use these systems daily in its 30 on-site
conference rooms and needed to standardize the tech-
nology and make it more supportive of collaboration.
The King County IT staff was able to handle instal-
lation and implementation of the Logitech SmartDock
system on its own. Employees are using the video-
conferencing and collaboration systems without IT
involvement. Being able to share presentations and
co-edit documents in Word, Excel, and other formats
has made working much more collaborative.
Sources: “‘Less Is More’ as Cisco Completely Reimagines Flagship
Three-Screen Video Conferencing Technology” and “Cisco
Telepresence IX5000 Series,” www.cisco.com, accessed February 5,
2018; www.produban.com, accessed February 5, 2018; www.
santander.com, accessed February 5, 2018; www.logitech.com, ac-
cessed February 5, 2018; and Samuel Greengard, “King County
Focuses on Collaboration,” CIO Insight, December 20, 2017.
Cloud Collaboration Services Google offers many online tools and services,
and some are suitable for collaboration. They include Google Drive, Google Docs,
G Suites, and Google Sites. Most are free of charge.
Google Drive is a file storage and synchronization service for cloud storage,
file sharing, and collaborative editing. Such web-based online file-sharing ser-
vices allow users to upload files to secure online storage sites from which the
files can be shared with others. Microsoft OneDrive and Dropbox are other lead-
ing cloud storage services. They feature both free and paid services, depending
on the amount of storage space and administration required. Users are able to
synchronize their files stored online with their local PCs and other kinds of de-
vices, with options for making the files private or public and for sharing them
with designated contacts.
Google Drive and Microsoft OneDrive are integrated with tools for docu-
ment creation and sharing. OneDrive provides online storage for Microsoft
Office documents and other files and works with Microsoft Office apps, both
installed and on the web. It can share to Facebook as well. Google Drive is
integrated with Google Docs, Sheets, and Slides, a suite of productivity ap-
plications that offer collaborative editing on documents, spreadsheets, and
presentations. Google’s cloud-based productivity suite for businesses, called
G Suite, also works with Google Drive. Google Sites allows users to quickly
create online team-oriented sites where multiple people can collaborate and
share files.
Microsoft SharePoint and IBM Notes Microsoft SharePoint is a browser-based
collaboration and document management platform, combined with a powerful
search engine, that is installed on corporate servers. SharePoint has a web-based
interface and close integration with productivity tools such as Microsoft Office.
CASE STUDY QUESTIONS
http://www.cisco.com
http://www.produban.com
http://www.santander.com
http://www.santander.com
http://www.logitech.com
64 Part One Organizations, Management, and the Networked Enterprise
SharePoint software makes it possible for employees to share their documents
and collaborate on projects using Office documents as the foundation.
SharePoint can be used to host internal websites that organize and store in-
formation in one central workspace to enable teams to coordinate work ac-
tivities, collaborate on and publish documents, maintain task lists, implement
workflows, and share information via wikis and blogs. Users are able to con-
trol versions of documents and document security. Because SharePoint stores
and organizes information in one place, users can find relevant information
quickly and efficiently while working closely together on tasks, projects, and
documents. Enterprise search tools help locate people, expertise, and content.
SharePoint now features social tools.
IBM Notes (formerly Lotus Notes) is a collaborative software system with
capabilities for sharing calendars, e-mail, messaging, collective writing and ed-
iting, shared database access, and online meetings. Notes software installed on
desktop or laptop computers obtains applications stored on an IBM Domino
server. Notes is web-enabled and offers an application development environ-
ment so that users can build custom applications to suit their unique needs.
Notes has also added capabilities for blogs, microblogs, wikis, online content
aggregators, help desk systems, voice and video conferencing, and online meet-
ings. IBM Notes promises high levels of security and reliability and the ability
to retain control over sensitive corporate information.
Enterprise Social Networking Tools The tools we have just described include
capabilities for supporting social business, but there are also more specialized so-
cial tools for this purpose, such as Salesforce Chatter, Microsoft Yammer, Jive, Face-
book Workplace, and IBM Connections. Enterprise social networking tools create
business value by connecting the members of an organization through profiles,
updates, and notifications similar to Facebook features but tailored to internal cor-
porate uses. Table 2.4 provides more detail about these internal social capabilities.
TABLE 2.4 ENTERPRISE SOCIAL NETWORKING SOFTWARE CAPABILITIES
SOCIAL SOFTWARE CAPABILITY DESCRIPTION
Profiles Ability to set up member profiles describing who
individuals are, educational background, interests.
Includes work-related associations and expertise
(skills, projects, teams).
Content sharing Share, store, and manage content including documents,
presentations, images, and videos.
Feeds and notifications Real-time information streams, status updates, and
announcements from designated individuals and groups.
Groups and team workspaces Establish groups to share information, collaborate
on documents, and work on projects with the ability
to set up private and public groups and to archive
conversations to preserve team knowledge.
Tagging and social bookmarking Indicate preferences for specific pieces of content,
similar to the Facebook Like button. Tagging lets
people add keywords to identify content they like.
Permissions and privacy Ability to make sure private information stays within
the right circles, as determined by the nature of
relationships. In enterprise social networks, there is a
need to establish who in the company has permission
to see what information.
Chapter 2 Global E-business and Collaboration 65
Same time
synchronous
S
am
e
p
la
ce
co
lo
ca
te
d
D
i�
er
en
t
p
la
ce
re
m
ot
e
Di�erent time
asynchronous
Face-to-face interactions
decision rooms, single display
groupware, shared table, wall
displays, roomware,…
Continuous task
team rooms, large public display,
shift work groupware, project
management,…
Remote interactions
video conferencing, instant
messaging, charts/MUDs/virtual
words, shared screens, multi-user
editors,…
Communication + coordination
e-mail, bulletin boards, blogs,
asynchronous conferencing, group
calendars, workflow, version control,
wikis,…
Time/Space
Collaboration and Social Tool Matrix
FIGURE 2.8 THE TIME/SPACE COLLABORATION AND SOCIAL TOOL
MATRIX
Collaboration and social technologies can be classified in terms of whether they support
interactions at the same or different times or places, and whether these interactions are
remote or colocated.
Although companies have benefited from enterprise social networking, in-
ternal social networking has not always been easy to implement. The chapter-
ending case study addresses this topic.
Checklist for Managers: Evaluating and Selecting
Collaboration and Social Software Tools
With so many collaboration and social business tools and services available, how
do you choose the right collaboration technology for your firm? To answer this
question, you need a framework for understanding just what problems these tools
are designed to solve. One framework that has been helpful for us to talk about
collaboration tools is the time/space collaboration and social tool matrix devel-
oped in the early 1990s by a number of collaborative work scholars (Figure 2.8).
The time/space matrix focuses on two dimensions of the collaboration prob-
lem: time and space. For instance, you need to collaborate with people in dif-
ferent time zones, and you cannot all meet at the same time. Midnight in New
York is noon in Mumbai, so this makes it difficult to have a videoconference
(the people in New York are too tired). Time is clearly an obstacle to collabora-
tion on a global scale.
Place (location) also inhibits collaboration in large global or even national
and regional firms. Assembling people for a physical meeting is made difficult
by the physical dispersion of distributed firms (firms with more than one loca-
tion), the cost of travel, and the time limitations of managers.
The collaboration and social technologies we have just described are ways
of overcoming the limitations of time and space. Using this time/space frame-
work will help you to choose the most appropriate collaboration and teamwork
tools for your firm. Note that some tools are applicable in more than one time/
place scenario. For example, Internet collaboration suites such as IBM Notes
have capabilities for both synchronous (instant messaging, meeting tools) and
asynchronous (e-mail, wikis, document editing) interactions.
66 Part One Organizations, Management, and the Networked Enterprise
Here’s a “to-do” list to get started. If you follow these six steps, you should be
led to investing in the correct collaboration software for your firm at a price you
can afford and within your risk tolerance.
1. What are the collaboration challenges facing the firm in terms of time and
space? Locate your firm in the time/space matrix. Your firm can occupy
more than one cell in the matrix. Different collaboration tools will be needed
for each situation.
2. Within each cell of the matrix where your firm faces challenges, exactly what
kinds of solutions are available? Make a list of vendor products.
3. Analyze each of the products in terms of its cost and benefits to your firm.
Be sure to include the costs of training in your cost estimates and the costs
of involving the information systems department, if needed.
4. Identify the risks to security and vulnerability involved with each of the
products. Is your firm willing to put proprietary information into the hands
of external service providers over the Internet? Is your firm willing to expose
its important operations to systems controlled by other firms? What are the
financial risks facing your vendors? Will they be here in three to five years?
What would be the cost of making a switch to another vendor in the event
the vendor firm fails?
5. Seek the help of potential users to identify implementation and training
issues. Some of these tools are easier to use than others.
6. Make your selection of candidate tools, and invite the vendors to make
presentations.
2-4 What is the role of the information
systems function in a business?
We’ve seen that businesses need information systems to operate today and that
they use many different kinds of systems. But who is responsible for running
these systems? Who is responsible for making sure the hardware, software, and
other technologies used by these systems are running properly and are up to
date? End users manage their systems from a business standpoint, but manag-
ing the technology requires a special information systems function.
The Information Systems Department
In all but the smallest of firms, 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 firm’s IT infrastructure.
We describe IT infrastructure in detail in Chapter 5.
The information systems department consists of specialists, such as program-
mers, systems analysts, project leaders, and information systems managers.
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. It
is the systems analyst’s job to translate business problems and requirements
into information requirements and systems. Information systems managers
are leaders of teams of programmers and analysts, project managers, physical
facility managers, telecommunications managers, or database specialists. They
are also managers of computer operations and data entry staff. Also, external
specialists, such as hardware vendors and manufacturers, software firms, and
Chapter 2 Global E-business and Collaboration 67
consultants, frequently participate in the day-to-day operations and long-term
planning of information systems.
In many companies, the information systems department is headed by a
chief information officer (CIO). The CIO is a senior manager who oversees
the use of information technology in the firm. Today’s CIOs are expected to
have a strong business background as well as information systems expertise
and to play a leadership role in exploring new technologies and integrating
technology into the firm’s business strategy. Large firms today also have posi-
tions for a chief security officer, chief knowledge officer, chief data officer, and
chief privacy officer, all of whom work closely with the CIO.
The chief security officer (CSO) is in charge of information systems secu-
rity for the firm and is responsible for enforcing the firm’s information security
policy (see Chapter 8). (Sometimes this position is called the chief information
security officer [CISO] where information systems security is separated from
physical security.) The CSO is responsible for educating and training users and
information systems specialists about security, keeping management aware of
security threats and breakdowns, and maintaining the tools and policies chosen
to implement security.
Information systems security and the need to safeguard personal data have
become so important that corporations collecting vast quantities of personal data
have established positions for a chief privacy officer (CPO). The CPO is respon-
sible for ensuring that the company complies with existing data privacy laws.
The chief knowledge officer (CKO) is responsible for the firm’s knowl-
edge management program. The 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.
The chief data officer (CDO) is responsible for enterprise-wide governance
and utilization of information to maximize the value the organization can real-
ize from its data. The CDO ensures that the firm is collecting the appropriate
data to serve its needs, deploying appropriate technologies for analyzing the
data, and using the results to support business decisions. This position arose to
deal with the very large amounts of data organizations are now generating and
collecting (see Chapter 6).
End users are representatives of departments outside of the information sys-
tems group for whom applications are developed. These users are playing an
increasingly large role in the design and development of information systems.
In the early years of computing, the information systems group was com-
posed mostly of programmers who performed highly specialized but limited
technical functions. Today, a growing proportion of staff members are systems
analysts and network specialists, with the information systems department act-
ing as a powerful change agent in the organization. The information systems
department suggests new business strategies and new information-based prod-
ucts and services and coordinates both the development of the technology and
the planned changes in the organization.
In 2019 there are about 4.5 million information system managers and employ-
ees in the United States, with an estimated growth rate of 13 percent through
2026, expanding the number of new jobs by more than 550,000. Although all IT/
IS occupations show above-average growth, the fastest-growing occupations are
information security analysts (28 percent), software developers (24 percent),
computer scientists (19 percent), web developers (15 percent), IS/IT manag-
ers (12 percent), com puter support specialists (11 percent), database adminis-
trators (11 percent), systems analysts (9 percent), computer network architects
(6 percent), and network and system administrators (6 percent) (Bureau of Labor
Statistics, 2018). The number of computer programmers will decline 7 percent in
68 Part One Organizations, Management, and the Networked Enterprise
this period, in part because the process of creating computer programs is becoming
increasingly efficient with the growth of online software services, cloud comput-
ing, and outsourcing of coding to low-wage countries. In general, the management
of IT occupations is showing faster expansion than the technical occupations in
IT. System and network security management positions are especially in demand.
See the Learning Track for this chapter titled “Occupational and Career Outlook for
Information Systems Majors 2016–2026” for more details on IS job opportunities.
Organizing the Information Systems Function
There are many types of business firms, and there are many ways in which the
IT function is organized within the firm. A very small company will not have a
formal information systems group. It might have one employee who is responsi-
ble for keeping its networks and applications running, or it might use consultants
for these services. Larger 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. Our Learning Track describes alternative
ways of organizing the information systems function within the business.
The question of how the information systems department should be orga-
nized is part of the larger issue of IT governance. IT governance includes the
strategy and policies for using information technology within an organization.
It specifies the decision rights and framework for accountability to ensure that
the use of information technology supports the organization’s strategies and
objectives. How much should the information systems function be centralized?
What decisions must be made to ensure effective management and use of infor-
mation technology, including the return on IT investments? Who should make
these decisions? How will these decisions be made and monitored? Firms with
superior IT governance will have clearly thought out the answers.
2-5 How will MIS help my career?
Here is how Chapter 2 and this book can help you find a job as a sales support
specialist.
The Company
Comprehensive Supplemental Insurance USA is a leading provider of individ-
ual supplemental accident, disability, health, and life insurance products. It is
headquartered in Minneapolis and has an open position for an entry-level sales
support specialist. The company offers supplemental insurance to complement
existing employer benefits programs, maintaining a field sales force and corpo-
rate staff of over 5,000 people worldwide. It is known for investing in its em-
ployees and their career development.
Position Description
This position will provide overall systems, administrative, and data manage-
ment support to the national sales organization for the company’s division that
markets to small businesses. Job responsibilities include:
• Daily administration and support of the firm’s Salesforce.com customer
relationship management system, including managing user setup, profiles
and roles, and validating data.
http://Salesforce.com
Chapter 2 Global E-business and Collaboration 69
• Assisting with data management and providing system training and
ongoing support to the field.
• Preparing routine weekly, monthly, and quarterly sales and key
performance indicator reports for sales management.
• Preparing agent commission reports and creating new reports as
requested.
• Supporting various projects related to agent licensing and agent
compensation.
Job Requirements
• Strong Excel skills plus some knowledge of data management
• Strong customer service skills
• Strong analytical, critical thinking, and communication skills
• Ability to multitask in a fast-paced environment
• College degree or 2 years equivalent experience
Interview Questions
1. What do you know about customer relationship management? Have
you ever worked with Salesforce.com? If so, what have you used the
system for?
2. What do you know about data management? Have you ever worked
with data management software? If so, what exactly have you done
with it?
3. Tell us what you can do with Excel. What kinds of problems have you used
Excel to solve? Did you take courses in Excel?
4. Have you ever worked in customer service? What exactly did you do? What
do you think is required to take on a successful client-oriented role for this
company’s agents and customers?
5. Can you give an example of a client service challenge you had to face? How
did you approach this challenge?
Author Tips
1. Review the section of this chapter on enterprise applications, the Chapter 9
discussion of customer relationship management, and Chapter 6 on data
management.
2. Use the web and the professional networking site LinkedIn to find out more
about the company, its insurance products and services, and the way it oper-
ates. Think about what it needs to do to support its agents and its customers
and why customer relationship management and data management are so
important. You might inquire about your responsibilities for data manage-
ment in this job position.
3. Learn what you can about Salesforce.com, especially how to set up user
profiles and roles and how to validate data. Indicate you want to learn more
about Salesforce and work with this tool.
4. Inquire how you would be using Excel; for example, calculating agent com-
missions. If you’ve never done that before, show some of the Excel work you
have done (and perhaps bring examples with you to the interview). Show
that you would be eager to learn what you don’t know in Excel to fulfill your
job assignments.
http://Salesforce.com
http://Salesforce.com
70 Part One Organizations, Management, and the Networked Enterprise
2-1 What are business processes? How are they related to information systems?
A business process is a logically related set of activities that defines how specific business tasks are
performed, and it represents a unique way in which an organization coordinates work, information,
and knowledge. Managers need to pay attention to business processes because they determine how
well the organization can execute its business, and they may be a source of strategic advantage. There
are business processes specific to each of the major business functions, but many business processes
are cross-functional. Information systems automate parts of business processes, and they can help
organizations redesign and streamline these processes.
2-2 How do systems serve the different management groups in a business, and how do systems that
link the enterprise improve organizational performance?
Systems serving operational management are transaction processing systems (TPS), such as payroll
or order processing, that track the flow of the daily routine transactions necessary to conduct business.
Management information systems (MIS) produce reports serving middle management by condensing
information from TPS, and these are not highly analytical. Decision-support systems (DSS) support
management decisions that are unique and rapidly changing using advanced analytical models. All
of these types of systems provide business intelligence that helps managers and enterprise employ-
ees make more-informed decisions. These systems for business intelligence serve multiple levels of
management and include executive support systems (ESS) for senior management that provide data
in the form of graphs, charts, and dashboards delivered via portals using many sources of internal and
external information.
Enterprise applications are designed to coordinate multiple functions and business processes. En-
terprise systems integrate the key internal business processes of a firm into a single software system to
improve coordination and decision making. Supply chain management systems help the firm manage
its relationship with suppliers to optimize the planning, sourcing, manufacturing, and delivery of prod-
ucts and services. Customer relationship management (CRM) systems coordinate the business pro-
cesses surrounding the firm’s customers. Knowledge management systems enable firms to optimize
the creation, sharing, and distribution of knowledge. Intranets and extranets are private corporate
networks based on Internet technology that assemble information from disparate systems. Extranets
make portions of private corporate intranets available to outsiders.
2-3 Why are systems for collaboration and social business so important, and what technologies do
they use?
Collaboration is working with others to achieve shared and explicit goals. Social business is the
use of internal and external social networking platforms to engage employees, customers, and
suppliers, and it can enhance collaborative work. Collaboration and social business have become
increasingly important in business because of globalization, the decentralization of decision mak-
ing, and growth in jobs where interaction is the primary value-adding activity. Collaboration and
social business enhance innovation, productivity, quality, and customer service. Tools for collabo-
ration and social business include e-mail and instant messaging, wikis, virtual meeting systems,
virtual worlds, cloud-based file-sharing services, corporate collaboration systems such as Microsoft
SharePoint and IBM Notes, and enterprise social networking tools such as Chatter, Yammer, Jive,
and IBM Connections.
2-4 What is the role of the information systems function in a business?
The information systems department is the formal organizational unit responsible for information
technology services. It is responsible for maintaining the hardware, software, data storage, and net-
works that comprise the firm’s IT infrastructure. The department consists of specialists, such as pro-
grammers, systems analysts, project leaders, and information systems managers, and is often headed
by a CIO.
REVIEW SUMMARY
Chapter 2 Global E-business and Collaboration 71
Key Terms
Business intelligence, 47
Chief data officer (CDO), 67
Chief information officer (CIO), 67
Chief knowledge officer (CKO), 67
Chief privacy officer (CPO), 67
Chief security officer (CSO), 67
Collaboration, 56
Customer relationship management (CRM) systems, 54
Decision-support systems (DSS), 49
Digital dashboard, 50
Electronic business (e-business), 55
Electronic commerce (e-commerce), 55
E-government, 55
End users, 67
Enterprise applications, 51
Enterprise systems, 53
Executive support systems (ESS), 50
Information systems department, 66
Information systems managers, 66
Interorganizational system, 54
IT governance, 68
Knowledge management systems (KMS), 54
Management information systems (MIS), 47
Portal, 50
Programmers, 66
Social business, 57
Supply chain management (SCM) systems, 54
Systems analysts, 66
Teams, 56
Telepresence, 61
Transaction processing systems (TPS), 46
MyLab MIS
To complete the problems marked with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
2-1 What are business processes? How are they
related to information systems?
• Define business processes and describe the
role they play in organizations.
• Describe the relationship between informa-
tion systems and business processes.
2-2 How do systems serve the different
management groups in a business, and how
do systems that link the enterprise improve
organizational performance?
• Describe the characteristics of transaction
processing systems (TPS) and the roles they
play in a business.
• Describe the characteristics of management
information systems (MIS) and explain how
MIS differ from TPS and from DSS.
• Describe the characteristics of decision-
support systems (DSS) and how they ben-
efit businesses.
• Describe the characteristics of executive
support systems (ESS) and explain how
these systems differ from DSS.
• Explain how enterprise applications im-
prove organizational performance.
• Define enterprise systems, supply chain
management systems, customer relation-
ship management systems, and knowledge
management systems and describe their
business benefits.
• Explain how intranets and extranets help
firms integrate information and business
processes.
2-3 Why are systems for collaboration and social
business so important, and what technologies
do they use?
• Define collaboration and social business
and explain why they have become so
important in business today.
• List and describe the business benefits of
collaboration and social business.
• Describe a supportive organizational culture
and business processes for collaboration.
• List and describe the various types of col-
laboration and social business tools.
2-4 What is the role of the information systems
function in a business?
• Describe how the information systems
function supports a business.
• Compare the roles played by programmers,
systems analysts, information systems
managers, the chief information officer
(CIO), the chief security officer (CSO),
the chief data officer (CDO), and the chief
knowledge officer (CKO).
72 Part One Organizations, Management, and the Networked Enterprise
Discussion Questions
2-5 How could information systems be used
to support the order fulfillment process
illustrated in Figure 2.1? What are the most
important pieces of information these
systems should capture? Explain your
answer.
2-6 Identify the steps that are performed in
the process of selecting and checking
out a book from your college library and
MyLab MIS
MyLab MIS
the information that flows among these
activities. Diagram the process. Are there
any ways this process could be changed to
improve the performance of your library or
your school? Diagram the improved process.
2-7 Use the time/space collaboration and social
tool matrix to classify the collaboration and
social technologies used by Sanofi Pasteur.
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience analyzing opportunities to improve business processes
with new information system applications, using a spreadsheet to improve decision making about suppliers, and
using Internet software to plan efficient transportation routes. Visit MyLab MIS to access this chapter’s Hands-
On MIS Projects.
Management Decision Problems
2-8 Don’s Lumber Company on the Hudson River features a large selection of materials for flooring, decks,
moldings, windows, siding, and roofing. The prices of lumber and other building materials are constantly
changing. When a customer inquires about the price on prefinished wood flooring, sales representatives
consult a manual price sheet and then call the supplier for the most recent price. The supplier in
turn uses a manual price sheet, which has been updated each day. Often, the supplier must call back
Don’s sales reps because the company does not have the newest pricing information immediately on
hand. Assess the business impact of this situation, describe how this process could be improved with
information technology, and identify the decisions that would have to be made to implement a solution.
2-9 Henry’s Hardware is a small family business in Sacramento, California. The owners, Henry and Kathleen,
must use every square foot of store space as profitably as possible. They have never kept detailed
inventory or sales records. As soon as a shipment of goods arrives, the items are immediately placed
on store shelves. Invoices from suppliers are only kept for tax purposes. When an item is sold, the item
number and price are rung up at the cash register. The owners use their own judgment in identifying
items that need to be reordered. What is the business impact of this situation? How could information
systems help Henry and Kathleen run their business? What data should these systems capture? What
decisions could the systems improve?
Improving Decision Making: Using a Spreadsheet to Select Suppliers
Software skills: Spreadsheet date functions, data filtering, DAVERAGE function
Business skills: Analyzing supplier performance and pricing
2-10 In this exercise, you will learn how to use spreadsheet software to improve management decisions about
selecting suppliers. You will filter transactional data on suppliers based on several different criteria to
select the best suppliers for your company.
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 whether you can benefit
from better supply chain management. In MyLab MIS, you will 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, purchaser’s order number, item identifica-
tion number and item description (for each item ordered from the vendor), cost per item, number of units of
the item ordered (quantity), total cost of each order, vendor’s accounts payable terms, order date, 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
supplier’s track record for on-time deliveries, suppliers offering the best accounts payable terms, and suppliers
Chapter 2 Global E-business and Collaboration 73
offering lower pricing when the same item can be provided by multiple suppliers. Use your spreadsheet soft-
ware to prepare reports to support your recommendations.
Achieving Operational Excellence: Using Internet Software to Plan Efficient
Transportation Routes
Software skills: Internet-based software
Business skills: Transportation planning
2-11 In this exercise, you will use Google Maps to map out transportation routes for a business and select the
most efficient route.
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 (at the
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 Google Maps to find the route that is the shortest distance between the two cities.
Use Google Maps again to find the route that takes the least time. Compare the results. Which route should
Cross-Country use?
Collaboration and Teamwork Project
Identifying Management Decisions and Systems
2-12 With a team of three or four other students, find a description of a manager in a corporation in Business
Week, Forbes, Fortune, the Wall Street Journal, or another business publication, or do your research on the web.
Gather information about what the manager does and the role he or she plays in the company. Identify the
organizational level and business function where this manager works. Make a list of the kinds of decisions
this manager has to make and the kind of information the manager would need for those decisions. Suggest
how information systems could supply this information. If possible, use Google Docs and Google Drive or
Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.
74 Part One Organizations, Management, and the Networked Enterprise
communication on both social media and email,
increasing the time and cost of performing their
jobs. BASF, the world’s largest chemical producer
with subsidiaries and joint ventures in more than 80
countries, prohibited some project teams from using
e-mail to encourage employees to use new social
media tools.
Social business requires a change in thinking,
including the ability to view the organization more
democratically in a flatter and more horizontal way.
A social business is much more open to everyone’s
ideas. A secretary, assembly line worker, or sales
clerk might be the source of the next big idea. As a
result, getting people to espouse social business tools
requires a more of a “pull” approach, one that en-
gages workers and offers them a significantly better
way to work. In most cases, they can’t be forced to
use social business apps.
Enterprise capabilities for managing social net-
works and sharing digital content can help or hurt an
organization. Social networks can provide rich and
diverse sources of information that enhance orga-
nizational productivity, efficiency, and innovation,
or they can be used to support pre-existing groups
of like-minded people that are reluctant to com-
municate and exchange knowledge with outsiders.
Productivity and morale will fall if employees use
internal social networks to criticize others or pursue
personal agendas.
Social business applications modeled on consumer-
facing platforms such as Facebook and Twitter will
not necessarily work well in an organization or
organizational department that has incompatible
objectives. Will the firm use social business for opera-
tions, human resources, or innovation? The social
media platform that will work best depends on its
specific business purpose. Additionally, employees
who have actively used Facebook and Twitter in their
personal lives are often hesitant to use similar social
tools for work purposes because they see social media
primarily as an informal, personal means of self-
expression and communication with friends and fam-
ily. Most managers want employees to use internal
social tools to communicate informally about work,
but not to discuss personal matters. Employees ac-
customed to Facebook and Twitter may have trouble
As companies become more dispersed in the global marketplace, businesses are turning increasingly to workplace collaboration tech-
nology, including tools for internal social network-
ing. These tools can promote employee collaboration
and knowledge sharing, and help employees make
faster decisions, develop more innovative ideas for
products and services, and become more engaged in
their work and their companies.
Adoption of internal enterprise social networking
is also being driven by the flood of email that em-
ployees typically receive each day and are increas-
ingly unable to handle. Hundreds of email messages
must be opened, read, answered, forwarded, or
deleted. For example, too much email is what drove
Hawk Ridge Systems to adopt a Glip, a cloud-based
social tool for its 200 employees located in 15 of-
fices in the United States and Canada. Glip features
real-time messaging, group chat, videoconferencing,
shared calendars, task management, and file sharing
all in one place. Glip helped Hawk Ridge operations
manager Samuel Eakin go from 200 to around 30
emails per day. Another driver of enterprise social
networking is “app fatigue.” In order to collaborate,
many employees have to log on to numerous apps,
creating additional work. Contemporary enterprise
social networking systems often integrate multiple
capabilities in one place.
A recent survey of 421 professionals conducted by
Harvard Business Review Analytics Services found
that collaboration tools could be effective in boosting
efficiency and productivity, while enabling users to
make better business decisions. The products also
expanded the potential for innovation. However,
not all companies are successfully using them.
Implementation and adoption of enterprise social
networking depend not only on the capabilities of
the technology but on the organization’s culture and
the compatibility of these tools with the firm’s busi-
ness processes.
When firms introduce new social media technol-
ogy (as well as other technologies), a sizable number
of employees resist the new tools, clinging to old
ways of working, including email, because these
methods are more familiar and comfortable. There
are companies where employees have duplicated
Should Companies Embrace Social Business?
CASE STUDY
Chapter 2 Global E-business and Collaboration 75
imagining how they could use social tools without
getting personal.
This means that instead of focusing on the tech-
nology, businesses should first identify how social
initiatives will actually improve work practices for
employees and managers. They need a detailed
understanding of social networks: how people are
currently working, with whom they are working,
what their needs are, and measures for overcoming
employee biases and resistance.
A successful social business strategy requires
leadership and behavioral changes. Just sponsor-
ing a social project is not enough—managers need
to demonstrate their commitment to a more open,
transparent work style. Employees who are used
to collaborating and doing business in more tradi-
tional ways need an incentive to use social software.
Changing an organization to work in a different way
requires enlisting those most engaged and interested
to help design and build the right workplace environ-
ment for using social technologies.
Management needs to ensure that the internal
and external social networking efforts of the com-
pany are providing genuine value to the business.
Content on the networks needs to be relevant, up to
date, and easy to access; users need to be able to con-
nect to people that have the information they need
and that would otherwise be difficult or impossible
to reach. Social business tools should be appropriate
for the tasks on hand and the organization’s business
processes, and users need to understand how and
why to use them.
For example, NASA’s Goddard Space Flight
Center had to abandon a custom-built enterprise
social network called Spacebook because no one
knew how its social tools would help people do their
jobs. Spacebook had been designed and developed
without taking into consideration the organization’s
culture and politics. This is not an isolated phenom-
enon. Dimension Data found that one-fourth of the
900 enterprises it surveyed focused more on the suc-
cessful implementation of collaboration technology,
rather than how it’s used and adopted.
Despite the challenges associated with launching
an internal social network, there are companies using
these networks successfully. For example, Covestro, a
leading global supplier of coatings and adhesives,
polyurethanes, and highly impact- resistant plastics,
made social collaboration a success by making the
tools more accessible; demonstrating the value of these
tools in pilot projects; employing a reverse mentoring
program for senior executives; and training employee
experts to spread know-how of the new social tools
and approaches within the company, and demonstrate
their usefulness. Using IBM Connections as the social
business toolset, Covestro’s efforts are now paying off:
50 percent of employees are now routinely active in
the company’s enterprise social network. Although
ROI on social business initiatives has been difficult to
measure, Covestro has benefited from faster knowledge
flows, increased efficiency, and lower operating costs.
Another company that has made social business
work is ModCloth, a popular online apparel, accesso-
ries, and home décor retailer noted for its fun and en-
gaging customer shopping experience. The company’s
business is based on strong social media ties with cus-
tomers, with 134,000 Twitter followers and 1,600,000
Facebook “likes.” Because social networks played such
a large role in ModCloth’s growth and development,
the company was eager to adopt social networking
tools for internal communication. ModCloth adopted
Microsoft’s Yammer as its social business tool.
ModCloth started piloting Yammer with a small
test group, and used a People Team to promote the
tool. Yammer caught on quickly with employees,
and was soon being used by over 250 employees
across four offices in the United States. Every new
ModCloth employee is introduced to Yammer on his
or her first day of work. Yammer helps new hires
learn their coworkers’ names and feel they are part
of the company.
Yammer has proved very useful for connecting
people and ideas, saving ModCloth considerable
time and money. For example, Scott Hernandez,
ModCloth Head of Talent Acquisition, has used
Yammer to identify promising hires for engineering
through referrals from ModCloth employees.
Yammer has helped save teams from duplicating
work that has already been done. ModCloth’s User
Experience group began designing a research cam-
paign to find out what users wanted in mobile appli-
cations for the company, posting news of the project
to Yammer. Within hours, a member of ModCloth’s
Social Team posted the results of a large user survey
on mobile expectations, including a detailed spread-
sheet with customer feedback data that it had already
completed. The User Experience team was able to
save two weeks of work.
The Esquel Group, based in Hong Kong, is a sup-
plier of cotton textiles and apparel, doing everything
from cotton farming and fabric production to gar-
ment manufacturing and finishing. Its core business
76 Part One Organizations, Management, and the Networked Enterprise
is making cotton tops for fashion brands such as
Lacoste, Ralph Lauren, and Nike. This company
was attracted to internal social networking as a way
to unite its different lines of business in various
locations. Esquel chose Microsoft Yammer as its en-
terprise social networking tool. Esquel employees
communicate in a variety of languages, so it espe-
cially appreciated Yammer’s translation capabilities.
Management sees many benefits in being able
to “listen” to its workforce. When people post com-
plaints on the network, it is able to find innovative
solutions and new ideas. For example, workers in
Esquel’s garment operation posted a complaint on
Yammer about having to wait in a long line to re-
charge their cards for purchasing meals in the com-
pany cafeteria. Four months later, the company had
a solution—a kiosk that instantly transferred funds
from payroll to the meal card.
Ideas posted on Yammer were used to improve
Esquel’s quality control process. Instead of using mea-
suring tape to ensure that sleeves and collars matched
specifications, an employee in the quality control de-
partment used Yammer to float the idea of an electric
ruler. The concept was refined through more Yammer
discussion. Instead of taking measurements and writ-
ing numbers down, staff can capture measurements
faster and more accurately electronically.
Yammer also helps Esquel replicate innovation-
and efficiency-promoting solutions throughout the
company. Traditionally, an innovation at one site
often is not rolled out to other locations. Yammer
provides a channel for news of innovations and
better practices to spread more easily throughout
the organization.
Esquel’s industry is one where companies often
move to lower-wage countries as labor costs rise.
Rather than relocating operations, Esquel prefers
to achieve savings through improvements in produc-
tivity. By helping employees work more efficiently
and effectively, business social networking has helped
Esquel save approximately $2 million each year.
Sources: “Top Four Social Collaboration Software Fails,” search-
mobilecoputing.techtarget.com, accessed February 7, 2018;
“ModCloth: Keeping Employees Engaged While Scaling Up,” and
“Esquel Group: Social Technology Weaves an Enterprise Together,”
blogs.office.com, accessed February 7, 2018; Margaret Jones and
Cordelia Kroob, “The Growth of an Enterprise Social Network
at BASF,” www.simply-communicate.com, accessed March 12,
2018; Paul Leonardi and Tsedal Neeley, “What Managers Need to
Know About Social Tools,” Harvard Business Review, November-
December 2017; Sue Hildreth, “What’s Next for Workplace
Collaboration?” searchcontentmanagement.com, March 2, 2017;
Arunima Majumdar, “3 Reasons Why Collaboration Tools Fail
to Make the intended Impact,” eLearning Industry, January 20,
2017; Harvard Business Review Analytic Services, “Collaboration
Technology Boosts Organizations,” Insight Enterprises Inc.
(February 13, 2017); and Dimension Data, “2016 Connected
Enterprise Report,” 2016.
CASE STUDY QUESTIONS
2-13 Identify the management, organization, and
technology factors affecting adoption of inter-
nal corporate social networks.
2-14 Compare the experiences implementing
internal social networks of the organizations
described in this case. Why were some
successful? What role did management
play in this process?
2-15 Should all companies implement internal
enterprise social networks? Why or why not?
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
2-16 Identify and describe the capabilities of enterprise social networking software. Describe how a firm could use
each of these capabilities.
2-17 Describe the systems used by various management groups within the firm in terms of the information they use,
their outputs, and groups served.
http://searchmobilecoputing.techtarget.com
http://searchmobilecoputing.techtarget.com
http://blogs.office.com
Home
http://searchcontentmanagement.com
Chapter 2 Global E-business and Collaboration 77
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78
MyLab MIS
Discussion Questions: 3-5, 3-6, 3-7; Hands-on MIS Projects: 3-8, 3-9, 3-10, 3-11;
Writing Assignments: 3-17, 3-18; eText with Conceptual Animations
CHAPTER CASES
Technology Helps Starbucks Find Better
Ways to Compete
Digital Technology Helps Crayola Brighten
Its Brand
Smart Products—Coming Your Way
Grocery Wars
VIDEO CASES
GE Becomes a Digital Firm: The Emerging
Industrial Internet
National Basketball Association: Competing
on Global Delivery with Akamai OS
Streaming
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
3-1 Which features of organizations do
managers need to know about to
build and use information systems
successfully?
3-2 What is the impact of information
systems on organizations?
3-3 How do Porter’s competitive forces
model, the value chain model,
synergies, core competencies, and
network economics help companies
develop competitive strategies using
information systems?
3-4 What are the challenges posed by
strategic information systems, and how
should they be addressed?
3-5 How will MIS help my career?
Information Systems, Organizations,
and Strategy3CHAPTER
79
Starbucks is the world’s largest specialty coffee retailer, with over 24,000 shops in 75 markets. Starbucks’s reputation rests on its high-end specialty coffees and beverages, friendly and knowledgeable servers, and customer-
friendly coffee shops. This was a winning formula for many years and has en-
abled Starbucks to charge premium prices for many of its items. But Starbucks
has competitors, and must constantly fine-tune its business model and business
strategy to keep pace with the competitive environment.
Starbucks tried online retailing
and it didn’t work out. If you go to
the Starbucks.com website, you’ll
see coffee, branded mugs, espresso
machines, and brewing accesso-
ries described online, but you will
need to purchase these items from
Starbucks stores, supermarkets,
or Starbucks-designated retailers.
Starbucks stopped selling online
in August of 2017. Starbucks man-
agement believes there has been
a “seismic shift” in retailing, and
merchants need to create unique
and immersive in-store experi-
ences to survive. For Starbucks,
products and services, for the most
part, should not be sold online.
Instead, Starbucks is focusing
on improving the in-store experience. The company rolled out a new Mercato
menu of freshly-made sandwiches and salads to more than 1,000 stores
in 2018 and plans to expand its line of caffeinated fruit juices (Starbucks
Refreshers) and nitro-brew cold drinks. Management hopes to double food
sales by 2021. Starbucks is also building high-end cafes around the world
under the “Reserve” brand to draw customers willing to pay more for pre-
mium coffee and pastries.
Starbucks continues to enhance the customer’s in-store experience through
information technology. Each Starbucks store has a Wi-Fi network providing
free wireless Internet access for customers. Many Starbucks customers are
active users of smartphones. Starbucks launched a mobile ordering app for
the iPhone and Android mobile devices in September 2015. The Starbucks
Mobile Order & Pay app makes it fast and easy to pay for drinks and food.
Technology Helps Starbucks Find Better Ways
to Compete
© Atstock Productions/Shutterstock
80 Part One Organizations, Management, and the Networked Enterprise
Customers can place their orders on the way to Starbucks stores with Mobile
Order & Pay and also tip the barista. Those ordering are told the time when
their beverage will be ready. There’s no need to wait in line. The mobile
app can also identify the songs playing in Starbucks stores and save them to
a playlist on Spotify. The app helps Starbucks target products to customers
more effectively, which could be especially important as the chain also adds
more lunch items and cold drinks to its menu to draw in more customers
after the morning coffee rush. Cold drinks now represent half of Starbucks’
beverage sales.
Starbucks wants U.S. customers who use its in-store Wi-Fi network
to enter their email address in the first store where they get connected.
The company’s software remembers the customer’s device and connects
it automatically thereafter. That would give Starbucks additional email
addresses that it could target with more promotions.
Sources: Julie Jargon, “Starbucks Aims for More Mobile Orders,” Wall Street Journal,
March 21, 2018; Stacy Cowley, “Starbucks Closes Online Store to Focus on In-Person
Experience,” New York Times, October 1, 2017; “Starbucks’ Mobile Order Push Meets
Resistance From Ritual Seekers,” Reuters, March 21, 2018; and www. starbucks.com, ac-
cessed March 28, 2018.
Starbucks illustrates some of the ways that information systems help busi-nesses compete, as well as the challenges of finding the right business strat-
egy and how to use technology in that strategy. Retailing today is an extremely
crowded and competitive playing field, both online and in physical brick-and-
mortar stores. Even though Starbucks is the world’s leading specialty coffee
retailer, it has many competitors, and it is searching for ways to keep growing
its business. Customers are increasingly doing more retail shopping online, but
Starbucks products do not sell well on the web. They are meant for an in-person
experience. They are too experiential.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Starbucks’ business model is based on an aggres-
sive product differentiation strategy, intended to emphasize the high quality of
its beverages and foods, efficient and helpful customer service, and the plea-
sures of purchasing and consuming these items in a Starbucks store. Starbucks
is using information technology to improve its in-store customer experience. Its
Mobile Order & Pay app expedites order and payment for Starbucks beverages
and food, and Starbucks had to redesign its payment process to take advantage
of mobile technology. The free Wi-Fi network makes Starbucks stores more in-
viting to visit, linger, and consume food and beverages. The mobile app enables
stores to serve more customers, and enrollment in the Wi-Fi service provides
additional e-mail addresses for promotional campaigns.
Here are some questions to think about: What is Starbucks’ business
strategy? How much has technology helped Starbucks compete? Explain your
answer.
http://www.starbucks.com
Chapter 3 Information Systems, Organizations, and Strategy 81
3-1 Which features of organizations do
managers need to know about to build and
use information systems successfully?
Information systems and organizations influence one another. Information sys-
tems are built by managers to serve the interests of the business firm. At the
same time, the organization must be aware of and open to the influences of
information systems to benefit from new technologies.
The interaction between information technology and organizations is com-
plex and is influenced by many mediating factors, including the organization’s
structure, business processes, politics, culture, surrounding environment, and
management decisions (see Figure 3.1). You will need to understand how infor-
mation systems can change social and work life in your firm. You will not be
able to design new systems successfully or understand existing systems with-
out understanding your own business organization.
As a manager, you will be the one to decide which systems will be built, what
they will do, and how they will be implemented. You may not be able to antici-
pate all of the consequences of these decisions. Some of the changes that occur in
business firms because of new information technology (IT) investments cannot
be foreseen and have results that may or may not meet your expectations. Who
would have imagined 15 years ago, for instance, that e-mail and instant messag-
ing would become a dominant form of business communication and that many
managers would be inundated with more than 200 e-mail messages each day?
What Is an Organization?
An organization is a stable, formal social structure that takes resources from
the environment and processes them to produce outputs. This technical defini-
tion focuses on three elements of an organization. Capital and labor are primary
production factors provided by the environment. The organization (the firm)
Management
Organization
Technology
Mobile Order and Pay
• Opportunities from new
technology
• Intense competition
• Target
promotions
• Optimize in-
store experience
• Redesign business
processes
• Wi-Fi wireless
network
• Smartphones
• Mobile app
• Expedite ordering and
purchasing
• Increase product promotions
• Increase revenue
• Increase service
• Determine business
strategy
• Design new products
and services
Information
System
Business
Problem
Business
Solutions
82 Part One Organizations, Management, and the Networked Enterprise
transforms these inputs into products and services in a production function.
The products and services are consumed by environments in return for supply
inputs (see Figure 3.2).
An organization is more stable than an informal group (such as a group of
friends that meets every Friday for lunch) in terms of longevity and routine-
ness. Organizations are formal legal entities with internal rules and procedures
that must abide by laws. Organizations are also social structures because they
are collections of social elements, much as a machine has a structure—a par-
ticular arrangement of valves, cams, shafts, and other parts.
This definition of organizations is powerful and simple, but it is not very de-
scriptive or even predictive of real-world organizations. A more realistic behav-
ioral definition of an organization is a collection of rights, privileges, obligations,
FIGURE 3.2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE
ORGANIZATION
In the microeconomic definition of organizations, capital and labor (the primary produc-
tion factors provided by the environment) are transformed by the firm through the pro-
duction process into products and services (outputs to the environment). The products
and services are consumed by the environment, which supplies additional capital and
labor as inputs in the feedback loop.
Inputs from the
environment
Organization
Outputs to the
environment
Production process
FIGURE 3.1 THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS
AND INFORMATION TECHNOLOGY
This complex two-way relationship is mediated by many factors, not the least of which
are the decisions made—or not made—by managers. Other factors mediating the
relationship include the organizational culture, structure, politics, business processes,
and environment.
Organizations InformationTechnology
Mediating Factors
Environment
Culture
Structure
Business Processes
Politics
Management Decisions
Chapter 3 Information Systems, Organizations, and Strategy 83
and responsibilities delicately balanced over a period of time through conflict
and conflict resolution (see Figure 3.3).
In this behavioral view of the firm, people who work in organizations de-
velop customary ways of working; they gain attachments to existing relation-
ships; and they make arrangements with subordinates and superiors about how
work will be done, the amount of work that will be done, and under what condi-
tions work will be done. Most of these arrangements and feelings are not dis-
cussed in any formal rulebook.
How do these definitions of organizations relate to information systems tech-
nology? A technical view of organizations encourages us to focus on how in-
puts are combined to create outputs when technology changes are introduced
into the company. The firm is seen as infinitely malleable, with capital and
labor substituting for each other quite easily. But the more realistic behavioral
definition of an organization suggests that building new information systems,
or rebuilding old ones, involves much more than a technical rearrangement
of machines or workers—that some information systems change the organi-
zational balance of rights, privileges, obligations, responsibilities, and feelings
that have been established over a long period of time.
Changing these elements can take a long time, be very disruptive, and requires
more resources to support training and learning. For instance, the length of time
required to implement a new information system effectively is much longer than
usually anticipated simply because there is a lag between implementing a techni-
cal system and teaching employees and managers how to use the system.
Technological change requires changes in who owns and controls infor-
mation, who has the right to access and update that information, and who
makes decisions about whom, when, and how. This more complex view
forces us to look at the way work is designed and the procedures used to
achieve outputs.
The technical and behavioral definitions of organizations are not contradic-
tory. Indeed, they complement each other: The technical definition tells us
how thousands of firms in competitive markets combine capital, labor, and
information technology, whereas the behavioral model takes us inside the
individual firm to see how that technology affects the organization’s inner
FIGURE 3.3 THE BEHAVIORAL VIEW OF ORGANIZATIONS
The behavioral view of organizations emphasizes group relationships, values, and
structures.
FORMAL ORGANIZATION
Structure
Hierarchy
Division of labor
Rules, procedures
Business processes
Culture
Process
Rights/obligations
Privileges/responsibilities
Values
Norms
People
Environmental
resources
Environmental
outputs
84 Part One Organizations, Management, and the Networked Enterprise
workings. Section 3-2 describes how each of these definitions of organiza-
tions can help explain the relationships between information systems and
organizations.
Features of Organizations
All modern organizations share certain characteristics. They are bureaucracies
with clear-cut divisions of labor and specialization. Organizations arrange spe-
cialists in a hierarchy of authority in which everyone is accountable to someone
and authority is limited to specific actions governed by abstract rules or proce-
dures. These rules create a system of impartial and universal decision making.
Organizations try to hire and promote employees on the basis of technical qual-
ifications and professionalism (not personal connections). The organization is
devoted to the principle of efficiency: maximizing output using limited inputs.
Other features of organizations include their business processes, organizational
culture, organizational politics, surrounding environments, structure, goals,
constituencies, and leadership styles. All of these features affect the kinds of
information systems used by organizations.
Routines and Business Processes
All organizations, including business firms, become very efficient over time be-
cause individuals in the firm develop routines for producing goods and services.
Routines—sometimes called standard operating procedures—are precise rules,
procedures, and practices that have been developed to cope with virtually all
expected situations. As employees learn these routines, they become highly pro-
ductive and efficient, and the firm is able to reduce its costs over time as effi-
ciency increases. For instance, when you visit a doctor’s office, receptionists have
a well-developed set of routines for gathering basic information from you, nurses
have a different set of routines for preparing you for an interview with a doctor,
and the doctor has a well-developed set of routines for diagnosing you. Business
processes, which we introduced in Chapters 1 and 2, are collections of such rou-
tines. A business firm, in turn, is a collection of business processes (Figure 3.4).
Organizational Politics
People in organizations occupy different positions with different specialties,
concerns, and perspectives. As a result, they naturally have divergent view-
points about how resources, rewards, and punishments should be distributed.
These differences matter to both managers and employees, and they result in
political struggles for resources, competition, and conflict within every orga-
nization. Political resistance is one of the great difficulties of bringing about
organizational change—especially the development of new information sys-
tems. Virtually all large information systems investments by a firm that bring
about significant changes in strategy, business objectives, business processes,
and procedures become politically charged events. Managers who know how
to work with the politics of an organization will be more successful than less-
skilled managers in implementing new information systems. Throughout this
book, you will find many examples where internal politics defeated the best-
laid plans for an information system.
Organizational Culture
All organizations have bedrock, unassailable, unquestioned (by the mem-
bers) assumptions that define their goals and products. Organizational
culture encompasses this set of assumptions about what products the
Chapter 3 Information Systems, Organizations, and Strategy 85
organization should produce, how it should produce them, where, and for
whom. Generally, these cultural assumptions are taken totally for granted
and are rarely publicly announced or discussed. Business processes—the ac-
tual way business firms produce value—are usually ensconced in the organi-
zation’s culture.
You can see organizational culture at work by looking around your univer-
sity or college. Some bedrock assumptions of university life are that profes-
sors know more than students, the reason students attend college is to learn,
and classes follow a regular schedule. Organizational culture is a powerful
unifying force that restrains political conflict and promotes common under-
standing, agreement on procedures, and common practices. If we all share
the same basic cultural assumptions, agreement on other matters is more
likely.
At the same time, organizational culture is a powerful restraint on change,
especially technological change. Most organizations will do almost anything
to avoid making changes in basic assumptions. Any technological change that
threatens commonly held cultural assumptions usually meets a great deal of
resistance. However, there are times when the only sensible way for a firm to
move forward is to employ a new technology that directly opposes an existing
FIGURE 3.4 ROUTINES, BUSINESS PROCESSES, AND FIRMS
All organizations are composed of individual routines and behaviors, a collection of
which make up a business process. A collection of business processes make up the
business firm. New information system applications require that individual routines and
business processes change to achieve high levels of organizational performance.
Individual
Routines
Business
Process 1
Business
Process 2
Business
Process 3
Business
Process N
Business
Firm
Routines, Business Processes, and Firms
86 Part One Organizations, Management, and the Networked Enterprise
organizational culture. When this occurs, the technology is often stalled while
the culture slowly adjusts.
Organizational Environments
Organizations reside in environments from which they draw resources and
to which they supply goods and services. Organizations and environments
have a reciprocal relationship. On the one hand, organizations are open to
and dependent on the social and physical environment that surrounds them.
Without financial and human resources—people willing to work reliably and
consistently for a set wage or revenue from customers—organizations could
not exist. Organizations must respond to legislative and other requirements
imposed by government as well as the actions of customers and competitors.
On the other hand, organizations can influence their environments. For ex-
ample, business firms form alliances with other businesses to influence the
political process; they advertise to influence customer acceptance of their
products.
Figure 3.5 illustrates the role of information systems in helping organizations
perceive changes in their environments and also in helping organizations act
on their environments. Information systems are key instruments for environ-
mental scanning, helping managers identify external changes that might require
an organizational response.
Environments generally change much faster than organizations. New tech-
nologies, new products, and changing public tastes and values (many of which
result in new government regulations) put strains on any organization’s cul-
ture, politics, and people. Most organizations are unable to adapt to a rapidly
changing environment. Inertia built into an organization’s standard operating
procedures, the political conflict raised by changes to the existing order, and the
FIGURE 3.5 ENVIRONMENTS AND ORGANIZATIONS HAVE A RECIPROCAL
RELATIONSHIP
Environments shape what organizations can do, but organizations can influence their
environments and decide to change environments altogether. Information technol-
ogy plays a critical role in helping organizations perceive environmental change and in
helping organizations act on their environment.
The Organization and Its Environment
Environmental Resources
and Constraints
Governments
Competitors
Customers
Financial Institutions
Culture
Knowledge
Technology
The Firm
Information Systems
Chapter 3 Information Systems, Organizations, and Strategy 87
threat to closely held cultural values inhibit organizations from making signifi-
cant changes. Young firms typically lack resources to sustain even short periods
of troubled times. It is not surprising that only 10 percent of the Fortune 500
companies in 1919 still exist today.
Disruptive Technologies: Riding the Wave Sometimes a technology and
resulting business innovation come along to radically change the business
landscape and environment. These innovations are loosely called “disrup-
tive” (Christensen, 2003; Christensen, Raynor, and McDonald, 2015). What
makes a technology disruptive? In some cases, disruptive technologies
are substitute products that perform as well as or better (often much better)
than anything currently produced. The car substituted for the horse-drawn
carriage, the word processor for typewriters, the Apple iPod and streaming
music service for portable CD players, and digital photography for process
film photography. Table 3.1 describes just a few disruptive technologies from
the past.
In these cases, entire industries were put out of business. In other
cases, disruptive technologies simply extend the market, usually with less func-
tionality and much less cost than existing products. Eventually they turn into
low-cost competitors for whatever was sold before. Disk drives are an example:
Small hard disk drives used in PCs extended the market for disk drives by offer-
ing cheap digital storage for small files. Eventually, small PC hard disk drives
became the largest segment of the disk drive marketplace.
TABLE 3.1 DISRUPTIVE TECHNOLOGIES: WINNERS AND LOSERS
TECHNOLOGY DESCRIPTION WINNERS AND LOSERS
Microprocessor chips (1971) Thousands and eventually millions of
transistors on a silicon chip
Microprocessor firms win (Intel, Texas
Instruments), while transistor firms (GE)
decline.
Personal computers (1975) Small, inexpensive, but fully functional
desktop computers
PC manufacturers (HP, Apple, IBM) and
chip manufacturers prosper (Intel), while
mainframe (IBM) and minicomputer (DEC)
firms lose.
Digital photography (1975) Using CCD (charge-coupled device) image
sensor chips to record images
CCD manufacturers and traditional camera
companies win; manufacturers of film
products lose.
World Wide Web (1989) A global database of digital files and
“pages” instantly available
Owners of online content and news benefit,
while traditional publishers (newspapers,
magazines, and broadcast television) lose.
Internet music, video,
TV services (1998)
Repositories of downloadable music, video,
and TV broadcasts on the web
Owners of Internet platforms,
telecommunications providers owning
Internet backbone (ATT, Verizon), and
local Internet service providers win, while
content owners and physical retailers (Tower
Records, Blockbuster) lose.
PageRank algorithm A method for ranking web pages in terms of
their popularity to supplement web search
by key terms
Google is the winner (it owns the patent),
while traditional key word search engines
(Alta Vista) lose.
Software as web service Using the Internet to provide remote access
to online software
Online software services companies
(Salesforce.com) win, while traditional
“boxed” software companies (Microsoft,
SAP, Oracle) lose.
http://Salesforce.com
88 Part One Organizations, Management, and the Networked Enterprise
Some firms are able to create these technologies and ride the wave to prof-
its; others learn quickly and adapt their business; still others are obliterated
because their products, services, and business models become obsolete. They
may be very efficient at doing what no longer needs to be done! There are
also cases where no firms benefit and all the gains go to consumers (firms fail
to capture any profits). Moreover, not all change or technology is disruptive
(King and Baatartogtokh, 2015). Managers of older businesses often do make
the right decisions and find ways to continue competing. Disruptive technolo-
gies are tricky. Firms that invent disruptive technologies as “first movers” do
not always benefit if they lack the resources to exploit the technology or fail
to see the opportunity. The MITS Altair 8800 is widely regarded as the first
PC, but its inventors did not take advantage of their first mover status. Second
movers, so-called “fast followers,” such as IBM and Microsoft, reaped the re-
wards. Citibank’s ATMs revolutionized retail banking, but they were copied by
other banks. Now all banks use ATMs, with the benefits going mostly to the
consumers.
Organizational Structure
All organizations have a structure or shape. Mintzberg’s classification, described
in Table 3.2, identifies five basic kinds of organizational structure (Mintzberg,
1971).
The kind of information systems you find in a business firm—and the
nature of problems with these systems—often reflects the type of organiza-
tional structure. For instance, in a professional bureaucracy such as a hospi-
tal, it is not unusual to find parallel patient record systems operated by the
administration, another by doctors, and another by other professional staff
such as nurses and social workers. In small entrepreneurial firms, you will
often find poorly designed systems developed in a rush that quickly out-
grow their usefulness. In huge multidivisional firms operating in hundreds
TABLE 3.2 ORGANIZATIONAL STRUCTURES
ORGANIZATIONAL TYPE DESCRIPTION EXAMPLES
Entrepreneurial structure Young, small firm in a fast-changing environment.
It has a simple structure and is managed by an
entrepreneur serving as its single chief executive
officer.
Small start-up business
Machine bureaucracy Large bureaucracy existing in a slowly changing
environment, producing standard products. It is
dominated by a centralized management team and
centralized decision making.
Midsize manufacturing firm
Divisionalized bureaucracy Combination of multiple machine bureaucracies,
each producing a different product or service, all
topped by one central headquarters.
Fortune 500 firms, such as General
Motors
Professional bureaucracy Knowledge-based organization where goods and
services depend on the expertise and knowledge
of professionals. Dominated by department heads
with weak centralized authority.
Law firms, school systems,
hospitals
Adhocracy Task force organization that must respond to
rapidly changing environments. Consists of large
groups of specialists organized into short-lived
multidisciplinary teams and has weak central
management.
Consulting firms, such as the Rand
Corporation
Chapter 3 Information Systems, Organizations, and Strategy 89
of locations, you will frequently find there is not a single integrating infor-
mation system, but instead each locale or each division has its own set of
information systems.
Other Organizational Features
Organizations have goals and use different means to achieve them. Some orga-
nizations have coercive goals (e.g., prisons); others have utilitarian goals (e.g.,
businesses). Still others have normative goals (universities, religious groups).
Organizations also serve different groups or have different constituencies,
some primarily benefiting their members, others benefiting clients, stockhold-
ers, or the public. The nature of leadership differs greatly from one organiza-
tion to another—some organizations may be more democratic or authoritarian
than others. Another way organizations differ is by the tasks they perform and
the technology they use. Some organizations perform primarily routine tasks
that can be reduced to formal rules that require little judgment (such as manu-
facturing auto parts), whereas others (such as consulting firms) work primarily
with nonroutine tasks.
3-2 What is the impact of information
systems on organizations?
Information systems have become integral, online, interactive tools deeply
involved in the minute-to-minute operations and decision making of large or-
ganizations. Over the past decade, information systems have fundamentally
altered the economics of organizations and greatly increased the possibilities
for organizing work. Theories and concepts from economics and sociology help
us understand the changes brought about by IT.
Economic Impacts
From the point of view of economics, IT changes both the relative costs of
capital and the costs of information. Information systems technology can be
viewed as a factor of production that can be substituted for traditional capital
and labor. As the cost of information technology decreases, it is substituted for
labor, which historically has been a rising cost. Hence, information technology
should result in a decline in the number of middle managers and clerical work-
ers as information technology substitutes for their labor.
As the cost of information technology decreases, it also substitutes for
other forms of capital such as buildings and machinery, which remain rela-
tively expensive. Hence, over time we should expect managers to increase
their investments in IT because of its declining cost relative to other capital
investments.
IT also affects the cost and quality of information and changes the econom-
ics of information. Information technology helps firms contract in size because
it can reduce transaction costs—the costs incurred when a firm buys on the
marketplace what it cannot make itself. According to transaction cost theory,
firms and individuals seek to economize on transaction costs, much as they do
on production costs. Using markets is expensive because of costs such as lo-
cating and communicating with distant suppliers, monitoring contract compli-
ance, buying insurance, obtaining information on products, and so forth (Coase,
1937; Williamson, 1985). Traditionally, firms have tried to reduce transaction
90 Part One Organizations, Management, and the Networked Enterprise
costs through vertical integration, by getting bigger, hiring more employees,
and buying their own suppliers and distributors, as both General Motors and
Ford used to do.
Information technology, especially the use of networks, can help firms lower
the cost of market participation (transaction costs), making it worthwhile for
firms to contract with external suppliers instead of using internal sources. As a re-
sult, firms can shrink in size (numbers of employees) because it is far less expen-
sive to outsource work to a competitive marketplace rather than hire employees.
For instance, by using computer links to external suppliers, automakers such
as Chrysler, Toyota, and Honda can achieve economies by obtaining more than
70 percent of their parts from the outside. Information systems make it possible
for companies such as Apple Cisco Systems and Dell Inc. to outsource assembly
of iPhones to contract manufacturers such as Foxconn instead of making their
products themselves.
As transaction costs decrease, firm size (the number of employees) should
shrink because it becomes easier and cheaper for the firm to contract for the pur-
chase of goods and services in the marketplace rather than to make the product
or offer the service itself. Firm size can stay constant or contract even as the com-
pany increases its revenues. For example, when Eastman Chemical Company
split off from Kodak in 1994, it had $3.3 billion in revenue and 24,000 full-time em-
ployees. In 2017, it generated $9.5 billion in revenue with only 14,500 employees.
Information technology also can reduce internal management costs.
According to agency theory, the firm is viewed as a “nexus of contracts”
among self-interested individuals rather than as a unified, profit-maximizing
entity (Jensen and Meckling, 1976). A principal (owner) employs “agents” (em-
ployees) to perform work on his or her behalf. However, agents need constant
supervision and management; otherwise, they will tend to pursue their own in-
terests rather than those of the owners. As firms grow in size and scope, agency
costs or coordination costs rise because owners must expend more and more
effort supervising and managing employees.
Information technology, by reducing the costs of acquiring and analyzing
information, permits organizations to reduce agency costs because it becomes
easier for managers to oversee a greater number of employees. By reducing
overall management costs, information technology enables firms to increase
revenues while shrinking the number of middle managers and clerical work-
ers. We have seen examples in earlier chapters where information technology
expanded the power and scope of small organizations by enabling them to per-
form coordinated activities such as processing orders or keeping track of inven-
tory with very few clerks and managers.
Because IT reduces both agency and transaction costs for firms, we should
expect firm size to shrink over time as more capital is invested in IT. Firms
should have fewer managers, and we expect to see revenue per employee in-
crease over time.
Organizational and Behavioral Impacts
Theories based in the sociology of complex organizations also provide some
understanding about how and why firms change with the implementation of
new IT applications.
IT Flattens Organizations
Large, bureaucratic organizations, which primarily developed before the com-
puter age, are often inefficient, slow to change, and less competitive than newly
Chapter 3 Information Systems, Organizations, and Strategy 91
created organizations. Some of these large organizations have downsized, reduc-
ing the number of employees and the number of levels in their organizational
hierarchies.
Behavioral researchers have theorized that information technology facili-
tates flattening of hierarchies by broadening the distribution of information
to empower lower-level employees and increase management efficiency (see
Figure 3.6). IT pushes decision-making rights lower in the organization be-
cause lower-level employees receive the information they need to make de-
cisions without supervision. (This empowerment is also possible because of
higher educational levels among the workforce, which give employees more
capabilities to make intelligent decisions.) Because managers now receive
so much more accurate information on time, they become much faster at
making decisions, so fewer managers are required. Management costs de-
cline as a percentage of revenues, and the hierarchy becomes much more
efficient.
These changes mean that the management span of control has also been
broadened, enabling high-level managers to manage and control more workers
spread over greater distances. Many companies have eliminated thousands of
middle managers as a result of these changes.
Postindustrial Organizations
Postindustrial theories based more on history and sociology than economics also
support the notion that IT should flatten hierarchies. In postindustrial societies,
authority increasingly relies on knowledge and competence and not merely
on formal positions. Hence, the shape of organizations flattens because profes-
sional workers tend to be self-managing, and decision making should become
FIGURE 3.6 FLATTENING ORGANIZATIONS
Information systems can reduce the number of levels in an organization by providing
managers with information to supervise larger numbers of workers and by giving lower-
level employees more decision-making authority.
An organization that has been “flattened” by removing layers of management
A traditional hierarchical organization with many levels of management
92 Part One Organizations, Management, and the Networked Enterprise
more decentralized as knowledge and information become more widespread
throughout the firm.
Information technology may encourage task force–networked organizations
in which groups of professionals come together—face-to-face or electronically—
for short periods of time to accomplish a specific task (e.g., designing a new au-
tomobile); once the task is accomplished, the individuals join other task forces.
The global consulting service Accenture is an example. Many of its 373,000 em-
ployees move from location to location to work on projects at client locations in
more than 56 different countries.
Who makes sure that self-managed teams do not head off in the wrong direc-
tion? Who decides which person works on which team and for how long? How
can managers evaluate the performance of someone who is constantly rotating
from team to team? How do people know where their careers are headed? New
approaches for evaluating, organizing, and informing workers are required, and
not all companies can make virtual work effective.
Understanding Organizational Resistance to Change
Information systems inevitably become bound up in organizational poli-
tics because they influence access to a key resource—namely, information.
Information systems can affect who does what to whom, when, where, and
how in an organization. Many new information systems require changes in per-
sonal, individual routines that can be painful for those involved and require
retraining and additional effort that may or may not be compensated. Because
information systems potentially change an organization’s structure, culture,
business processes, and strategy, there is often considerable resistance to them
when they are introduced.
There are several ways to visualize organizational resistance. Research on or-
ganizational resistance to innovation suggests that four factors are paramount:
the nature of the IT innovation, the organization’s structure, the culture of peo-
ple in the organization, and the tasks affected by the innovation (see Figure 3.7).
FIGURE 3.7 ORGANIZATIONAL RESISTANCE TO INFORMATION SYSTEM
INNOVATIONS
Implementing information systems has consequences for task arrangements, structures,
and people. According to this model, to implement change, all four components must
be changed simultaneously.
Information Technology
Organizational Structure
People Job Tasks
Resistance
to
Change
Chapter 3 Information Systems, Organizations, and Strategy 93
Here, changes in technology are absorbed, interpreted, deflected, and defeated
by organizational task arrangements, structures, and people. In this model, the
only way to bring about change is to change the technology, tasks, structure,
and people simultaneously. Other authors have spoken about the need to “un-
freeze” organizations before introducing an innovation, quickly implement-
ing it, and “refreezing” or institutionalizing the change (Kolb and Frohman,
1970).
Because organizational resistance to change is so powerful, many informa-
tion technology investments flounder and do not increase productivity. Indeed,
research on project implementation failures demonstrates that the most com-
mon reason for failure of large projects to reach their objectives is not the fail-
ure of the technology but organizational and political resistance to change.
Chapter 14 treats this issue in detail. Therefore, as a manager involved in future
IT investments, your ability to work with people and organizations is just as
important as your technical awareness and knowledge.
The Internet and Organizations
The Internet, especially the World Wide Web, has an important impact on the
relationships between many firms and external entities and even on the organi-
zation of business processes inside a firm. The Internet increases the accessibil-
ity, storage, and distribution of information and knowledge for organizations.
In essence, the Internet is capable of dramatically lowering the transaction and
agency costs facing most organizations. For instance, a global sales force can
receive nearly instant product price information updates using the web or in-
structions from management sent by e-mail or text messaging on smartphones
or mobile laptops. Vendors of some large retailers can access retailers’ internal
websites directly to find up-to-the-minute sales information and to initiate re-
plenishment orders instantly.
Businesses are rapidly rebuilding some of their key business processes
based on Internet technology and making this technology a key component
of their IT infrastructures. If prior networking is any guide, one result will be
simpler business processes, fewer employees, and flatter organizations than in
the past.
Implications for the Design and Understanding
of Information Systems
To deliver genuine benefits, information systems must be built with a clear un-
derstanding of the organization in which they will be used. In our experience,
the central organizational factors to consider when planning a new system are
the following:
• The environment in which the organization must function
• The structure of the organization: hierarchy, specialization, routines, and
business processes
• The organization’s culture and politics
• The type of organization and its style of leadership
• The principal interest groups affected by the system and the attitudes of
workers who will be using the system
• The kinds of tasks, decisions, and business processes that the information
system is designed to assist
94 Part One Organizations, Management, and the Networked Enterprise
3-3 How do Porter’s competitive forces model, the
value chain model, synergies, core competencies,
and network economics help companies develop
competitive strategies using information systems?
In almost every industry you examine, you will find that some firms do bet-
ter than most others. There’s almost always a standout firm. In the automo-
tive industry, Toyota is considered a superior performer. In pure online retail,
Amazon is the leader; in off-line retail, Walmart, the largest retailer on earth, is
the leader. In online music, Apple’s iTunes is considered the leader with more
than 60 percent of the downloaded music market. In web search, Google is
considered the leader.
Firms that “do better” than others are said to have a competitive advantage
over others: They either have access to special resources that others do not, or
they are able to use commonly available resources more efficiently—usually
because of superior knowledge and information assets. In any event, they do
better in terms of revenue growth, profitability, or productivity growth (effi-
ciency), all of which ultimately in the long run translate into higher stock mar-
ket valuations than their competitors.
But why do some firms do better than others, and how do they achieve com-
petitive advantage? How can you analyze a business and identify its strategic
advantages? How can you develop a strategic advantage for your own business?
And how do information systems contribute to strategic advantages? One an-
swer to that question is Michael Porter’s competitive forces model.
Porter’s Competitive Forces Model
Arguably, the most widely used model for understanding competitive advan-
tage is Michael Porter’s competitive forces model (see Figure 3.8). This model
provides a general view of the firm, its competitors, and the firm’s environ-
ment. Earlier in this chapter, we described the importance of a firm’s environ-
ment and the dependence of firms on environments. Porter’s model is all about
the firm’s general business environment. In this model, five competitive forces
shape the fate of the firm.
FIGURE 3.8 PORTER’S COMPETITIVE FORCES MODEL
In Porter’s competitive forces model, the strategic position of the firm and its strate-
gies are determined not only by competition with its traditional direct competitors but
also by four other forces in the industry’s environment: new market entrants, substitute
products, customers, and suppliers.
New market entrants
The Firm Competitors
Substitute products
Suppliers Customers
Chapter 3 Information Systems, Organizations, and Strategy 95
Traditional Competitors
All firms share market space with other competitors who are continuously de-
vising new, more-efficient ways to produce by introducing new products and
services, and attempting to attract customers by developing their brands and
imposing switching costs on their customers.
New Market Entrants
In a free economy with mobile labor and financial resources, new companies
are always entering the marketplace. In some industries, there are very low bar-
riers to entry, whereas in other industries, entry is very difficult. For instance,
it is fairly easy to start a pizza business or just about any small retail business,
but it is much more expensive and difficult to enter the computer chip busi-
ness, which has very high capital costs and requires significant expertise and
knowledge that are hard to obtain. New companies have several possible ad-
vantages: They are not locked into old plants and equipment, they often hire
younger workers who are less expensive and perhaps more innovative, they
are not encumbered by old worn-out brand names, and they are “more hungry”
(more highly motivated) than traditional occupants of an industry. These ad-
vantages are also their weaknesses: They depend on outside financing for new
plants and equipment, which can be expensive; they have a less-experienced
workforce; and they have little brand recognition.
Substitute Products and Services
In just about every industry, there are substitutes that your customers might
use if your prices become too high. New technologies create new substitutes
all the time. Ethanol can substitute for gasoline in cars; vegetable oil for diesel
fuel in trucks; and wind, solar, coal, and hydro power for industrial electricity
generation. Likewise, Internet and wireless telephone service can substitute for
traditional telephone service. And, of course, an Internet music service that al-
lows you to download music tracks to an iPad or smartphone has become a sub-
stitute for CD-based music stores. The more substitute products and services
in your industry, the less you can control pricing and the lower your profit
margins.
Customers
A profitable company depends in large measure on its ability to attract and
retain customers (while denying them to competitors) and charge high prices.
The power of customers grows if they can easily switch to a competitor’s prod-
ucts and services or if they can force a business and its competitors to com-
pete on price alone in a transparent marketplace where there is little product
differentiation and all prices are known instantly (such as on the Internet).
For instance, in the used college textbook market on the Internet, students
(customers) can find multiple suppliers of just about any current college text-
book. In this case, online customers have extraordinary power over used-book
firms.
Suppliers
The market power of suppliers can have a significant impact on firm profits,
especially when the firm cannot raise prices as fast as can suppliers. The more
different suppliers a firm has, the greater control it can exercise over suppliers
in terms of price, quality, and delivery schedules. For instance, manufacturers
of laptop PCs almost always have multiple competing suppliers of key compo-
nents, such as keyboards, hard drives, and display screens.
96 Part One Organizations, Management, and the Networked Enterprise
Information System Strategies for Dealing with
Competitive Forces
What is a firm to do when it is faced with all these competitive forces? And how
can the firm use information systems to counteract some of these forces? How
do you prevent substitutes and inhibit new market entrants? There are four
generic strategies, each of which often is enabled by using information technol-
ogy and systems: low-cost leadership, product differentiation, focus on market
niche, and strengthening customer and supplier intimacy.
Low-Cost Leadership
Use information systems to achieve the lowest operational costs and the lowest
prices. The classic example is Walmart. By keeping prices low and shelves well
stocked using a legendary inventory replenishment system, Walmart became
the leading retail business in the United States. Walmart’s continuous replenish-
ment system sends orders for new merchandise directly to suppliers as soon as
consumers pay for their purchases at the cash register. Point-of-sale terminals
record the bar code of each item passing the checkout counter and send a pur-
chase transaction directly to a central computer at Walmart headquarters. The
computer collects the orders from all Walmart stores and transmits them to sup-
pliers. Suppliers can also access Walmart’s sales and inventory data using web
technology.
Because the system replenishes inventory with lightning speed, Walmart
does not need to spend much money on maintaining large inventories of goods
in its own warehouses. The system also enables Walmart to adjust purchases of
store items to meet customer demands. Competitors, such as Sears, have been
spending 24.9 percent of sales on overhead. But by using systems to keep oper-
ating costs low, Walmart pays only 16.6 percent of sales revenue for overhead.
(Operating costs average 20.7 percent of sales in the retail industry.)
Walmart’s continuous replenishment system is also an example of an efficient
customer response system. An efficient customer response system directly links
Supermarkets and large re-
tail stores such as Walmart
use sales data captured at
the checkout counter to
determine which items have
sold and need to be reor-
dered. Walmart’s continu-
ous replenishment system
transmits orders to restock
directly to its suppliers. The
system enables Walmart to
keep costs low while fine-
tuning its merchandise to
meet customer demands.
© Betty LaRue/Alamy Stock Photo
Chapter 3 Information Systems, Organizations, and Strategy 97
consumer behavior to distribution and production and supply chains. Walmart’s
continuous replenishment system provides such an efficient customer response.
Product Differentiation
Use information systems to enable new products and services or greatly change
the customer convenience in using your existing products and services. Big Tech
firms like Google, Facebook, Amazon, Apple, and others are pouring billions of
dollars into research and deployment of new services, and enhancements to
their most valuable services and products in order to differentiate them from
potential competitors. For instance, in 2018 Google updated its Google Assistant
to enable more natural continuous conversations and smart displays that can
display the output of Assistant to screens. Google added Assistant support to
its core Google Maps service to make interaction with Maps more natural, and
released a Machine Language Kit for developers that supports text recogni-
tion, face detection, image labeling, and landmark recognition. The continual
stream of innovations flowing from Big Tech companies ensures their products
are unique, and difficult to copy.
Crayola, not known as a tech company, is another firm that is creating new
technology-based products and services to inspire children, parents, and edu-
cators, and differentiate their products from competitors. (See the Interactive
Session on Organizations.)
Manufacturers and retailers are using information systems to create prod-
ucts and services that are customized and personalized to fit the precise
specifications of individual customers. For example, Nike sells customized
sneakers through its NIKEiD program on its website. Customers are able
to select the type of shoe, colors, material, outsoles, and even a logo of up
to eight characters. Nike transmits the orders via computers to specially
equipped plants in China and Korea. The sneakers take about three weeks
to reach the customer. This ability to offer individually tailored products or
services using the same production resources as mass production is called
mass customization.
Table 3.3 lists a number of companies that have developed IT-based products
and services that other firms have found difficult to copy—or at least taken a
long time to copy.
Focus on Market Niche
Use information systems to enable a specific market focus and serve this nar-
row target market better than competitors. Information systems support this
strategy by producing and analyzing data for finely tuned sales and marketing
techniques. Information systems enable companies to analyze customer buy-
ing patterns, tastes, and preferences closely so that they efficiently pitch adver-
tising and marketing campaigns to smaller and smaller target markets.
The data come from a range of sources—credit card transactions, demo-
graphic data, purchase data from checkout counter scanners at supermarkets
TABLE 3.3 IT-ENABLED NEW PRODUCTS AND SERVICES PROVIDING COMPETITIVE ADVANTAGE
Amazon: One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers.
Online music: Apple iTunes Apple sells music from an online library of more than 45 million songs.
Golf club customization: Ping Customers can select from more than 1 million different golf club options; a build-to-
order system ships their customized clubs within 48 hours.
Online person-to-person
payment: PayPal
PayPal enables the transfer of money between individual bank accounts and between
bank accounts and credit card accounts.
98 Part One Organizations, Management, and the Networked Enterprise
INTERACTIVE SESSION ORGANIZATIONS
Digital Technology Helps Crayola Brighten Its Brand
Crayola is one of the world’s most beloved brands
for children and their parents. The Easton,
Pennsylvania–based company has been noted for
high-quality, non-toxic crayons, markers, pencils,
modeling clay, creative toys, and innovative art tools
that have inspired artistic creativity in children for
more than one hundred years. You can find Cray-
ola products nearly everywhere, including schools,
offices, supermarkets, drug stores, hospitals, theme
parks, airports, gas stations, and restaurants.
The Crayola crayon box became part of the col-
lective history and experiences of generations of
Americans, and a symbol of the color and fun of
childhood. But today, that Crayola crayon box is not
as iconic as in the past. The popularity of Crayola
crayons is under assault—not by Crayola’s traditional
competitors (Faber-Castelli, DixonTiconderoga, and
MEGA Brands), but by changing times.
There has been a profound technological and
cultural shift in how children play. Children and
their families are being bombarded with increasingly
sophisticated forms of entertainment, many of them
digitally based. Digital products are starting to sup-
plant physical ones in the world of children’s play as
well as in other areas of work and everyday life. With
the advent of computers and web-based learning, chil-
dren are leaving behind hand-held art supplies at an
increasingly younger age. The phenomenon is called
KGOY, standing for “Kids Growing Older Younger.” As
children reach the age of 4 or 5, when they become
old enough to play with a computer, they become less
interested in toys and crayons and prefer electronics
such as video games and digital tablets and smart-
phones. Crayola is not immune to this problem.
Will Crayola become a dinosaur from a different
era? Not likely, thanks to the company’s forward-
looking management, which embarked over a decade
ago on far-reaching changes in leadership, organiza-
tional culture, and the product development func-
tion. The organization restructured around consumer
insights and needs rather than specific product lines.
Vicky Lozano, Crayola’s VP of Corporate Strategy
and her team recognized that Crayola’s purpose
has always been to nourish originality and to help
parents and teachers raise creative and inspired
children. Crayola’s broader mission is not just to put
crayons and art materials in children’s hands but to
help children learn and play in colorful ways. The
question they asked was not, how can we sell more
crayons? Instead they asked, what kinds of experi-
ences and technologies should Crayola embrace?
Crayola has reframed its business model, introduced
a new innovation process for product development,
and created new products and revenue streams. The
company has been transformed from a manufacturer
of crayons and art tools into a trusted source of tools
and experiences for creative play.
Crayola is using digital technology, but not to re-
place its core crayon business. Instead, it’s integrat-
ing the old and the new. The company now offers a
new range of products like the iMarker, an all-in-one
digital pen, crayon, and pencil, designed for use with
the Color Studio HD iPad app. It’s like a traditional
coloring book, but includes new interactive sounds
and motion. Lights, Camera, Color! is another digital
application that allows kids to turn their favorite pho-
tos into digital coloring book pages. Tech toys such as
the Digital Light Designer, a 360-degree domed draw-
ing surface, encourage imaginations to run wild with
colored LED lights. Children can play updated ver-
sions of their favorite games or animate and save up to
50 pieces of their own artwork. Crayola found that par-
ents are looking for toys that are less messy than tra-
ditional markers or fingerpaints. These digital toys are
“100 percent mess-proof,” and technology has helped
Crayola make its other products less messy as well.
In designing new digital products and experiences,
Crayola has drawn on its extensive knowledge of
child development. It understands how digital tech-
nology can play a part at different ages. For instance,
the My First Crayola line is targeted specifically at
one-year-olds; while Crayola Catwalk Creations is
designed for “tween” girls who like expressing them-
selves through fashion.
Crayola also understood that it had to change the
way it markets its products as well as the products
themselves and has been investing more and more
in digital marketing. These initiatives include online
advertising, promotions, social media pushes, and
other digital activation programs that allow Crayola to
connect with parents and educators invested in rais-
ing children’s creativity level. Social media has proven
especially effective and Crayola has a presence on
Facebook, YouTube, Pinterest, Twitter, and Instagram.
and retail stores, and data collected when people access and interact with
websites. Sophisticated software tools find patterns in these large pools of
data and infer rules from them to guide decision making. Analysis of such
data drives one-to-one marketing that creates personal messages based on
individualized preferences. For example, Hilton Hotels’ OnQ system analyzes
detailed data collected on active guests in all of its properties to determine
the preferences of each guest and each guest’s profitability. Hilton uses this
information to give its most profitable customers additional privileges, such
as late checkouts. Contemporary customer relationship management (CRM)
systems feature analytical capabilities for this type of intensive data analysis
(see Chapters 2 and 9).
Credit card companies are able to use this strategy to predict their most prof-
itable cardholders. The companies gather vast quantities of data about con-
sumer purchases and other behaviors and mine these data to construct detailed
profiles that identify cardholders who might be good or bad credit risks. We
discuss the tools and technologies for data analysis in Chapters 6 and 12.
Strengthen Customer and Supplier Intimacy
Use information systems to tighten linkages with suppliers and develop
intimacy with customers. Toyota, Ford, and other automobile manufacturers
use information systems to facilitate direct access by suppliers to production
schedules and even permit suppliers to decide how and when to ship supplies
to their factories. This allows suppliers more lead time in producing goods.
Chapter 3 Information Systems, Organizations, and Strategy 99
Crayola’s YouTube channel features colorful videos on
Crayola products and instructions for creative projects
where they can be used. The company’s Facebook
presence features a live chat series with experts and
creative celebrities called “Inside the Crayon Box.”
Crayola wants to stimulate conversations around cre-
ativity so parents can learn from each other and un-
derstand how to build creativity in their children.
Crayola’s core parent audience is turning to the
web for gift and usage ideas, comparing prices, and
reading reviews before making purchases. Crayola
wants to be first in mind as a source of $20 artsy toys
and mess-proof gifts. The company focuses heavily
on search, social media, and digital display, to help
parents find the Crayola products needed for their
children’s school supplies or gifts. Crayola closely
tracks activity on its online channels through Google
Analytics to make sure it is getting the most out of its
marketing and ad campaigns.
Crayola’s website has been thoughtfully designed
for children, parents, and educators. It features free
ideas for crafts, printable coloring pages, and even
advice on how to remove stains. The website also can
be used for ordering Crayola products online. Thanks
to its new array of products and services, Crayola has
experienced better growth, and its future looks as
bright as the vibrant colors of its iconic crayons.
Sources: www.crayola.com, accessed March 28, 2018; “Crayola
SWOT,” www.marketingteacher.com, accessed March 29, 2018; and
Jon Coen, “Crayola’s Colorful Evolution,” Think Play, July 2012.
CASE STUDY QUESTIONS
1. Analyze Crayola’s problem. What management,
organization, and technology factors contributed
to the problem?
2. What competitive strategies is Crayola pursu-
ing? How does digital technology support those
strategies?
3. What people issues did Crayola have to address in
designing its new technology-based products?
4. How has digital technology changed Crayola’s
business model and the way it runs its business?
http://www.crayola.com
Marketing Teacher
100 Part One Organizations, Management, and the Networked Enterprise
On the customer side, Amazon keeps track of user preferences for book and
CD purchases and can recommend titles purchased by others to its customers.
Strong linkages to customers and suppliers increase switching costs (the cost
of switching from one product to a competing product) and loyalty to your firm.
Table 3.4 summarizes the competitive strategies we have just described.
Some companies focus on one of these strategies, but you will often see com-
panies pursuing several of them simultaneously. For example, Starbucks, the
world’s largest specialty coffee retailer, offers unique high-end specialty coffees
and beverages but is also trying to compete by more targeted marketing.
The Internet’s Impact on Competitive Advantage
Because of the Internet, the traditional competitive forces are still at work, but
competitive rivalry has become much more intense (Porter, 2001). Internet
technology is based on universal standards that any company can use, making
it easy for rivals to compete on price alone and for new competitors to enter the
market. Because information is available to everyone, the Internet raises the
bargaining power of customers, who can quickly find the lowest-cost provider
on the web. Profits have been dampened. Table 3.5 summarizes some of the po-
tentially negative impacts of the Internet on business firms identified by Porter.
The Internet has nearly destroyed some industries and has severely threat-
ened more. For instance, the printed encyclopedia industry and the travel
TABLE 3.5 IMPACT OF THE INTERNET ON COMPETITIVE FORCES AND INDUSTRY STRUCTURE
COMPETITIVE FORCE IMPACT OF THE INTERNET
Substitute products or services Enables substitutes to emerge with new approaches to meeting needs and
performing functions
Customers’ bargaining power Availability of global price and product information shifts bargaining power to
customers
Suppliers’ bargaining power Procurement over the Internet tends to raise bargaining power over suppliers;
suppliers can also benefit from reduced barriers to entry and from the elimination of
distributors and other intermediaries standing between them and their users
Threat of new entrants Reduces barriers to entry, such as the need for a sales force, access to channels, and
physical assets; provides a technology for driving business processes that makes
other things easier to do
Positioning and rivalry among
existing competitors
Widens the geographic market, increasing the number of competitors and reducing
differences among competitors; makes it more difficult to sustain operational
advantages; puts pressure to compete on price
TABLE 3.4 FOUR BASIC COMPETITIVE STRATEGIES
STRATEGY DESCRIPTION EXAMPLE
Low-cost leadership Use information systems to produce products and
services at a lower price than competitors while
enhancing quality and level of service
Walmart
Product differentiation Use information systems to differentiate products, and
enable new services and products
Uber, Nike, Apple
Focus on market niche Use information systems to enable a focused strategy
on a single market niche; specialize
Hilton Hotels, Harrah’s
Customer and supplier
intimacy
Use information systems to develop strong ties and
loyalty with customers and suppliers
Toyota Corporation, Amazon
Chapter 3 Information Systems, Organizations, and Strategy 101
agency industry have been nearly decimated by the availability of substitutes
over the Internet. Likewise, the Internet has had a significant impact on the
retail, music, book, retail brokerage, software, telecommunications, and news-
paper industries.
However, the Internet has also created entirely new markets; formed the
basis for thousands of new products, services, and business models; and pro-
vided new opportunities for building brands with very large and loyal customer
bases. Amazon, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are
examples. In this sense, the Internet is “transforming” entire industries, forcing
firms to change how they do business.
Smart Products and the Internet of Things
The growing use of sensors in industrial and consumer products, often called
the Internet of Things (IoT), is an excellent example of how the Internet is
changing competition within industries and creating new products and ser-
vices. Under Armour and other sports and fitness companies are pouring money
into wearable health trackers and fitness equipment that use sensors to report
users’ activities to remote corporate computing centers where the data can be
analyzed (see the Interactive Session on Technology). John Deere tractors are
loaded with field radar, GPS transceivers, and hundreds of sensors keeping track
of the equipment, as described in the Chapter 12 opening case. GE is creating a
new business helping its aircraft and wind turbine clients improve operations by
examining the data generated from the many thousands of sensors in the equip-
ment. The result is what are referred to as “smart products”—products that are a
part of a larger set of information-intensive services sold by firms (Gandhi and
Gervet, 2016; Porter and Heppelmann, 2014; Iansiti and Lakhani, 2014).
The impact of smart, Internet-connected products is just now being under-
stood. Smart products offer new functionality, greater reliability, and more in-
tense use of products while providing detailed information that can be used to
improve both the products and the customer experience. They expand opportu-
nities for product and service differentiation. When you buy a wearable digital
health product, you not only get the product itself, you also get a host of ser-
vices available from the manufacturer’s cloud servers. Smart products increase
rivalry among firms that will either innovate or lose customers to competitors.
Smart products generally raise switching costs and inhibit new entrants to a
market because existing customers are trapped in the dominant firm’s software
environment. Finally, smart products may decrease the power of suppliers of
industrial components if, as many believe, the physical product becomes less
important than the software and hardware that make it run.
The Business Value Chain Model
Although the Porter model is very helpful for identifying competitive forces
and suggesting generic strategies, it is not very specific about what exactly to
do, and it does not provide a methodology to follow for achieving competi-
tive advantages. If your goal is to achieve operational excellence, where do you
start? Here’s where the business value chain model is helpful.
The value chain model highlights specific activities in the business where
competitive strategies can best be applied (Porter, 1985) and where informa-
tion systems are most likely to have a strategic impact. This model identifies
specific, critical leverage points where a firm can use information technology
most effectively to enhance its competitive position. The value chain model
views the firm as a series or chain of basic activities that add a margin of value
102 Part One Organizations, Management, and the Networked Enterprise
INTERACTIVE SESSION TECHNOLOGY
Smart Products—Coming Your Way
If you don’t use a smart product yet, you soon will.
Your shoes, your clothing, your watch, your water
bottle, and even your toothbrush are being rede-
signed to incorporate sensors and metering devices
connected to the Internet so that their performance
can be monitored and analyzed. Your home will in-
creasingly use smart devices such as smart thermo-
stats, smart electrical meters, smart security systems,
and smart lighting systems.
Under Armour, noted for performance clothing,
spent $710 million to scoop up mobile apps such as
MyFitnessPal, Map My Fitness, and Endomondo,
which enable it to tap into the world’s largest digital
health and fitness community, with more than 225
million registered users. According to company data,
Under Armour’s connected fitness users have logged
more than 500 million workouts and taken 7 trillion
steps since the company started tracking the data.
Analyzing these data has provided insights such as
3.1 miles being the average distance for a run and
that May is the most active month for exercise.
Under Armour is trying to enhance its perfor-
mance clothing with digital technology. The com-
pany now sells connected running shoes. The shoes
come in several models and feature a built-in wire-
less Bluetooth sensor that tracks cadence, distance,
pace, stride length, and steps, even if the runner does
not bring a smartphone along. The data are stored
on the shoe until they can sync wirelessly to Under
Armour’s Map My Run app for iPhone, iPad, and
Android devices. Users can also connect to the app on
third-party devices such as AppleWatch, Garmin, or
Fitbit, to incorporate metrics such as heart rate that
can’t be tracked by the shoes. The shoe’s analytics
will let users know when it’s time to purchase new
shoes and sensor batteries have to be charged.
Under Armour has recently added a digital coach-
ing feature for the connected running shoes and
Map My Run app. Runners will be able to monitor
their gait and stride length mile after mile, and see
how that impacts their pace and cadence. By analyz-
ing these data, along with data about the runner’s
gender, age, weight, and height, Map My Run will be
able to provide a runner with tips on how to improve
his or her pace and splits, by taking shorter or longer
strides while running, for instance.
Under Armour can generate revenue from in-app
ads, including ads from other companies, and pur-
chases from app users referred to its products. The
platform delivers unprecedented depth of informa-
tion and insight about fitness- and health-oriented
consumers, creating numerous opportunities for
Under Armour and other brands to engage with po-
tential and existing customers. For example, Map My
Fitness collects data about a user’s name, e-mail ad-
dress, birth date, location, performance, and profile
if the user connects to the app using social media.
Under Armour does not sell identifiable personal
data about individuals to third parties but does pro-
vide advertisers with aggregate information about
app users. Under Armour is hoping that daily use
of its smartphone apps will build stronger ties to
customers that will lead to stronger sales of its own
apparel, footwear, and other athletic gear. The com-
pany is clearly benefiting from bringing the power of
software to its physical products.
Smart products are also finding their way into
people’s homes. Between 2017 and 2022, Con
Edison, which supplies electrical power and natu-
ral gas to the New York City metropolitan area, is
installing 3.6 million new electric smart meters
and 1.2 million new gas smart meters in all its cus-
tomers’ homes and businesses. A smart meter is a
digital meter that communicates between a resi-
dence or business and Con Edison through a secure
wireless communication network. The smart meter
records and transmits each customer’s energy con-
sumption regularly throughout the day. The smart
meter transmits data to a system of access points on
utility poles, which send the usage information to
Con Edison.
The smart meter will let the company know when
a customer loses service, resulting in faster repairs,
and will also provide real-time billing information
to customers based on energy usage, enabling them
to pinpoint areas for energy savings. They will also
permit more definitive voltage regulation, enhancing
electric distribution-system efficiency, reducing costs,
and providing savings that ultimately get reflected in
lower customer bills. Data from the new meters will
let Con Ed set prices based on customers’ time and
level of use. Rates might jump during summer hours
when hot weather makes people turn on their air con-
ditioners, or drop overnight when power use is lowest.
Con Ed customers can use an online My Account
dashboard with tools to track their daily energy
consumption down to 15-minute increments. They
can analyze their usage by comparing hour to hour,
weekday versus weekend, or day versus evening use
to see where they can save, and they can receive
high bill alerts if they are using more energy than
usual. Con Ed also offers a mobile app for iPhone
and Android smartphone users so that they can track
their detailed energy usage while they are on the go.
Sources: Jen Booton, “Under Armour’s New HOVR Smart Shoe Will
Automatically Track Your Run,” SportTechie, January 26, 2018; Edgar
Alvarez, “Under Armour’s HOVR smart running shoes are more than
just a gimmick,” Engadget, February 9, 2018; www.coned.com, accessed
March 28, 2018; Edward C. Baig, “Under Armour and HTC Team Up on
Connected Fitness,” USA Today, January 5, 2016; www.underarmour.
com, accessed April 20, 2018; and John Kell, “Why Under Armour Is
Making a Costly Bet on Connected Fitness,” Fortune, April 21, 2016.
CASE STUDY QUESTIONS
1. Describe the role of information technology in the
products described in this case. How is it adding
value to these products? How is it transforming
these products?
2. How are these smart products changing opera-
tions and decision making for these organizations?
How are they changing the behavior of their
users?
3. Are there any ethical issues raised by these smart
products, such as their impact on consumer pri-
vacy? Explain your answer.
Chapter 3 Information Systems, Organizations, and Strategy 103
to a firm’s products or services. These activities can be categorized as either
primary activities or support activities (see Figure 3.9).
Primary activities are most directly related to the production and distribu-
tion of the firm’s products and services, which create value for the customer.
Primary activities include inbound logistics, operations, outbound logistics, sales
and marketing, and service. Inbound logistics includes receiving and storing ma-
terials for distribution to production. Operations transforms inputs into finished
products. Outbound logistics entails storing and distributing finished products.
Sales and marketing includes promoting and selling the firm’s products. The ser-
vice activity includes maintenance and repair of the firm’s goods and services.
Support activities make the delivery of the primary activities possible and
consist of organization infrastructure (administration and management), human
resources (employee recruiting, hiring, and training), technology (improving
products and the production process), and procurement (purchasing input).
Now you can ask at each stage of the value chain, “How can we use information
systems to improve operational efficiency and improve customer and supplier in-
timacy?” This will force you to critically examine how you perform value-adding
activities at each stage and how the business processes might be improved. You
can also begin to ask how information systems can be used to improve the rela-
tionship with customers and with suppliers who lie outside the firm’s value chain
but belong to the firm’s extended value chain where they are absolutely critical to
your success. Here, supply chain management systems that coordinate the flow
of resources into your firm and customer relationship management systems that
coordinate your sales and support employees with customers are two of the most
common system applications that result from a business value chain analysis. We
discuss these enterprise applications in detail later in Chapter 9.
Using the business value chain model will also cause you to consider bench-
marking your business processes against your competitors or others in related
industries and identifying industry best practices. Benchmarking involves
http://www.coned.com
http://www.underarmour.com
http://www.underarmour.com
104 Part One Organizations, Management, and the Networked Enterprise
FIGURE 3.9 THE VALUE CHAIN MODEL
This figure provides examples of systems for both primary and support activities of a firm and of
its value partners that can add a margin of value to a firm’s products or services.
Administration and Management:
Electronic scheduling and messaging systems
Human Resources:
Workforce planning systems
Procurement:
Computerized ordering systems
Technology:
Computer-aided design systems
Inbound
Logistics
Automated
warehousing
systems
Operations
Computer-
controlled
machining
systems
Sales and
Marketing
Computerized
ordering
systems
Service
Equipment
maintenance
systems
Outbound
Logistics
Automated
shipment
scheduling
systems
Firm
Value
Chain
Support
Activities
Primary
Activities
Customer
Relationship
Management
Systems
Sourcing and
Procurement
Systems
Suppliers Firm Distributors Customers
Suppliers’
Suppliers
Industry Value Chain
comparing the efficiency and effectiveness of your business processes against
strict standards and then measuring performance against those standards.
Industry best practices are usually identified by consulting companies, re-
search organizations, government agencies, and industry associations as the
most successful solutions or problem-solving methods for consistently and ef-
fectively achieving a business objective.
Once you have analyzed the various stages in the value chain at your busi-
ness, you can come up with candidate applications of information systems.
Then, once you have a list of candidate applications, you can decide which
to develop first. By making improvements in your own business value chain
that your competitors might miss, you can achieve competitive advantage by
attaining operational excellence, lowering costs, improving profit margins, and
forging a closer relationship with customers and suppliers. If your competitors
are making similar improvements, then at least you will not be at a competitive
disadvantage—the worst of all cases!
Extending the Value Chain: The Value Web
Figure 3.9 shows that a firm’s value chain is linked to the value chains of its
suppliers, distributors, and customers. After all, the performance of most firms
depends not only on what goes on inside a firm but also on how well the firm
coordinates with direct and indirect suppliers, delivery firms (logistics partners,
such as FedEx or UPS), and, of course, customers.
Chapter 3 Information Systems, Organizations, and Strategy 105
How can information systems be used to achieve strategic advantage at the
industry level? By working with other firms, industry participants can use infor-
mation technology to develop industrywide standards for exchanging informa-
tion or business transactions electronically, which force all market participants
to subscribe to similar standards. Such efforts increase efficiency, making prod-
uct substitution less likely and perhaps raising entry costs—thus discouraging
new entrants. Also, industry members can build industrywide, IT-supported
consortia, symposia, and communications networks to coordinate activities con-
cerning government agencies, foreign competition, and competing industries.
Looking at the industry value chain encourages you to think about how to
use information systems to link up more efficiently with your suppliers, stra-
tegic partners, and customers. Strategic advantage derives from your ability to
relate your value chain to the value chains of other partners in the process. For
instance, if you are Amazon.com, you want to build systems that:
• Make it easy for suppliers to display goods and open stores on the Amazon site
• Make it easy for customers to pay for goods
• Develop systems that coordinate the shipment of goods to customers
• Develop shipment tracking systems for customers
Internet technology has made it possible to create highly synchronized in-
dustry value chains called value webs. A value web is a collection of indepen-
dent firms that use information technology to coordinate their value chains
to produce a product or service for a market collectively. It is more customer
driven and operates in a less linear fashion than the traditional value chain.
Figure 3.10 shows that this value web synchronizes the business processes
of customers, suppliers, and trading partners among different companies in an
industry or in related industries. These value webs are flexible and adaptive to
changes in supply and demand. Relationships can be bundled or unbundled in re-
sponse to changing market conditions. Firms will accelerate time to market and to
customers by optimizing their value web relationships to make quick decisions on
who can deliver the required products or services at the right price and location.
Synergies, Core Competencies, and Network-Based
Strategies
A large corporation is typically a collection of businesses. Often, the firm is or-
ganized financially as a collection of strategic business units and the returns to
the firm are directly tied to the performance of all the strategic business units.
Information systems can improve the overall performance of these business
units by promoting synergies and core competencies.
Synergies
The idea of synergies is that when the output of some units can be used as
inputs to other units or two organizations pool markets and expertise, these re-
lationships lower costs and generate profits. Bank and financial firm mergers
such as the merger of JPMorgan Chase and Bank of New York as well as Bank
of America and Countrywide Financial Corporation occurred precisely for this
purpose.
One use of information technology in these synergy situations is to tie to-
gether the operations of disparate business units so that they can act as a whole.
For example, acquiring Countrywide Financial enabled Bank of America to ex-
tend its mortgage lending business and to tap into a large pool of new customers
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106 Part One Organizations, Management, and the Networked Enterprise
who might be interested in its credit card, consumer banking, and other finan-
cial products. Information systems would help the merged companies consoli-
date operations, lower retailing costs, and increase cross-marketing of financial
products.
Enhancing Core Competencies
Yet another way to use information systems for competitive advantage is to
think about ways that systems can enhance core competencies. The argument
is that the performance of all business units will increase insofar as these busi-
ness units develop, or create, a central core of competencies. A core compe-
tency is an activity for which a firm is a world-class leader. Core competencies
may involve being the world’s best miniature parts designer, the best package
delivery service, or the best thin-film manufacturer. In general, a core com-
petency relies on knowledge that is gained over many years of practical field
experience with a technology. This practical knowledge is typically supple-
mented with a long-term research effort and committed employees.
Any information system that encourages the sharing of knowledge across
business units enhances competency. Such systems might encourage or
enhance existing competencies and help employees become aware of new
external knowledge; such systems might also help a business leverage exist-
ing competencies to related markets. For example, Procter & Gamble, a world
leader in brand management and consumer product innovation, uses a series
of systems to enhance its core competencies by helping people working on
similar problems share ideas and expertise. Employees working in research
and development (R&D), engineering, purchasing, marketing, legal affairs, and
FIGURE 3.10 THE VALUE WEB
The value web is a networked system that can synchronize the value chains of business
partners within an industry to respond rapidly to changes in supply and demand.
Supply Chain Management
Systems
Supplier Extranets
Net Marketplaces
Customer Relationship
Management Systems
Customers
Customers’
Customers
Strategic Alliance
and Partner Firms
Industry
Firms
ERP Systems
Core Transaction
Systems
Indirect Suppliers
Suppliers
Suppliers’
Suppliers
Chapter 3 Information Systems, Organizations, and Strategy 107
business information systems around the world can share documents, reports,
charts, videos, and other data from various sources online and locate employ-
ees with special expertise. P&G systems also can link to research scientists and
entrepreneurs outside the company who are searching for new, innovative
products worldwide.
Network-Based Strategies
Internet and networking technology have inspired strategies that take advan-
tage of firms’ abilities to create networks or network with each other. Network-
based strategies include the use of network economics, a virtual company
model, and business ecosystems.
Network Economics Network economics refers to market situations where
the economic value being produced depends on the number of people using a
product. For certain products and markets, the real economic value comes from
the fact that other people use the product. In these situations, “network effects”
are at work. For instance, what’s the value of a telephone if it is not connected
to millions of others? Email has value because it allows us to communicate with
millions of others. Business models that are based on network effects have been
highly successful on the Internet, including social networks, software, messaging
apps, and on-demand companies like Uber and Airbnb.
In traditional economics—the economics of factories and agriculture—
production experiences diminishing returns. The more any given resource is ap-
plied to production, the lower the marginal gain in output, until a point is reached
where the additional inputs produce no additional outputs. This is the law of di-
minishing returns, and it is the foundation for most of modern economics.
In some situations, the law of diminishing returns does not work. For in-
stance, in a network, the marginal costs of adding another participant are
about zero, whereas the marginal gain is much larger. The larger the number
of subscribers in a telephone system or the Internet, the greater the value to all
participants because each user can interact with more people. It is not much
more expensive to operate a television station with 1,000 subscribers than with
10 million subscribers. The value of a community of people grows with size,
whereas the cost of adding new members is inconsequential. The value of
Facebook to users increases greatly as more people use the social network.
From this network economics perspective, information technology can be
strategically useful. Internet sites can be used by firms to build communities of
users—like-minded customers who want to share their experiences. This builds
customer loyalty and enjoyment and builds unique ties to customers. eBay, the
giant online auction site, is an example. This business is based on a network
of millions of users, and has built an online community by using the Internet.
The more people offering products on eBay, the more valuable the eBay site is
to everyone because more products are listed, and more competition among
suppliers lowers prices. Network economics also provides strategic benefits to
commercial software vendors. The value of their software and complementary
software products increases as more people use them, and there is a larger in-
stalled base to justify continued use of the product and vendor support.
Virtual Company Model Another network-based strategy uses the model of
a virtual company to create a competitive business. A virtual company, also
known as a virtual organization, uses networks to link people, assets, and ideas,
enabling it to ally with other companies to create and distribute products and ser-
vices without being limited by traditional organizational boundaries or physical lo-
cations. One company can use the capabilities of another company without being
108 Part One Organizations, Management, and the Networked Enterprise
organizationally tied to that company. The virtual company model is useful when
a company finds it cheaper to acquire products, services, or capabilities from an
external vendor or when it needs to move quickly to exploit new market opportu-
nities and lacks the time and resources to respond on its own.
Fashion companies, such as GUESS, Ann Taylor, Levi Strauss, and Reebok,
enlist Hong Kong–based Li & Fung to manage production and shipment of their
garments. Li & Fung handles product development, raw material sourcing, pro-
duction planning, quality assurance, and shipping. Li & Fung does not own
any fabric, factories, or machines, outsourcing all of its work to a network of
more than 15,000 suppliers in 40 countries all over the world. Customers place
orders with Li & Fung over its private extranet. Li & Fung then sends instruc-
tions to appropriate raw material suppliers and factories where the clothing is
produced. The Li & Fung extranet tracks the entire production process for each
order. Working as a virtual company keeps Li & Fung flexible and adaptable so
that it can design and produce the products ordered by its clients in short order
to keep pace with rapidly changing fashion trends.
Business Ecosystems and Platforms The Internet and the emergence of digital
firms call for some modification of the industry competitive forces model. The tra-
ditional Porter model assumes a relatively static industry environment; relatively
clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes,
and customers. Instead of participating in a single industry, some of today’s firms
participate in industry sets—collections of industries that provide related services
and products that deliver value to the customer (see Figure 3.11). Business eco-
system is another term for these loosely coupled but interdependent networks of
suppliers, distributors, outsourcing firms, transportation service firms, and tech-
nology manufacturers (Iansiti and Levien, 2004).
An example of a business ecosystem is the mobile Internet platform. In this
ecosystem there are four industries: device makers (Apple iPhone, Samsung,
LG, and others), wireless telecommunication firms (AT&T, Verizon, T-Mobile,
Sprint, and others), independent software applications providers (generally
FIGURE 3.11 AN ECOSYSTEM STRATEGIC MODEL
The digital firm era requires a more dynamic view of the boundaries among industries,
firms, customers, and suppliers, with competition occurring among industry sets in
a business ecosystem. In the ecosystem model, multiple industries work together to
deliver value to the customer. IT plays an important role in enabling a dense network of
interactions among the participating firms.
Industry
1
Industry
3
Industry
2
Industry
4
Industry Ecosystem
Customers
Substitute
Products
and Services
New
Market
Entrants
Suppliers
Chapter 3 Information Systems, Organizations, and Strategy 109
small firms selling games, applications, and ring tones), and Internet service
providers (who participate as providers of Internet service to the mobile plat-
form). Each of these industries has its own history, interests, and driving forces.
But these elements come together in a sometimes cooperative and sometimes
competitive new mobile digital platform ecosystem, creating value for consum-
ers that none of them could achieve acting alone.
Business ecosystems typically have one or only a few keystone firms that domi-
nate the ecosystem and create the platforms used by other niche firms. For in-
stance, both Microsoft and Facebook provide platforms composed of information
systems, technologies, and services that thousands of other firms in different in-
dustries use to enhance their own capabilities (Van Alstyne et. al, 2016). Facebook
is a platform used by billions of people and millions of businesses to interact and
share information as well as to buy, market, and sell numerous products and ser-
vices. More firms are trying to use information systems to develop into keystone
firms by building IT-based platforms that other firms can use. Alternatively, firms
should consider how their information systems will enable them to become profit-
able niche players in the larger ecosystems created by keystone firms.
3-4 What are the challenges posed by
strategic information systems, and
how should they be addressed?
Strategic information systems often change the organization as well as its
products, services, and operating procedures, driving the organization into
new behavioral patterns. Successfully using information systems to achieve a
competitive advantage is challenging and requires precise coordination of tech-
nology, organizations, and management.
Sustaining Competitive Advantage
The competitive advantages that strategic systems confer do not necessarily
last long enough to ensure long-term profitability. Because competitors can re-
taliate and copy strategic systems, competitive advantage is not always sustain-
able. Markets, customer expectations, and technology change; globalization has
made these changes even more rapid and unpredictable. The Internet can make
competitive advantages disappear very quickly because virtually all companies
can use this technology. Classic strategic systems, such as American Airlines’s
SABRE computerized reservation system, Citibank’s ATM system, and FedEx’s
package tracking system, benefited by being the first in their industries. Then
rival systems emerged. Amazon was an e-commerce leader but now faces com-
petition from eBay, Walmart, and Google. Information systems alone cannot
provide an enduring business advantage. Systems originally intended to be stra-
tegic frequently become tools for survival, required by every firm to stay in
business, or they may inhibit organizations from making the strategic changes
essential for future success.
Aligning IT with Business Objectives
The research on IT and business performance has found that (a) the more suc-
cessfully a firm can align information technology with its business goals, the
more profitable it will be, and (b) only one-quarter of firms achieve alignment
110 Part One Organizations, Management, and the Networked Enterprise
of IT with the business. About half of a business firm’s profits can be explained
by alignment of IT with business (Luftman, 2003).
Most businesses get it wrong: Information technology takes on a life of its
own and does not serve management and shareholder interests very well.
Instead of businesspeople taking an active role in shaping IT to the enterprise,
they ignore it, claim not to understand IT, and tolerate failure in the IT area
as just a nuisance to work around. Such firms pay a hefty price in poor perfor-
mance. Successful firms and managers understand what IT can do and how it
works, take an active role in shaping its use, and measure its impact on rev-
enues and profits.
Management Checklist: Performing a Strategic
Systems Analysis
To align IT with the business and use information systems effectively for com-
petitive advantage, managers need to perform a strategic systems analysis. To
identify the types of systems that provide a strategic advantage to their firms,
managers should ask the following questions:
1. What is the structure of the industry in which the firm is located?
• What are some of the competitive forces at work in the industry?
Are there new entrants to the industry? What is the relative power of
suppliers, customers, and substitute products and services over prices?
• Is the basis of competition quality, price, or brand?
• What are the direction and nature of change within the industry? From
where are the momentum and change coming?
• How is the industry currently using information technology? Is the organiza-
tion behind or ahead of the industry in its application of information systems?
2. What are the business, firm, and industry value chains for this particular firm?
• How is the company creating value for the customer—through lower
prices and transaction costs or higher quality? Are there any places in the
value chain where the business could create more value for the customer
and additional profit for the company?
• Does the firm understand and manage its business processes using
the best practices available? Is it taking maximum advantage of supply
chain management, customer relationship management, and enterprise
systems?
• Does the firm leverage its core competencies?
• Is the industry supply chain and customer base changing in ways that
benefit or harm the firm?
• Can the firm benefit from strategic partnerships, value webs, ecosystems,
or platforms?
• Where in the value chain will information systems provide the greatest
value to the firm?
3. Have we aligned IT with our business strategy and goals?
• Have we correctly articulated our business strategy and goals?
• Is IT improving the right business processes and activities to promote this
strategy?
• Are we using the right metrics to measure progress toward those goals?
Managing Strategic Transitions
Adopting the kinds of strategic systems described in this chapter generally
requires changes in business goals, relationships with customers and suppli-
ers, and business processes. These sociotechnical changes, affecting both
Chapter 3 Information Systems, Organizations, and Strategy 111
social and technical elements of the organization, can be considered strategic
transitions—a movement between levels of sociotechnical systems.
Such changes often entail blurring of organizational boundaries, both external
and internal. Suppliers and customers must become intimately linked and may
share each other’s responsibilities. Managers will need to devise new business pro-
cesses for coordinating their firms’ activities with those of customers, suppliers,
and other organizations. The organizational change requirements surrounding
new information systems are so important that they merit attention throughout
this text. Chapter 14 examines organizational change issues in more detail.
3-5 How will MIS help my career?
Here is how Chapter 3 and this book can help you find a job as an entry-level
business development representative.
The Company
Superior Data Quality, a fast-growing Los Angeles–based company providing
software and services to help large companies manage their data and data qual-
ity, is looking for an entry-level business development representative. The
company’s data quality and data management tools and services help firms
correct, standardize, and enhance customer data by capturing accurate address,
email, and phone information; removing duplicate data in corporate systems;
analyzing data to discover relationships; restructuring and standardizing data;
and monitoring data to ensure ongoing quality control and standardization. The
company has 12,000 clients worldwide, 450 employees, and offices throughout
the United States, Europe, and Asia.
Position Description
The business development representative will help the company’s sales team
meet aggressive growth targets. The company provides classroom and on-the-
job training on how to communicate with prospects and customers, how to
identify appropriate markets for its solutions, how to write a sales plan, and
how to use tools such as Salesforce.com. Job responsibilities include:
• Researching targeted accounts to generate potential business opportunities.
• Supporting customer acquisition and sales strategies.
• Implementing tactics for successful execution of marketing campaigns.
• Building and managing a pipeline of sales leads through prospecting and
qualifying marketing-generated leads.
• Reporting on the success of campaigns and lead generation activities.
Job Requirements
• Bachelor’s degree
• Strong interest in a sales career
• Exceptional communication, interpersonal, analytical, and problem-solving
skills
• Ability to multitask in fast-paced environment
http://Salesforce.com
112 Part One Organizations, Management, and the Networked Enterprise
Interview Questions
1. What do you know about data quality and data management? Have you any
work experience in these areas? Have you ever encountered a data quality
problem? If so, can you describe how the problem was solved?
2. Have you ever worked with Salesforce.com? What do you know about it?
How have you used the software?
3. Can you give us an example of a marketing or sales-related problem or other
business problem that you helped solve? Do you have any examples of your
writing and analysis work?
4. Have you had much face-to-face contact with customers? Can you describe
what work you did with customers?
Author Tips
1. Review the discussion of IT and business strategy in Chapter 3 and also the
section on data management, including data quality, in Chapter 6.
2. Use the web to find out more about tools and services for promoting data quality
and data management and research the company’s specific offerings in this area.
3. Review the company’s LinkedIn profile and posts in addition to other social
media channels. Are there consistent themes across these channels on which
the company seems to focus? Be prepared to show that you understand the
kinds of business challenges facing this company.
4. Learn what you can about Salesforce.com related to the responsibilities out-
lined for this job. Inquire about exactly how you would be using Salesforce.
com in your work.
5. Consider inquiring what kinds of problems with customers’ data quality you
would be most likely to encounter on the job.
3-1 Which features of organizations do managers need to know about to build and use information
systems successfully?
All modern organizations are hierarchical, specialized, and impartial, using explicit routines to max-
imize efficiency. All organizations have their own cultures and politics arising from differences in
interest groups, and they are affected by their surrounding environment. Organizations differ in goals,
groups served, social roles, leadership styles, incentives, types of tasks performed, and type of struc-
ture. These features help explain differences in organizations’ use of information systems. Information
systems and the organizations in which they are used interact with and influence each other.
3-2 What is the impact of information systems on organizations?
The introduction of a new information system will affect organizational structure, goals, work design,
values, competition between interest groups, decision making, and day-to-day behavior. At the same
time, information systems must be designed to serve the needs of important organizational groups and
will be shaped by the organization’s structure, business processes, goals, culture, politics, and manage-
ment. Information technology can reduce transaction and agency costs, and such changes have been
accentuated in organizations using the Internet. New systems disrupt established patterns of work and
power relationships, so there is often considerable resistance to them when they are introduced.
3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies,
and network economics help companies develop competitive strategies using information systems?
In Porter’s competitive forces model, the strategic position of the firm and its strategies are deter-
mined by competition with its traditional direct competitors, but they are also greatly affected by new
REVIEW SUMMARY
http://Salesforce.com
http://Salesforce.com
http://Salesforce.com
http://Salesforce.com
Chapter 3 Information Systems, Organizations, and Strategy 113
market entrants, substitute products and services, suppliers, and customers. Information systems help com-
panies compete by maintaining low costs, differentiating products or services, focusing on market niche,
strengthening ties with customers and suppliers, and increasing barriers to market entry with high levels of
operational excellence.
The value chain model highlights specific activities in the business where competitive strategies and infor-
mation systems will have the greatest impact. The model views the firm as a series of primary and support
activities that add value to a firm’s products or services. Primary activities are directly related to production
and distribution, whereas support activities make the delivery of primary activities possible. A firm’s value
chain can be linked to the value chains of its suppliers, distributors, and customers. A value web consists of
information systems that enhance competitiveness at the industry level by promoting the use of standards
and industrywide consortia and by enabling businesses to work more efficiently with their value partners.
Because firms consist of multiple business units, information systems achieve additional efficiencies or
enhance services by tying together the operations of disparate business units. Information systems help
businesses leverage their core competencies by promoting the sharing of knowledge across business units.
Information systems facilitate business models based on large networks of users or subscribers that take
advantage of network economics. A virtual company strategy uses networks to link to other firms so that a
company can use the capabilities of other companies to build, market, and distribute products and services.
In business ecosystems, multiple industries work together to deliver value to the customer. Information
systems support a dense network of interactions among the participating firms.
3-4 What are the challenges posed by strategic information systems, and how should they be addressed?
Implementing strategic systems often requires extensive organizational change and a transition from one
sociotechnical level to another. Such changes are called strategic transitions and are often difficult and pain-
ful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive to build. Many
strategic information systems are easily copied by other firms, so that strategic advantage is not always
sustainable.
Key Terms
Agency theory, 90
Benchmarking, 103
Best practices, 104
Business ecosystem, 108
Competitive forces model, 94
Core competency, 106
Disruptive technologies, 87
Efficient customer response system, 96
Mass customization, 97
Network economics, 107
Organization, 81
Platforms, 109
Primary activities, 103
Product differentiation, 95
Routines, 84
Strategic transitions, 111
Support activities, 103
Switching costs, 100
Transaction cost theory, 89
Value chain model, 101
Value web, 105
Virtual company, 107
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
3-1 Which features of organizations do managers
need to know about to build and use
information systems successfully?
• Define an organization and compare the
technical definition of organizations with
the behavioral definition.
• Identify and describe the features of orga-
nizations that help explain differences in
organizations’ use of information systems.
3-2 What is the impact of information systems on
organizations?
• Describe the major economic theories that
help explain how information systems
affect organizations.
• Describe the major behavioral theories
that help explain how information systems
affect organizations.
114 Part One Organizations, Management, and the Networked Enterprise
• Explain why there is considerable organi-
zational resistance to the introduction of
information systems.
• Describe the impact of the Internet and dis-
ruptive technologies on organizations.
3-3 How do Porter’s competitive forces model,
the value chain model, synergies, core
competencies, and network economics help
companies develop competitive strategies using
information systems?
• Define Porter’s competitive forces model
and explain how it works.
• Describe what the competitive forces model
explains about competitive advantage.
• List and describe four competitive strate-
gies enabled by information systems that
firms can pursue.
• Describe how information systems can sup-
port each of these competitive strategies
and give examples.
• Explain why aligning IT with business objec-
tives is essential for strategic use of systems.
• Define and describe the value chain model.
• Explain how the value chain model can be
used to identify opportunities for informa-
tion systems.
• Define the value web and show how it is
related to the value chain.
• Explain how the value web helps busi-
nesses identify opportunities for strategic
information systems.
• Describe how the Internet has changed com-
petitive forces and competitive advantage.
• Explain how information systems promote
synergies and core competencies.
• Describe how promoting synergies and
core competencies enhances competitive
advantage.
• Explain how businesses benefit by using
network economics and ecosystems.
• Define and describe a virtual company and
the benefits of pursuing a virtual company
strategy.
3-4 What are the challenges posed by strategic
information systems, and how should they be
addressed?
• List and describe the management challenges
posed by strategic information systems.
• Explain how to perform a strategic systems
analysis.
Discussion Questions
3-5 It has been said that there is no such thing
as a sustainable strategic advantage. Do you
agree? Why or why not?
3-6 It has been said that the advantage that
leading-edge retailers such as Dell and
Walmart have over their competition isn’t
MyLab MIS
MyLab MIS
technology; it’s their management. Do you
agree? Why or why not?
3-7 What are some of the issues to consider in
determining whether the Internet would
provide your business with a competitive
advantage?
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience identifying information systems to support a business
strategy and to solve a customer retention problem, using a database to improve decision making about busi-
ness strategy, and using web tools to configure and price an automobile. Visit MyLab MIS to access this chapter’s
Hands-On MIS Projects.
Management Decision Problems
3-8 Macy’s, Inc., through its subsidiaries, operates approximately 840 department stores in the United States.
Its retail stores sell a range of merchandise, including apparel, home furnishings, and housewares. Senior
management has decided that Macy’s needs to tailor merchandise more to local tastes and that the colors,
sizes, brands, and styles of clothing and other merchandise should be based on the sales patterns in each
individual Macy’s store. How could information systems help Macy’s management implement this new
strategy? What pieces of data should these systems collect to help management make merchandising
decisions that support this strategy?
Chapter 3 Information Systems, Organizations, and Strategy 115
3-9 T-Mobile has launched aggressive campaigns to attract customers with lower mobile phone prices, and it
has added to its customer base. However, management wants to know if there are other ways of luring
and keeping customers. Are customers concerned about the level of customer service, uneven network
coverage, or data plans? How can the company use information systems to help find the answer? What
management decisions could be made using information from these systems?
Improving Decision Making: Using a Database to Clarify Business Strategy
Software skills: Database querying and reporting; database design
Business skills: Reservation systems; customer analysis
3-10 In this exercise, you will use database software to analyze the reservation transactions for a hotel and
use that information to fine-tune the hotel’s business strategy and marketing activities.
In MyLab MIS, you will find a database for hotel reservation transactions developed in Microsoft Access
with information about the President’s Inn in Cape May, New Jersey. At the Inn, 10 rooms overlook side streets,
10 rooms have bay windows that offer limited views of the ocean, and the remaining 10 rooms in the front of
the hotel face the ocean. Room rates are based on room choice, length of stay, and number of guests per room.
Room rates are the same for one to four guests. Fifth and sixth guests must pay an additional $20 charge each
per person per day. Guests staying for seven days or more receive a 10 percent discount on their daily room
rates.
The owners currently use a manual reservation and bookkeeping system, which has caused many prob-
lems. Use the database to develop reports on average length of stay, average visitors per room, base revenue per
room (i.e., length of visit multiplied by the daily rate), and strongest customer base. After answering these ques-
tions, write a brief report about the Inn’s current business situation and suggest future strategies.
Improving Decision Making: Using Web Tools to Configure and Price an Automobile
Software skills: Internet-based software
Business skills: Researching product information and pricing
3-11 In this exercise, you will use software at car websites to find product information about a car of your
choice and use that information to make an important purchase decision. You will also evaluate two of
these sites as selling tools.
You are interested in purchasing a new Ford Escape (or some other car of your choice). Go to the website
of CarsDirect (www.carsdirect.com) and begin your investigation. Locate the Ford Escape. Research the vari-
ous Escape models, and choose one you prefer in terms of price, features, and safety ratings. Locate and read at
least two reviews. Surf the website of the manufacturer, in this case Ford (www.ford.com). Compare the infor-
mation available on Ford’s website with that of CarsDirect for the Ford Escape. Try to locate the lowest price for
the car you want in a local dealer’s inventory. Suggest improvements for CarsDirect.com and Ford.com.
Collaboration and Teamwork Project
Identifying Opportunities for Strategic Information Systems
3-12 With your team of three or four other students, select a company described in the Wall Street Journal, Fortune,
Forbes, or another business publication or do your research on the web. Visit the company’s website to find
additional information about that company and to see how the firm is using the web. On the basis of this
information, analyze the business. Include a description of the organization’s features, such as important
business processes, culture, structure, and environment as well as its business strategy. Suggest strategic
information systems appropriate for that particular business, including those based on Internet technology,
if appropriate. If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and
develop a presentation of your findings for the class.
http://www.carsdirect.com
http://www.ford.com
http://CarsDirect.com
http://Ford.com
116 Part One Organizations, Management, and the Networked Enterprise
Grocery Wars
CASE STUDY
On June 16, 2017 Amazon announced that it was purchasing the upscale food market chain Whole Foods for $13.7 billion. The
acquisition, completed in August of that year, was
Amazon’s largest, and sent shock waves throughout
the grocery industry. The purchase has profound im-
plications for the future of groceries, the entire food
industry, and perhaps the future of shopping itself.
Even before acquiring Whole Foods, Amazon had
been expanding into groceries and physical locations,
including bookstores, two Seattle drive-through gro-
cery stores where customers can pick up online or-
ders, and a convenience store called Amazon Go that
uses sensors and software to let shoppers pay for pur-
chases without waiting in line to check out. Amazon
has also acquired experience with online grocery sales
through its Amazon Fresh program. However, Amazon
hadn’t quite achieved the success with online grocer-
ies as it had with books and media. Whole Foods gives
Amazon new ways to enhance its online business
while establishing a presence in physical retail outlets.
The grocery business is notoriously competitive
and low-margin, with profits of 1–2 cents on the dollar.
Although Amazon is skilled at competing on low price,
why take on this challenge? From Amazon’s stand-
point, there are several reasons why Whole Foods
might turn out to be a very good investment. Groceries
are an important purchase category, representing
$800 billion in U.S. sales. A recent report by the Food
Marketing Institute found that U.S. grocery sales could
grow fivefold over the next decade. Purchasing Whole
Foods helps Amazon become a major player in the
grocery industry. Whole Foods takes Amazon’s physi-
cal presence to a new level, with more than 460 stores
in the United States, Canada, and Britain and sales of
$16 billion in fiscal 2017. It will be within an hour or 30
minutes of as many people as possible.
Amazon could use its $119-a-year Prime member-
ship service, which gives customers free, two-day
shipping and other benefits, to offer Whole Foods
customers a better price on groceries, as it does for
books in its bookstores. The stores could also serve
as an advertisement to get more customers to sign up
for Prime. As of September 2017, Prime had 49 mil-
lion subscribers in the United States, representing
about 44 percent of households.
Amazon is a master at providing what’s known as
“consumer convenience.” E-commerce is soaring and
food-delivery businesses are taking off because people
are too busy or otherwise occupied to leave their
homes to go out and shop. Americans are ordering
more of their groceries and meals online. A study com-
missioned by the market-research firm Euromonitor
projects that the online market is projected to grow 15
times faster than the rest of the restaurant business
through the end of the decade. Amazon can continue
to sell groceries online but it can also provide the cus-
tomer experience of shopping for food in person.
Whole Foods can also be used as a delivery net-
work for Amazon’s other non-grocery products.
Amazon has been trying to open warehouses closer
to customers so it can deliver orders in as little
as two hours, and Whole Foods stores will bring
Amazon physically closer to its shoppers. The stores
could become locations for returning online orders
of all kinds. Amazon could also use them to cut deliv-
ery times for online orders.
Several analysts have observed that Whole Foods’
urban and suburban locations are so valuable for
Amazon’s delivery business that the deal could
be worthwhile even if Whole Foods pretty much
stopped selling food. When Amazon bought Whole
Foods, it acquired 431 U.S. upper-income, prime-
location distribution points for everything it does.
With Whole Foods’ footprint in affluent areas and
Amazon’s expertise in supply chain and delivery, it
could upend both food retailing and food delivery.
One expert has called Amazon a “life bundle,” par-
ticularly for affluent Americans. Amazon Prime could
become the cable bundle of the future—an annual
subscription to a group of diverse services that give
Amazon a dependable revenue stream and a grow-
ing, loyal customer base. More than half of American
households with incomes over $100,000 are already
Prime subscribers, and they spend more than $1,000
a year using this service. Affluent families regularly
spend $500 a month at Whole Foods. Once Amazon
owns Whole Foods, its richest customers could be ex-
pected to spend thousands of dollars a year through
Amazon. As Whole Foods customers are urged to sign
up for Amazon Prime—and as Prime customers get
enticing deals at Whole Foods—Amazon’s penetration
Chapter 3 Information Systems, Organizations, and Strategy 117
of the upscale market should grow, even as it offers
discounts to lower-income Americans.
Amazon started making changes to Whole Foods
as soon as the acquisition was completed in August
2017. The day the acquisition went through, prices
of many Whole Foods staples dropped. Prices of
some items decreased by up to 40 percent. An identi-
cal basket of items from a Whole Foods location in
Brooklyn went from $97.76 pre-acquisition to $75.85
post-acquisition. In November 2017, Whole Foods
announced another round of price cuts, with a focus
on holiday staples and best-sellers as well as Whole
Foods’ private-label 365 line of products.
In February 2018, Amazon and Whole Foods
launched a test to deliver groceries and other goods
directly from Whole Foods in four cities across the
United States. Whole Foods was basically used as an
Amazon depot. Customers can order fresh produce,
seafood, meat, flowers, baked goods, and dairy prod-
ucts for delivery, with items arriving at their door-
step within two hours. The company plans to roll
out the service through Prime Now to more cities.
Later in February, Amazon extended its 5 percent
cash-back benefit to Prime members shopping at
Whole Foods with the Amazon Prime Rewards Visa
Card. Selected Whole Foods stores have begun selling
Amazon technology products, including the Amazon
Echo voice- controlled speaker system, Echo Dots,
Fire TV, Kindle e-readers, and Fire tablets.
Whole Foods announced that Amazon Prime
would replace Whole Foods’ loyalty program. And
Whole Foods goods are now available on Amazon.
com, AmazonFresh (Amazon’s grocery delivery ser-
vice), Prime Pantry, and Prime Now. Some Whole
Foods stores have added Amazon Lockers, allowing
customers to have their Amazon.com orders deliv-
ered to a secure location inside certain Whole Foods
stores until it’s time to pick them up. Customers can
also use lockers to return Amazon items. Amazon
and Whole Foods are integrating their point-of-sale
systems to enable more of Amazon’s brands to be
available at Whole Foods, and vice versa.
Buying Whole Foods represents an escalation of
Amazon’s long-running battle with Walmart. Walmart
is the world’s largest and most successful physical
retailer, while Amazon dominates the online com-
merce space. Each wants to move into the other’s
turf: Amazon would like to have a more formidable
physical presence as well as online, while Walmart is
making a big push to expand in e-commerce.
Walmart is the largest seller of groceries in the
United States, and with Sam’s Club, accounts for
about 18 percent of the grocery market. Grocery ac-
counts for 56 percent of Walmart’s total sales, and
grocery shopping is a major driver of store traffic and
customer loyalty. The company is intent on main-
taining its position as the leading U.S. grocer. Walmart
has invested and tested in click-and-collect programs,
stand-alone grocery pick-up sites, and scanning and
paying for items with smartphones. Grocery is where
Walmart really shines. If Walmart loses the grocery
battle to Amazon, it has no chance of ever overtaking
Amazon as the world’s largest e-commerce player.
Online grocery sales were a key part of Walmart’s
e-commerce sales growth in 2017, and management
expects online grocery expansion to be the main
driver of Walmart’s sales growth going forward. But if
Walmart wants to meet their goal of 40 percent growth
in online sales in 2018, it will have to do even more.
Management rolled out same-day grocery delivery to
100 markets by the end of 2018, covering 40 percent
of U.S. households. Deliveries are handled by Uber
Technologies and other providers, with a $9.95 service
fee for a minimum $30 purchase. Walmart’s online
order and pickup service was available at 2,000 stores
by the end of 2018. Management is hoping growth will
continue to increase year over year with rollout of
new stores into the online order and pickup program.
The move into home delivery will help get more
of Walmart’s in-store shoppers to start buying online
as well, where they typically spend twice as much. It
also complements Walmart’s rollout of curbside gro-
cery pickup, now available in 1,200 stores and adding
an additional 1,000 this year.
Walmart will compete against Amazon’s Prime
Now service, which offers free two-hour delivery
to members of its loyalty program. Both companies
have also introduced services that allow delivery
people to enter homes and leave packages inside.
How will the rest of the grocery industry fare as a re-
sult of these developments? Amazon terrifies competi-
tors because it can offer such low prices on so many
different categories of items. If Whole Foods follows
this playbook, shoppers can expect prices to fall, and
other grocery industry players will suffer. Stocks for
Kroger, Costco, and Dollar General all fell more than
six percent when Amazon announced the Whole Foods
acquisition. The merger might be even worse news for
Instacart, the grocery-delivery service that has had a
close relationship with Whole Foods.
http://Amazon.com
http://Amazon.com
http://Amazon.com
118 Part One Organizations, Management, and the Networked Enterprise
There are other forces at work affecting
Amazon-Whole Foods, Walmart, and the grocery
industry’s competitive landscape. Money spent on
dining out has surpassed grocery sales. Instead
of shopping weekly at the supermarket for gro-
ceries to prepare meals at home, consumers are
increasingly snacking and using prepared foods.
Companies in the $1.5 billion meal kit industry
(such as Blue Apron) have moved into the market,
though grocery chains are creating their own pre-
packaged food kits as well.
Grocers are also adapting to surging consumer de-
mand for fresher items, personalized options, and use
of technology to improve the food-buying experience.
Deloitte researchers found an overwhelming majority
of shoppers are deploying digital devices to research
the groceries they intend to buy. Deloitte also found
that shoppers spend more when using digital tools.
Despite the growth of online food shopping and
these other shifts in the competitive landscape, ex-
perts believe the market for supermarkets is strong.
According to brokerage and advisory firm Marcus &
Millichap, there will be a wave of grocery store open-
ings consuming 25 million square feet of commercial
space over the next five years. Domestic chains and
German discount supermarkets Aldi and Lidl are
opening U.S. locations and smaller-format stores are
likely to be part of the mix.
Sources: Kate Taylor, “Here Are the Changes Amazon Is Making
to Whole Foods,” Business Insider, March 2, 2018; Adam Levy,
“Walmart’s Grocery Efforts Probably Aren’t Enough to Overcome
Amazon,” The Motley Fool, March 17, 2018; Matthew Boyle,
“Walmart to Expand Grocery Delivery as Amazon Battle Rages,”
Bloomberg, March 14, 2018; John Cook, “Walmart Counterpunches
Amazon with Plan to Expand Grocery Delivery Service to 100
U.S. Markets,” GeekWire, March 14, 2018; Toby Clarence-Smith,
“Amazon vs. Walmart: Bezos Goes for the Jugular with Whole
Foods Acquisition,” www.Toptal.com, accessed March 21, 2018;
Tom McGee,” Perspective for the Grocery Wars: Shoppers Crave
Experience,” Forbes, September 13, 2017; Derek Thompson, “Why
Amazon Bought Whole Foods,” The Atlantic, June 16, 2017; and
Nick Wingfield and Michael J. de la Merced, “Amazon to Buy
Whole Foods for $13.4 Billion,” New York Times, June 16, 2017.
CASE STUDY QUESTIONS
3-13 Analyze Amazon.com and Walmart using the
value chain and competitive forces models.
3-14 Compare the role of grocery sales in Amazon
and Walmart’s business strategies.
3-15 What role does information technology play in
these strategies?
3-16 Which company is more likely to dominate
grocery retailing? Explain your answer.
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
3-17 Describe the impact of the Internet on each of the five competitive forces.
3-18 What are the main factors that mediate the relationship between information technology and organiza-
tions and that managers need to take into account when developing new information systems? Give a
business example of how each factor would influence the development of new information systems.
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120
MyLab MIS
Discussion Questions: 4-5, 4-6, 4-7; Hands-on MIS Projects: 4-8, 4-9, 4-10, 4-11;
Writing Assignments: 4-17, 4-18; eText with Conceptual Animations
CHAPTER CASES
Are Cars Becoming Big Brother on Wheels?
Will Automation Kill Jobs?
How Harmful Are Smartphones?
Facebook Privacy: Your Life for Sale
VIDEO CASES
What Net Neutrality Means for You
Facebook and Google Privacy: What Privacy?
United States v. Terrorism: Data Mining for
Terrorists and Innocents
Instructional Video:
Viktor Mayer-Schönberger on the Right to Be
Forgotten
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
4-1 What ethical, social, and political issues
are raised by information systems?
4-2 What specific principles for conduct
can be used to guide ethical decisions?
4-3 Why do contemporary information
systems technology and the Internet
pose challenges to the protection
of individual privacy and intellectual
property?
4-4 How have information systems affected
laws for establishing accountability and
liability and the quality of everyday life?
4-5 How will MIS help my career?
Ethical and Social Issues in
Information Systems4CHAPTER
121
Cars today have become sophisticated listening posts on wheels. They can track phone calls and texts, record what radio stations you listen to, mon-itor the speed at which you drive and your braking actions, and even tell
when you are breaking the speed limit, often without your knowledge.
Tens of millions of drivers in the United States are currently being moni-
tored, with that number rising every time a new vehicle is sold or leased. There
are 78 million cars on the road with an embedded cyber connection that can be
used for monitoring drivers. According to research firm Gartner Inc., 98 percent
of new cars sold in the United States and Europe will be connected by 2021.
Since 2014, every new car in the United States comes with an event data
recorder (EDR), which records and stores over a dozen data points, including
vehicle speed, seat belt use, and braking activation. EDR data are available to
any auto maker as well as to insurance companies, which use these stored EDR
data to help establish responsibility for an accident or to detect fraud.
EDRs are mandated and regulated by the U.S. gov-
ernment, but other data-gathering software in today’s
cars is not. Such software underlies numerous sen-
sors, diagnostic systems, in-dash navigation systems,
and built-in cellular connections, as well as driver-
assistance systems to help drivers park, stay in their
lane, avoid rear-ending another car, and steer for
short time periods. All of this software keeps track
of what drivers are doing. Newer cars may record
driver eye movements, the weight of people in the
front seats, and whether the driver’s hands are on the
wheel. Smartphones, whether connected to the car
or not, can also track your activities, including any
texting while driving. Auto makers are able to mine
all this information, as are app developers and com-
panies such as Google or Spotify.
With the exception of medical information, the United States has few regu-
lations governing what data companies can gather and how they can use the
data. Companies generally are not required to conceal names or other personal
details. In most cases the driver must consent to allowing his or her personal
information to be tracked or monitored. Many people unwittingly provide this
consent when they check off a box on one of the lengthy service agreement
forms required to register a car’s in-dash system or navigation app.
Collecting such large amounts of personal data generated by drivers has
raised concerns about whether automakers and others are doing enough to pro-
tect people’s privacy. Drivers may welcome the use of information to relay
helpful diagnostic information or updates on nearby traffic jams. But they do
Are Cars Becoming Big Brother on Wheels?
© Metamorworks/Shutterstock
122 Part One Organizations, Management, and the Networked Enterprise
not necessarily endorse other uses, and automakers have refrained from com-
menting on future data collection plans and policies.
Automakers argue that the data are valuable for improving vehicle perfor-
mance and vehicle safety and soon will be able to reduce traffic accidents and
fatalities. Amassing detailed data about human driving behavior is also essential
for the development of self-driving cars. But privacy experts believe the prac-
tice is dangerous. With enough data about driver behavior, individual profiles
as unique as fingerprints could be developed. Trips to businesses reveal buy-
ing habits and relationships that could be valuable to corporations, government
agencies, or law enforcement. For example, frequent visits to a liquor store or
mental health clinic could reveal information about someone’s drinking habits
or health problems. People obviously would not want such confidential data
shared with others.
Sources: Peter Holley, “Big Brother on Wheels: Why Your Car Company May Know More
About You Than Your Spouse.” Washington Post, January 15, 2018; Christina Rogers, “What
Your Car Knows about You,” Wall Street Journal, August 18, 2018; John R. Quain, “Cars Suck Up
Data About You. Where Does It All Go?” New York Times, July 27, 2017; and Russ Heaps, “Data
Collection for Self-Driving Cars Could Be Risking Your Privacy,” Autotrader, September 2016.
The challenges that connected vehicles and big data pose to privacy, described in the chapter-opening case, show that technology can be a double-edged
sword. It can be the source of many benefits, including the capability to make
driving safer and more efficient. At the same time, digital technology creates new
opportunities for invading privacy and using information that could cause harm.
The chapter-opening diagram calls attention to important points this case and
this chapter raise. Developments in data management technology, the Internet
of Things (IoT), and analytics have created opportunities for organizations to
use big data to improve operations and decision making. Big data analytics are
now being applied to all the data generated by motor vehicles, especially those
with Internet connections. The auto makers and other organizations described
here are benefiting from using big data to monitor vehicle performance and
driver behavior and to provide drivers with helpful tools for driving safely and
caring for their cars. However, the use of big data from motor vehicles is also
taking benefits away from individuals. Individuals might be subject to job dis-
crimination or higher insurance rates because organizations have new tools
to assemble and analyze huge quantities of data about their driving behavior.
There are very few privacy protections for all the personal data gathered from
car driving. New privacy protection laws and policies need to be developed to
keep up with the technologies for assembling and analyzing big data.
This case illustrates an ethical dilemma because it shows two sets of interests
at work, the interests of organizations that have raised profits or even helped
many people with the data generated by connected vehicles and those who fer-
vently believe that businesses and public organizations should not use big data
analysis to invade privacy or harm individuals. As a manager, you will need to
be sensitive to both the positive and negative impacts of information systems
for your firm, employees, and customers. You will need to learn how to resolve
ethical dilemmas involving information systems.
Chapter 4 Ethical and Social Issues in Information Systems 123
Business
Solutions
Management
Organization
Vehicle and Driver
Monitoring Systems
Technology
Information
System
Business
Problem
• Opportunities from new technology
• Undeveloped legal environment
• Collect car-
generated data
• Analyze car/driver
data
• Monitor vehicle performance
• Monitor driver behavior
• Provide diagnostic and
navigation tools
• Assemble individual profiless
• Invade privacy?
• Increase e�ciency
• Increase safety
• Internet of Things
• Sensors
• Smartphones
• EDR
• In-car diagnostic/navigation/safety/
entertainment systems
• Develop big data
strategy
• Develop privacy
policies
Here are some questions to think about: Does analyzing big data from motor
vehicles create an ethical dilemma? Why or why not? Should there be new
privacy laws to protect personal data collected from cars? Why or why not?
4-1 What ethical, social, and political issues
are raised by information systems?
In the past 20 years, we have witnessed, arguably, one of the most ethically
challenging periods for U.S. and global business. Table 4.1 provides a small sam-
ple of recent cases demonstrating failed ethical judgment by senior and middle
managers. These lapses in ethical and business judgment occurred across a
broad spectrum of industries.
In today’s new legal environment, managers who violate the law and are
convicted will most likely spend time in prison. U.S. federal sentencing guide-
lines adopted in 1987 mandate that federal judges impose stiff sentences on
business executives based on the monetary value of the crime, the presence of
a conspiracy to prevent discovery of the crime, the use of structured financial
transactions to hide the crime, and failure to cooperate with prosecutors (U.S.
Sentencing Commission, 2004).
Although business firms would, in the past, often pay for the legal defense of
their employees enmeshed in civil charges and criminal investigations, firms
are now encouraged to cooperate with prosecutors to reduce charges against
the entire firm for obstructing investigations. More than ever, as a manager or
an employee, you will have to decide for yourself what constitutes proper legal
and ethical conduct.
These major instances of failed ethical and legal judgment were not master-
minded by information systems departments, but information systems were
instrumental in many of these frauds. In many cases, the perpetrators of these
crimes artfully used financial reporting information systems to bury their deci-
sions from public scrutiny.
124 Part One Organizations, Management, and the Networked Enterprise
We deal with the issue of control in information systems in Chapter 8. In this
chapter, we will talk about the ethical dimensions of these and other actions
based on the use of information systems.
Ethics refers to the principles of right and wrong that individuals, acting as
free moral agents, use to make choices to guide their behavior. Information
systems raise new ethical questions for both individuals and societies because
they create opportunities for intense social change and, thus, threaten existing
distributions of power, money, rights, and obligations. Like other technologies,
such as steam engines, electricity, and the telephone, information technology
can be used to achieve social progress, but it can also be used to commit crimes
and threaten cherished social values. The development of information technol-
ogy will produce benefits for many and costs for others.
Ethical issues in information systems have been given new urgency by the
rise of the Internet and e-commerce. Internet and digital technologies make it
easier than ever to assemble, integrate, and distribute information, unleashing
new concerns about the appropriate use of customer information, the protec-
tion of personal privacy, and the protection of intellectual property.
Other pressing ethical issues that information systems raise include estab-
lishing accountability for the consequences of information systems, setting
standards to safeguard system quality that protects the safety of the individual
and society, and preserving values and institutions considered essential to the
quality of life in an information society. When using information systems, it is
essential to ask, “What is the ethical and socially responsible course of action?”
A Model for Thinking about Ethical, Social,
and Political Issues
Ethical, social, and political issues are closely linked. The ethical dilemma
you may face as a manager of information systems typically is reflected in
social and political debate. One way to think about these relationships is
TABLE 4.1 RECENT EXAMPLES OF FAILED ETHICAL JUDGMENT BY SENIOR MANAGERS
Wells Fargo (2018) Wells Fargo bank admitted to opening millions of false accounts, manipulating terms
of mortgages, and forcing auto loan customers to purchase unneeded insurance.
The bank was fined $2.5 billion by the federal government.
Deerfield Management (2017) Washington, D.C., hedge fund indicted for using confidential information about
government financing to trade shares in healthcare companies that would be
affected by the changes.
General Motors, Inc. (2015) General Motors CEO admitted the firm covered up faulty ignition switches for more
than a decade, resulting in the deaths of at least 114 customers. More than 100
million vehicles worldwide were affected.
Takata Corporation (2015) Takata executives admitted they covered up faulty airbags used in millions of cars
over many years. Three executives were indicted on criminal charges and Takata was
fined $1 billion. Takata filed for bankruptcy in June 2017.
GlaxoSmithKline LLC (2012) The global healthcare giant admitted to unlawful and criminal promotion of certain
prescription drugs, its failure to report certain safety data, and its civil liability for
alleged false price reporting practices. Fined $3 billion, the largest healthcare fraud
settlement in U.S. history.
Bank of America (2012) Federal prosecutors charged Bank of America and its affiliate, Countrywide Financial,
with defrauding government-backed mortgage agencies by churning out loans at a
rapid pace without proper controls. Prosecutors sought $1 billion in penalties from
the bank.
Chapter 4 Ethical and Social Issues in Information Systems 125
shown in Figure 4.1. Imagine society as a more or less calm pond on a sum-
mer day, a delicate ecosystem in partial equilibrium with individuals and
with social and political institutions. Individuals know how to act in this
pond because social institutions (family, education, organizations) have de-
veloped well-honed rules of behavior, and these are supported by laws de-
veloped in the political sector that prescribe behavior and promise sanctions
for violations. Now toss a rock into the center of the pond. What happens?
Ripples, of course.
Imagine instead that the disturbing force is a powerful shock of new informa-
tion technology and systems hitting a society more or less at rest. Suddenly, in-
dividual actors are confronted with new situations often not covered by the old
rules. Social institutions cannot respond overnight to these ripples—it may take
years to develop etiquette, expectations, social responsibility, politically cor-
rect attitudes, or approved rules. Political institutions also require time before
developing new laws and often require the demonstration of real harm before
they act. In the meantime, you may have to act. You may be forced to act in a
legal gray area.
We can use this model to illustrate the dynamics that connect ethical, social,
and political issues. This model is also useful for identifying the main moral
dimensions of the information society, which cut across various levels of
action—individual, social, and political.
FIGURE 4.1 THE RELATIONSHIP BETWEEN ETHICAL, SOCIAL, AND
POLITICAL ISSUES IN AN INFORMATION SOCIETY
The introduction of new information technology has a ripple effect, raising new ethical,
social, and political issues that must be dealt with on the individual, social, and politi-
cal levels. These issues have five moral dimensions: information rights and obligations,
property rights and obligations, system quality, quality of life, and accountability and
control.
System Quality
Ethical Issues
Social Issues
Political Issues
Polity
Society
Individual
Quality of Life
Accountability
and Control
Information
Rights and
Obligations
Property Rights
and Obligations
Information
Technology and
Systems
126 Part One Organizations, Management, and the Networked Enterprise
Five Moral Dimensions of the Information Age
The major ethical, social, and political issues that information systems raise
include the following moral dimensions.
• Information rights and obligations What information rights do individuals and
organizations possess with respect to themselves? What can they protect?
• Property rights and obligations How will traditional intellectual property rights
be protected in a digital society in which tracing and accounting for owner-
ship are difficult, and ignoring such property rights is so easy?
• Accountability and control Who can and will be held accountable and liable for
the harm done to individual and collective information and property rights?
• System quality What standards of data and system quality should we demand
to protect individual rights and the safety of society?
• Quality of life What values should be preserved in an information- and
knowledge-based society? Which institutions should we protect from
violation? Which cultural values and practices does the new information
technology support?
We explore these moral dimensions in detail in Section 4-3.
Key Technology Trends that Raise Ethical Issues
Ethical issues long preceded information technology. Nevertheless, information
technology has heightened ethical concerns, taxed existing social arrangements,
and made some laws obsolete or severely crippled. Five key technological
trends are responsible for these ethical stresses, summarized in Table 4.2.
The doubling of computing power every 18 months has made it possible
for most organizations to use information systems for their core production
processes. As a result, our dependence on systems and our vulnerability to
system errors and poor data quality have increased. Social rules and laws have
not yet adjusted to this dependence. Standards for ensuring the accuracy and
reliability of information systems (see Chapter 8) are not universally accepted
or enforced.
Advances in data storage techniques and rapidly declining storage costs have
been responsible for the proliferation of databases on individuals—employees,
customers, and potential customers—maintained by private and public organi-
zations. These advances in data storage have made the routine violation of indi-
vidual privacy both inexpensive and effective. Enormous data storage systems
TABLE 4.2 TECHNOLOGY TRENDS THAT RAISE ETHICAL ISSUES
TREND IMPACT
Computing power doubles
every 18 months
More organizations depend on computer systems for critical operations and become
more vulnerable to system failures.
Data storage costs rapidly
decline
Organizations can easily maintain detailed databases on individuals. There are no
limits on the data collected about you.
Data analysis advances Companies can analyze vast quantities of data gathered on individuals to develop
detailed profiles of individual behavior. Large-scale population surveillance is enabled.
Networking advances The cost of moving data and making data accessible from anywhere falls
exponentially. Access to data becomes more difficult to control.
Mobile device growth impact Individual cell phones may be tracked without user consent or knowledge. The
always-on device becomes a tether.
Chapter 4 Ethical and Social Issues in Information Systems 127
for terabytes and petabytes of data are now available on-site or as online ser-
vices for firms of all sizes to use in identifying customers.
Advances in data analysis techniques for large pools of data are another
technological trend that heightens ethical concerns because companies and
government agencies can find out highly detailed personal information about
individuals. With contemporary data management tools (see Chapter 6), com-
panies can assemble and combine myriad pieces of information about you
stored on computers much more easily than in the past.
Think of all the ways you generate digital information about yourself—credit
card purchases; telephone calls; magazine subscriptions; video rentals; mail-
order purchases; banking records; local, state, and federal government records
(including court and police records); and visits to websites. Put together and
mined properly, this information could reveal not only your credit information
but also your driving habits, your tastes, your associations, what you read and
watch, and your political interests.
Companies purchase relevant personal information from these sources to
help them more finely target their marketing campaigns. Chapters 6 and 12 de-
scribe how companies can analyze large pools of data from multiple sources to
identify buying patterns of customers rapidly and make individualized recom-
mendations. The use of computers to combine data from multiple sources and
create digital dossiers of detailed information on individuals is called profiling.
For example, several thousand of the most popular websites allow DoubleClick
(owned by Google), an Internet advertising broker, to track the activities of
their visitors in exchange for revenue from advertisements based on visitor in-
formation DoubleClick gathers. DoubleClick uses this information to create a
profile of each online visitor, adding more detail to the profile as the visitor
accesses an associated DoubleClick site. Over time, DoubleClick can create a
detailed dossier of a person’s spending and computing habits on the web that is
sold to companies to help them target their web ads more precisely. Advertisers
can combine online consumer information with offline information, such as
credit card purchases at stores.
Credit card purchases can
make personal informa-
tion available to market
researchers, telemarketers,
and direct mail companies.
Advances in information
technology facilitate the
invasion of privacy.
© Dedivan1923/123RF
128 Part One Organizations, Management, and the Networked Enterprise
LexisNexis Risk Solutions (formerly ChoicePoint) gathers data from police,
criminal, and motor vehicle records, credit and employment histories, current
and previous addresses, professional licenses, and insurance claims to assemble
and maintain dossiers on almost every adult in the United States. The company
sells this personal information to businesses and government agencies. Demand
for personal data is so enormous that data broker businesses, such as Risk
Solutions, Acxiom, Nielsen, Experian, Equifax, and CoreLogic, are flourishing.
The two largest credit card networks, Visa Inc. and Mastercard Inc., have agreed
to link credit card purchase information with consumer social network and other
information to create customer profiles that could be sold to advertising firms.
A data analysis technology called nonobvious relationship awareness
(NORA) has given both the government and the private sector even more
powerful profiling capabilities. NORA can take information about people from
many disparate sources, such as employment applications, telephone records,
customer listings, and wanted lists, and correlate relationships to find obscure
connections that might help identify criminals or terrorists (see Figure 4.2).
NORA technology scans data and extracts information as the data are being
generated so that it could, for example, instantly discover a man at an airline
ticket counter who shares a phone number with a known terrorist before that
person boards an airplane. The technology is considered a valuable tool for
homeland security but does have privacy implications because it can provide
such a detailed picture of the activities and associations of a single individual.
FIGURE 4.2 NONOBVIOUS RELATIONSHIP AWARENESS (NORA)
NORA technology can take information about people from disparate sources and find
obscure, nonobvious relationships. It might discover, for example, that an applicant for
a job at a casino shares a telephone number with a known criminal and issue an alert to
the hiring manager.
Customer
Transaction
Systems
Incident and
Arrest Systems
Telephone
Records
Human
Resources
Systems
“Watch” Lists
Name standardization
Match
Merge
NORA Alerts
Chapter 4 Ethical and Social Issues in Information Systems 129
Finally, advances in networking, including the Internet, promise to reduce
greatly the costs of moving and accessing large quantities of data and open the
possibility of mining large pools of data remotely by using small desktop ma-
chines, mobile devices, and cloud servers, permitting an invasion of privacy on
a scale and with a precision heretofore unimaginable.
4-2 What specific principles for conduct can
be used to guide ethical decisions?
Ethics is a concern of humans who have freedom of choice. Ethics is about indi-
vidual choice: When faced with alternative courses of action, what is the correct
moral choice? What are the main features of ethical choice?
Basic Concepts: Responsibility, Accountability,
and Liability
Ethical choices are decisions made by individuals who are responsible for the
consequences of their actions. Responsibility is a key element of ethical action.
Responsibility means that you accept the potential costs, duties, and obligations
for the decisions you make. Accountability is a feature of systems and social
institutions; it means that mechanisms are in place to determine who took action
and who is responsible. Systems and institutions in which it is impossible to find
out who took what action are inherently incapable of ethical analysis or ethical
action. Liability extends the concept of responsibility further to the area of laws.
Liability is a feature of political systems in which a body of laws is in place that
permits individuals to recover the damages done to them by other actors, sys-
tems, or organizations. Due process is a related feature of law-governed societies
and is a process in which laws are known and understood, and ability exists to
appeal to higher authorities to ensure that the laws are applied correctly.
These basic concepts form the underpinning of an ethical analysis of infor-
mation systems and those who manage them. First, information technologies
are filtered through social institutions, organizations, and individuals. Systems
do not have impacts by themselves. Whatever information system effects exist
are products of institutional, organizational, and individual actions and behav-
iors. Second, responsibility for the consequences of technology falls clearly
on the institutions, organizations, and individual managers who choose to use
the technology. Using information technology in a socially responsible man-
ner means that you can and will be held accountable for the consequences
of your actions. Third, in an ethical, political society, individuals and others
can recover damages done to them through a set of laws characterized by due
process.
Ethical Analysis
When confronted with a situation that seems to present ethical issues, how
should you analyze it? The following five-step process should help:
1. Identify and describe the facts clearly Find out who did what to whom and
where, when, and how. In many instances, you will be surprised at the er-
rors in the initially reported facts, and often you will find that simply getting
the facts straight helps define the solution. It also helps to get the opposing
parties involved in an ethical dilemma to agree on the facts.
130 Part One Organizations, Management, and the Networked Enterprise
2. Define the conflict or dilemma and identify the higher-order values involved
Ethical, social, and political issues always reference higher values. The
parties to a dispute all claim to be pursuing higher values (e.g., freedom,
privacy, protection of property, or the free enterprise system). Typically, an
ethical issue involves a dilemma: two diametrically opposed courses of
action that support worthwhile values. For example, the chapter-opening
case study illustrates two competing values: the need to make organizations
more efficient and cost-effective and the need to respect individual privacy.
3. Identify the stakeholders Every ethical, social, and political issue has stake-
holders: players in the game who have an interest in the outcome, who have
invested in the situation, and usually who have vocal opinions. Find out the
identity of these groups and what they want. This will be useful later when
designing a solution.
4. Identify the options that you can reasonably take You may find that none of the
options satisfy all the interests involved but that some options do a better job
than others. Sometimes arriving at a good or ethical solution may not always
be a balancing of consequences to stakeholders.
5. Identify the potential consequences of your options Some options may be ethi-
cally correct but disastrous from other points of view. Other options may
work in one instance but not in similar instances. Always ask yourself, “What
if I choose this option consistently over time?”
Candidate Ethical Principles
Once your analysis is complete, what ethical principles or rules should you use
to make a decision? What higher-order values should inform your judgment?
Although you are the only one who can decide which among many ethical prin-
ciples you will follow, and how you will prioritize them, it is helpful to consider
some ethical principles with deep roots in many cultures that have survived
throughout recorded history:
1. Do unto others as you would have them do unto you (the Golden Rule). Put-
ting yourself in the place of others, and thinking of yourself as the object of
the decision, can help you think about fairness in decision making.
2. If an action is not right for everyone to take, it is not right for anyone
(Immanuel Kant’s categorical imperative). Ask yourself, “If everyone did
this, could the organization, or society, survive?”
3. If an action cannot be taken repeatedly, it is not right to take at all. This is
the slippery slope rule: An action may bring about a small change now that
is acceptable, but if it is repeated, it would bring unacceptable changes in the
long run. In the vernacular, it might be stated as “once started down a slip-
pery path, you may not be able to stop.”
4. Take the action that achieves the higher or greater value (utilitarian
principle). This rule assumes you can prioritize values in a rank order and
understand the consequences of various courses of action.
5. Take the action that produces the least harm or the least potential cost (risk
aversion principle). Some actions have extremely high failure costs of very
low probability (e.g., building a nuclear generating facility in an urban area)
or extremely high failure costs of moderate probability (speeding and auto-
mobile accidents). Avoid actions that have extremely high failure costs; focus
on reducing the probability of accidents occurring.
6. Assume that virtually all tangible and intangible objects are owned by someone
else unless there is a specific declaration otherwise. (This is the ethical no-
free-lunch rule.) If something someone else has created is useful to you, it has
value, and you should assume the creator wants compensation for this work.
Chapter 4 Ethical and Social Issues in Information Systems 131
Actions that do not easily pass these rules deserve close attention and a great
deal of caution. The appearance of unethical behavior may do as much harm to
you and your company as actual unethical behavior.
Professional Codes of Conduct
When groups of people claim to be professionals, they take on special rights
and obligations because of their special claims to knowledge, wisdom, and
respect. Professional codes of conduct are promulgated by associations
of professionals such as the American Medical Association (AMA), the
American Bar Association (ABA), the Association of Information Technology
Professionals (AITP), and the Association for Computing Machinery (ACM).
These professional groups take responsibility for the partial regulation of
their professions by determining entrance qualifications and competence.
Codes of ethics are promises by professions to regulate themselves in the
general interest of society. For example, avoiding harm to others, honor-
ing property rights (including intellectual property), and respecting privacy
are among the General Moral Imperatives of the ACM’s Code of Ethics and
Professional Conduct.
Some Real-World Ethical Dilemmas
Information systems have created new ethical dilemmas in which one set of
interests is pitted against another. For example, many companies use voice
recognition software to reduce the size of their customer support staff by en-
abling computers to recognize a customer’s responses to a series of computer-
ized questions. Many companies monitor what their employees are doing on
the Internet to prevent them from wasting company resources on nonbusiness
activities (see the Chapter 7 Interactive Session on Management).
In each instance, you can find competing values at work, with groups lined
up on either side of a debate. A company may argue, for example, that it has
a right to use information systems to increase productivity and reduce the
size of its workforce to lower costs and stay in business. Employees displaced
by information systems may argue that employers have some responsibility
for their welfare. Business owners might feel obligated to monitor employee
email and Internet use to minimize drains on productivity. Employees might
believe they should be able to use the Internet for short personal tasks in
place of the telephone. A close analysis of the facts can sometimes produce
compromised solutions that give each side half a loaf. Try to apply some of
the principles of ethical analysis described to each of these cases. What is the
right thing to do?
4-3 Why do contemporary information
systems technology and the Internet pose
challenges to the protection of individual
privacy and intellectual property?
In this section, we take a closer look at the five moral dimensions of informa-
tion systems first described in Figure 4.1. In each dimension, we identify the
ethical, social, and political levels of analysis and use real-world examples to
illustrate the values involved, the stakeholders, and the options chosen.
132 Part One Organizations, Management, and the Networked Enterprise
Information Rights: Privacy and Freedom in the
Internet Age
Privacy is the claim of individuals to be left alone, free from surveillance or in-
terference from other individuals or organizations, including the state. Claims
to privacy are also involved at the workplace. Millions of employees are sub-
ject to digital and other forms of high-tech surveillance. Information technology
and systems threaten individual claims to privacy by making the invasion of
privacy cheap, profitable, and effective.
The claim to privacy is protected in the United States, Canadian, and German
constitutions in a variety of ways and in other countries through various stat-
utes. In the United States, the claim to privacy is protected primarily by the
First Amendment guarantees of freedom of speech and association, the Fourth
Amendment protections against unreasonable search and seizure of one’s per-
sonal documents or home, and the guarantee of due process.
Table 4.3 describes the major U.S. federal statutes that set forth the condi-
tions for handling information about individuals in such areas as credit re-
porting, education, financial records, newspaper records, and electronic and
digital communications. The Privacy Act of 1974 has been the most impor-
tant of these laws, regulating the federal government’s collection, use, and
disclosure of information. At present, most U.S. federal privacy laws apply
only to the federal government and regulate very few areas of the private
sector.
Most American and European privacy law is based on a regime called Fair
Information Practices (FIP), first set forth in a report written in 1973 by a
federal government advisory committee and updated in 2010 to take into ac-
count new privacy-invading technology (U.S. Department of Health, Education,
and Welfare, 1973). FIP is a set of principles governing the collection and use of
information about individuals. FIP principles are based on the notion of a mu-
tuality of interest between the record holder and the individual. The individual
has an interest in engaging in a transaction, and the record keeper— usually
a business or government agency—requires information about the individual
to support the transaction. After information is gathered, the individual main-
tains an interest in the record, and the record may not be used to support
other activities without the individual’s consent. In 1998, the Federal Trade
TABLE 4.3 FEDERAL PRIVACY LAWS IN THE UNITED STATES
GENERAL FEDERAL PRIVACY LAWS PRIVACY LAWS AFFECTING PRIVATE INSTITUTIONS
Freedom of Information Act of 1966 as
Amended (5 USC 552)
Fair Credit Reporting Act of 1970
Privacy Act of 1974 as Amended (5 USC 552a) Family Educational Rights and Privacy Act of 1974
Electronic Communications Privacy Act of 1986 Right to Financial Privacy Act of 1978
Computer Matching and Privacy Protection Act
of 1988
Privacy Protection Act of 1980
Computer Security Act of 1987 Cable Communications Policy Act of 1984
Federal Managers Financial Integrity Act
of 1982
Electronic Communications Privacy Act of 1986
Driver’s Privacy Protection Act of 1994 Video Privacy Protection Act of 1988
E-Government Act of 2002 The Health Insurance Portability and Accountability Act (HIPAA) of 1996
Children’s Online Privacy Protection Act (COPPA) of 1998
Financial Modernization Act (Gramm-Leach-Bliley Act) of 1999
Chapter 4 Ethical and Social Issues in Information Systems 133
Commission (FTC) restated and extended the original FIP to provide guidelines
for protecting online privacy. Table 4.4 describes the FTC’s FIP principles.
The FTC’s FIP principles are being used as guidelines to drive changes in pri-
vacy legislation. In July 1998, the U.S. Congress passed the Children’s Online
Privacy Protection Act (COPPA), requiring websites to obtain parental permis-
sion before collecting information on children under the age of 13. The FTC
has recommended additional legislation to protect online consumer privacy in
advertising networks that collect records of consumer web activity to develop
detailed profiles, which other companies then use to target online ads. In 2010,
the FTC added three practices to its framework for privacy. Firms should adopt
privacy by design, building products and services that protect privacy; firms
should increase the transparency of their data practices; and firms should re-
quire consumer consent and provide clear options to opt out of data collection
schemes (Federal Trade Commission, 2012). Other proposed Internet privacy
legislation focuses on protecting the online use of personal identification num-
bers, such as social security numbers; protecting personal information collected
on the Internet from individuals not covered by COPPA; and limiting the use of
data mining for homeland security. In 2015 the FTC was researching new guid-
ance for the protection of privacy and the Internet of Things (IoT), and mobile
health apps (Federal Trade Commission, 2015).
In 2012, the FTC extended its FIP doctrine to address the issue of behavioral
targeting. However, the government, privacy groups, and the online ad industry
are still at loggerheads over two issues. Privacy advocates want both an opt-in
policy at all sites and a national Do Not Track list. The online industry opposes
these moves and continues to insist that an opt-out capability is the only way
to avoid tracking. Nevertheless, there is an emerging consensus among all par-
ties that greater transparency and user control (especially making opting out of
tracking the default option) is required to deal with behavioral tracking. Public
opinion polls show an ongoing distrust of online marketers. Although there are
many studies of privacy issues at the federal level, there has been no significant
legislation in recent years. A 2016 survey by the Pew Research Center found
that 91 percent of Americans feel consumers have lost control of their personal
information online and 86 percent have taken steps to protect their information
online.
Privacy protections have also been added to recent laws deregulating finan-
cial services and safeguarding the maintenance and transmission of health
information about individuals. The Gramm-Leach-Bliley Act of 1999, which
repeals earlier restrictions on affiliations among banks, securities firms, and
TABLE 4.4 FEDERAL TRADE COMMISSION FAIR INFORMATION PRACTICE PRINCIPLES
Notice/awareness (core principle). Websites must disclose their information practices before collecting data. Includes
identification of collector; uses of data; other recipients of data; nature of collection (active/inactive); voluntary or required
status; consequences of refusal; and steps taken to protect confidentiality, integrity, and quality of the data.
Choice/consent (core principle). A choice regime must be in place allowing consumers to choose how their information will
be used for secondary purposes other than supporting the transaction, including internal use and transfer to third parties.
Access/participation. Consumers should be able to review and contest the accuracy and completeness of data collected
about them in a timely, inexpensive process.
Security. Data collectors must take responsible steps to ensure that consumer information is accurate and secure from
unauthorized use.
Enforcement. A mechanism must be in place to enforce FIP principles. This can involve self-regulation, legislation giving
consumers legal remedies for violations, or federal statutes and regulations.
134 Part One Organizations, Management, and the Networked Enterprise
insurance companies, includes some privacy protection for consumers of finan-
cial services. All financial institutions are required to disclose their policies and
practices for protecting the privacy of nonpublic personal information and to
allow customers to opt out of information-sharing arrangements with nonaffili-
ated third parties.
The Health Insurance Portability and Accountability Act (HIPAA) of 1996,
which took effect on April 14, 2003, includes privacy protection for medical
records. The law gives patients access to their personal medical records that
healthcare providers, hospitals, and health insurers maintain and the right to
authorize how protected information about themselves can be used or dis-
closed. Doctors, hospitals, and other healthcare providers must limit the disclo-
sure of personal information about patients to the minimum amount necessary
to achieve a given purpose.
The European Directive on Data Protection
In Europe, privacy protection is much more stringent than in the United States.
Unlike the United States, European countries do not allow businesses to use per-
sonally identifiable information without consumers’ prior consent. In 1998, the
European Commission’s Data Protection Directive went into effect, requiring
companies in European Union (EU) nations to inform people when they collect
information about them and disclose how it will be stored and used. Customers
must provide their informed consent before any company can legally use data
about them, and they have the right to access that information, correct it, and
request that no further data be collected. Informed consent can be defined as
consent given with knowledge of all the facts needed to make a rational decision.
Individual EU member nations translated these principles into their own laws and
prohibited the transfer of personal data to countries, such as the United States,
that do not have similar privacy protection regulations. In 2009, the European
Parliament passed new rules governing the use of third-party cookies for behav-
ioral tracking purposes. These new rules require website visitors to give explicit
consent to be tracked by cookies and websites to have highly visible warnings on
their pages if third-party cookies are being used (European Parliament, 2009).
In 2012, the EU changed its data protection rules to apply to all compa-
nies providing services in Europe and required Internet companies, such as
Amazon, Facebook, Apple, Google, and others, to obtain explicit consent from
consumers about the use of their personal data, delete information at the us-
er’s request, and retain information only as long as absolutely necessary. In
2014, the European Parliament extended greater control to Internet users by
establishing the “right to be forgotten,” which gives EU citizens the right to ask
Google and social network sites to remove their personal information. Although
the privacy policies of U.S. firms (in contrast to the government’s) are largely
voluntary, in Europe, corporate privacy policies are mandated and more consis-
tent across jurisdictions.
The European Commission and the U.S. Department of Commerce devel-
oped a safe harbor framework for U.S. firms. A safe harbor is a private, self-
regulating policy and enforcement mechanism that meets the objectives of
government regulators and legislation but does not involve government regula-
tion or enforcement. U.S. businesses would be allowed to use personal data from
EU countries if the firms developed privacy protection policies that met EU
standards. Enforcement would occur in the United States by using self-policing,
regulation, and government enforcement of fair trade statutes.
By 2015 the EU started taking steps to replace safe harbor and the Data
Protection Directive with a more stringent General Data Protection
Chapter 4 Ethical and Social Issues in Information Systems 135
Regulation (GDPR). The GDPR applies to any firm operating in any EU coun-
try, requires unambiguous consent to use personal data for purposes like track-
ing individuals across the web, and limits the use of data for purposes other
than those for which it was collected (such as constructing user profiles). It also
strengthens the right to be forgotten by allowing individuals to remove personal
data from social platforms like Facebook and to prevent such companies from
collecting any new information. Companies operating in the EU are required to
delete personal information once it no longer serves the purpose for which it
was collected (European Commission, 2016).
Following the revelation that U.S. government intelligence agencies had
access to personal information on EU citizens, and a growing sense that Facebook
and Google were not complying with EU policies, the EU GDPR was revised in
2016 to further strengthen users’ ability to control what information is collected
and retained, with whom it is shared, and how and where it is processed. Fines
for failure to comply were increased to up to 4 percent of a firm’s global rev-
enue (about $1.6 billion for Facebook). GDPR also created a single EU privacy
policy that governed all 28 nations in the Union. One result in Europe, but not
in the United States, is that ad targeting will be reduced, along with the likeli-
hood that ads will follow users around the Internet. The GDPR went into effect
in May 2018. Facebook, Google, and Microsoft are building major data centers in
Europe, and are planning to implement the GDPR regulations worldwide.
Internet Challenges to Privacy
Internet technology has posed new challenges for the protection of individual
privacy. Websites track searches that have been conducted, the websites and
web pages visited, the online content a person has accessed, and what items that
person has inspected or purchased over the web. This monitoring and tracking
of website visitors occurs in the background without the visitor’s knowledge. It
is conducted not just by individual websites but by advertising networks such
as Microsoft Advertising, Yahoo, and Google’s DoubleClick that are capable of
tracking personal browsing behavior across thousands of websites. Both website
publishers and the advertising industry defend tracking of individuals across
the web because doing so allows more relevant ads to be targeted to users, and
this pays for the cost of publishing websites. In this sense, it’s like broadcast
television: advertiser-supported content that is free to the user. The commer-
cial demand for this personal information is virtually insatiable. However, these
practices also impinge on individual privacy.
Cookies are small text files deposited on a computer hard drive when a user
visits websites. Cookies identify the visitor’s web browser software and track
visits to the website. When the visitor returns to a site that has stored a cookie,
the website software searches the visitor’s computer, finds the cookie, and
knows what that person has done in the past. It may also update the cookie,
depending on the activity during the visit. In this way, the site can customize
its content for each visitor’s interests. For example, if you purchase a book on
Amazon.com and return later from the same browser, the site will welcome you
by name and recommend other books of interest based on your past purchases.
DoubleClick, described earlier in this chapter, uses cookies to build its dossiers
with details of online purchases and examine the behavior of website visitors.
Figure 4.3 illustrates how cookies work.
Websites using cookie technology cannot directly obtain visitors’ names and
addresses. However, if a person has registered at a site, that information can be
combined with cookie data to identify the visitor. Website owners can also com-
bine the data they have gathered from cookies and other website monitoring
http://Amazon.com
136 Part One Organizations, Management, and the Networked Enterprise
tools with personal data from other sources, such as offline data collected from
surveys or paper catalog purchases, to develop very detailed profiles of their
visitors.
There are now even more subtle and surreptitious tools for surveillance of
Internet users. Web beacons, also called web bugs (or simply tracking files),
are tiny software programs that keep a record of users’ online clickstreams.
They report this data back to whomever owns the tracking file, which is invis-
ibly embedded in email messages and web pages to monitor the behavior of the
user visiting a website or sending email. Web beacons are placed on popular
websites by third-party firms who pay the websites a fee for access to their audi-
ence. So how common is web tracking? In a path-breaking series of articles in
the Wall Street Journal, researchers examined the tracking files on 50 of the most
popular U.S. websites. What they found revealed a very widespread surveil-
lance system. On the 50 sites, they discovered 3,180 tracking files installed on
visitor computers. Only one site, Wikipedia, had no tracking files. Two-thirds of
the tracking files came from 131 companies whose primary business is identify-
ing and tracking Internet users to create consumer profiles that can be sold to
advertising firms looking for specific types of customers. The biggest trackers
were Google, Microsoft, and Quantcast, all of whom are in the business of sell-
ing ads to advertising firms and marketers. A follow-up study found tracking on
the 50 most popular sites had risen nearly fivefold due to the growth of online
ad auctions where advertisers buy the data about users’ web-browsing behavior.
Other spyware can secretly install itself on an Internet user’s computer by
piggybacking on larger applications. Once installed, the spyware calls out to
websites to send banner ads and other unsolicited material to the user, and it
can report the user’s movements on the Internet to other computers. More in-
formation is available about intrusive software in Chapter 8.
Nearly 80 percent of global Internet users use Google Search and other
Google services, making Google the world’s largest collector of online user data.
Whatever Google does with its data has an enormous impact on online privacy.
Most experts believe that Google possesses the largest collection of personal
FIGURE 4.3 HOW COOKIES IDENTIFY WEB VISITORS
Cookies are written by a website on a visitor’s computer. When the visitor returns to that
website, the web server requests the ID number from the cookie and uses it to access
the data stored by that server on that visitor. The website can then use these data to
display personalized information.
1
3
2
4
User
Windows 10
Internet Explorer 11
jdoe123@aol.com
Cookie
931032944 Previous buyer
Welcome back, Jane Doe!
Server
1. The web server reads the user’s web browser and determines the operating system,
browser name, version number, Internet address, and other information.
2. The server transmits a tiny text file with user identification information called a cookie,
which the user’s browser receives and stores on the user’s computer hard drive.
3. When the user returns to the website, the server requests the contents of any cookie
it deposited previously in the user’s computer.
4. The web server reads the cookie, identifies the visitor, and calls up data on the user.
Chapter 4 Ethical and Social Issues in Information Systems 137
information in the world—more data on more people than any government
agency. The nearest competitor is Facebook.
After Google acquired the advertising network DoubleClick in 2007, it began
using behavioral targeting to help display more relevant ads based on users’
search activities and to target individuals as they move from one site to another
to show them display or banner ads. Google allows tracking software on its
search pages, and using DoubleClick, it can track users across the Internet. One
of its programs enables advertisers to target ads based on the search histories of
Google users, along with any other information the user submits to Google such
as age, demographics, region, and web activities (such as blogging). Google’s
AdSense program enables Google to help advertisers select keywords and de-
sign ads for various market segments based on search histories such as help-
ing a clothing website create and test ads targeted at teenage females. Google
now displays targeted ads on YouTube and Google mobile applications, and its
DoubleClick ad network serves up targeted banner ads.
The United States has allowed businesses to gather transaction information
generated in the marketplace and then use that information for other market-
ing purposes without obtaining the informed consent of the individual whose
information is being used. These firms argue that when users agree to the sites’
terms of service, they are also agreeing to allow the site to collect information
about their online activities. An opt-out model of informed consent permits
the collection of personal information until the consumer specifically requests
the data not to be collected. Privacy advocates would like to see wider use of an
opt-in model of informed consent in which a business is prohibited from col-
lecting any personal information unless the consumer specifically takes action
to approve information collection and use. Here, the default option is no collec-
tion of user information.
The online industry has preferred self-regulation to privacy legislation for
protecting consumers. Members of the advertising network industry, including
Google’s DoubleClick, have created an industry association called the Network
Advertising Initiative (NAI) to develop its own privacy policies to help consum-
ers opt out of advertising network programs and provide consumers redress
from abuses.
Individual firms such as Microsoft, Mozilla Foundation, Yahoo, and Google
have recently adopted policies on their own in an effort to address public con-
cern about tracking people online. Microsoft’s Internet Explorer 11 web browser
was released in 2015 with the opt-out option as the default, but this was changed
to opt-in by default because most websites ignored the request to opt out. Other
browsers have opt-out options, but users need to turn them on, and most users
fail to do this. AOL established an opt-out policy that allows users of its site to
choose not to be tracked. Yahoo follows NAI guidelines and allows opt-out for
tracking and web beacons (web bugs). Google has reduced retention time for
tracking data.
In general, most Internet businesses do little to protect the privacy of their
customers, and consumers do not do as much as they should to protect them-
selves. For commercial websites that depend on advertising to support them-
selves, most revenue derives from selling access to customer information. Of
the companies that do post privacy policies on their websites, about half do not
monitor their sites to ensure that they adhere to these policies. The vast ma-
jority of online customers claim they are concerned about online privacy, but
fewer than half read the privacy statements on websites. In general, website
privacy policies require a law degree to understand and are ambiguous about
key terms (Laudon and Traver, 2019). Today, what firms such as Facebook and
138 Part One Organizations, Management, and the Networked Enterprise
Google call a privacy policy is in fact a data use policy. The concept of privacy
is associated with consumer rights, which firms do not wish to recognize. A data
use policy simply tells customers how the information will be used without any
mention of rights.
A group of students at the University of California at Berkeley conducted
surveys of online users and of complaints filed with the FTC involving privacy
issues. Some results showed that people feel they have no control over the
information collected about them, and they don’t know to whom to complain.
Websites collect all this information but do not let users have access, their poli-
cies are unclear, and they share data with affiliates but never identify who the
affiliates are and how many there are. Web bug trackers are ubiquitous, and
users are not informed of trackers on the pages they visit. The results of this
study and others suggest that consumers want some controls on what personal
information can be collected, what is done with the information, and the abil-
ity to opt out of the entire tracking enterprise. (The full report is available at
knowprivacy.org.)
Technical Solutions
In addition to legislation, there are a few technologies that can protect user
privacy during interactions with websites. Many of these tools are used for en-
crypting email, for making email or surfing activities appear anonymous, for
preventing client computers from accepting cookies, or for detecting and elimi-
nating spyware. For the most part, technical solutions have failed to protect
users from being tracked as they move from one site to another.
Many browsers have Do Not Track options. For users who have selected the
Do Not Track browser option, their browser will send a request to websites
that the user’s behavior not be tracked, but websites are not obligated to honor
these requests. There is no online advertising industry agreement on how to
respond to Do Not Track requests nor, currently, any legislation requiring web-
sites to stop tracking. Private browser encryption software or apps on mobile
devices provide consumers a powerful opportunity to at least keep their mes-
sages private.
Property Rights: Intellectual Property
Contemporary information systems have severely challenged existing laws and
social practices that protect intellectual property. Intellectual property is de-
fined as tangible and intangible products of the mind created by individuals or
corporations. Information technology has made it difficult to protect intellec-
tual property because computerized information can be so easily copied or dis-
tributed on networks. Intellectual property is subject to a variety of protections
under four legal traditions: copyright, patents, trademarks, and trade secrets.
Copyright
Copyright is a statutory grant that protects creators of intellectual property
from having their work copied by others for any purpose during the life of
the author plus an additional 70 years after the author’s death. For corporate-
owned works, copyright protection lasts for 95 years after their initial creation.
Congress has extended copyright protection to books, periodicals, lectures,
dramas, musical compositions, maps, drawings, artwork of any kind, and mo-
tion pictures. The intent behind copyright laws has been to encourage creativ-
ity and authorship by ensuring that creative people receive the financial and
other benefits of their work. Most industrial nations have their own copyright
http://knowprivacy.org
Chapter 4 Ethical and Social Issues in Information Systems 139
laws, and there are several international conventions and bilateral agreements
through which nations coordinate and enforce their laws.
In the mid-1960s, the Copyright Office began registering software programs,
and in 1980, Congress passed the Computer Software Copyright Act, which
clearly provides protection for software program code and copies of the original
sold in commerce; it sets forth the rights of the purchaser to use the software
while the creator retains legal title.
Copyright protects against copying entire programs or their parts. Damages
and relief are readily obtained for infringement. The drawback to copyright
protection is that the underlying ideas behind a work are not protected, only
their manifestation in a work. A competitor can use your software, understand
how it works, and build new software that follows the same concepts without
infringing on a copyright.
Look-and-feel copyright infringement lawsuits are precisely about the dis-
tinction between an idea and its expression. For instance, in the early 1990s,
Apple Computer sued Microsoft Corporation and Hewlett-Packard for in-
fringement of the expression of Apple’s Macintosh interface, claiming that the
defendants copied the expression of overlapping windows. The defendants
countered that the idea of overlapping windows can be expressed only in a
single way and, therefore, was not protectable under the merger doctrine of
copyright law. When ideas and their expression merge, the expression cannot
be copyrighted.
In general, courts appear to be following the reasoning of a 1989 case—Brown
Bag Software v. Symantec Corp—in which the court dissected the elements of
software alleged to be infringing. The court found that similar concept, func-
tion, general functional features (e.g., drop-down menus), and colors are not
protectable by copyright law (Brown Bag Software v. Symantec Corp., 1992).
Patents
A patent grants the owner an exclusive monopoly on the ideas behind an
invention for 20 years. The congressional intent behind patent law was to
ensure that inventors of new machines, devices, or methods receive the full
financial and other rewards of their labor and yet make widespread use of the
invention possible by providing detailed diagrams for those wishing to use the
idea under license from the patent’s owner. The granting of a patent is deter-
mined by the United States Patent and Trademark Office and relies on court
rulings.
The key concepts in patent law are originality, novelty, and invention. The
Patent Office did not accept applications for software patents routinely until
a 1981 Supreme Court decision held that computer programs could be part of
a patentable process. Since that time, hundreds of patents have been granted,
and thousands await consideration.
The strength of patent protection is that it grants a monopoly on the underly-
ing concepts and ideas of software. The difficulty is passing stringent criteria
of nonobviousness (e.g., the work must reflect some special understanding and
contribution), originality, and novelty as well as years of waiting to receive
protection.
In what some call the patent trial of the century, in 2011, Apple sued
Samsung for violating its patents for iPhones, iPads, and iPods. On August 24,
2012, a California jury in federal district court awarded Apple $1 billion in dam-
ages and prohibited Samsung from selling its new Galaxy 10 tablet computer
in the United States. The decision established criteria for determining just
how close a competitor can come to an industry-leading and standard-setting
140 Part One Organizations, Management, and the Networked Enterprise
product like Apple’s iPhone before it violates the design and utility patents
of the leading firm. Samsung subsequently won a patent infringement case
against Apple that banned a handful of older iPhone and iPad devices. In
2014, Apple sued Samsung again, claiming infringement of five patents cover-
ing hardware and software techniques for handling photos, videos, and lists
used on the Samsung Galaxy 5. In 2015, the U.S. Court of Appeals reaffirmed
that Samsung had copied specific design patents, but reduced the damages
asked by Apple from $2 billion to $930 million. This lawsuit returned to court
in May 2018 to consider how to calculate the damages caused by Samsung’s
infringement.
To make matters more complicated, Apple has been one of Samsung’s largest
customers for flash memory processors, graphic chips, solid-state drives, and
display parts that are used in Apple’s iPhones, iPads, iPod Touch devices, and
MacBooks. The Samsung and Apple patent cases are indicative of the complex
relationships among the leading computer firms.
Trademarks
Trademarks are the marks, symbols, and images used to distinguish products
in the marketplace. Trademark laws protect consumers by ensuring they re-
ceive what they paid for. These laws also protect the investments that firms
have made to bring products to market. Typical trademark infringement viola-
tions occur when one firm appropriates or pirates the marks of a competing
firm. Infringement also occurs when firms dilute the value of another firm’s
marks by weakening the connection between a mark and the product. For in-
stance, if a search engine firm copies the trademarked Google icon, colors, and
images, it would be infringing on Google’s trademarks. It would also be diluting
the connection between the Google search service and its trademarks, poten-
tially creating confusion in the marketplace.
Trade Secrets
Any intellectual work product—a formula, device, pattern, or compilation of
data—used for a business purpose can be classified as a trade secret, provided
it is not based on information in the public domain. Protections for trade se-
crets vary from state to state. In general, trade secret laws grant a monopoly on
the ideas behind a work product, but it can be a very tenuous monopoly.
Software that contains novel or unique elements, procedures, or compila-
tions can be considered a trade secret. Trade secret law protects the actual ideas
in a work product, not only their manifestation. To make this claim, the creator
or owner must take care to bind employees and customers with nondisclosure
agreements and prevent the secret from falling into the public domain.
The limitation of trade secret protection is that, although virtually all soft-
ware programs of any complexity contain unique elements of some sort, it is
difficult to prevent the ideas in the work from falling into the public domain
when the software is widely distributed.
Challenges to Intellectual Property Rights
Contemporary information technologies, especially software, pose severe chal-
lenges to existing intellectual property regimes and, therefore, create significant
ethical, social, and political issues. Digital media differ from books, periodicals,
and other media in terms of ease of replication; ease of transmission; ease of alter-
ation; compactness, making theft easy; and difficulties in establishing uniqueness.
Chapter 4 Ethical and Social Issues in Information Systems 141
The proliferation of digital networks, including the Internet, has made it
even more difficult to protect intellectual property. Before widespread use
of networks, copies of software, books, magazine articles, or films had to be
stored on physical media, such as paper, computer disks, or videotape, creating
some hurdles to distribution. Using networks, information can be more widely
reproduced and distributed. The BSA Global Software Survey conducted by
International Data Corporation and The Software Alliance (also known as BSA)
reported that 37 percent of the software installed on personal computers was
unlicensed in 2018 (The Software Alliance, 2018).
The Internet was designed to transmit information freely around the world,
including copyrighted information. You can easily copy and distribute virtually
anything to millions of people worldwide, even if they are using different types
of computer systems. Information can be illicitly copied from one place and
distributed through other systems and networks even though these parties do
not willingly participate in the infringement.
Individuals have been illegally copying and distributing digitized music files
on the Internet for several decades. File-sharing services such as Napster and,
later, Grokster, Kazaa, Morpheus, Megaupload, and The Pirate Bay sprang up
to help users locate and swap digital music and video files, including those
protected by copyright. Illegal file sharing became so widespread that it threat-
ened the viability of the music recording industry and, at one point, consumed
20 percent of Internet bandwidth. The recording industry won several legal bat-
tles for shutting these services down, but it has not been able to halt illegal file
sharing entirely. The motion picture and cable television industries are waging
similar battles. Several European nations have worked with U.S. authorities to
shut down illegal sharing sites, with mixed results.
As legitimate online music stores such as iTunes and streaming services
such as Pandora expanded, illegal file sharing significantly declined. The Apple
iTunes Store legitimized paying for music and entertainment and created a
closed environment from which music and videos could not be easily copied
and widely distributed unless played on Apple devices. Amazon’s Kindle also
protects the rights of publishers and writers because its books cannot be cop-
ied to the Internet and distributed. Streaming of Internet radio, on services
such as Pandora and Spotify, and Hollywood movies (at sites such as Hulu and
Netflix) also inhibit piracy because the streams cannot be easily recorded on
separate devices and videos cannot be downloaded so easily. Despite these
gains in legitimate online music platforms, artists and record labels have ex-
perienced a 50 percent decline in revenues and the loss of thousands of jobs
since 2000.
The Digital Millennium Copyright Act (DMCA) of 1998 also provides
some copyright protection. The DMCA implemented a World Intellectual
Property Organization Treaty that makes it illegal to circumvent technology-
based protections of copyrighted materials. Internet service providers (ISPs)
are required to take down sites of copyright infringers they are hosting when
the ISPs are notified of the problem. Microsoft and other major software and
information content firms are represented by the Software and Information
Industry Association (SIIA), which lobbies for new laws and enforcement of ex-
isting laws to protect intellectual property around the world. The SIIA runs an
antipiracy hotline for individuals to report piracy activities, offers educational
programs to help organizations combat software piracy, and has published
guidelines for employee use of software.
142 Part One Organizations, Management, and the Networked Enterprise
4-4 How have information systems affected
laws for establishing accountability and
liability and the quality of everyday life?
Along with privacy and property laws, new information technologies are chal-
lenging existing liability laws and social practices for holding individuals and
institutions accountable. If a person is injured by a machine controlled, in
part, by software, who should be held accountable and, therefore, held liable?
Should a social network site like Facebook or Twitter be held liable and ac-
countable for the posting of pornographic material or racial insults, or should
it be held harmless against any liability for what users post (as is true of com-
mon carriers, such as the telephone system)? What about the Internet? If you
outsource your information processing to the cloud, and the cloud provider
fails to provide adequate service, what can you do? Cloud providers often
claim the software you are using is the problem, not the cloud servers.
Computer-Related Liability Problems
In late 2013 hackers obtained credit card, debit card, and additional personal infor-
mation about 70 to 110 million customers of Target, one of the largest U.S. retail-
ers. Target’s sales and reputation took an immediate hit from which it has still not
completely recovered. Target says it has spent over $60 million to strengthen its
systems. In 2015, Target agreed to pay $10 million to customers and $19 million to
Mastercard. It has paid an even greater price through the loss of sales and trust.
Who is liable for any economic harm caused to individuals or businesses whose
credit cards were compromised? Is Target responsible for allowing the breach to
occur despite efforts it did make to secure the information? Or is this just a cost
of doing business in a credit card world where customers and businesses have
insurance policies to protect them against losses? Customers, for instance, have a
maximum liability of $50 for credit card theft under federal banking law.
Are information system managers responsible for the harm that corporate
systems can do? Beyond IT managers, insofar as computer software is part of
a machine, and the machine injures someone physically or economically, the
producer of the software and the operator can be held liable for damages. Insofar
as the software acts like a book, storing and displaying information, courts have
been reluctant to hold authors, publishers, and booksellers liable for contents
(the exception being instances of fraud or defamation); hence, courts have been
wary of holding software authors liable.
In general, it is very difficult (if not impossible) to hold software producers liable
for their software products that are considered to be like books, regardless of the
physical or economic harm that results. Historically, print publishers of books and
periodicals have not been held liable because of fears that liability claims would
interfere with First Amendment rights guaranteeing freedom of expression. The
kind of harm software failures cause is rarely fatal and typically inconveniences
users but does not physically harm them (the exception being medical devices).
What about software as a service? ATMs are a service provided to bank cus-
tomers. If this service fails, customers will be inconvenienced and perhaps
harmed economically if they cannot access their funds in a timely manner.
Should liability protections be extended to software publishers and operators of
defective financial, accounting, simulation, or marketing systems?
Software is very different from books. Software users may develop expec-
tations of infallibility about software; software is less easily inspected than a
Chapter 4 Ethical and Social Issues in Information Systems 143
book, and it is more difficult to compare with other software products for qual-
ity; software claims to perform a task rather than describe a task, as a book
does; and people come to depend on services essentially based on software.
Given the centrality of software to everyday life, the chances are excellent that
liability law will extend its reach to include software even when the software
merely provides an information service.
Telephone systems have not been held liable for the messages transmitted be-
cause they are regulated common carriers. In return for their right to provide tele-
phone service, they must provide access to all, at reasonable rates, and achieve
acceptable reliability. Likewise, cable networks are considered private networks
not subject to regulation, but broadcasters using the public airwaves are subject to a
wide variety of federal and local constraints on content and facilities. In the United
States, with few exceptions, websites are not held liable for content posted on their
sites regardless of whether it was placed there by the website owners or users.
System Quality: Data Quality and System Errors
White Christmas turned into a blackout for millions of Netflix customers and
social network users on December 24, 2012. The blackout was caused by the
failure of Amazon’s cloud computing service (AWS), which provides storage and
computing power for many websites and services, including Netflix. The loss of
service lasted for a day. Amazon blamed it on elastic load balancing, a software
program that balances the loads on all its cloud servers to prevent overload.
Amazon’s cloud computing services have had several subsequent outages, al-
though none as long-lasting as the Christmas Eve outage. In September 2016,
AWS experienced a five-hour outage. Outages at cloud computing services are
rare but recur. These outages have called into question the reliability and qual-
ity of cloud services. Are these outages acceptable?
The debate over liability and accountability for unintentional consequences
of system use raises a related but independent moral dimension: What is an ac-
ceptable, technologically feasible level of system quality? At what point should
system managers say, “Stop testing, we’ve done all we can to perfect this soft-
ware. Ship it!” Individuals and organizations may be held responsible for avoid-
able and foreseeable consequences, which they have a duty to perceive and
correct. The gray area is that some system errors are foreseeable and correct-
able only at very great expense, expense so great that pursuing this level of per-
fection is not feasible economically—no one could afford the product.
For example, although software companies try to debug their products be-
fore releasing them to the marketplace, they knowingly ship buggy products
because the time and cost of fixing all minor errors would prevent these prod-
ucts from ever being released. What if the product was not offered on the mar-
ketplace? Would social welfare as a whole falter and perhaps even decline?
Carrying this further, just what is the responsibility of a producer of computer
services—should it withdraw the product that can never be perfect, warn the
user, or forget about the risk (let the buyer beware)?
Three principal sources of poor system performance are (1) software bugs
and errors, (2) hardware or facility failures caused by natural or other causes,
and (3) poor input data quality. The Chapter 8 Learning Track discusses why
zero defects in software code of any complexity cannot be achieved and why
the seriousness of remaining bugs cannot be estimated. Hence, there is a tech-
nological barrier to perfect software, and users must be aware of the potential
for catastrophic failure. The software industry has not yet arrived at testing
standards for producing software of acceptable but imperfect performance.
144 Part One Organizations, Management, and the Networked Enterprise
Although software bugs and facility catastrophes are likely to be widely reported
in the press, by far the most common source of business system failure is data qual-
ity (see Chapter 6). Few companies routinely measure the quality of their data, but
individual organizations report data error rates ranging from 0.5 to 30 percent.
Quality of Life: Equity, Access, and Boundaries
The negative social costs of introducing information technologies and systems
are beginning to mount along with the power of the technology. Many of these
negative social consequences are not violations of individual rights or property
crimes. Nevertheless, they can be extremely harmful to individuals, societies,
and political institutions. Computers and information technologies potentially
can destroy valuable elements of our culture and society even while they bring
us benefits. If there is a balance of good and bad consequences of using infor-
mation systems, whom do we hold responsible for the bad consequences? Next,
we briefly examine some of the negative social consequences of systems, con-
sidering individual, social, and political responses.
Balancing Power: Center Versus Periphery
An early fear of the computer age was that huge, centralized mainframe com-
puters would centralize power in the nation’s capital, resulting in a Big Brother
society, as was suggested in George Orwell’s novel 1984. The shift toward highly
decentralized client–server computing, coupled with an ideology of empower-
ment of Twitter and social media users, and the decentralization of decision
making to lower organizational levels, until recently reduced the fears of power
centralization in government institutions. Yet much of the empowerment de-
scribed in popular business magazines is trivial. Lower-level employees may
be empowered to make minor decisions, but the key policy decisions can be
as centralized as in the past. At the same time, corporate Internet behemoths
such as Google, Apple, Yahoo, Amazon, and Microsoft have come to dominate
the collection and analysis of personal private information of all citizens. Since
the terrorist attacks against the United States on September 11, 2001, the fed-
eral government has greatly expanded its use of this private sector information
under the authority of the Patriot Act of 2001, and subsequent and secret execu-
tive orders. In this sense, the power of information has become more central-
ized in the hands of a few private oligopolies and large government agencies.
Rapidity of Change: Reduced Response Time to Competition
Information systems have helped to create much more efficient national and
international markets. Today’s rapid-moving global marketplace has reduced
the normal social buffers that permitted businesses many years to adjust to
competition. Time-based competition has an ugly side; the business you work
for may not have enough time to respond to global competitors and may be
wiped out in a year along with your job. We stand the risk of developing a just-
in-time society with just-in-time jobs and just-in-time workplaces, families, and
vacations. One impact of Uber (see Chapter 10) and other on-demand services
firms is to create just-in-time jobs with no benefits or insurance for employees.
Maintaining Boundaries: Family, Work, and Leisure
The danger of ubiquitous computing, telecommuting, nomad computing, mo-
bile computing, and the do-anything-anywhere computing environment is that
it is actually coming true. The traditional boundaries that separate work from
family and just plain leisure have been weakened.
Chapter 4 Ethical and Social Issues in Information Systems 145
Although writers have traditionally worked just about anywhere, the advent of
information systems, coupled with the growth of knowledge-work occupations,
means that more and more people are working when traditionally they would
have been playing or communicating with family and friends. The work um-
brella now extends far beyond the eight-hour day into commuting time, vacation
time, and leisure time. The explosive growth and use of smartphones have only
heightened the sense of many employees that they are never away from work.
Even leisure time spent on the computer threatens these close social rela-
tionships. Extensive Internet and cell phone use, even for entertainment or
recreational purposes, takes people away from their family and friends. Among
middle school and teenage children, it can lead to harmful antisocial behavior,
such as the recent upsurge in cyberbullying.
Weakening these institutions poses clear-cut risks. Family and friends histori-
cally have provided powerful support mechanisms for individuals, and they act
as balance points in a society by preserving private life, providing a place for peo-
ple to collect their thoughts, think in ways contrary to their employer, and dream.
Dependence and Vulnerability
Today, our businesses, governments, schools, and private associations, such
as churches, are incredibly dependent on information systems and are, there-
fore, highly vulnerable if these systems fail. Think of what would happen if the
nation’s electric power grid shut down, with no backup structure to make up
for the loss of the system. With systems now as ubiquitous as the telephone
system, it is startling to remember that there are no regulatory or standard-
setting forces in place that are similar to telephone, electrical, radio, television,
or other public utility technologies. The absence of standards and the criticality
of some system applications will probably call forth demands for national stan-
dards and perhaps regulatory oversight.
Computer Crime and Abuse
New technologies, including computers, create new opportunities for commit-
ting crime by creating new, valuable items to steal, new ways to steal them, and
new ways to harm others. Computer crime is the commission of illegal acts by
Although some people
enjoy the convenience
of working at home, the
do-anything-anywhere
computing environment can
blur the traditional boundar-
ies between work and family
time.
© David Pereiras Villagrá/123RF
146 Part One Organizations, Management, and the Networked Enterprise
using a computer or against a computer system. Simply accessing a computer
system without authorization or with intent to do harm, even by accident, is
now a federal crime. The most frequent types of incidents comprise a greatest
hits list of cybercrime: malware, phishing, network interruption, spyware, and
denial of service attacks (PwC, 2016). The true cost of all computer crime is
unknown, but it is estimated to be in the billions of dollars. You can find a more
detailed discussion of computer crime in Chapter 8.
Computer abuse is the commission of acts involving a computer that may
not be illegal but are considered unethical. The popularity of the Internet, email,
and mobile phones has turned one form of computer abuse— spamming—into
a serious problem for both individuals and businesses. Originally, spam was
junk email an organization or individual sent to a mass audience of Internet
users who had expressed no interest in the product or service being marketed.
Spammers tend to market pornography, fraudulent deals and services, out-
right scams, and other products not widely approved in most civilized societies.
Some countries have passed laws to outlaw spamming or restrict its use. In the
United States, it is still legal if it does not involve fraud and the sender and sub-
ject of the email are properly identified.
Spamming has mushroomed because it costs only a few cents to send thou-
sands of messages advertising wares to Internet users. The percentage of all
email that is spam was estimated at around 60 percent in 2017 (Symantec,
2018). Most spam originates from bot networks, which consist of thousands of
captured PCs that can initiate and relay spam messages. Spam costs for busi-
nesses are very high (estimated at more than $50 billion per year) because of
the computing and network resources and the time required to deal with bil-
lions of unwanted email messages.
Identity and financial-theft cybercriminals are targeting smartphones as users
check email, do online banking, pay bills, and reveal personal information. Cell
phone spam usually comes in the form of SMS text messages, but increasingly, users
are receiving spam in their Facebook News feed and messaging service as well.
ISPs and individuals can combat spam by using spam filtering software to
block suspicious email before it enters a recipient’s email inbox. However, spam
filters may block legitimate messages. Spammers know how to skirt filters by
continually changing their email accounts, by incorporating spam messages in
images, by embedding spam in email attachments and digital greeting cards,
and by using other people’s computers that have been hijacked by botnets (see
Chapter 8). Many spam messages are sent from one country although another
country hosts the spam website.
Spamming is more tightly regulated in Europe than in the United States. In
2002, the European Parliament passed a ban on unsolicited commercial messag-
ing. Digital marketing can be targeted only to people who have given prior consent.
The U.S. CAN-SPAM Act of 2003, which went into effect in 2004, does not
outlaw spamming but does ban deceptive email practices by requiring commer-
cial email messages to display accurate subject lines, identify the true senders,
and offer recipients an easy way to remove their names from email lists. It also
prohibits the use of fake return addresses. A few people have been prosecuted
under this law, but it has had a negligible impact on spamming, in large part
because of the Internet’s exceptionally poor security and the use of offshore
servers and botnets. Most large-scale spamming has moved offshore to Russia
and Eastern Europe, where hackers control global botnets capable of generating
billions of spam messages. One of the largest spam networks in recent years
was the Russian network Festi, based in St. Petersburg. Festi is best known as
the spam generator behind the global Viagra-spam industry.
Chapter 4 Ethical and Social Issues in Information Systems 147
Employment: Trickle-Down Technology and Reengineering
Job Loss
Reengineering work is typically hailed in the information systems community as a
major benefit of new information technology. It is much less frequently noted that
redesigning business processes has caused millions of mid-level factory managers
and clerical workers to lose their jobs. Some economists have sounded new alarms
about information and computer technology threatening middle-class, white-
collar jobs (in addition to blue-collar factory jobs). Erik Brynjolfsson and Andrew
P. McAfee argue that the pace of automation has picked up in recent years be-
cause of a combination of technologies, including robotics, numerically controlled
machines, computerized inventory control, pattern recognition, voice recognition,
and online commerce. One result is that machines can now do a great many jobs
heretofore reserved for humans, including tech support, call center work, X-ray
examination, and even legal document review (Brynjolfsson and McAfee, 2011).
These views contrast with other economists’ assessments that new technolo-
gies created as many or more new jobs than they destroyed. In some cases, em-
ployment has grown or remained unchanged in industries like finance, where
investment in IT capital is highest. For instance, the growth of e-commerce
has led to a decline in retail sales jobs but an increase in jobs for warehouse
workers, supervisors, and delivery work. These economists also believe that
bright, educated workers who are displaced by technology will move to better
jobs in fast-growth industries. Missing from this equation are unskilled, blue-
collar workers and older, less–well-educated middle managers. It is not clear
that these groups can be retrained easily for high-quality, high-paying jobs. The
Interactive Session on Organizations explores this issue.
Equity and Access: Increasing Racial and Social Class
Cleavages
Does everyone have an equal opportunity to participate in the digital age? Will
the social, economic, and cultural gaps that exist in the United States and other
societies be reduced by information systems technology? Or will the cleavages
be increased, permitting the better-off to become even more better-off relative
to others?
These questions have not yet been fully answered because the impact of sys-
tems technology on various groups in society has not been thoroughly studied.
What is known is that information, knowledge, computers, and access to these
resources through educational institutions and public libraries are inequitably
distributed along ethnic and social class lines, as are many other information re-
sources. Several studies have found that low-income groups in the United States
are less likely to have computers or online Internet access even though com-
puter ownership and Internet access have soared in the past five years. Although
the gap in computer access is narrowing, higher-income families in each ethnic
group are still more likely to have home computers and broadband Internet ac-
cess than lower-income families in the same group. Moreover, the children of
higher-income families are far more likely to use their Internet access to pursue
educational goals, whereas lower-income children are much more likely to spend
time on entertainment and games. This is called the “time-wasting” gap.
Left uncorrected, this digital divide could lead to a society of information
haves, who are computer literate and skilled, versus a large group of information
have-nots, who are computer illiterate and unskilled. Public interest groups want
to narrow this digital divide by making digital information services— including the
Internet—available to virtually everyone, just as basic telephone service is now.
148 Part One Organizations, Management, and the Networked Enterprise
Dennis Kriebal of Youngstown, Ohio, had been a su-
pervisor at an aluminum extrusion factory, where he
punched out parts for cars and tractors. Six years ago,
he lost his job to a robot, and since then has been
doing odd jobs to keep afloat. Sherry Johnson used
to work for the local newspaper in Marietta, Geor-
gia, feeding paper into printing machines and laying
out pages. She lost this job as well as others making
medical equipment and working in inventory and
filing to automation.
These situations illustrate the negative impact
of computer technology on jobs. Far more U.S. jobs
have been lost to robots and automation than to
trade with China, Mexico, or any other country.
According to a study by the Center for Business and
Economic Research at Ball State University, about
87 percent of manufacturing job losses between
2000 and 2010 stemmed from factories becoming
more efficient through automation and better
technology. Only 13 percent of job losses were
due to trade. For example, the U.S. steel industry
lost 400,000 jobs between 1962 and 2005. A study
by the American Economic Review found that steel
shipments did not decline, but fewer people were
needed to do the same amount of work as before,
with major productivity gains from using mini
mills (small plants that make specialty steel from
scrap iron).
A November 2015 McKinsey Global Institute re-
port by Michael Chui, James Manyika, and Mehdi
Miremadi examined 2,000 distinct types of work
activities in 800 occupations. The authors found
that 45 percent of these work activities could be
automated by 2055 using technologies that cur-
rently exist. About 51 percent of the work activities
Americans perform involve predictable and routine
physical work, data collection, and data process-
ing. All of these tasks are ripe for some degree of
automation. No one knows exactly how many U.S.
jobs will be lost or how soon, but the researchers
estimate that from 9 to 47 percent of jobs could
eventually be affected and perhaps 5 percent of jobs
eliminated entirely. These changes shouldn’t lead
to mass unemployment because automation could
increase global productivity by 0.8 percent to 1.4
percent annually over the next 50 years and create
many new jobs.
According to a study by MIT labor economist
David Autor, automation advances up to this point
have not eliminated most jobs. Sometimes ma-
chines do replace humans, as in agriculture and
manufacturing, but not across an entire economy.
Productivity gains from workforce automation
have increased the demand for goods and services,
in turn increasing the demand for new forms of
labor. Jobs that have not been eliminated by au-
tomation are often enhanced by it. For example,
since BMW’s Spartanburg, South Carolina, plant
automated many routine production tasks over
the past decade, it has more than doubled its an-
nual car production to more than 400,000 units.
The Spartanburg labor force has grown from 4,200
workers to 10,000, and they handle vastly more
complex autos. (Cars that once had 3,000 parts
now have 15,000.)
The positive and negative impacts of technology
are not delivered in an equal way. All the new jobs
created by automation are not necessarily better
jobs. There have been increases in high-paying jobs
(such as accountants) but also in low-paying jobs
such as food service workers and home health aides.
Disappearing factory jobs have been largely replaced
by new jobs in the service sector but often at lower
wages.
Manufacturing jobs have been the hardest hit
by robots and automation. There are more than 5
million fewer jobs in manufacturing today than in
2000. According to a study by economists Daron
Acemoglu of MIT and Pascual Restrepo of Boston
University, for every robot per thousand workers, up
to six workers lost their jobs and wages fell as much
as 0.75 percent. Acemoglu and Restrepo found very
little employment increase in other occupations to
offset job losses in manufacturing. That increase
could eventually happen, but right now there are
large numbers of people out of work in the United
States, especially blue-collar men and women with-
out college degrees. These researchers also found in-
dustrial robots were to blame for as many as 670,000
manufacturing jobs lost between 1990 and 2007,
and this number will rise going forward because
the number of industrial robots is predicted to qua-
druple. Acemoglu and Restrepo noted that a specific
local economy, such as Detroit, could be especially
INTERACTIVE SESSION ORGANIZATIONS
Will Automation Kill Jobs?
Chapter 4 Ethical and Social Issues in Information Systems 149
1. How does automating jobs pose an ethical
dilemma? Who are the stakeholders? Identify the
options that can be taken and the potential conse-
quences of each.
2. If you were the owner of a factory deciding on
whether to acquire robots to perform certain tasks,
what people, organization, and technology factors
would you consider?
hard-hit, although nationally the effects of robots are
smaller because jobs were created in other places.
The new jobs created by technology are not neces-
sarily in the places losing jobs, such as the Rust Belt.
Those forced out of a job by robots generally do not
have the skills or mobility to assume the new jobs
created by automation.
Automation is not just affecting manual labor and
factory jobs. Computers are now capable of taking
over certain kinds of white collar and service-sector
work, including X-ray analysis and sifting through
documents. Job opportunities are shrinking slightly
for medical technicians, supervisors, and even law-
yers. Work that requires creativity, management,
information technology skills, or personal caregiving
is least at risk.
According to Boston University economist James
Bessen, the problem is not mass unemployment; it’s
transitioning people from one job to another. People
need to learn new skills to work in the new economy.
When the United States moved from an agrarian to
an industrialized economy, high school education
expanded rapidly. By 1951 the average American had
6.2 more years of education than someone born 75
years earlier. Additional education enabled people
to do new kinds of jobs in factories, hospitals, and
schools.
Sources: William Wilkes, “How the World’s Biggest Companies Are
Fine-Tuning the Robot Revolution,” Wall Street Journal, May 14, 2018;
James Manyika and Michael Spence, “The False Choice Between
Automation and Jobs,” Harvard Business Review, February 5, 2018;
Andrew Hobbs, “Automation Will Replace 9 Percent of U.S. Jobs in
2018,” Internet of Business, February 16, 2018; Patrick Gillespie, “Rise
of the Machines: Fear Robots, Not China or Mexico,” CNN Money,
January 30, 2017; Claire Cain Miller, “Evidence That Robots Are Win-
ning the Race for American Jobs,” New York Times, March 28, 2017;
“The Long-Term Jobs Killer Is Not China, It’s Automation,” New York
Times, December 21, 2016; “A Darker Theme in Obama’s Farewell:
Automation Can Divide Us,” New York Times, January 12, 2017; Steve
Lohr, “Robots Will Take Jobs, But Not as Fast as Some Fear,” New York
Times, January 12, 2017; Michael Chui, James Manyika, and Mehdi
Miremadi, “Where Machines Could Replace Humans—and Where
They Can’t (Yet),” McKinsey Quarterly, July 2016; Stephen Gold, “The
Future of Automation—and Your Job,” Industry Week, January 18,
2016; and Christopher Mims, “Automation Can Actually Create More
Jobs,” Wall Street Journal, December 11, 2016.
CASE STUDY QUESTIONS
Health Risks: RSI, CVS, and Cognitive Decline
A common occupational disease today is repetitive stress injury (RSI). RSI
occurs when muscle groups are forced through repetitive actions often with
high-impact loads (such as tennis) or tens of thousands of repetitions under
low-impact loads (such as working at a computer keyboard). The incidence of
RSI is estimated to affect as much as one-third of the labor force and accounts
for one-third of all disability cases.
The single largest source of RSI is computer keyboards. The most common
kind of computer-related RSI is carpal tunnel syndrome (CTS), in which
pressure on the median nerve through the wrist’s bony structure, called a
carpal tunnel, produces pain. The pressure is caused by constant repeti-
tion of keystrokes: In a single shift, a word processor may perform 23,000
keystrokes. Symptoms of CTS include numbness, shooting pain, inability to
grasp objects, and tingling. Millions of workers have been diagnosed with
CTS. It affects an estimated 3 to 6 percent of the workforce (LeBlanc and
Cestia, 2011).
150 Part One Organizations, Management, and the Networked Enterprise
RSI is avoidable. Designing workstations for a neutral wrist position (using
a wrist rest to support the wrist), proper monitor stands, and footrests all con-
tribute to proper posture and reduced RSI. Ergonomically correct keyboards are
also an option. These measures should be supported by frequent rest breaks
and rotation of employees to different jobs.
RSI is not the only occupational illness computers cause. Back and neck
pain, leg stress, and foot pain also result from poor ergonomic designs of work-
stations. Computer vision syndrome (CVS) refers to any eyestrain condi-
tion related to display screen use in desktop computers, laptops, e-readers,
smartphones, and handheld video games. CVS affects about 90 percent of
people who spend three hours or more per day at a computer. Its symptoms,
which are usually temporary, include headaches, blurred vision, and dry and
irritated eyes.
In addition to these maladies, computer technology may be harming
our cognitive functions or at least changing how we think and solve prob-
lems. Although the Internet has made it much easier for people to access,
create, and use information, some experts believe that it is also preventing
people from focusing and thinking clearly on their own. They argue that ex-
cessive use of computers (and smartphones—see the Interactive Session on
Technology) reduces intelligence. One MIT scholar believes exposure to com-
puters encourages looking up answers rather than engaging in real problem
solving. Students, in this view, don’t learn much surfing the web or answering
email when compared to listening, drawing, arguing, looking, and exploring
(Henry, 2011).
The computer has become part of our lives—personally as well as socially,
culturally, and politically. It is unlikely that the issues and our choices will be-
come easier as information technology continues to transform our world. The
growth of the Internet and the information economy suggests that all the ethi-
cal and social issues we have described will be heightened further as we move
further into the first digital century.
Repetitive stress injury (RSI)
is a leading occupational
disease today. The single
largest cause of RSI is
computer keyboard work.
© Ian Allenden/123RF
Chapter 4 Ethical and Social Issues in Information Systems 151
For many of us, smartphones have become indispens-
able, but they have also come under fire for their
impact on the way we think and behave, especially
among children. Two of the largest investors in Apple
Inc. are urging the iPhone maker to take action against
smartphone addiction among children over growing
concerns about the negative effects of technology.
An open letter to Apple on January 6, 2018 from
New York-based JANA Partners and the California
State Teachers’ Retirement System (CalSTRS) stated
that the firm must do more to help children fight
smartphone addiction. These two shareholders to-
gether control about $2 billion in Apple stock.
The investors’ letter urged Apple to offer tools to pre-
vent smartphone addiction and to provide more paren-
tal options for monitoring children’s smartphone usage.
The iOS operating system for Apple smartphones and
tablets already has limited parental controls for restrict-
ing apps, features such as location sharing, and access
to certain types of content. The investors felt Apple
needs to do more—for example, enable parents to
specify the age of the user of the phone during setup,
establish limits on screen time, select hours of the day
the phone can be used, and block social media services.
The average American teenager who uses a smart-
phone receives his or her first phone at age 10 and
spends over 4.5 hours a day on it (excluding texting
and talking). Seventy-eight percent of teens check
their phones at least hourly and 50 percent report
feeling “addicted” to their phones. The investors’ letter
cited a number of studies on the negative effects of
heavy smartphone and social media use on the men-
tal and physical health of children whose brains are
still developing. These range from distractions in the
classroom to a higher risk of suicide and depression.
A recent survey of over 2,300 teachers by the
Center on Media and Child Health and the University
of Alberta found that 67 percent of the teachers
reported that the number of students who are
negatively distracted by digital technologies in the
classroom is growing. Seventy-five percent of these
teachers think students’ ability to focus on educational
tasks has decreased. Research by psychology profes-
sor Jean Twenge of San Diego State University found
that U.S. teenagers who spend 3 hours a day or more
on electronic devices are 35 percent more likely, and
those who spend 5 hours or more are 71 percent more
likely, to have a risk factor for suicide than those who
spend less than 1 hour. This research also showed that
eighth-graders who are heavy users of social media
have a 27 percent higher risk of depression. Those
who spend more than the average time playing sports,
hanging out with friends in person, or doing home-
work have a significantly lower risk. Additionally,
teens who spend 5 or more hours a day on electronic
devices are 51 percent more likely to get less than 7
hours of sleep per night (versus the recommended 9).
Nicholas Carr, who has studied the impact of tech-
nology on business and culture, shares these con-
cerns. He has been highly critical of the Internet’s ef-
fect on cognition, and these cognitive effects extend
to smartphone use. Carr worries that excessive use of
mobile devices diminishes the capacity for concen-
tration and contemplation.
Carr recognizes that smartphones provide many use-
ful functions in a very handy form. However, this ex-
traordinary usefulness gives them too much influence
on our attention, thinking, and behavior. Smartphones
shape our thoughts in deep and complicated ways, and
their effects persist even when we aren’t using the de-
vices. Research suggests that the intellect weakens as
the brain grows dependent on the technology.
Carr points to the work of Adrian Ward, a cognitive
psychologist and marketing professor at the University
of Texas at Austin, who for a decade has been study-
ing how smartphones and the Internet affect people’s
thoughts and judgment. Ward has observed that using
a smartphone, or even hearing one ring or vibrate,
produces distractions that make it harder to concen-
trate on a difficult problem or job. Divided attention
impedes reasoning and performance.
A study published in Applied Cognitive Psychology
in April 2017 examined how smartphones affected
learning in a lecture class with 160 students at the
University of Arkansas at Monticello. It found that
students who didn’t bring their phones to the class-
room scored a full letter-grade higher on a test of
the material presented than those who brought
their phones. It didn’t matter whether students who
brought their phones used them or not. A study of 91
U.K. secondary schools, published in 2016 in the jour-
nal Labour Economics, found that when schools ban
smartphones, students’ examination scores go up sub-
stantially, and the weakest students benefit the most.
INTERACTIVE SESSION TECHNOLOGY
How Harmful Are Smartphones?
152 Part One Organizations, Management, and the Networked Enterprise
1. Identify the problem described in this case study.
In what sense is it an ethical dilemma?
2. Should restrictions be placed on children’s and
teenagers’ smartphone use? Why or why not?
3. Can the problem of smartphones reducing cogni-
tive skills be solved? Why or why not? Explain
your answer.
Carr also observes that using smartphones ex-
tensively can be detrimental to social skills and
relationships. Connecting with “friends” electroni-
cally via smartphones is not a substitute for genu-
ine person-to-person relationships and face-to-face
conversations.
Sources: “Letter from JANA Partners & CalSTRS to Apple, Inc.,”
posted by Anne Sheehan, California State Teachers’ Retirement
System, Harvard Law School Forum on Corporate Governance
and Financial Regulation, January 19, 2018; Samuel Gibbs, “Apple
Investors Call for Action over iPhone ‘Addiction’ among Children,”
The Guardian, January 8, 2018; David Benoit, “iPhones and Children
CASE STUDY QUESTIONS
4-5 How will MIS help my career?
Here is how Chapter 4 and this book can help you find a job as a junior privacy
analyst.
The Company
Pinnacle Air Force Base in Texas has an open entry-level position for a junior
privacy analyst in its human resources office. The office maintains detailed
personnel records, including work history, compensation, healthcare, and re-
tirement benefits, on more than 6,800 military members and their families and
1,250 civilian employees.
Position Description
The junior privacy analyst will assist with employee recordkeeping and help
ensure compliance with all federal and state privacy regulations. Job responsi-
bilities include:
• Analyzing and developing policy and procedures related to privacy office
functions.
• Logging and tracking Privacy Act requests, assistance with review, redac-
tion and preparation of responsive records, and tracking all privacy office
correspondence.
• Monitoring and responding to written, verbal, and electronic correspondence
and inquiries directed to the government privacy office, including sensitive
beneficiary/personnel correspondence.
• Coordinating privacy office meetings.
• Reviewing and analyzing data and documents and assessing options, issues, and
positions for a variety of program planning, reporting, and execution activities.
Job Requirements
• Bachelor’s degree in liberal arts or business
• Strong communication and organizational skills
• Experience with recordkeeping and file systems desirable
Are a Toxic Pair, Say Two Big Apple Investors,” Wall Street Journal,
January 7, 2018; and Nicholas Carr, “How Smartphones Hijack Our
Minds,” Wall Street Journal, October 7, 2017.
Chapter 4 Ethical and Social Issues in Information Systems 153
Interview Questions
1. What background or job experience do you have in the privacy protection field?
2. What do you know about the Privacy Act?
3. What do you know about privacy protection practices for both written and
electronic correspondence?
4. If you were asked to improve privacy protection for our organization, how
would you proceed?
5. Have you ever dealt with a problem involving privacy protection? What role
did you play in its solution?
Author Tips
1. Review this chapter, with special attention to the sections dealing with infor-
mation systems and privacy.
2. Use the web to find out more about the Privacy Act and privacy protection
procedures and policies for personnel records.
3. Try to find out more about employee recordkeeping and privacy protection
at U.S. military bases or other organizations.
4. If you do not have any hands-on experience in the privacy area, explain what
you do know about privacy and why it is so important to protect sensitive
personal data, and indicate you would be very interested in learning more
and doing privacy-related work.
4-1 What ethical, social, and political issues are raised by information systems?
Information technology is introducing changes for which laws and rules of acceptable conduct have
not yet been developed. Increasing computing power, storage, and networking capabilities—including
the Internet—expand the reach of individual and organizational actions and magnify their impacts.
The ease and anonymity with which information is now communicated, copied, and manipulated in
online environments pose new challenges to the protection of privacy and intellectual property. The
main ethical, social, and political issues information systems raise center on information rights and ob-
ligations, property rights and obligations, accountability and control, system quality, and quality of life.
4-2 What specific principles for conduct can be used to guide ethical decisions?
Six ethical principles for judging conduct include the Golden Rule, Immanuel Kant’s categorical
imperative, the slippery slope rule, the utilitarian principle, the risk aversion principle, and the ethical
no-free-lunch rule. These principles should be used in conjunction with an ethical analysis.
4-3 Why do contemporary information systems technology and the Internet pose challenges to the
protection of individual privacy and intellectual property?
Contemporary data storage and data analysis technology enable companies to gather personal data
from many sources easily about individuals and analyze these data to create detailed digital profiles
about individuals and their behaviors. Data flowing over the Internet can be monitored at many points.
Cookies and other web monitoring tools closely track the activities of website visitors. Not all websites
have strong privacy protection policies, and they do not always allow for informed consent regarding
the use of personal information. Traditional copyright laws are insufficient to protect against software
piracy because digital material can be copied so easily and transmitted to many locations simultane-
ously over the Internet.
REVIEW SUMMARY
154 Part One Organizations, Management, and the Networked Enterprise
4-4 How have information systems affected laws for establishing accountability and liability and the
quality of everyday life?
New information technologies are challenging existing liability laws and social practices for holding
individuals and institutions accountable for harm done to others. Although computer systems have
been sources of efficiency and wealth, they have some negative impacts. Computer errors can cause
serious harm to individuals and organizations. Poor data quality is also responsible for disruptions and
losses for businesses. Jobs can be lost when computers replace workers or tasks become unnecessary
in reengineered business processes. The ability to own and use a computer may be exacerbating socio-
economic disparities among different ethnic groups and social classes. Widespread use of computers
increases opportunities for computer crime and computer abuse. Computers can also create health
and cognitive problems such as repetitive stress injury, computer vision syndrome, and the inability
to think clearly and perform complex tasks.
Key Terms
Accountability, 129
Carpal tunnel syndrome (CTS), 149
Computer abuse, 146
Computer crime, 145
Computer vision syndrome (CVS), 150
Cookies, 135
Copyright, 138
Digital divide, 147
Digital Millennium Copyright Act (DMCA), 141
Due process, 129
Ethical no-free-lunch rule, 130
Ethics, 124
Fair Information Practices (FIP), 132
General Data Protection Regulation (GDPR), 134
Golden Rule, 130
Immanuel Kant’s categorical imperative, 130
Information rights, 126
Informed consent, 134
Intellectual property, 138
Liability, 129
Nonobvious relationship awareness (NORA), 128
Opt-in, 137
Opt-out, 137
Patent, 139
Privacy, 132
Profiling, 127
Repetitive stress injury (RSI), 149
Responsibility, 129
Risk aversion principle, 130
Safe harbor, 134
Slippery slope rule, 130
Spam, 146
Spyware, 136
Trade secret, 140
Trademarks, 140
Utilitarian principle, 130
Web beacons, 136
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
4-1 What ethical, social, and political issues are
raised by information systems?
• Explain how ethical, social, and politi-
cal issues are connected and give some
examples.
• List and describe the key technological
trends that heighten ethical concerns.
• Differentiate between responsibility,
accountability, and liability.
4-2 What specific principles for conduct can be used
to guide ethical decisions?
• List and describe the five steps in an ethical
analysis.
• Identify and describe six ethical principles.
4-3 Why do contemporary information systems
technology and the Internet pose challenges
to the protection of individual privacy and
intellectual property?
• Define privacy and Fair Information
Practices.
• Explain how the Internet challenges the
protection of individual privacy and intel-
lectual property.
• Explain how informed consent, legislation,
industry self-regulation, and technology
tools help protect the individual privacy of
Internet users.
• List and define the three regimes that
protect intellectual property rights.
Chapter 4 Ethical and Social Issues in Information Systems 155
4-4 How have information systems affected laws for
establishing accountability and liability and the
quality of everyday life?
• Explain why it is so difficult to hold soft-
ware services liable for failure or injury.
• List and describe the principal causes of
system quality problems.
• Name and describe four quality of life
impacts of computers and information
systems.
• Define and describe computer vision syn-
drome and repetitive stress injury (RSI) and
explain their relationship to information
technology.
Discussion Questions
4-5 Should producers of software-based services,
such as ATMs, be held liable for economic
injuries suffered when their systems fail?
4-6 Should companies be responsible for
unemployment their information systems
cause? Why or why not?
MyLab MIS
MyLab MIS
4-7 Discuss the pros and cons of allowing
companies to amass personal data for
behavioral targeting.
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience in analyzing the privacy implications of using online
data brokers, developing a corporate policy for employee web usage, using blog creation tools to create a simple
blog, and analyzing web browser privacy. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
4-8 InfoFree’s website is linked to massive databases that consolidate personal data on millions of people.
Users can purchase marketing lists of consumers broken down by location, age, gender, income level,
home value, and interests. One could use this capability to obtain a list, for example, of everyone in
Peekskill, New York, making $150,000 or more per year. Do data brokers such as InfoFree raise privacy
issues? Why or why not? If your name and other personal information were in this database, what
limitations on access would you want to preserve your privacy? Consider the following data users:
government agencies, your employer, private business firms, other individuals.
4-9 As the head of a small insurance company with six employees, you are concerned about how effectively
your company is using its networking and human resources. Budgets are tight, and you are struggling
to meet payrolls because employees are reporting many overtime hours. You do not believe that the
employees have a sufficiently heavy workload to warrant working longer hours and are looking into the
amount of time they spend on the Internet.
Each employee uses a computer with Internet access on the job. Review a sample of your company’s
weekly report of employee web usage, which can be found in MyLab MIS.
• Calculate the total amount of time each employee spent on the web for the week and the total amount
of time that company computers were used for this purpose. Rank the employees in the order of the
amount of time each spent online.
• Do your findings and the contents of the report indicate any ethical problems employees are creating?
Is the company creating an ethical problem by monitoring its employees’ use of the Internet?
• Use the guidelines for ethical analysis presented in this chapter to develop a solution to the problems
you have identified.
Achieving Operational Excellence: Creating a Simple Blog
Software skills: Blog creation
Business skills: Blog and web page design
4-10 In this project, you’ll learn how to build a simple blog of your own design using the online blog creation
software available at Blogger.com. Pick a sport, hobby, or topic of interest as the theme for your blog. Name
http://Blogger.com
156 Part One Organizations, Management, and the Networked Enterprise
the blog, give it a title, and choose a template for the blog. Post at least four entries to the blog, adding a label
for each posting. Edit your posts if necessary. Upload an image, such as a photo from your computer, or the
web, to your blog. Add capabilities for other registered users, such as team members, to comment on your
blog. Briefly describe how your blog could be useful to a company selling products or services related to the
theme of your blog. List the tools available to Blogger that would make your blog more useful for business
and describe the business uses of each. Save your blog and show it to your instructor.
Improving Decision Making: Analyzing Web Browser Privacy
Software Skills: Web browser software
Business Skills: Analyzing web browser privacy protection features
4-11 This project will help develop your Internet skills for using the privacy protection features of leading
web browser software.
Examine the privacy protection features and settings for two leading web browsers such as Internet
Explorer, Mozilla Firefox, or Google Chrome. Make a table comparing the features of two of these browsers in
terms of functions provided and ease of use.
• How do these privacy protection features protect individuals?
• How do these privacy protection features affect what businesses can do on the Internet?
• Which browser does the best job of protecting privacy? Why?
Collaboration and Teamwork Project
Developing a Corporate Code of Ethics
4-12 With three or four of your classmates, develop a corporate ethics code on privacy that addresses both employ-
ee privacy and the privacy of customers and users of the corporate website. Be sure to consider email privacy
and employer monitoring of worksites as well as corporate use of information about employees concerning
their off-the-job behavior (e.g., lifestyle, marital arrangements, and so forth). If possible, use Google Docs
and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the
class.
Chapter 4 Ethical and Social Issues in Information Systems 157
Facebook describes its corporate mission as giv-ing people the power to build community and bring the world closer together. In 2017 and
2018 these lofty objectives took a serious blow when
it became known that Facebook had lost control of
the personal information users share on the site.
Facebook had allowed its platform to be exploited by
Russian intelligence and political consultants with the
intention of intensifying existing political cleavages,
driving people away from community and from one
another during the U.S. presidential election of 2016.
In January 2018, a founder and former employee
of a political consulting and voter profiling company
called Cambridge Analytica revealed that his firm had
harvested the personal information of as many as 87
million users of Facebook, and used this information
in an effort to influence the U.S. presidential election
of 2016. Facebook does not sell the personal informa-
tion of its users, but it did allow third-party apps to
obtain the personal information of Facebook users.
In this case, a U.K. researcher was granted access to
50,000 Facebook users for the purpose of research. He
developed an app quiz that claimed to measure users’
personality traits. Facebook’s design allowed this app
to not only collect the personal information of people
who agreed to take the survey, but also the personal
information of all the people in those users’ Facebook
social network. The researcher sold the data to
Cambridge Analytica, who in turn used it to send tar-
geted political ads in the presidential election.
In a Senate hearing in October 2017, Facebook
testified that Russian operatives had exploited
Facebook’s social network in an effort to influence
the 2016 presidential election. More than 130,000
fake messages and stories had been sent to Facebook
users in the United States using an army of auto-
mated software bots, built and operated by several
thousand Russian-based hackers working for a
Russian intelligence agency, the Internet Research
Agency. (A bot is a software program that performs
an automated task, and is often on the Internet for
malicious purposes—see Chapter 8.) Using 75,000
fake Facebook accounts, and 230,000 bots, the
Russian messages were sent to an estimated 146 mil-
lion people on Facebook. The messages targeted peo-
ple based on their personal information collected by
Facebook Privacy: Your Life for Sale
CASE STUDY
Facebook in the normal course of business, including
users’ religion, race, ethnicity, personal interests,
and political views. The ads targeted groups who had
opposing political views, with the intention of inten-
sifying social conflict among them.
How could all this happen? As it turns out, it was
quite easy and inexpensive, given the design and
management of Facebook. Once Facebook grants ac-
cess to advertisers, app developers, or researchers,
it has a very limited capability to control how that
information is used. Third-party agreements and
policies are rarely reviewed by Facebook to check
for compliance. Facebook executives claimed they
were as shocked as others that 87 million Facebook
users had their personal information harvested by
Russian intelligence agencies and used by Cambridge
Analytica to target political ads.
It gets worse: In early June 2018, several months
after Facebook was forced to explain its privacy mea-
sures and pledge reforms in the wake of the Cambridge
Analytica scandal, the New York Times reported that
Facebook had data-sharing partnerships with at least
60 device makers. Facebook allowed Apple, Samsung,
Amazon, and other companies that sell mobile phones,
tablets, TVs, and video game consoles to gain access
not only to data about Facebook users but also personal
data about their friends—without their explicit consent.
As of 2015, Facebook had supposedly prohibited app
software developers from collecting information about
customers’ friends. Apparently, these restrictions did
not extend to device makers.
Shortly thereafter, it was also revealed that
Facebook had struck customized data-sharing deals
that gave select companies such as Royal Bank of
Canada and Nissan Motor Co. special access to user
records, even though Facebook claimed it had it
walled off that information in 2015. Certain compa-
nies were also allowed access to additional informa-
tion about a user’s Facebook friends.
Facebook again came under attack from the press,
privacy advocates, and government authorities for
pleading ignorance and for allowing uncontrolled data
sharing to happen. For the first time since its found-
ing, Facebook is facing a serious existential crisis, and
potentially a threat to its business model. Facebook’s
current crisis follows from a history of privacy abuses
158 Part One Organizations, Management, and the Networked Enterprise
in its short 14-year life. Facebook has quickly morphed
from a small, niche networking site for mostly Ivy
League college students into a publicly traded com-
pany with a market worth of $534 billion in 2018.
Facebook boasts that it is free to join and always will
be, so where’s the money coming from to service 2.1
billion worldwide subscribers? Just like its fellow tech
titan and rival Google, Facebook’s revenue comes al-
most entirely from advertising (97 percent of $40.6 bil-
lion in revenue in 2017). Facebook watches what you
do on Facebook and then sells that information and in-
formation about your friends to advertisers, not just on
Facebook but all over the web. As Tim Cook, CEO of
Apple, noted, at Facebook, the product they sell is you.
More than ever, companies such as Facebook and
Google, which made approximately $110 billion in ad-
vertising revenue in 2017, are using your online activ-
ity to develop a frighteningly accurate digital picture
of your life, and then selling access to their platform of
personal information to advertisers. Facebook’s goal is
to serve advertisements that are more relevant to you
than anywhere else on the web, but the personal infor-
mation it gathers about you both with and without your
consent can also be used against you in other ways.
Facebook has a diverse array of compelling and
useful features. It has helped families find lost pets
and allows active-duty soldiers to stay in touch with
their families; it gives smaller companies a chance to
further their e-commerce efforts and larger compa-
nies a chance to solidify their brands; and, perhaps
most obviously, Facebook makes it easier for you
to keep in touch with your friends, relatives, local
restaurants, and, in short, just about all the things
you are interested in. These are the reasons so many
people use Facebook—it provides real value to users.
The cost of participating in the Facebook platform is
that your personal information is shared with adver-
tisers and with others you may not know.
Facebook has a checkered past of privacy viola-
tions and missteps that raise doubts about whether it
should be responsible for the personal data of billions
of people. There are no laws in the United States that
give consumers the right to know what data compa-
nies like Facebook have compiled. You can challenge
information in credit reports because of the Fair
Credit Reporting Act, but until recently, you could
not obtain what data Facebook has gathered about
you. It’s been different in Europe: for several years,
users had the right to demand that Facebook turn
over a report of all the information it had collected
on individuals. In 2018, Facebook allowed users to
download all the information they had collected on
a person, even though users had no legal right to de-
mand that information.
Think you own your face? Not on Facebook, thanks
to its facial recognition software for photo tagging of
users. This “tag suggestions” feature is automatically
on when you sign up, and there is no user consent. A
federal court in 2016 allowed a lawsuit to go forward
contesting Facebook’s right to photo tag without user
consent. This feature is in violation of several state
laws that seek to secure the privacy of biometric data.
A Consumer Reports study found that among
150 million Americans on Facebook every day, at
least 4.8 million were willingly sharing informa-
tion that could be used against them in some way.
That includes plans to travel on a particular day,
which burglars could use to time robberies, or
Liking a page about a particular health condition
or treatment, which might prompt insurers to deny
coverage. Credit card companies and similar orga-
nizations have begun engaging in weblining, taken
from the term redlining, by altering their treatment
of you based on the actions of other people with
profiles similar to yours. Employers can assess your
personality and behavior by using your Facebook
Likes. Thirteen million users have never adjusted
Facebook’s privacy controls, which allow friends
using Facebook applications to transfer your data un-
wittingly to a third party without your knowledge.
Why, then, do so many people share sensitive
details of their life on Facebook? Often, it’s because
users do not realize that their data are being col-
lected and transmitted in this way. A Facebook user’s
friends are not notified if information about them
is collected by that user’s applications. Many of
Facebook’s features and services are enabled by de-
fault when they are launched without notifying users,
and a study by Siegel+Gale found that Facebook’s
privacy policy is more difficult to comprehend than
government notices or typical bank credit card agree-
ments, which are notoriously dense. Did you know
that whenever you log into a website using Facebook,
Facebook shares some personal information with that
site and can track your movements in that site? Next
time you visit Facebook, click Privacy Settings and
see whether you can understand your options.
However, there are some signs that Facebook
might become more responsible with its data col-
lection processes, whether by its own volition or
because it is forced to do so. As a publicly traded
company, Facebook now invites more scrutiny from
Chapter 4 Ethical and Social Issues in Information Systems 159
investors and regulators. In 2018, in response to a
maelstrom of criticism in the United States, and
Europe’s new General Data Protection Regulation
(GDPR), Facebook changed its privacy policy to make
it easier for users to select their privacy preferences;
to know exactly what they are consenting to; to down-
load users’ personal archives and the information that
Facebook collects and shares, including facial images;
to restrict click bait and spam in newsfeeds; to more
closely monitor app developers’ use of personal infor-
mation; and to increase efforts to eliminate millions
of fake accounts. Facebook hired 10,000 new em-
ployees and several hundred fact-checking firms to
identify and eliminate fake news. For the first time in
its history, Facebook is being forced to apply editorial
controls to the content posted by users and, in that
sense, become more like a traditional publisher and
news outlet that takes responsibility for its content.
Unfortunately, as researchers have long known, and
Facebook executives understand, very few users—
estimated to be less than 12 percent—take the time
to understand and adjust their privacy preferences.
In reality, user choice is not a powerful check on
Facebook’s use of personal information.
Although U.S. Facebook users have little recourse
to access data that Facebook has collected on them,
users from other countries have done better. In
Europe, over 100,000 Facebook users have already
requested their data, and European law requires
Facebook to respond to these requests within 40
days. Government privacy regulators from France,
Spain, Italy, Germany, Belgium, and the Netherlands
have been actively investigating Facebook’s privacy
controls as the European Union pursues more strin-
gent privacy protection legislation.
While Facebook has shut down several of its more
egregious privacy-invading features, and enhanced
its consent process, the company’s data use policies
make it very clear that, as a condition of using the
service, users grant the company wide latitude in
using their personal information in advertising. The
default option for users is “opt-in”; most users do not
know how to control use of their information; and
they cannot “opt out” of all sharing if they want to
use Facebook. This is called the “control paradox” by
researchers: even when users are given controls over
the use of their personal information, they typically
choose not to use those controls. Although users can
limit some uses of their information, an advanced de-
gree in Facebook data features is required. Facebook
shows you ads not only on Facebook but across the
web through its Facebook Audience Network, which
keeps track of what its users do on other websites and
then targets ads to those users on those websites.
Critics have asked Facebook why it doesn’t offer
an ad-free service—like music streaming sites—for
a monthly fee. Others want to know why Facebook
does not allow users just to opt out of tracking. But
these kinds of changes would be very difficult for
Facebook because its business model depends entirely
on the largely unfettered use of its users’ personal
private information, just as it declares in its data use
policy. That policy states very openly that if you use
Facebook you agree to their terms of service, which
enable it to share your information with third parties.
Sources: Deepa Seetharaman and Kirsten Grind, “Facebook Gave
Some Companies Access to Additional Data About Users’ Friends,”
Wall Street Journal, June 8, 2018; Natalia Drozdiak, Sam Schechner,
and Valentina Pop, “Mark Zuckerberg Apologizes to EU Lawmakers
for Facebook’s Fake-News Failures,” Wall Street Journal, May 22,
2018; Cecilia Kang and Sheera Frenkel, “Facebook Says Cambridge
Analytica Harvested Data of Up to 87 Million Users,” New York
Times, April 24, 2018; Eduardo Porter, “The Facebook Fallacy:
Privacy Is Up to You,” New York Times, April 24, 2018; Jack Nicas,
“Facebook to Require Verified Identities for Future Political Ads,”
New York Times, April 6, 2018; Sheera Frenkel and Natasha Singer,
“Facebook Introduces Central Page for Privacy and Security
Settings,” New York Times, March 28, 2018; David Mayer, “Facebook
Is Giving You New Privacy Options, But It’s Clear What It Wants You
to Choose,” Fortune, March 19, 2018; Matthew Rosenberg, Nicholas
Confessore, and Carole Cadwalladr, “How Trump Consultants
Exploited the Facebook Data of Millions,” New York Times, March
17, 2018; Sheera Frenkel, “Tech Giants Brace for Europe’s New Data
Privacy Rules,” New York Times, January 28, 2018; Georgia Wells and
Deepa Seetharaman, “New Facebook Data Shows Russians Targeted
Users by Education, Religion, Politics,” Wall Street Journal, November
1, 2017; Hunt Allcott and Matthew Gentzkow, “Social Media and
Fake News in the 2016 Election,” Journal of Economic Perspectives,
March, 2017; Samuel Gibbs, “Facebook Facing Privacy Actions
Across Europe as France Fines Firm €150k,” The Guardian, May
16, 2017; and Katie Collins, “Facebook’s Newest Privacy Problem:
‘Faceprint’ Data,” CNET, May 16, 2016.
CASE STUDY QUESTIONS
4-13 Perform an ethical analysis of Facebook. What
is the ethical dilemma presented by this case?
4-14 What is the relationship of privacy to
Facebook’s business model?
4-15 Describe the weaknesses of Facebook’s privacy
policies and features. What management, orga-
nization, and technology factors have contrib-
uted to those weaknesses?
4-16 Will Facebook be able to have a successful busi-
ness model without invading privacy? Explain
your answer. Could Facebook take any mea-
sures to make this possible?
160 Part One Organizations, Management, and the Networked Enterprise
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161
Information Technology
Infrastructure
PART TWO provides the technical foundation for understanding information systems by
examining hardware, software, database, and networking technologies along with tools and
techniques for security and control. This part answers questions such as: What technologies
do businesses today need to accomplish their work? What do I need to know about these
technologies to make sure they enhance the performance of the firm? How are these tech-
nologies likely to change in the future? What technologies and procedures are required to
ensure that systems are reliable and secure?
PART TWO
CHAPTER 5
IT Infrastructure and Emerging
Technologies
CHAPTER 6
Foundations of Business Intelligence:
Databases and Information Management
CHAPTER 7
Telecommunications, the Internet,
and Wireless Technology
CHAPTER 8
Securing Information Systems
162
MyLab MIS
Discussion Questions: 5-6, 5-7, 5-8; Hands-on MIS Projects: 5-9, 5-10, 5-11, 5-12;
Writing Assignments: 5-18, 5-19; eText with Conceptual Animations
CHAPTER CASES
PeroxyChem’s Cloud Computing Formula for
Success
Is Business Ready for Wearable Computers?
Look to the Cloud
Is BYOD Good for Business?
VIDEO CASES
Rockwell Automation Fuels the Oil and Gas
Industry with the Internet of Things (IoT)
ESPN.com: The Future of Sports Coverage in
the Cloud
Netflix: Building a Business in the Cloud
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
5-1 What is IT infrastructure, and what
are the stages and drivers of IT
infrastructure evolution?
5-2 What are the components of IT
infrastructure?
5-3 What are the current trends in
computer hardware platforms?
5-4 What are the current computer
software platforms and trends?
5-5 What are the challenges of managing
IT infrastructure and management
solutions?
5-6 How will MIS help my career?
IT Infrastructure and Emerging
Technologies5CHAPTER
http://ESPN.com
163
PeroxyChem is a leading global supplier of hydrogen peroxide and related substances for electronics, paper production, and household medical products. The company is headquartered in Philadelphia, Pennsylvania
and has about 500 employees; generates over $400 million in revenue; and op-
erates research, sales, and manufacturing facilities in North America, Europe,
and Asia.
In February 2014 PeroxyChem was divested from its parent company and
had just one year to take over management of its business systems. It would
have to create its own IT infrastructure and IT department, all while keep-
ing day-to-day business systems and operations running smoothly. As part of a
large corporation, PeroxyChem had not been responsible for maintaining and
managing its own IT systems but suddenly had to become self-sufficient. The
company was understandably reluctant at
that point to take on the cost or risk of pro-
curing its own hardware, setting up a data
center on premises, and maintaining a large
in-house IT department, nor did it have the
in-house expertise to do so.
According to PeroxyChem CIO Jim
Curley, management didn’t want to change
any of its applications, but it did want to
transition to a cloud infrastructure where
the computer hardware and software for
running a firm’s systems are available as
on-demand services in remote computing
centers accessed via the Internet. The goal
was for PeroxyChem IT personnel to spend
only 40 percent of their time on operational
tasks to keep the company running and
60 percent on strategic projects designed to grow the business. PeroxyChem
also lacked the time and resources to hire and train new personnel to run
day-to-day operations.
PeroxyChem worked with IBM to migrate its existing systems to IBM’s
SoftLayer cloud computing infrastructure. This is a managed cloud infrastruc-
ture in which IBM, as a trusted and experienced third party, manages the or-
ganization’s cloud computing activities, freeing the organization to focus on its
core competencies. IBM also helped implement enterprise and business intel-
ligence applications from SAP, configuring the systems to meet PeroxyChem’s
business requirements. The new infrastructure was rigorously tested and was
able to go live in four and a half months with no disruptions to PeroxyChem’s
existing IT operations.
PeroxyChem’s Cloud Computing Formula
for Success
© Olegdudko/123RF
164 Part Two Information Technology Infrastructure
PeroxyChem can run and extend its enterprise business systems with a
lean in-house team. The managed IBM Cloud hosting solution has made it
possible for PeroxyChem’s IT staff to spend less time on routine maintenance
and more time on leveraging its core competencies and developing innova-
tive products for specialty industries such as food safety and electronics.
Using a cloud infrastructure has reduced costs and risk by avoiding large
up-front capital investment for new hardware, software, and a data center, as
well as the expense of maintaining a large in-house IT team. The infrastruc-
ture is scalable and can expand computing capacity if the company grows
or has peaking workloads, or reduce computing resources (and expenses) if
the company has fewer users or less computing work. The company can eas-
ily add more users without purchasing additional computing, storage, and
networking resources of its own. PeroxyChem’s cloud infrastructure is op-
erational around the clock, making it easier to for this global company to do
business.
Sources: David Slovensky, “PeroxyChem Builds a Whole New IT Infrastructure in Less
Than Five Months,” www.ibm.com, January 17, 2017; “PeroxyChem LLC.” www.03-ibm.
com, accessed February 20, 2018; Ken Murphy, “PeroxyChem Starts a Cloud Reaction,”
SAP Insider Profiles, December 12, 2016; and www.peroxychem.com, accessed February 20,
2018.
The experience of PeroxyChem illustrates the importance of information technology infrastructure in running a business today. The right technol-
ogy at the right price will improve organizational performance. After dives-
titure from its parent corporation, PeroxyChem was left to manage its own
information systems. The company would have been overwhelmed with set-
ting up its own IT department and learning how to run its own systems, with
no time for developing systems to support its strategy and future growth.
PeroxyChem would be prevented from operating as efficiently and effectively
as it could have.
The chapter-opening case diagram calls attention to important points
raised by this case and this chapter. Divestiture left PeroxyChem with limited
resources and a short time frame to set up and run its essential business infor-
mation systems and data center. Using cloud computing for its IT infrastruc-
ture enabled PeroxyChem to quickly delegate the operation and management
of its IT systems to outside specialists, to maintain a very small in-house IT
staff, and to use that staff to support innovation rather than day-to-day opera-
tions. The company pays for only the computing capacity it actually uses on
an as-needed basis, and did not have to make extensive and costly up-front IT
investments.
Here are some questions to think about: What were the business benefits for
PeroxyChem of using a cloud computing infrastructure? What role did divesti-
ture play in PeroxyChem’s choice of a solution?
http://www.ibm.com
http://www.03-ibm.com
http://www.03-ibm.com
http://www.peroxychem.com
Chapter 5 IT Infrastructure and Emerging Technologies 165
5-1 What is IT infrastructure, and what are the
stages and drivers of IT infrastructure evolution?
In Chapter 1, we defined information technology (IT) infrastructure as the shared
technology resources that provide the platform for the firm’s specific informa-
tion system applications. An IT infrastructure includes investment in hard-
ware, software, and services—such as consulting, education, and training—that
are shared across the entire firm or across entire business units in the firm. A
firm’s IT infrastructure provides the foundation for serving customers, working
with vendors, and managing internal firm business processes (see Figure 5.1).
Supplying firms worldwide with IT infrastructure (hardware, software, net-
working, and IT services) in 2018 was estimated to be a $3.7 trillion industry
(Gartner, 2018). Investments in infrastructure account for between 25 and
50 percent of information technology expenditures in large firms, led by finan-
cial services firms where IT investment is well over half of all capital investment.
Defining IT Infrastructure
An IT infrastructure consists of a set of physical devices and software applica-
tions that are required to operate the entire enterprise. But IT infrastructure
also includes a set of firmwide services budgeted by management and com-
posed of both human and technical capabilities. These services include the
following:
• Computing platforms used to provide computing services that connect
employees, customers, and suppliers into a coherent digital environment,
including large mainframes, midrange computers, desktop and laptop com-
puters, and mobile handheld and remote cloud computing services
Business
Solutions
Management
Organization
Cloud IT Infrastructure
Technology
Information
System
Business
Challenges
• Loss of IT infrastructure from divestiture
• Limited time frame and resources
• Inadequate in-house IT sta
• Shift from
operational to
strategic technology
orientation
• Outsource IT infrastructure
management and operations
• Provision computing
resources as needed
• Support 24/7 global
operations
• Improve e ectiveness
• Control costs
• Legacy IT
infrastructure
• IBM-managed cloud
computing services
• SAP applications
• Plan new IT
infrastructure
• Make IT infrastructure
investments
166 Part Two Information Technology Infrastructure
• Telecommunications services that provide data, voice, and video connectivity
to employees, customers, and suppliers
• Data management services that store and manage corporate data and provide
capabilities for analyzing the data
• Application software services, including online software services,
that provide enterprise-wide capabilities such as enterprise resource
planning, customer relationship management, supply chain manage-
ment, and knowledge management systems that are shared by all
business units
• Physical facilities management services that develop and manage the physi-
cal installations required for computing, telecommunications, and data man-
agement services
• IT management services that plan and develop the infrastructure, coordinate
with the business units for IT services, manage accounting for the IT expen-
diture, and provide project management services
• IT standards services that provide the firm and its business units with
policies that determine which information technology will be used, when,
and how
• IT education services that provide training in system use to employ-
ees and offer managers training in how to plan for and manage IT
investments
FIGURE 5.1 CONNECTION BETWEEN THE FIRM, IT INFRASTRUCTURE, AND BUSINESS
CAPABILITIES
The services a firm is capable of providing to its customers, suppliers, and employees are a direct function of its
IT infrastructure. Ideally, this infrastructure should support the firm’s business and information systems strategy.
New information technologies have a powerful impact on business and IT strategies as well as the services that
can be provided to customers.
IT Services
and
Infrastructure
Customer
Services
Supplier
Services
Enterprise
Services
IT Strategy
Information
Technology
Business
Strategy
Chapter 5 IT Infrastructure and Emerging Technologies 167
• IT research and development services that provide the firm with research on
potential future IT projects and investments that could help the firm differ-
entiate itself in the marketplace
This “service platform” perspective makes it easier to understand the busi-
ness value provided by infrastructure investments. For instance, the real
business value of a fully loaded personal computer operating at 3.5 gigahertz
that costs about $1,000 and a high-speed Internet connection is hard to un-
derstand without knowing who will use it and how it will be used. When we
look at the services provided by these tools, however, their value becomes
more apparent: The new PC makes it possible for a high-cost employee mak-
ing $100,000 a year to connect to all the company’s major systems and the
public Internet. The high-speed Internet service saves this employee about
an hour per day in reduced wait time for Internet information. Without this
PC and Internet connection, the value of this one employee to the firm might
be cut in half.
Evolution of IT Infrastructure
The IT infrastructure in organizations today is an outgrowth of more than
50 years of evolution in computing platforms. There have been five stages
in this evolution, each representing a different configuration of comput-
ing power and infrastructure elements (see Figure 5.2). The five eras are
general-purpose mainframe and minicomputer computing, personal com-
puters, client/server networks, enterprise computing, and cloud and mobile
computing.
Technologies that characterize one era may also be used in another time
period for other purposes. For example, some companies still run traditional
mainframe systems or use mainframe computers as servers supporting large
websites and corporate enterprise applications.
General-Purpose Mainframe and Minicomputer Era
(1959 to Present)
The introduction of the IBM 1401 and 7090 transistorized machines in 1959
marked the beginning of widespread commercial use of mainframe comput-
ers. In 1965, the mainframe computer truly came into its own with the in-
troduction of the IBM 360 series. The 360 was the first commercial computer
that could provide time sharing, multitasking, and virtual memory in more ad-
vanced models. IBM has dominated mainframe computing from this point on.
Mainframe computers became powerful enough to support thousands of online
remote terminals connected to the centralized mainframe using proprietary
communication protocols and proprietary data lines.
The mainframe era was a period of highly centralized computing under the
control of professional programmers and systems operators (usually in a cor-
porate data center), with most elements of infrastructure provided by a single
vendor, the manufacturer of the hardware and the software.
This pattern began to change with the introduction of minicomputers, pro-
duced by Digital Equipment Corporation (DEC) in 1965. DEC minicomputers
(PDP-11 and later the VAX machines) offered powerful machines at far lower
prices than IBM mainframes, making possible decentralized computing, cus-
tomized to the specific needs of individual departments or business units rather
than time sharing on a single huge mainframe. In recent years, the minicom-
puter has evolved into a midrange computer or midrange server and is part of
a network.
168 Part Two Information Technology Infrastructure
FIGURE 5.2 ERAS IN IT INFRASTRUCTURE EVOLUTION
Illustrated here are the typical computing configurations characterizing each of the five
eras of IT infrastructure evolution.
Stages in IT Infrastructure Evolution
Mainframe/
Minicomputer
(1959–present)
Personal
Computer
(1981–present)
Client/Server
(1983–present)
Enterprise
Computing
(1992–present)
Cloud and Mobile
Computing
(2000–present)
Enterprise
Server
Internet
THE INTERNET
• Hardware
• Software
• Services
Chapter 5 IT Infrastructure and Emerging Technologies 169
Personal Computer Era (1981 to Present)
Although the first truly personal computers (PCs) appeared in the 1970s (the
Xerox Alto, the MITS Altair 8800, and the Apple I and II, to name a few), these
machines had only limited distribution to computer enthusiasts. The appear-
ance of the IBM PC in 1981 is usually considered the beginning of the PC era
because this machine was the first to be widely adopted by businesses. At first
using the DOS operating system, a text-based command language, and later the
Microsoft Windows operating system, the Wintel PC computer (Windows op-
erating system software on a computer with an Intel microprocessor) became
the standard desktop personal computer. Worldwide PC sales have declined be-
cause of the popularity of tablets and smartphones, but the PC is still a popular
tool for business. Approximately 88 percent of desktop PCs are thought to run a
version of Windows, and about 8 percent run a version of MacOS. Wintel domi-
nance as a computing platform is receding as iPhone and Android device sales
increase.
Proliferation of PCs in the 1980s and early 1990s launched a spate of personal
desktop productivity software tools—word processors, spreadsheets, electronic
presentation software, and small data management programs—that were very
valuable to both home and corporate users. These PCs were stand-alone systems
until PC operating system software in the 1990s made it possible to link them into
networks.
Client/Server Era (1983 to Present)
In client/server computing, desktop or laptop computers called clients are
networked to powerful server computers that provide the client computers
with a variety of services and capabilities. Computer processing work is split
between these two types of machines. The client is the user point of entry,
whereas the server typically processes and stores shared data, serves up web
pages, or manages network activities. The term server refers to both the soft-
ware application and the physical computer on which the network software
runs. The server could be a mainframe, but today, server computers typi-
cally are more powerful versions of personal computers, based on inexpen-
sive chips and often using multiple processors in a single computer box or in
server racks.
The simplest client/server network consists of a client computer networked
to a server computer, with processing split between the two types of machines.
This is called a two-tiered client/server architecture. Whereas simple client/server
networks can be found in small businesses, most corporations have more com-
plex, multitiered client/server architectures (often called N-tier client/server
architectures) in which the work of the entire network is balanced over several
different levels of servers, depending on the kind of service being requested
(see Figure 5.3).
For instance, at the first level, a web server will serve a web page to a cli-
ent in response to a request for service. Web server software is responsible for
locating and managing stored web pages. If the client requests access to a cor-
porate system (a product list or price information, for instance), the request is
passed along to an application server. Application server software handles all
application operations between a user and an organization’s back-end business
systems. The application server may reside on the same computer as the web
server or on its own dedicated computer. Chapters 6 and 7 provide more detail
on other pieces of software that are used in multitiered client/server architec-
tures for e-commerce and e-business.
170 Part Two Information Technology Infrastructure
Client/server computing enables businesses to distribute computing work
across a series of smaller, inexpensive machines that cost much less than cen-
tralized mainframe systems. The result is an explosion in computing power and
applications throughout the firm.
Novell NetWare was the leading technology for client/server networking at
the beginning of the client/server era. Today, Microsoft is the market leader
with its Windows operating systems (Windows Server, Windows 10, Windows
8, and Windows 7).
Enterprise Computing Era (1992 to Present)
In the early 1990s, firms turned to networking standards and software tools
that could integrate disparate networks and applications throughout the
firm into an enterprise-wide infrastructure. As the Internet developed into a
trusted communications environment after 1995, business firms began seri-
ously using the Transmission Control Protocol/Internet Protocol (TCP/IP) net-
working standard to tie their disparate networks together. We discuss TCP/IP
in detail in Chapter 7.
The resulting IT infrastructure links different pieces of computer hard-
ware and smaller networks into an enterprise-wide network so that informa-
tion can flow freely across the organization and between the firm and other
organizations. It can link different types of computer hardware, including
mainframes, servers, PCs, and mobile devices, and it includes public infra-
structures such as the telephone system, the Internet, and public network
services. The enterprise infrastructure also requires software to link disparate
applications and enable data to flow freely among different parts of the busi-
ness, such as enterprise applications (see Chapters 2 and 9) and web services
(discussed in Section 5-4).
Cloud and Mobile Computing Era (2000 to Present)
The growing bandwidth power of the Internet has pushed the client/server
model one step further, toward what is called the “cloud computing model.”
Cloud computing refers to a model of computing that provides access to a
shared pool of computing resources (computers, storage, applications, and
FIGURE 5.3 A MULTITIERED (N-TIER) CLIENT/SERVER NETWORK
In a multitiered client/server network, client requests for service are handled by different levels of servers.
Web Server Application ServerClient
Data
Sales
Production
Accounting
HR
Internet
Chapter 5 IT Infrastructure and Emerging Technologies 171
services) over the network, often the Internet. These “clouds” of computing re-
sources can be accessed on an as-needed basis from any connected device and
location.
Cloud computing bas become the fastest-growing form of computing, with
worldwide public cloud spending to reach $411 billion by 2020. Cisco Systems
predicts that 94 percent of all computer workloads will run in some type of
cloud environment by 2021 (Gartner, 2017; Cisco 2018).
Thousands or even hundreds of thousands of computers are located in cloud
data centers, where they can be accessed by desktop computers, laptop com-
puters, tablets, entertainment centers, smartphones, and other client machines
linked to the Internet. Amazon, Google, IBM, and Microsoft operate huge, scal-
able cloud computing centers that provide computing power, data storage,
application development tools, and high-speed Internet connections to firms
that want to maintain their IT infrastructures remotely. Firms such as Google,
Microsoft, SAP, Oracle, and Salesforce.com sell software applications as services
delivered over the Internet.
We discuss cloud and mobile computing in more detail in Section 5-3. The
Learning Tracks include a table titled “Comparing Stages in IT Infrastructure
Evolution,” which compares each era on the infrastructure dimensions introduced.
Technology Drivers of Infrastructure Evolution
The changes in IT infrastructure we have just described have resulted from
developments in computer processing, memory chips, storage devices, net-
working hardware and software, and software design that have exponentially
increased computing power while exponentially reducing costs. Let’s look at
the most important developments.
Moore’s Law and Microprocessing Power
In 1965, Gordon Moore, the director of Fairchild Semiconductor’s Research and
Development Laboratories, wrote in Electronics magazine that since the first mi-
croprocessor chip was introduced in 1959, the number of components on a chip
with the smallest manufacturing costs per component (generally transistors)
had doubled each year. This assertion became the foundation of Moore’s Law.
Moore later reduced the rate of growth to a doubling every two years.
There are at least three variations of Moore’s Law, none of which Moore ever
stated: (1) the power of microprocessors doubles every 18 months, (2) comput-
ing power doubles every 18 months, and (3) the price of computing falls by half
every 18 months.
Figure 5.4 illustrates the relationship between number of transistors on a mi-
croprocessor and millions of instructions per second (MIPS), a common mea-
sure of processor power. Figure 5.5 shows the exponential decline in the cost of
transistors and rise in computing power. For instance, in 2018, you could buy an
Intel i7 processor chip with 2.5 billion transistors for about one ten-millionth of
a dollar per transistor.
Exponential growth in the number of transistors and the power of proces-
sors coupled with an exponential decline in computing costs may not be able
to continue much longer. In the last five years, the cost improvement rate
has fallen to single digits from 30 percent annual reductions. Chip manufac-
turers continue to miniaturize components. Today’s transistors are 14 nano-
meters in size, and should no longer be compared to the size of a human hair
(80 thousand nanometers) but rather to the size of a virus (400 nanometers).
Within the next five years or so, chip makers may reach the physical limits
http://Salesforce.com
172 Part Two Information Technology Infrastructure
FIGURE 5.5 FALLING COST OF CHIPS
Changes in production technology, and very-large-scale production runs, have driven
dramatic declines in the cost of chips, and the products that use them.
Source: Authors’ estimate.
1965
1968
1973
1978
1983
1988
1993
1998
2003
2008
2018
Packing more transistors into less
space has driven dramatic reductions
in their cost and in the cost of the products
they populate.
Ten
Transistor Price
in U.S. Dollars
One
One Tenth
One Hundredth
One Thousandth
One Ten-Thousandth
One Hundred-Thousandth
One Millionth
One Ten-Millionth
Moore’s Law
Begins 1965
Moore’s Law Means
Decreasing Costs
FIGURE 5.4 MOORE’S LAW AND MICROPROCESSOR PERFORMANCE
Packing 5 billion transistors into a tiny microprocessor has exponentially increased
processing power. Processing power has increased to more than 250,000 MIPS (about
2.6 billion instructions per second).
Source: Authors’ estimate.
2018
250,000
Moore’s Law Means
More Performance
Processing power (MIPS)
2014
2010
2006
2002
1998
1994
1990
1986
1982
1978
1974
1970
Nu
mb
er
of
tra
ns
ist
or
s
5 b
illio
n
Chapter 5 IT Infrastructure and Emerging Technologies 173
of semiconductor size. At that point they may need to use alternatives to
fashioning chips from silicon or find other ways to make computers more
powerful.
Chip manufacturers can shrink the size of transistors down to the width
of several atoms by using nanotechnology. Nanotechnology uses individual
atoms and molecules to create computer chips and other devices that are
thousands of times smaller than current technologies permit. Chip manufac-
turers are trying to develop a manufacturing process to produce nanotube
processors economically. Stanford University scientists have built a nanotube
computer.
The Law of Mass Digital Storage
A second technology driver of IT infrastructure change is the Law of Mass
Digital Storage. The amount of digital information is roughly doubling every
year (Lyman and Varian, 2003). Fortunately, the cost of storing digital informa-
tion is falling at an exponential rate of 100 percent a year. Figure 5.6 shows that
the number of megabytes that can be stored on magnetic media for $1 from
1950 to the present roughly doubled every 15 months. In 2018, a 1 terabyte hard
disk drive sells at retail for about $50.
Metcalfe’s Law and Network Economics
Moore’s Law and the Law of Mass Digital Storage help us understand why com-
puting resources are now so readily available. But why do people want more
computing and storage power? The economics of networks and the growth of
the Internet provide some answers.
Robert Metcalfe—inventor of Ethernet local area network technology—
claimed in 1970 that the value or power of a network grows exponentially
as a function of the number of network members. Metcalfe and others point
to the increasing returns to scale that network members receive as more and
more people join the network. As the number of members in a network grows
Nanotubes are tiny tubes
about 10,000 times thin-
ner than a human hair.
They consist of rolled-up
sheets of carbon hexa-
gons, have potential use
as minuscule wires or
in ultrasmall electronic
devices, and are very
powerful conductors of
electrical current.
© Forance/123RF
174 Part Two Information Technology Infrastructure
linearly, the value of the entire system grows exponentially and continues
to grow as members increase. Demand for information technology has been
driven by the social and business value of digital networks, which rapidly
multiply the number of actual and potential links among network members.
Declining Communications Costs and the Internet
A fourth technology driver transforming IT infrastructure is the rapid de-
cline in the costs of communication and the exponential growth in the
size of the Internet. Today there are 4.2 billion Internet users worldwide
(Internetworldstats.com, 2018). Figure 5.7 illustrates the exponentially de-
clining cost of communication both over the Internet and over telephone
networks (which increasingly are based on the Internet). As communication
costs fall toward a very small number and approach zero, utilization of com-
munication and computing facilities explode. In 2018, one megabit of Internet
access costs about $2.60. In 2000, the cost was over $300 if available. In this
same time frame, average household Internet speeds have risen from .2 Mbps
to 18 Mbps.
To take advantage of the business value associated with the Internet, firms
must greatly expand their Internet connections, including wireless connectiv-
ity, and greatly expand the power of their client/server networks, desktop cli-
ents, and mobile computing devices. There is every reason to believe these
trends will continue.
Standards and Network Effects
Today’s enterprise infrastructure and Internet computing would be impossible—
both now and in the future—without agreements among manufacturers and
FIGURE 5.6 THE AMOUNT OF STORAGE PER DOLLAR RISES
EXPONENTIALLY, 1950–2018
Cloud storage services like Google Drive provide 100 gigabytes of storage for
$1.99 per month.
Source: Authors’ estimates.
19
50
19
55
19
58
19
59
19
60
19
70
19
75
19
80
19
90
20
00
20
05
20
10
20
15
20
18
Data Storage Per Dollar
S
to
ra
g
e
(
G
ig
a
b
yt
e
s)
0
2
4
6
8
10
100
http://Internetworldstats.com
Chapter 5 IT Infrastructure and Emerging Technologies 175
FIGURE 5.7 EXPONENTIAL DECLINES IN INTERNET COMMUNICATIONS
COSTS ($/MBPS)
The cost of communication over the Internet and over telephone networks has de-
clined exponentially, fueling the explosive growth of communication and computing
worldwide.
Sources: 2007–2018: “Average Internet Connection Speed in the United States from 2007 to 2017 (in Mbps), by Quarter” Statista, 2018;
2006 Home Broadband Adoption 2006 BY John B. Horrigan PEW Research 2007; Internet speeds: How Fast Does Internet Speed grow?By
Xah Lee. Date: 2006-12-30. Last updated: 2017-01-22,http://xahlee.info/comp/bandwidth.html
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20
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20
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widespread consumer acceptance of technology standards. Technology stan-
dards are specifications that establish the compatibility of products and the abil-
ity to communicate in a network.
Technology standards unleash powerful economies of scale and result in
price declines as manufacturers focus on the products built to a single standard.
Without these economies of scale, computing of any sort would be far more ex-
pensive than is currently the case. Table 5.1 describes important standards that
have shaped IT infrastructure.
In the 1990s, corporations started moving toward standard computing and
communications platforms. The Wintel PC with the Windows operating system
and Microsoft Office desktop productivity applications became the standard
desktop and mobile client computing platform. (It now shares the spotlight with
other standards, such as Apple’s iOS and Macintosh operating systems and the
Android operating system.) Widespread adoption of Unix-Linux as the enter-
prise server operating system of choice made possible the replacement of pro-
prietary and expensive mainframe infrastructures. In networking, the Ethernet
standard enabled PCs to connect together in small local area networks (LANs;
see Chapter 7), and the TCP/IP standard enabled these LANs to be connected
into firmwide networks, and ultimately, to the Internet.
5-2 What are the components of IT infrastructure?
IT infrastructure today is composed of seven major components. Figure 5.8
illustrates these infrastructure components and the major vendors within
each component category. These components constitute investments that
must be coordinated with one another to provide the firm with a coherent
infrastructure.
http://xahlee.info/comp/bandwidth.html
176 Part Two Information Technology Infrastructure
TABLE 5.1 SOME IMPORTANT STANDARDS IN COMPUTING
STANDARD SIGNIFICANCE
American Standard Code for
Information Interchange (ASCII) (1958)
Made it possible for computer machines from different manufacturers to exchange
data; later used as the universal language linking input and output devices such as
keyboards and mice to computers. Adopted by the American National Standards
Institute in 1963.
Common Business Oriented Language
(COBOL) (1959)
An easy-to-use software language that greatly expanded the ability of programmers to
write business-related programs and reduced the cost of software. Sponsored by the
Defense Department in 1959.
Unix (1969–1975) A powerful multitasking, multiuser, portable operating system initially developed at Bell
Labs (1969) and later released for use by others (1975). It operates on a wide variety of
computers from different manufacturers. Adopted by Sun, IBM, HP, and others in the
1980s, it became the most widely used enterprise-level operating system.
Ethernet (1973) A network standard for connecting desktop computers into local area networks that
enabled the widespread adoption of client/server computing and local area networks
and further stimulated the adoption of personal computers.
Transmission Control Protocol/Internet
Protocol (TCP/IP) (1974)
Suite of communications protocols and a common addressing scheme that enables
millions of computers to connect together in one giant global network (the
Internet). Later, it was used as the default networking protocol suite for local area
networks and intranets. Developed in the early 1970s for the U.S. Department of
Defense.
IBM/Microsoft/Intel Personal Computer
(1981)
The standard Wintel design for personal desktop computing based on standard Intel
processors and other standard devices, Microsoft DOS, and later Windows software.
The emergence of this standard, low-cost product laid the foundation for a 25-year
period of explosive growth in computing throughout all organizations around the
globe. Today, more than 1 billion PCs power business and government activities
every day.
World Wide Web (1989–1993) Standards for storing, retrieving, formatting, and displaying information as a worldwide
web of electronic pages incorporating text, graphics, audio, and video enables creation
of a global repository of billions of web pages.
In the past, technology vendors supplying these components offered pur-
chasing firms a mixture of incompatible, proprietary, partial solutions that
could not work with other vendor products. Increasingly, vendor firms have
been forced to cooperate in strategic partnerships with one another in order to
keep their customers. For instance, a hardware and services provider such as
IBM cooperates with all the major enterprise software providers, has strategic
relationships with system integrators, and promises to work with whichever
data management products its client firms wish to use (even though it sells its
own database management software called DB2).
Another big change is that companies are moving more of their IT infra-
structure to the cloud or to outside services, owning and managing much less
on their premises. Firms’ IT infrastructure will increasingly be an amalgam of
components and services that are partially owned, partially rented or licensed,
partially located on site, and partially supplied by external vendors or cloud
services.
Computer Hardware Platforms
Firms worldwide are expected to spend $704 billion on computer hardware de-
vices in 2018, including mainframes, servers, PCs, tablets, and smartphones.
All these devices constitute the computer hardware platform for corporate (and
personal) computing worldwide.
Chapter 5 IT Infrastructure and Emerging Technologies 177
Most business computing has taken place using microprocessor chips
manufactured or designed by Intel Corporation and, to a lesser extent, AMD
Corporation. Intel and AMD processors are often referred to as “i86” processors
because the original IBM PCs used an Intel 8086 processor and all the Intel (and
AMD) chips that followed are downward compatible with this processor. (For
instance, you should be able to run a software application designed 10 years ago
on a new PC you bought yesterday.)
The computer platform changed dramatically with the introduction of mo-
bile computing devices, from the iPod in 2001 to the iPhone in 2007 and the
iPad in 2010. Worldwide, 2 billion people use smartphones. You can think of
these devices as a second computer hardware platform, one that is consumer
device–driven.
Mobile devices are not required to perform as many tasks as computers in
the first computer hardware platform, so they consume less power, and gener-
ate less heat. Processors for mobile devices are manufactured by a wide range
of firms, including Apple, Samsung, and Qualcomm, using an architecture de-
signed by ARM Holdings.
Mainframes have not disappeared. They continue to be used to reliably
and securely handle huge volumes of transactions, for analyzing very large
FIGURE 5.8 THE IT INFRASTRUCTURE ECOSYSTEM
There are seven major components that must be coordinated to provide the firm with a coherent IT
infrastructure. Listed here are major technologies and suppliers for each component.
Computer Hardware
Platforms
IBM
Oracle Sun
HP
Apple
Data Management
and Storage
IBM DB2
Oracle
SQL Server
Sybase
MySQL
Apache
Hadoop
Consultants and
System Integrators
IBM
HP
Accenture Networking/
Telecommunications
Microsoft Windows Server
Linux
Cisco
AT&T, Verizon
IT Infrastructure Ecosystem
Operating Systems
Platforms
Microsoft Windows
Unix
Linux
MacOS
Chrome
Android
iOS
Internet Platforms
Apache
Microsoft IIS, .NET
Unix
Cisco
Java
Enterprise Software
Applications
(including middleware)
SAP
Oracle
Microsoft
IBM
178 Part Two Information Technology Infrastructure
quantities of data, and for handling large workloads in cloud computing
centers. The mainframe is still the digital workhorse for banking and tele-
communications networks that are often running software programs that
are older and require a specific hardware platform. However, the number
of providers has dwindled to one: IBM. IBM has also repurposed its main-
frame systems so they can be used as giant servers for enterprise networks
and corporate websites. A single IBM mainframe can run thousands of
instances of Linux or Windows Server software and is capable of replac-
ing thousands of smaller servers (see the discussion of virtualization in
Section 5-3).
Operating System Platforms
The leading operating systems for corporate servers are Microsoft Windows
Server, Unix, and Linux, an inexpensive and robust open source relative of
Unix. Microsoft Windows Server is capable of providing enterprise-wide operat-
ing system and network services and appeals to organizations seeking Windows-
based IT infrastructures. Unix and Linux are scalable, reliable, and much less
expensive than mainframe operating systems. They can also run on many dif-
ferent types of processors. The major providers of Unix operating systems are
IBM, HP, and Oracle-Sun, each with slightly different and partially incompatible
versions.
Nearly 90 percent of PCs use some form of the Microsoft Windows operating
system for managing the resources and activities of the computer. However,
there is now a much greater variety of client operating systems than in the
past, with new operating systems for computing on handheld mobile digital
devices or cloud-connected computers.
Google’s Chrome OS provides a lightweight operating system for cloud
computing using a web-connected computer. Programs are not stored on
the user’s computer but are used over the Internet and accessed through
the Chrome web browser. User data reside on servers across the Internet.
Android is an open source operating system for mobile devices such as
smartphones and tablet computers, developed by the Open Handset Alliance
led by Google. It has become the most popular smartphone platform world-
wide, competing with iOS, Apple’s mobile operating system for the iPhone,
iPad, and iPod Touch. Conventional client operating system software is de-
signed around the mouse and keyboard but increasingly is becoming more
natural and intuitive by using touch technology. iOS, the operating system
for the phenomenally popular Apple iPad and iPhone, features a multitouch
interface, where users employ one or more fingers to manipulate objects on a
screen without a mouse or keyboard. Microsoft’s Windows 10 and Windows
8, which run on tablets as well as PCs, have multitouch capabilities, as do
many Android devices.
Enterprise Software Applications
Firms worldwide are expected to spend about $389 billion in 2018 on software
for enterprise applications that are treated as components of IT infrastructure.
We introduced the various types of enterprise applications in Chapter 2, and
Chapter 9 provides a more detailed discussion of each.
The largest providers of enterprise application software are SAP and
Oracle. Also included in this category is middleware software supplied
by vendors such as IBM and Oracle for achieving firmwide integration by
Chapter 5 IT Infrastructure and Emerging Technologies 179
linking the firm’s existing application systems. Microsoft is attempting to
move into the lower ends of this market by focusing on small and medium-
sized businesses.
Data Management and Storage
Enterprise database management software is responsible for organizing and
managing the firm’s data so that they can be efficiently accessed and used.
Chapter 6 describes this software in detail. The leading database software
providers are IBM (DB2), Oracle, Microsoft (SQL Server), and SAP Sybase
(Adaptive Server Enterprise). MySQL is a Linux open source relational da-
tabase product now owned by Oracle Corporation, and Apache Hadoop is
an open source software framework for managing very large data sets (see
Chapter 6).
Networking/Telecommunications Platforms
Companies worldwide are expected to spend $1.43 trillion for telecommunica-
tions services in 2018 (Gartner, Inc., 2018). Windows Server is predominantly
used as a local area network operating system, followed by Linux and Unix.
Large, enterprise-wide area networks use some variant of Unix. Most local area
networks, as well as wide area enterprise networks, use the TCP/IP protocol
suite as a standard (see Chapter 7).
Cisco and Juniper Networks are leading networking hardware providers.
Telecommunications platforms are typically provided by telecommunications/
telephone services companies that offer voice and data connectivity, wide area
networking, wireless services, and Internet access. Leading telecommunica-
tions service vendors include AT&T and Verizon. This market is exploding with
new providers of cellular wireless, high-speed Internet, and Internet telephone
services.
Internet Platforms
Internet platforms include hardware, software, and management services to
support a firm’s website, including web hosting services, routers, and cabling or
wireless equipment. A web hosting service maintains a large web server, or se-
ries of servers, and provides fee-paying subscribers with space to maintain their
websites.
The Internet revolution created a veritable explosion in server computers,
with many firms collecting thousands of small servers to run their Internet
operations. There has been a steady push to reduce the number of server com-
puters by increasing the size and power of each and by using software tools
that make it possible to run more applications on a single server. Use of stand-
alone server computers is decreasing as organizations transition to cloud com-
puting services. The Internet hardware server market has become increasingly
concentrated in the hands of IBM, Dell, Oracle, and HP, as prices have fallen
dramatically.
The major web software application development tools and suites are
supplied by Microsoft (Microsoft Visual Studio and the Microsoft .NET develop-
ment platform), Oracle-Sun, and a host of independent software developers,
including Adobe. Chapter 7 describes the components of the firm’s Internet
platform in greater detail.
180 Part Two Information Technology Infrastructure
Consulting and System Integration Services
Today, even a large firm does not have the staff, the skills, the budget, or
the necessary experience to deploy and maintain its entire IT infrastructure.
Implementing a new infrastructure requires (as noted in Chapters 13 and 14)
significant changes in business processes and procedures, training and educa-
tion, and software integration. Leading consulting firms providing this exper-
tise include Accenture, IBM Services, HP, Infosys, and Wipro.
Software integration means ensuring the new infrastructure works with the
firm’s older, so-called legacy systems and ensuring the new elements of the in-
frastructure work with one another. Legacy systems are generally older trans-
action processing systems created for mainframe computers that continue to be
used to avoid the high cost of replacing or redesigning them. Replacing these
systems is cost prohibitive and generally not necessary if these older systems
can be integrated into a contemporary infrastructure.
5-3 What are the current trends in computer
hardware platforms?
The exploding power of computer hardware and networking technology has
dramatically changed how businesses organize their computing power, putting
more of this power on networks and mobile handheld devices and obtaining
more of their computing capabilities in the form of services. We look at eight
hardware trends: the mobile digital platform, consumerization of IT and BYOD,
quantum computing, virtualization, cloud computing, edge computing, green
computing, and high-performance/power-saving processors.
The Mobile Digital Platform
Chapter 1 pointed out that new mobile digital computing platforms have
emerged as alternatives to PCs and larger computers. The iPhone and Android
smartphones have taken on many functions of PCs, including transmitting data,
surfing the web, transmitting e-mail and instant messages, displaying digital
content, and exchanging data with internal corporate systems. The new mobile
platform also includes small, lightweight netbooks optimized for wireless com-
munication and Internet access, tablet computers such as the iPad, and digital
e-book readers such as Amazon’s Kindle with some web access capabilities.
Smartphones and tablets are becoming the primary means of accessing the
Internet and are increasingly used for business computing as well as for con-
sumer applications. For example, senior executives at General Motors are using
smartphone applications that drill down into vehicle sales information, finan-
cial performance, manufacturing metrics, and project management status.
Wearable computing devices are a recent addition to the mobile digital platform.
These include smartwatches, smart glasses, smart ID badges, and activity track-
ers. Wearable computing technology has many business uses, and it is changing
the way firms work, as described in the Interactive Session on Technology.
Consumerization of IT and BYOD
The popularity, ease of use, and rich array of useful applications for smartphones
and tablet computers have created a groundswell of interest in allowing em-
ployees to use their personal mobile devices in the workplace, a phenomenon
Chapter 5 IT Infrastructure and Emerging Technologies 181
Wearable computing is starting to take off.
Smartwatches, smart glasses, smart ID badges, and
activity trackers promise to change how we go about
each day and the way we do our jobs. According to
Gartner Inc., sales of wearables will increase from
275 million units in 2016 to 477 million units by
2020. Although smartwatches such as the Apple
Watch and fitness trackers have been successful
consumer products, business uses for wearables ap-
pear to be advancing more rapidly. A report from
research firm Tractica projects that worldwide sales
for enterprise wearables will increase exponentially
to 66.4 million units by 2021.
Doctors and nurses are using smart eyewear
for hands-free access to patients’ medical records.
Oil rig workers sport smart helmets to connect
with land-based experts, who can view their work
remotely and communicate instructions. Warehouse
managers are able to capture real-time performance
data using a smartwatch to better manage distribu-
tion and fulfillment operations. Wearable computing
devices improve productivity by delivering informa-
tion to workers without requiring them to interrupt
their tasks, which in turn empowers employees to
make more-informed decisions more quickly.
Wearable devices are helping businesses learn
more about employees and the everyday workplace
than ever before. New insights and information can
be uncovered as IoT sensor data is correlated to
actual human behavior. Information on task dura-
tion and the proximity of one device or employee
to another, when combined with demographic data,
can shed light on previously unidentified workflow
inefficiencies. Technologically sophisticated firms
will understand things they never could before about
workers and customers; what they do every day, how
healthy they are, where they go, and even how well
they feel. This obviously has implications for protect-
ing individual privacy, raising potential employee
(and customer) fears that businesses are collecting
sensitive data about them. Businesses will need to
tread carefully.
Global logistics company DHL worked with
Ricoh, the imaging and electronics company, and
Ubimax, a wearable computing services and solu-
tions company, to implement “vision picking” in
its warehouse operations. Location graphics are
displayed on smart glasses guiding staffers through
the warehouse to both speed the process of find-
ing items and reduce errors. The company says the
technology delivered a 25 percent increase in ef-
ficiency. Vision picking gives workers locational in-
formation about the items they need to retrieve and
allows them to automatically scan retrieved items.
Future enhancements will enable the system to plot
optimal routes through the warehouse, provide pic-
tures of items to be retrieved (a key aid in case an
item has been misplaced on the warehouse shelves),
and instruct workers on loading carts and pallets
more efficiently.
Google has developed Glass Enterprise Edition
smart glasses for business use, with its development
partners creating applications for specific indus-
tries such as manufacturing and healthcare. Glass
Enterprise Edition is being touted as a tool for eas-
ing workflows by removing distractions that prevent
employees from remaining engaged and focused on
tasks. More than 50 businesses including Dignity
Health, The Boeing Company, and Volkswagen have
been using Glass to complete their work more rap-
idly and efficiently.
Duke Energy has been piloting the use of smart
glasses, and sees multiple uses for them. According
to Aleksandar Vukojevic, technology development
manager for Duke Energy’s Emerging Technologies
Office, smart glasses can enable employees working
in the field to access training or instructional videos
to help with equipment repairs or upgrades. The
glasses also allow remote management, enabling
managers to capture what a line or transformer
worker sees, annotate images and video with in-
structions, and send them back out to workers in
the field. Duke also tried out the smart glasses in its
warehouses for stock inventory. As a worker looks at
an item code, it’s automatically recorded against an
existing database.
There are some challenges. Locking down data
that’s accessed with smart glasses is essential, as
with any other mobile device used in the enterprise.
Today’s smart glasses haven’t been designed with
security in mind. The sensors in the smart glasses
are also not as accurate as other products. A field
INTERACTIVE SESSION TECHNOLOGY
Is Business Ready for Wearable Computers?
182 Part Two Information Technology Infrastructure
1. Wearables have the potential to change the way or-
ganizations and workers conduct business. Discuss
the implications of this statement.
2. What management, organization, and technology
issues would have to be addressed if a company
was thinking of equipping its workers with a
wearable computing device?
3. What kinds of businesses are most likely to benefit
from wearable computers? Select a business and
describe how a wearable computing device could
help that business improve operations or decision
making.
worker using smart glasses to locate a breaker or
other device might be off by 10 or 15 feet using
Google’s GPS instead of a military-grade solu-
tion more common to the energy industry, which
can locate equipment to within one centimeter.
Additionally, smart glasses don’t necessarily allow
safety glasses to be worn over them. Integrating data
from smart glasses with Duke’s internal databases
could prove difficult.
Smart glasses are like smartphones. Without
integration with internal content and the right ap-
plications, they would not be so useful. The value of
wearable computing devices isn’t from transferring
the same information from a laptop or smartphone
to a smartwatch or eyeglass display. Rather, it’s
about finding ways to use wearables to augment and
enhance business processes. Successful adoption of
wearable computing depends not only on cost effec-
tiveness but on the development of new and better
apps and integration with existing IT infrastructure
and the organization’s tools for managing and securing
mobile devices (see the chapter-ending case study).
Sources: George Thangadurai, “Wearables at Work: Why Enterprise
Usage Is Outshining Consumer Usage,” IoT Agenda, March 8,
2018; Josh Garrett, “Wearables: The Next Wave of Enterprise
IoT?” IoT Agenda, February 1, 2018; and Lucas Mearian, “Is
Google Glass Really Ready for the Enterprise?” Computerworld,
August 1, 2017.
CASE STUDY QUESTIONS
popularly called “bring your own device” (BYOD). BYOD is one aspect of the
consumerization of IT, in which new information technology that first emerges
in the consumer market spreads into business organizations. Consumerization
of IT includes not only mobile personal devices but also business uses of soft-
ware services that originated in the consumer marketplace as well, such as
Google and Yahoo search, Gmail, Google Maps, Dropbox, and even Facebook and
Twitter.
Consumerization of IT is forcing businesses to rethink the way they obtain
and manage information technology equipment and services. Historically,
at least in large firms, the IT department was responsible for selecting and
managing the information technology and applications used by the firm and
its employees. It furnished employees with desktops or laptops that were
able to access corporate systems securely. The IT department maintained
control over the firm’s hardware and software to ensure that the business
was being protected and that information systems served the purposes of
the firm and its management. Today, employees and business departments
are playing a much larger role in technology selection, in many cases de-
manding that employees be able to use their own personal computers,
smartphones, and tablets to access the corporate network. It is more dif-
ficult for the firm to manage and control these consumer technologies and
make sure they serve the needs of the business. The chapter-ending case
study explores some of these management challenges created by BYOD and
IT consumerization.
Chapter 5 IT Infrastructure and Emerging Technologies 183
Quantum Computing
Quantum computing uses the principles of quantum physics to represent
data and perform operations on these data. While conventional computers han-
dle bits of data as either 0 or 1 but not both, quantum computing can process
units of data as 0, 1, or both simultaneously. A quantum computer would gain
enormous processing power through this ability to be in multiple states at once,
allowing it to solve some scientific and business problems millions of times
faster than can be done today. IBM has made quantum computing available
to the general public through IBM Cloud. Google’s Alphabet, Microsoft, Intel,
and NASA and are also working on quantum computing platforms. Quantum
computing is still an emerging technology, but its real-world applications are
growing.
Virtualization
Virtualization is the process of presenting a set of computing resources
(such as computing power or data storage) so that they can all be accessed in
ways that are not restricted by physical configuration or geographic location.
Virtualization enables a single physical resource (such as a server or a storage
device) to appear to the user as multiple logical resources. For example, a server
or mainframe can be configured to run many instances of an operating system
(or different operating systems) so that it acts like many different machines.
Each virtual server “looks” like a real physical server to software programs, and
multiple virtual servers can run in parallel on a single machine. VMware is the
leading virtualization software vendor for Windows and Linux servers.
Server virtualization is a common method of reducing technology costs
by providing the ability to host multiple systems on a single physical ma-
chine. Most servers run at just 15 to 20 percent of capacity, and virtualization
can boost server utilization rates to 70 percent or higher. Higher utilization
rates translate into fewer computers required to process the same amount of
work, reduced data center space to house machines, and lower energy usage.
Virtualization also facilitates centralization and consolidation of hardware
administration.
Virtualization also enables multiple physical resources (such as storage de-
vices or servers) to appear as a single logical resource, as in software-defined
storage (SDS), which separates the software for managing data storage from
storage hardware. Using software, firms can pool and arrange multiple storage
infrastructure resources and efficiently allocate them to meet specific appli-
cation needs. SDS enables firms to replace expensive storage hardware with
lower-cost commodity hardware and cloud storage hardware. There is less
under- or over-utilization of storage resources (Letschin, 2016).
Cloud Computing
It is now possible for companies and individuals to perform all of their com-
puting work using a virtualized IT infrastructure in a remote location, as is
the case with cloud computing. Cloud computing is a model of computing in
which computer processing, storage, software, and other services are provided
as a shared pool of virtualized resources over a network, primarily the Internet.
These “clouds” of computing resources can be accessed on an as-needed basis
from any connected device and location. Figure 5.9 illustrates the cloud com-
puting concept.
184 Part Two Information Technology Infrastructure
The U.S. National Institute of Standards and Technology (NIST) defines cloud
computing as having the following essential characteristics (Mell and Grance,
2009):
• On-demand self-service: Consumers can obtain computing capabilities
such as server time or network storage as needed automatically on their
own.
• Ubiquitous network access: Cloud resources can be accessed using stan-
dard network and Internet devices, including mobile platforms.
• Location-independent resource pooling: Computing resources are pooled
to serve multiple users, with different virtual resources dynamically assigned
according to user demand. The user generally does not know where the com-
puting resources are located.
• Rapid elasticity: Computing resources can be rapidly provisioned, in-
creased, or decreased to meet changing user demand.
• Measured service: Charges for cloud resources are based on amount of
resources actually used.
FIGURE 5.9 CLOUD COMPUTING PLATFORM
In cloud computing, hardware and software capabilities are a pool of virtualized resources provided over
a network, often the Internet. Businesses and employees have access to applications and IT infrastructure
anywhere, at any time, and on any device.
Platform Services
Cloud Computing
Application Services
Infrastructure Services
Laptops Identity
Management
iPhone Tablet Computers
Computing Resource
Management
Network
Management
Storage
Management
Block Storage
Desktops
Servers
Content
Management
Enterprise
Software
Collaboration
Environments
Process
Management
Communication
Networks
Content Servers
NEWS
Chapter 5 IT Infrastructure and Emerging Technologies 185
Cloud computing consists of three different types of services:
• Infrastructure as a service (IaaS): Customers use processing, storage,
networking, and other computing resources from cloud service providers to
run their information systems. For example, Amazon uses the spare capac-
ity of its IT infrastructure to provide a broadly based cloud environment
selling IT infrastructure services. These include its Simple Storage Service
(S3) for storing customers’ data and its Elastic Compute Cloud (EC2) service
for running their applications. Users pay only for the amount of comput-
ing and storage capacity they actually use. (See the Interactive Session
on Organizations). Figure 5.10 shows the range of services Amazon Web
Services offers.
• Software as a service (SaaS): Customers use software hosted by the ven-
dor on the vendor’s cloud infrastructure and delivered as a service over a
network. Leading software as a service (SaaS) examples are Google’s G
Suite, which provides common business applications online, and Salesforce.
com, which leases customer relationship management and related software
services over the Internet. Both charge users an annual subscription fee,
although Google has a pared-down free version. Users access these applica-
tions from a web browser, and the data and software are maintained on the
providers’ remote servers.
• Platform as a service (PaaS): Customers use infrastructure and program-
ming tools supported by the cloud service provider to develop their own ap-
plications. For example, Microsoft offers PaaS tools and services for software
development and testing among its Azure cloud services. Another example is
Salesforce.com’s Salesforce Platform.
FIGURE 5.10 AMAZON WEB SERVICES
Amazon Web Services (AWS) is a collection of web services that Amazon provides to
users of its cloud platform. AWS is the largest provider of cloud computing services in
the United States.
Amazon
Web
Services
Analytics
Application
services
Computing
Management
Deployment Database
Data
storage
Content
delivery
Networking
Chapter 2 discussed Google Docs, Microsoft Office 365, and related soft-
ware services for desktop productivity and collaboration. These are among
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186 Part Two Information Technology Infrastructure
If you want to see where computing is taking place,
look to the cloud. Cloud computing is now the
fastest-growing form of computing. According to
Cisco Systems, 94 percent of all computing workloads
will run in some form of cloud environment by 2021.
This includes both public and private cloud plat-
forms. Dedicated servers will be a distinct minority.
Cloud computing has become an affordable and
sensible option for companies of all sizes, ranging
from tiny Internet startups to established companies
like Netflix and FedEx. For example, Amazon Web
Services (AWS) provides subscribing companies with
flexible computing power and data storage as well as
data management, messaging, payment, and other
services that can be used together or individually,
as the business requires. Anyone with an Internet
connection and a little bit of money can harness the
same computing systems that Amazon itself uses to
run its retail business. If customers provide specifica-
tions on the amount of server space, bandwidth, stor-
age, and any other services they require, AWS can
automatically allocate those resources. You don’t pay
a monthly or yearly fee to use Amazon’s computing
resources—instead, you pay for exactly what you
use. Economies of scale keep costs astonishingly low,
and AWS has been able to keep reducing prices. To
remain competitive, other cloud computing vendors
have had to follow suit.
Cloud computing also appeals to many businesses
because the cloud services provider will handle all
of the maintenance and upkeep of their IT infra-
structures, allowing these businesses to spend more
time on higher-value work. Start-up companies and
smaller companies are finding that they no longer
need to build their own data center. With cloud infra-
structures like Amazon’s readily available, they have
access to technical capability that was formerly avail-
able to only much larger businesses. Hi-Media is the
Internet publisher of the Fotolog photo blogging web-
site. Hi-Media rebuilt the site and moved it to AWS
where it can easily scale computing capacity to meet
the demands of Fotolog’s 32 million global users who
have collectively posted 1 billion photos and 10 bil-
lion comments.
Although cloud computing has been touted as a
cheap and more flexible alternative to buying and
owning information technology, this isn’t always the
case. For large companies, paying a public cloud pro-
vider a monthly service fee for 10,000 or more em-
ployees may actually be more expensive than hav-
ing the company maintain its own IT infrastructure
and staff. Companies also worry about unexpected
“runaway costs” from using a pay-per-use model.
Integrating cloud services with existing IT infrastruc-
tures, errors, mismanagement, or unusually high
volumes of web traffic will run up the bill for cloud
service users.
A major barrier to widespread cloud adoption has
been concerns about cloud reliability and security.
Problems with Amazon Web Services’ Direct Connect
service took down several large customers on the
morning of March 2, 2018, including enterprise
software tool provider Atalassian, Capital One, and
Amazon’s own Alexa personal assistant. (AWS Direct
Connect is used by hybrid cloud customers to set up
a secure connection between AWS infrastructure and
the customer’s on-premises infrastructure.) Amazon’s
S3 cloud storage service experienced a four-hour
outage February 28, 2017, shutting down thousands
of websites across the Internet. There were also
significant Amazon cloud outages in the preceding
five years. As cloud computing continues to mature
and the major cloud infrastructure providers gain
more experience, cloud service and reliability have
steadily improved. Experts recommend that compa-
nies for whom an outage would be a major risk con-
sider using another computing service as a backup.
In February 2016 Netflix completed a decade-long
project to shut down its own data centers and use
Amazon’s cloud exclusively to run its business.
Management liked not having to guess months before-
hand what the firm’s hardware, storage, and network-
ing needs would be. AWS would provide whatever
Netflix needed at the moment. Netflix also maintains
a content-delivery network through Internet service
providers and other third parties to speed up the de-
livery of movies and web traffic between Netflix and
its customers. Netflix competes with Amazon in the
video-streaming business, and it wanted to retain con-
trol of its own content delivery network.
Dropbox, on the other hand, did the opposite.
The online file hosting company saved nearly
INTERACTIVE SESSION ORGANIZATIONS
Look to the Cloud
Chapter 5 IT Infrastructure and Emerging Technologies 187
the most popular software services for consumers, although they are in-
creasingly used in business. Salesforce.com is a leading software service
for business. Salesforce.com provides customer relationship management
(CRM) and other application software solutions as software services leased
over the Internet. Its sales and service clouds offer applications for improv-
ing sales and customer service. A marketing cloud enables companies to
engage in digital marketing interactions with customers through email, mo-
bile, social, web, and connected products. Salesforce.com also provides a
community cloud platform for online collaboration and engagement and
an analytics cloud platform to deploy sales, service, marketing, and custom
analytics apps.
1. What business benefits do cloud computing
services provide? What problems do they solve?
2. What are the disadvantages of cloud computing?
3. What kinds of businesses are most likely to benefit
from using cloud computing? Why?
$75 million in infrastructure costs over two years
following a cloud data migration off AWS. Dropbox
had been an early AWS success story, but it had
never run all of its systems on AWS. Dropbox had
originally split its architecture to host metadata that
provides information about other data in private
data centers and to host file content on the AWS
Simple Storage Service (S3). Dropbox subsequently
built systems better suited to its needs, which so far
has produced big savings following its cloud data
migration off AWS. However, that transition was
costly. The company spent more than $53 million
for custom architectures in three colocation facili-
ties to accommodate exabytes of storage. Dropbox
stores the remaining 10 percent of user data on
AWS, in part to localize data in the United States and
Europe, and it uses Amazon’s public cloud to help
deliver its services. Experts believe that Dropbox’s
experience with AWS is not representative of most
companies. Dropbox’s strategy to build one of the
largest data stores in the world depended on owning
its computing resources.
Many large companies are moving more of their
computing to the cloud but are unable to migrate
completely. Legacy systems are the most difficult to
switch over. Most midsized and large companies will
gravitate toward a hybrid approach. The top cloud
providers themselves—Amazon, Google, Microsoft,
and IBM—use their own public cloud services for
some purposes, but they continue to keep certain
functions on private servers. Worries about reliabil-
ity, security, and risks of change have made it diffi-
cult for them to move critical computing tasks to the
public cloud.
Honda UK implemented the hybrid cloud model
to enable its IT infrastructure to handle sudden
spikes in usage of its websites. The company had
experienced sudden web server crashes due to band-
width limitations. Honda UK had initially moved
to a private cloud model, which was used during
the launch of the Accord Tourer model to handle
heavy user demand for its website. Honda UK then
started using the public cloud during the launch of
the Honda CR-Z. Honda UK had to pay for the cloud
service only when the company used it. The pay-as-
you-go model helped keep costs in check while en-
suring optimum scalability.
Sources: Trevor Jones, “Dropbox Is Likely an Outlier with its Suc-
cessful Cloud Data Migration off AWS,” searchaws.com, February
28, 2018; Andy Patrizio, “Cisco Says Almost All Workloads Will Be
Cloud-Based Within 3 Years,” Network World, February 5, 2018; Tom
Krazit, “Widespread Outage at Amazon Web Services’ U.S. East
Region Takes down Alexa, Atlassian Developer Tools,” GeekWire,
March 2, 2018; DasGupta, “A Case Study: How Hybrid Clouds
Should Be Done,” Cloudwards.net, January 21, 2018; Robert McMil-
lan, “Amazon Grapples with Outage at AWS Cloud Service,” Wall
Street Journal, March 1, 2017; “AWS Case Study: Hi-Media,” www.
aws.amazon.com, accessed May 14, 2017; and Kelly Bit, “The $10
Hedge Fund Supercomputer That’s Sweeping Wall Street,” Bloom-
berg Business Week, May 20, 2015.
CASE STUDY QUESTIONS
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http://Cloudwards.net
http://www.aws.amazon.com
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188 Part Two Information Technology Infrastructure
Salesforce.com is also a leading example of platform as a service (PaaS). Its
Salesforce Platform gives users the ability to develop, launch, and manage ap-
plications without having to deal with the infrastructure required for creating
new software. The Salesforce Platform provides a set of development tools and
IT services that enable users to build new applications and run them in the
cloud on Salesforce.com’s data center infrastructure. Salesforce.com also lists
software from other independent developers on its AppExchange, an online
marketplace for third-party applications that run on the Salesforce Platform.
A cloud can be private or public. A public cloud is owned and maintained
by a cloud service provider, such as Amazon Web Services, and made available
to the general public or industry group. Public cloud services are often used for
websites with public information and product descriptions, one-time large com-
puting projects, developing and testing new applications, and consumer services
such as online storage of data, music, and photos. Google Drive, Dropbox, and
Apple iCloud are leading examples of these consumer public cloud services.
A private cloud is operated solely for an organization. It may be managed
by the organization or a third party and may be hosted either internally or ex-
ternally. Like public clouds, private clouds are able to allocate storage, comput-
ing power, or other resources seamlessly to provide computing resources on an
as-needed basis. Companies that want flexible IT resources and a cloud service
model while retaining control over their own IT infrastructure are gravitating
toward these private clouds.
Because organizations using public clouds do not own the infrastructure,
they do not have to make large investments in their own hardware and soft-
ware. Instead, they purchase their computing services from remote providers
and pay only for the amount of computing power they actually use (utility
computing) or are billed on a monthly or annual subscription basis. The term
on-demand computing has also been used to describe such services.
Cloud computing has some drawbacks. Unless users make provisions for
storing their data locally, the responsibility for data storage and control is in
the hands of the provider. Some companies worry about the security risks re-
lated to entrusting their critical data and systems to an outside vendor that also
works with other companies. Companies expect their systems to be available
24/7 and do not want to suffer any loss of business capability if cloud infra-
structures malfunction. Nevertheless, the trend is for companies to shift more
of their computer processing and storage to some form of cloud infrastructure.
Startups and small companies with limited IT resources and budgets will find
public cloud services especially helpful.
Large firms are most likely to adopt a hybrid cloud computing model where
they use their own infrastructure for their most essential core activities and
adopt public cloud computing for less critical systems or for additional process-
ing capacity during peak business periods. Table 5.2 compares the three cloud
computing models. Cloud computing will gradually shift firms from having a
fixed infrastructure capacity toward a more flexible infrastructure, some of it
owned by the firm and some of it rented from giant computer centers owned by
computer hardware vendors. You can find out more about cloud computing in
the Learning Tracks for this chapter.
Edge Computing
Having all the laptops, smartphones, tablets, wireless sensor networks, and
local on-premise servers used in cloud computing systems interacting with a
single central public cloud data center to process all their data can be inefficient
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Chapter 5 IT Infrastructure and Emerging Technologies 189
and costly. Edge computing is a method of optimizing cloud computing sys-
tems by performing some data processing on a set of linked servers at the edge
of the network, near the source of the data. This reduces the amount of data
flowing back and forth between local computers and other devices and the cen-
tral cloud data center.
Edge computing deployments are useful when sensors or other IoT devices
do not need to be constantly connected to a central cloud. For example, an oil
rig in the ocean might have thousands of sensors producing large amounts of
data, perhaps to confirm that systems are working properly. The data do not
necessarily need to be sent over a network as soon as they are produced, so the
local edge computing system could compile the data and send daily reports to
a central data center or cloud for long-term storage. By only sending important
data over the network, the edge computing system reduces the amount of data
traversing the network
Edge computing also reduces delays in the transmitting and processing of
data because data does not have to travel over a network to a remote data center
or cloud for processing. This is ideal for situations where delays of milliseconds
can be untenable, such as in financial services or manufacturing.
Green Computing
By curbing hardware proliferation and power consumption, virtualization has
become one of the principal technologies for promoting green computing.
Green computing, or green IT, refers to practices and technologies for de-
signing, manufacturing, using, and disposing of computers, servers, and associ-
ated devices such as monitors, printers, storage devices, and networking and
communications systems to minimize impact on the environment.
According to Green House Data, the world’s data centers use as much en-
ergy as the output of 30 nuclear power plants, which amounts to 1.5 percent
of all energy use in the world. A corporate data center can easily consume
over 100 times more power than a standard office building. All this additional
power consumption has a negative impact on the environment and corporate
operating costs. Data centers are now being designed with energy efficiency
in mind, using state-of-the art air-cooling techniques, energy-efficient equip-
ment, virtualization, and other energy-saving practices. Large companies like
Microsoft, Google, Facebook, and Apple are starting to reduce their carbon foot-
print with clean energy–powered data centers with power-conserving equip-
ment and extensive use of wind and hydropower.
TABLE 5.2 CLOUD COMPUTING MODELS COMPARED
TYPE OF CLOUD DESCRIPTION MANAGED BY USES
Public cloud Third-party service offering computing,
storage, and software services to multiple
customers and that is available to the public
Third-party
service providers
Companies without major privacy concerns
Companies seeking pay-as-you-go IT services
Companies lacking IT resources and expertise
Private cloud Cloud infrastructure operated solely for
a single organization and hosted either
internally or externally
In-house IT or
private third-party
host
Companies with stringent privacy and
security requirements
Companies that must have control over data
sovereignty
Hybrid cloud Combination of private and public cloud
services that remain separate entities
In-house IT,
private host, third-
party providers
Companies requiring some in-house control
of IT that are also willing to assign part of
their IT infrastructures to a public cloud
190 Part Two Information Technology Infrastructure
High-Performance and Power-Saving Processors
Another way to reduce power requirements and hardware sprawl is to use
more efficient and power-saving processors. Contemporary microprocessors
now feature multiple processor cores (which perform the reading and execu-
tion of computer instructions) on a single chip. A multicore processor is an
integrated circuit to which two or more processor cores have been attached
for enhanced performance, reduced power consumption, and more efficient si-
multaneous processing of multiple tasks. This technology enables two or more
processing engines with reduced power requirements and heat dissipation to
perform tasks faster than a resource-hungry chip with a single processing core.
Today you’ll find PCs with dual-core, quad-core, six-core, and eight-core proces-
sors and servers with 16- and 32-core processors.
Intel and other chip manufacturers are working on microprocessors that
minimize power consumption, which is essential for prolonging battery life in
small mobile digital devices. Highly power-efficient microprocessors, such as
the A9, A10, and A11 processors used in Apple’s iPhone and iPad and Intel’s
Atom processor, are used in lightweight smartphones and tablets, intelligent
cars, and healthcare devices.
5-4 What are the current computer software
platforms and trends?
There are four major themes in contemporary software platform evolution:
• Linux and open source software
• Java, HTML, and HTML5
• Web services and service-oriented architecture
• Software outsourcing and cloud services
Linux and Open Source Software
Open source software is software produced by a community of several hun-
dred thousand programmers around the world. According to the leading open
source professional association, OpenSource.org, open source software is free
and can be modified by users. Works derived from the original code must also
be free. Open source software is by definition not restricted to any specific op-
erating system or hardware technology.
Popular open source software tools include the Linux operating system,
the Apache HTTP web server, the Mozilla Firefox web browser, and the
Apache OpenOffice desktop productivity suite. Google’s Android mobile op-
erating system and Chrome web browser are based on open source tools. You
can find out more about the Open Source Definition from the Open Source
Initiative and the history of open source software in the Learning Tracks for
this chapter.
Linux
Perhaps the most well-known open source software is Linux, an operating sys-
tem related to Unix. Linux was created by Finnish programmer Linus Torvalds
and first posted on the Internet in August 1991. Linux applications are embed-
ded in cell phones, smartphones, tablet computers, and consumer electronics.
Chapter 5 IT Infrastructure and Emerging Technologies 191
Linux is available in free versions downloadable from the Internet or in low-
cost commercial versions that include tools and support from vendors such as
Red Hat.
Although Linux is not used in many desktop systems, it is a leading operat-
ing system for servers, mainframe computers, and supercomputers. IBM, HP,
Intel, Dell, and Oracle have made Linux a central part of their offerings to cor-
porations. Linux has profound implications for corporate software platforms—
cost reduction, reliability, and resilience—because Linux can work on all the
major hardware platforms.
Software for the Web: Java, HTML, and HTML5
Java is an operating system-independent, processor-independent, object-
oriented programming language created by Sun Microsystems that has be-
come the leading interactive programming environment for the web. The Java
platform has migrated into mobile phones, tablets, automobiles, music play-
ers, game machines, and set-top cable television systems serving interactive
content and pay-per-view services. Java software is designed to run on any
computer or computing device, regardless of the specific microprocessor or op-
erating system the device uses. For each of the computing environments in
which Java is used, a Java Virtual Machine interprets Java programming code
for that machine. In this manner, the code is written once and can be used on
any machine for which there exists a Java Virtual Machine.
Java developers can create small applet programs that can be embedded
in web pages and downloaded to run on a web browser. A web browser is
an easy-to-use software tool with a graphical user interface for displaying web
pages and for accessing the web and other Internet resources. Microsoft’s
Internet Explorer, Mozilla Firefox, Google Chrome, and Apple Safari brows-
ers are examples. At the enterprise level, Java is being used for more complex
e-commerce and e-business applications that require communication with an
organization’s back-end transaction processing systems.
HTML and HTML5
Hypertext Markup Language (HTML) is a page description language for
specifying how text, graphics, video, and sound are placed on a web page and
for creating dynamic links to other web pages and objects. Using these links, a
user need only point at a highlighted keyword or graphic, click on it, and im-
mediately be transported to another document.
HTML was originally designed to create and link static documents composed
largely of text. Today, however, the web is much more social and interactive,
and many web pages have multimedia elements—images, audio, and video.
Third-party plug-in applications like Flash, Silverlight, and Java have been re-
quired to integrate these rich media with web pages. However, these add-ons
require additional programming and put strains on computer processing. The
next evolution of HTML, called HTML5, solves this problem by making it pos-
sible to embed images, audio, video, and other elements directly into a doc-
ument without processor-intensive add-ons. HTML5 makes it easier for web
pages to function across different display devices, including mobile devices as
well as desktops, and it will support the storage of data offline for apps that run
over the web.
Other popular programming tools for web applications include Ruby and
Python. Ruby is an object-oriented programming language known for speed
192 Part Two Information Technology Infrastructure
and ease of use in building web applications, and Python (praised for its clarity)
is being used for building cloud computing applications.
Web Services and Service-Oriented Architecture
Web services refer to a set of loosely coupled software components that ex-
change information with each other using universal web communication
standards and languages. They can exchange information between two differ-
ent systems regardless of the operating systems or programming languages
on which the systems are based. They can be used to build open standard
web-based applications linking systems of two different organizations, and they
can also be used to create applications that link disparate systems within a sin-
gle company. Different applications can use web services to communicate with
each other in a standard way without time-consuming custom coding.
The foundation technology for web services is XML, which stands for
Extensible Markup Language. This language was developed in 1996 by the
World Wide Web Consortium (W3C, the international body that oversees the de-
velopment of the web) as a more powerful and flexible markup language than
hypertext markup language (HTML) for web pages. Whereas HTML is limited
to describing how data should be presented in the form of web pages, XML can
perform presentation, communication, and storage of data. In XML, a number
is not simply a number; the XML tag specifies whether the number represents
a price, a date, or a ZIP code. Table 5.3 illustrates some sample XML statements.
By tagging selected elements of the content of documents for their mean-
ings, XML makes it possible for computers to manipulate and interpret their
data automatically and perform operations on the data without human inter-
vention. Web browsers and computer programs, such as order processing or
enterprise resource planning (ERP) software, can follow programmed rules for
applying and displaying the data. XML provides a standard format for data ex-
change, enabling web services to pass data from one process to another.
Web services communicate through XML messages over standard web pro-
tocols. Companies discover and locate web services through a directory. Using
web protocols, a software application can connect freely to other applications
without custom programming for each different application with which it wants
to communicate. Everyone shares the same standards.
The collection of web services that are used to build a firm’s software systems
constitutes what is known as a service-oriented architecture. A service-
oriented architecture (SOA) is set of self-contained services that communi-
cate with each other to create a working software application. Business tasks
are accomplished by executing a series of these services. Software developers
reuse these services in other combinations to assemble other applications as
needed.
Virtually all major software vendors provide tools and entire platforms for
building and integrating software applications using web services. Microsoft
has incorporated web services tools in its Microsoft .NET platform.
TABLE 5.3 EXAMPLES OF XML
PLAIN ENGLISH XML
Subcompact
4 passenger 4
$16,800 $16,800
Chapter 5 IT Infrastructure and Emerging Technologies 193
Dollar Rent A Car’s systems use web services for its online booking system
with Southwest Airline’s website. Although both companies’ systems are based
on different technology platforms, a person booking a flight on Southwest.com
can reserve a car from Dollar without leaving the airline’s website. Instead of
struggling to get Dollar’s reservation system to share data with Southwest’s in-
formation systems, Dollar used Microsoft .NET web services technology as an
intermediary. Reservations from Southwest are translated into web services
protocols, which are then translated into formats that can be understood by
Dollar’s computers.
Other car rental companies have linked their information systems to airline
companies’ websites before. But without web services, these connections had to
be built one at a time. Web services provide a standard way for Dollar’s comput-
ers to “talk” to other companies’ information systems without having to build
special links to each one. Dollar is now expanding its use of web services to link
directly to the systems of a small tour operator and a large travel reservation
system as well as a wireless website for cell phones and smartphones. It does
not have to write new software code for each new partner’s information sys-
tems or each new wireless device (see Figure 5.11).
Software Outsourcing and Cloud Services
Today, many business firms continue to operate legacy systems that continue
to meet a business need and that would be extremely costly to replace. But they
will purchase or rent most of their new software applications from external
sources. Figure 5.12 illustrates the rapid growth in external sources of software
for U.S. firms.
FIGURE 5.11 HOW DOLLAR RENT A CAR USES WEB SERVICES
Dollar Rent A Car uses web services to provide a standard intermediate layer of software
to “talk” to other companies’ information systems. Dollar Rent A Car can use this set of
web services to link to other companies’ information systems without having to build a
separate link to each firm’s systems.
Tour
Operator’s
Systems
Wireless
WebSite
Dollar Rent A Car
Systems
Web
Services
Travel
Reservation
System
Southwest
Airlines
Systems
Future
Business
Partners’
Systems
Server
Legacy
Reservation
System
http://Southwest.com
194 Part Two Information Technology Infrastructure
There are three external sources for software: software packages from a com-
mercial software vendor (most ERP systems), outsourcing custom application
development to an external vendor (which may or may not be offshore), and
cloud-based software services and tools (SaaS/PaaS).
Software Packages and Enterprise Software
We have already described software packages for enterprise applications as one
of the major types of software components in contemporary IT infrastructures.
A software package is a prewritten commercially available set of software pro-
grams that eliminates the need for a firm to write its own software programs for
certain functions, such as payroll processing or order handling.
Enterprise application software vendors such as SAP and Oracle have
developed powerful software packages that can support the primary business
processes of a firm worldwide from warehousing, customer relationship man-
agement, and supply chain management to finance and human resources.
These large-scale enterprise software systems provide a single, integrated,
worldwide software system for firms at a cost much less than they would pay if
they developed it themselves. Chapter 9 discusses enterprise systems in detail.
Software Outsourcing
Software outsourcing enables a firm to contract custom software develop-
ment or maintenance of existing legacy programs to outside firms, which often
operate offshore in low-wage areas of the world. For example, in 2013, IKEA
announced a six-year offshore IT outsourcing deal with German infrastruc-
ture solutions firm Wincor Nixdorf. Wincor Nixdorf set up 12,000 point-of- sale
(POS) systems in 300 IKEA stores in 25 countries. These systems use Wincor
Nixdorf’s POS TP.net software to control furniture checkout transactions in each
FIGURE 5.12 CHANGING SOURCES OF FIRM SOFTWARE
In 2017, U.S. firms spent an estimated $380 billion on software. About 47 percent
($179 billion) of that originated outside the firm, provided by a variety of vendors. About
13 percent ($49 billion) was provided by SaaS vendors as an online cloud-based service.
Sources: BEA National Income and Product Accounts, 2018.
Sources of Software
E
xp
en
d
it
u
re
s
(b
ill
io
n
s
$)
Outsourced Software
Total Software Spending
0
50
100
150
200
250
300
350
400
2007 2008 2009 2010 2011 2012 2013
Year
2014 2015 2016 2017
Software as a Se
rvice (SaaS)
http://TP.net
Chapter 5 IT Infrastructure and Emerging Technologies 195
store and consolidate all data across the retail group. Wincor Nixdorf provides
IKEA with services that include operation and customization of the systems, as
well as updating the software and applications running on them. Having a sin-
gle software provider offshore helped IKEA reduce the work to run the stores
(Existek, 2017). Offshore software outsourcing firms have primarily provided
lower-level maintenance, data entry, and call center operations, although more
sophisticated and experienced offshore firms, particularly in India, have been
hired for new-program development. However, as wages offshore rise and the
costs of managing offshore projects are factored in (see Chapter 13), some work
that would have been sent offshore is returning to domestic companies.
Cloud-Based Software Services and Tools
In the past, software such as Microsoft Word or Adobe Illustrator came in a box
and was designed to operate on a single machine. Today, you’re more likely to
download the software from the vendor’s website or to use the software as a
cloud service delivered over the Internet and pay a subscription fee.
Cloud-based software and the data it uses are hosted on powerful servers
in data centers and can be accessed with an Internet connection and standard
web browser. In addition to free or low-cost tools for individuals and small busi-
nesses provided by Google or Yahoo, enterprise software and other complex
business functions are available as services from the major commercial soft-
ware vendors. Instead of buying and installing software programs, subscribing
companies rent the same functions from these services, with users paying ei-
ther on a subscription or per-transaction basis. A leading example of software
as a service (SaaS) is Salesforce.com, described earlier in this chapter, which
provides on-demand software services for customer relationship management.
In order to manage their relationship with an outsourcer or technology ser-
vice provider, firms need a contract that includes a service level agreement
(SLA). The SLA is a formal contract between customers and their service pro-
viders that defines the specific responsibilities of the service provider and the
level of service expected by the customer. SLAs typically specify the nature
and level of services provided, criteria for performance measurement, support
options, provisions for security and disaster recovery, hardware and software
ownership and upgrades, customer support, billing, and conditions for termi-
nating the agreement. We provide a Learning Track on this topic.
Mashups and Apps
The software you use for both personal and business tasks today may be com-
posed of interchangeable components that integrate freely with other applications
on the Internet. Individual users and entire companies mix and match these soft-
ware components to create their own customized applications and to share infor-
mation with others. The resulting software applications are called mashups. The
idea is to take different sources and produce a new work that is greater than the
sum of its parts. You have performed a mashup if you’ve ever personalized your
Facebook profile or your blog with a capability to display videos or slide shows.
Web mashups combine the capabilities of two or more online applications
to create a kind of hybrid that provides more customer value than the original
sources alone. For instance, ZipRealty uses Google Maps and data provided by
an online real estate database. Apps are small, specialized software programs
that run on the Internet, on your computer, or on your mobile phone or tablet
and are generally delivered over the Internet. Google refers to its online ser-
vices as apps. But when we talk about apps today, most of the attention goes to
the apps that have been developed for the mobile digital platform. It is these
http://Salesforce.com
196 Part Two Information Technology Infrastructure
apps that turn smartphones and tablets into general-purpose computing tools.
There are now millions of apps for the IOS and Android operating systems.
Some downloaded apps do not access the web, but many do, providing faster
access to web content than traditional web browsers. Apps provide a stream-
lined non-browser pathway for users to perform a number of tasks, ranging
from reading the newspaper to shopping, searching, personal health monitor-
ing, playing games, and buying. They increasingly are used by managers as
gateways to their firm’s enterprise systems. Because so many people are now
accessing the Internet from their mobile devices, some say that apps are “the
new browsers.” Apps are also starting to influence the design and function of
traditional websites as consumers are attracted to the look and feel of apps and
their speed of operation.
Many apps are free or purchased for a small charge, much less than conven-
tional software, which further adds to their appeal. The success of these mobile
platforms depends in large part on the quantity and the quality of the apps they
provide. Apps tie the customer to a specific hardware platform: As the user
adds more and more apps to his or her mobile phone, the cost of switching to a
competing mobile platform rises.
At the moment, the most commonly downloaded apps are games, news and
weather, maps/navigation, social networking, music, and video/movies. But
there are also serious apps for business users that make it possible to create
and edit documents, connect to corporate systems, schedule and participate
in meetings, track shipments, and dictate voice messages (see the Chapter 1
Interactive Session on Management). Most large online retailers have apps for
consumers for researching and buying goods and services online.
5-5 What are the challenges of managing IT
infrastructure and management solutions?
Creating and managing a coherent IT infrastructure raises multiple challenges:
dealing with platform and technology change (including cloud and mobile
computing), management and governance, and making wise infrastructure
investments.
Dealing with Platform and Infrastructure Change
As firms grow, they often quickly outgrow their infrastructure. As firms shrink,
they can get stuck with excessive infrastructure purchased in better times. How
can a firm remain flexible if investments in IT infrastructure are fixed-cost pur-
chases and licenses? How well does the infrastructure scale? Scalability refers
to the ability of a computer, product, or system to expand to serve a large num-
ber of users without breaking down. New applications, mergers and acquisi-
tions, and changes in business volume all affect computer workload and must
be considered when planning hardware capacity.
Firms using mobile computing and cloud computing platforms will require
new policies, procedures, and tools for managing these platforms. They will
need to inventory all of their mobile devices in business use and develop poli-
cies and tools for tracking, updating, and securing them, and for controlling
the data and applications that run on them. Firms often turn to mobile device
management (MDM) software, which monitors, manages, and secures mobile
devices that are deployed across multiple mobile service providers and across
Chapter 5 IT Infrastructure and Emerging Technologies 197
multiple mobile operating systems being used in the organization. MDM tools
enable the IT department to monitor mobile usage, install or update mobile
software, back up and restore mobile devices, and remove software and data
from devices that are stolen or lost.
Firms using cloud computing and SaaS will need to fashion new contractual
arrangements with remote vendors to make sure that the hardware and soft-
ware for critical applications are always available when needed and that they
meet corporate standards for information security. It is up to business manage-
ment to determine acceptable levels of computer response time and availability
for the firm’s mission-critical systems to maintain the level of business perfor-
mance that is expected.
Management and Governance
A long-standing issue among information system managers and CEOs has
been the question of who will control and manage the firm’s IT infrastructure.
Chapter 2 introduced the concept of IT governance and described some issues
it addresses. Other important questions about IT governance are: Should de-
partments and divisions have the responsibility of making their own informa-
tion technology decisions, or should IT infrastructure be centrally controlled
and managed? What is the relationship between central information systems
management and business unit information systems management? How will
infrastructure costs be allocated among business units? Each organization will
need to arrive at answers based on its own needs.
Making Wise Infrastructure Investments
IT infrastructure is a major investment for the firm. If too much is spent on
infrastructure, it lies idle and constitutes a drag on the firm’s financial perfor-
mance. If too little is spent, important business services cannot be delivered
and the firm’s competitors (who spent the right amount) will outperform the
under-investing firm. How much should the firm spend on infrastructure? This
question is not easy to answer.
A related question is whether a firm should purchase and maintain its own
IT infrastructure components or rent them from external suppliers, includ-
ing those offering cloud services. The decision either to purchase your own
IT assets or to rent them from external providers is typically called the rent-
versus-buy decision.
Cloud computing is a low-cost way to increase scalability and flexibility, but
firms should evaluate this option carefully in light of security requirements and
impact on business processes and workflows. In some instances, the cost of
renting software adds up to more than purchasing and maintaining an applica-
tion in-house, or firms can overspend on cloud services (Loten, 2018). Yet there
are many benefits to using cloud services including significant reductions in
hardware, software, human resources, and maintenance costs. Moving to cloud
computing allows firms to focus on their core businesses rather than technol-
ogy issues.
Total Cost of Ownership of Technology Assets
The actual cost of owning technology resources includes the original cost of
acquiring and installing hardware and software as well as ongoing administra-
tion costs for hardware and software upgrades, maintenance, technical sup-
port, training, and even utility and real estate costs for running and housing
198 Part Two Information Technology Infrastructure
the technology. The total cost of ownership (TCO) model can be used to
analyze these direct and indirect costs to help firms determine the actual cost
of specific technology implementations. Table 5.4 describes the most important
components to consider in a TCO analysis.
When all these cost components are considered, the TCO for a PC might run
up to three times the original purchase price of the equipment. Gains in pro-
ductivity and efficiency from equipping employees with mobile computing de-
vices must be balanced against increased costs from integrating these devices
into the firm’s IT infrastructure and from providing technical support. Other
cost components include fees for wireless airtime, end-user training, help desk
support, and software for special applications. Costs are higher if the mobile
devices run many different applications or need to be integrated into back-end
systems such as enterprise applications.
Hardware and software acquisition costs account for only about 20 percent
of TCO, so managers must pay close attention to administration costs to under-
stand the full cost of the firm’s hardware and software. It is possible to reduce
some of these administration costs through better management. Many large
firms are saddled with redundant, incompatible hardware and software because
their departments and divisions have been allowed to make their own technol-
ogy purchases.
In addition to switching to cloud services, these firms could reduce their TCO
through greater centralization and standardization of their hardware and soft-
ware resources. Companies could reduce the size of the information systems
staff required to support their infrastructure if the firm minimizes the number
of different computer models and pieces of software that employees are al-
lowed to use. In a centralized infrastructure, systems can be administered from
a central location and troubleshooting can be performed from that location.
Competitive Forces Model for IT Infrastructure Investment
Figure 5.13 illustrates a competitive forces model you can use to address the
question of how much your firm should spend on IT infrastructure.
TABLE 5.4 TOTAL COST OF OWNERSHIP (TCO) COST COMPONENTS
INFRASTRUCTURE COMPONENT COST COMPONENTS
Hardware acquisition Purchase price of computer hardware equipment,
including computers, terminals, storage, and printers
Software acquisition Purchase or license of software for each user
Installation Cost to install computers and software
Training Cost to provide training for information systems
specialists and end users
Support Cost to provide ongoing technical support, help
desks, and so forth
Maintenance Cost to upgrade the hardware and software
Infrastructure Cost to acquire, maintain, and support related
infrastructure, such as networks and specialized
equipment (including storage backup units)
Downtime Cost of lost productivity if hardware or software failures
cause the system to be unavailable for processing and
user tasks
Space and energy Real estate and utility costs for housing and providing
power for the technology
Chapter 5 IT Infrastructure and Emerging Technologies 199
Market demand for your firm’s services. Make an inventory of the ser-
vices you currently provide to customers, suppliers, and employees. Survey
each group, or hold focus groups to find out if the services you currently
offer are meeting the needs of each group. For example, are customers com-
plaining of slow responses to their queries about price and availability? Are
employees complaining about the difficulty of finding the right information
for their jobs? Are suppliers complaining about the difficulties of discovering
your production requirements?
Your firm’s business strategy. Analyze your firm’s five-year business strat-
egy and try to assess what new services and capabilities will be required to
achieve strategic goals.
Your firm’s IT strategy, infrastructure, and cost. Examine your firm’s
information technology plans for the next five years and assess its alignment
with the firm’s business plans. Determine the total IT infrastructure costs. You
will want to perform a TCO analysis. If your firm has no IT strategy, you will
need to devise one that takes into account the firm’s five-year strategic plan.
Information technology assessment. Is your firm behind the technology
curve or at the bleeding edge of information technology? Both situations
are to be avoided. It is usually not desirable to spend resources on advanced
technologies that are still experimental, often expensive, and sometimes
unreliable. You want to spend on technologies for which standards have been
established; IT vendors are competing on cost, not design; and where there
are multiple suppliers. However, you do not want to put off investment in
new technologies or allow competitors to develop new business models and
capabilities based on the new technologies.
FIGURE 5.13 COMPETITIVE FORCES MODEL FOR IT INFRASTRUCTURE
There are six factors you can use to answer the question “How much should our firm spend on IT
infrastructure?”
1
Market Demand
for Your Firm’s
Customer Services,
Supplier Services,
and Enterprise
Services
Your Firm’s
IT Services
and Infrastructure
4
Information
Technology
External Market Factors
Internal Factors
6
Competitor Firms’
IT Infrastructure
Investments
2
Your Firm’s
Business Strategy
3
Your Firm’s
IT Strategy,
Infrastructure,
and Cost
5
Competitor
Firms’
IT Services
200 Part Two Information Technology Infrastructure
Competitor firm services. Try to assess what technology services competi-
tors offer to customers, suppliers, and employees. Establish quantitative and
qualitative measures to compare them to those of your firm. If your firm’s
service levels fall short, your company is at a competitive disadvantage. Look
for ways your firm can excel at service levels.
Competitor firm IT infrastructure investments. Benchmark your expen-
ditures for IT infrastructure against your competitors. Many companies are
quite public about their innovative expenditures on IT. If competing firms
try to keep IT expenditures secret, you may be able to find IT investment in-
formation in public companies’ SEC Form 10-K annual reports to the federal
government when those expenditures affect a firm’s financial results.
Your firm does not necessarily need to spend as much as or more than your
competitors. Perhaps it has discovered much less expensive ways of providing
services, and this can lead to a cost advantage. Alternatively, your firm may be
spending far less than competitors, and experiencing commensurate poor per-
formance and losing market share.
5-6 How will MIS help my career?
Here is how Chapter 5 and this book can help you find a job as an entry-level
IT consultant.
The Company
A1 Tech IT Consulting, a national technology consulting firm headquartered
in Atlanta, is looking for an entry-level IT consultant. The company partners
with technology vendors to create and sell leading-edge technology solutions
based on cloud, network, and managed IT services to small, medium-sized, and
enterprise-sized companies. The company has 65 employees and is noted for
outstanding customer service.
Position Description
The entry-level IT consultant will work with the firm’s account managers to
maintain good relationships with existing clients and help its technology con-
sultants create solutions and proposals for prospective customers. The com-
pany will provide on-the-job training about the technology industry and its
technology consulting process. Job responsibilities include:
• Providing research on potential and existing clients and the competitive
landscape.
• Managing digital marketing campaigns.
• Assisting in identifying potential business opportunities.
• Preparing periodic reports on screening, tracking, and monitoring clients and
prospects.
Job Requirements
• Bachelor’s degree or equivalent
• Ability to communicate well with clients by phone, by email, and face-to-face
• Strong organizational, presentation, and writing skills
Chapter 5 IT Infrastructure and Emerging Technologies 201
• Ability to work in a fast-paced environment and collaborate effectively as a
team member
• Proficiency in Microsoft Office (Word, Excel, and PowerPoint)
• Strong organizational, presentation, and writing skills and willingness to
learn
Interview Questions
1. What do you know about cloud computing and managed IT services? Are
you familiar with common operating systems, security, and data manage-
ment platforms? Have you ever used these services on the job? What did you
do with them?
2. Have you had much face-to-face contact with customers? Can you describe
what work you did with customers? Have you ever helped customers with a
technology problem?
3. Do you have any digital marketing experience?
4. Can you give us an example of a sales-related problem or other business
problem that you helped solve? Do you do any writing and analysis? Can you
provide examples?
5. What is your level of proficiency with Microsoft Office? What work have you
done with Excel spreadsheets?
Author Tips
1. Review this chapter and also Chapters 6 and 8 of this text, paying special
attention to cloud computing, networking technology, and managed technol-
ogy services.
2. Use the web to research the company and how it works with other technol-
ogy companies to provide its IT services. Learn what you can about these
partner companies as well and the tools and services they offer.
3. Inquire exactly how you would be using Microsoft Office, and if possible
provide examples of how you used these tools to solve problems in the
classroom or for a job assignment. Bring examples of your writing (includ-
ing some from your Digital Portfolio described in MyLab MIS) demonstrating
your analytical skills and project experience.
4. Indicate that you are very interested in learning more about the technology
industry and technologies and services used by the company.
5. Review the company’s LinkedIn page, Facebook, and Twitter to learn about
strategic trends and important issues for this company.
REVIEW SUMMARY
5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution?
IT infrastructure is the shared technology resources that provide the platform for the firm’s specific
information system applications. IT infrastructure includes hardware, software, and services that are
shared across the entire firm.
The five stages of IT infrastructure evolution are the mainframe era, the personal computer era, the
client/server era, the enterprise computing era, and the cloud and mobile computing era. Moore’s Law
deals with the exponential increase in processing power and decline in the cost of computer technol-
ogy, stating that every 18 months the power of microprocessors doubles and the price of computing
falls in half. The Law of Mass Digital Storage deals with the exponential decrease in the cost of storing
202 Part Two Information Technology Infrastructure
data, stating that the number of kilobytes of data that can be stored on magnetic media for $1 roughly
doubles every 15 months. Metcalfe’s Law states that a network’s value to participants grows exponen-
tially as the network takes on more members. The rapid decline in costs of communication and grow-
ing agreement in the technology industry to use computing and communications standards are also
driving an explosion of computer use.
5-2 What are the components of IT infrastructure?
Major IT infrastructure components include computer hardware platforms, operating system plat-
forms, enterprise software platforms, networking and telecommunications platforms, database man-
agement software, Internet platforms, and consulting services and systems integrators.
5-3 What are the current trends in computer hardware platforms?
Increasingly, computing is taking place on a mobile digital platform. Quantum computing is an
emerging technology that could dramatically boost processing power through the ability to be in more
than one state at the same time. Consumerization of IT is the business use of information technology
that originated in the consumer market. Virtualization organizes computing resources so that their use
is not restricted by physical configuration or geographic location. In cloud computing, firms and indi-
viduals obtain computing power and software as services over a network, including the Internet, rath-
er than purchasing and installing the hardware and software on their own computers. Edge computing
helps optimize cloud computing by performing some data processing on a set of linked servers at the
edge of the network, near the source of the data. A multicore processor is a microprocessor to which
two or more processing cores have been attached for enhanced performance. Green computing in-
cludes practices and technologies for producing, using, and disposing of information technology hard-
ware to minimize negative impact on the environment.
5-4 What are the current computer software platforms and trends?
Open source software is produced and maintained by a global community of programmers and is
often downloadable for free. Linux is a powerful, resilient open source operating system that can run
on multiple hardware platforms and is used widely to run web servers. Java is an operating system–
and hardware-independent programming language that is the leading interactive programming envi-
ronment for the web. HTML5 makes it possible to embed images, audio, and video directly into a web
document without add-on programs. Web services are loosely coupled software components based on
open web standards that work with any application software and operating system. They can be used
as components of web-based applications linking the systems of two different organizations or to link
disparate systems of a single company. Companies are purchasing their new software applications
from outside sources, including software packages, by outsourcing custom application development
to an external vendor (that may be offshore), or by renting online software services (SaaS). Mashups
combine two different software services to create new software applications and services. Apps are
software applications that run on mobile devices and are delivered over the Internet.
5-5 What are the challenges of managing IT infrastructure and management solutions?
Major challenges include dealing with platform and infrastructure change, infrastructure manage-
ment and governance, and making wise infrastructure investments. Solution guidelines include using
a competitive forces model to determine how much to spend on IT infrastructure and where to make
strategic infrastructure investments, and establishing the total cost of ownership (TCO) of information
technology assets. The total cost of owning technology resources includes not only the original cost
of computer hardware and software but also costs for hardware and software upgrades, maintenance,
technical support, and training. Many firms are turning to cloud computing in an effort to reduce their
IT platform costs. Firms use tools for mobile device management (MDM) to monitor, manage, and se-
cure mobile devices that are deployed across the enterprise.
Key Terms
Android, 178
Application server, 169
Apps, 195
BYOD, 182
Chrome OS, 178
Clients, 169
Client/server computing, 169
Cloud computing, 170
Chapter 5 IT Infrastructure and Emerging Technologies 203
Consumerization of IT, 182
Edge computing, 189
Green computing (green IT), 189
Hypertext Markup Language (HTML), 191
HTML5, 191
Hybrid cloud, 188
Infrastructure as a service (IaaS), 185
iOS, 178
Java, 191
Legacy systems, 180
Linux, 178
Mainframe, 167
Mashup, 195
Minicomputers, 167
Mobile device management (MDM), 196
Moore’s Law, 171
Multicore processor, 190
Multitiered client/server architecture, 169
Multitouch, 178
Nanotechnology, 173
On-demand computing, 188
Open source software, 190
Operating system, 178
Outsourcing, 194
Platform as a service (PaaS), 185
Private cloud, 188
Public cloud, 188
Quantum computing, 183
Scalability, 196
Server, 169
Service level agreement (SLA), 195
Service-oriented architecture (SOA), 192
Software as a service (SaaS), 185
Software package, 194
Software-defined storage (SDS), 183
Tablet computers, 180
Technology standards, 175
Total cost of ownership (TCO), 198
Unix, 178
Virtualization, 183
Web browser, 191
Web hosting service, 179
Web server, 169
Web services, 192
Windows, 170
Windows 10, 178
Wintel PC, 169
XML, 192
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in MyLab MIS.
Review Questions
5-1 What is IT infrastructure, and what are the stages
and drivers of IT infrastructure evolution?
• Define IT infrastructure from both a tech-
nology and a services perspective.
• List each of the eras in IT infrastructure
evolution and describe its distinguishing
characteristics.
• Define and describe the following: web
server, application server, multitiered cli-
ent/server architecture.
• Describe Moore’s Law and the Law of Mass
Digital Storage.
• Describe how network econom-
ics, declining communications costs,
and technology standards affect IT
infrastructure.
5-2 What are the components of IT infrastructure?
• List and describe the components of IT in-
frastructure that firms need to manage.
5-3 What are the current trends in computer
hardware platforms?
• Describe the evolving mobile plat-
form, consumerization of IT, and cloud
computing.
• Explain how businesses can benefit from
virtualization, green computing, and multi-
core processors.
5-4 What are the current computer software
platforms and trends?
• Define and describe open source software
and Linux and explain their business
benefits.
• Define Java and HTML5 and explain why
they are important.
• Define and describe web services and the
role played by XML.
• Name and describe the three external
sources for software.
• Define and describe software mashups and
apps.
5-5 What are the challenges of managing IT
infrastructure and management solutions?
• Name and describe the management chal-
lenges posed by IT infrastructure.
• Explain how using a competitive forces
model and calculating the TCO of technol-
ogy assets help firms make good infrastruc-
ture investments.
204 Part Two Information Technology Infrastructure
Hands-On MIS Projects
The projects in this section give you hands-on experience in developing solutions for managing IT infrastructures
and IT outsourcing, using spreadsheet software to evaluate alternative desktop systems, and using web research
to budget for a sales conference. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
5-9 The University of Pittsburgh Medical Center (UPMC) relies on information systems to operate 19
hospitals, a network of other care sites, and international and commercial ventures. Demand for
additional servers and storage technology was growing by 20 percent each year. UPMC was setting up
a separate server for every application, and its servers and other computers were running a number
of different operating systems, including several versions of Unix and Windows. UPMC had to manage
technologies from many different vendors, including Hewlett-Packard (HP), Sun Microsystems, Microsoft,
and IBM. Assess the impact of this situation on business performance. What factors and management
decisions must be considered when developing a solution to this problem?
5-10 Qantas Airways, Australia’s leading airline, faces cost pressures from high fuel prices and lower levels of
global airline traffic. To remain competitive, the airline must find ways to keep costs low while providing
a high level of customer service. Qantas had a 30-year-old data center. Management had to decide
whether to replace its IT infrastructure with newer technology or outsource it. What factors should be
considered by Qantas management when deciding whether to outsource? If Qantas decides to outsource,
list and describe points that should be addressed in a service level agreement.
Improving Decision Making: Using a Spreadsheet to Evaluate Hardware and Software
Options
Software skills: Spreadsheet formulas
Business skills: Technology pricing
5-11 In this exercise, you will use spreadsheet software to calculate the cost of desktop systems, printers,
and software.
Use the Internet to obtain pricing information on hardware and software for an office of 30 people. You
will need to price 30 PC desktop systems (monitors, computers, and keyboards) manufactured by Lenovo,
Dell, and HP. (For the purposes of this exercise, ignore the fact that desktop systems usually come with
preloaded software packages.) Also obtain pricing on 15 desktop printers manufactured by HP, Canon, and
Brother. Each desktop system must satisfy the minimum specifications shown in tables that you can find in
MyLab MIS.
Also obtain pricing on 30 licenses or copies of the most recent versions of Microsoft Office 365 Business
and Apache Open Office (formerly Oracle Open Office) and on 30 copies of Microsoft Windows 10 Pro.
Each desktop productivity solution should contain software for word processing, spreadsheets, database,
and presentations. Prepare a spreadsheet showing your research results for the desktop system, printer, and
software combination offering the best performance and pricing per worker over a two-year period. Because
every two workers share one printer (15 printers/30 systems), your calculations should assume only half a
printer cost per worker.
Discussion Questions
5-6 Why is selecting computer hardware and
software for the organization an important
management decision? What management,
organization, and technology issues should
be considered when selecting computer
hardware and software?
5-7 Should organizations use software service
providers for all their software needs?
MyLab MIS
MyLab MIS
Why or why not? What management,
organization, and technology factors should
be considered when making this decision?
5-8 What are the advantages and disadvantages
of cloud computing?MyLab MIS
Chapter 5 IT Infrastructure and Emerging Technologies 205
Improving Decision Making: Using Web Research to Budget for a Sales Conference
Software skills: Internet-based software
Business skills: Researching transportation and lodging costs
5-12 The Foremost Composite Materials Company is planning a two-day sales conference for October 19–20,
starting with a reception on the evening of October 18. The conference consists of all-day meetings
that the entire sales force, numbering 120 sales representatives and their 16 managers, must attend.
Each sales representative requires his or her own room, and the company needs two common meeting
rooms, one large enough to hold the entire sales force plus a few visitors (200) and the other able to
hold half the force. Management has set a budget of $195,000 for the representatives’ room rentals. The
company would like to hold the conference in either Miami or Marco Island, Florida, at a Hilton- or
Marriott-owned hotel.
Use the Hilton and Marriott websites to select a hotel in whichever of these cities would enable the com-
pany to hold its sales conference within its budget and meet its sales conference requirements. Then locate
flights arriving the afternoon prior to the conference. Your attendees will be coming from Los Angeles (51), San
Francisco (30), Seattle (22), Chicago (19), and Pittsburgh (14). Determine costs of each airline ticket from these
cities. When you are finished, create a budget for the conference. The budget will include the cost of each air-
line ticket, the room cost, and $70 per attendee per day for food.
Collaboration and Teamwork Project
Evaluating Server and Mobile Operating Systems
5-13 Form a group with three or four of your classmates. Choose server or mobile operating systems to evaluate.
You might research and compare the capabilities and costs of Linux versus Unix or the most recent version of
the Windows operating system for servers. Alternatively, you could compare the capabilities of the Android
mobile operating system with iOS for the iPhone. If possible, use Google Docs and Google Drive or Google
Sites to brainstorm, organize, and develop a presentation of your findings for the class.
206 Part Two Information Technology Infrastructure
Is BYOD Good for Business?
CASE STUDY
Just about everyone who has a smartphone wants to be able to bring it to work and use it on the job, and many employers would
like workers to do so. A survey of BYOD trends by
MarketsandMarkets found that adoption rates among
North American companies approached 50 percent
by the start of 2018. Research from Sapho workplace
productivity experts found the average worker saves
81 minutes per week in productivity by using a per-
sonal device at work.
Will BYOD become the new normal? Not neces-
sarily. Half of all enterprises believe that BYOD rep-
resents a growing problem for their organizations,
according to a number of studies. Although BYOD
can improve employee job satisfaction and produc-
tivity, it also can cause a number of problems if not
managed properly. Support for personally owned de-
vices is more difficult than it is for company-supplied
devices, the cost of managing mobile devices can
increase, and protecting corporate data and networks
becomes more difficult.
When every employee brings his or her own de-
vice to work, IT departments lose almost all control
over the hardware. They can’t control what apps or
programs are installed, how the devices are secured,
or what files are downloaded. In the past, the firm
was able to control who had what technology in
order to prevent privacy breaches, hacking, and un-
authorized access to corporate information. Inability
to control the hardware means more vulnerabilities.
That is the big tradeoff with BYOD: offering employ-
ees greater flexibility while potentially exposing the
company to danger.
BYOD advocates have argued that it increases
employee productivity, but that is not always the
case. When employees bring their own devices to
work, they may be tempted to use them on the job
for entertainment or catching up with friends. It’s
incredibly easy for employees to get sucked into an
endless black hole of text messaging, YouTube vid-
eos, and checking Facebook updates. Productivity
will suffer (see the Chapter 7 Interactive Session on
Management).
BYOD requires a significant portion of corporate
IT resources dedicated to managing and maintaining
a large number of devices within the organization.
In the past, companies tried to limit business smart-
phone use to a single platform. This made it easier to
keep track of each mobile device and to roll out soft-
ware upgrades or fixes because all employees were
using the same devices or, at the very least, the same
operating system. Today, the mobile digital land-
scape is much more complicated, with a variety of
devices and operating systems on the market that do
not have well-developed tools for administration and
security. Android has over 80 percent of the world-
wide smartphone market, but it is more difficult to
use for corporate work than Apple mobile devices
using the iOS operating system. iOS is considered
a closed system and runs only on a limited num-
ber of different Apple mobile devices. In contrast,
Android’s fragmentation makes it more difficult and
costly for corporate IT to manage. There are about
25,000 different models of Android-based devices
available around the world, according to a report by
OpenSignal, which researches wireless networks and
devices. Android’s huge consumer market share at-
tracts many hackers. Android is also vulnerable be-
cause it has an open source architecture and comes
in multiple versions.
If employees are allowed to work with more than
one type of mobile device and operating system,
companies need an effective way to keep track of
all the devices employees are using. To access com-
pany information, the company’s networks must be
configured to receive connections from that device.
When employees make changes to their personal
phone, such as switching cellular carriers, changing
their phone number, or buying a new mobile device
altogether, companies will need to quickly and flex-
ibly ensure that their employees are still able to
remain productive. Firms need a system that keeps
track of which devices employees are using, where
the device is located, whether it is being used, and
what software it is equipped with. For unprepared
companies, keeping track of who gets access to what
data could be a nightmare.
With the large variety of mobile devices and oper-
ating systems available, providing adequate technical
support for every employee could be difficult. When
employees are not able to access critical data or en-
counter other problems with their mobile devices,
Chapter 5 IT Infrastructure and Emerging Technologies 207
they will need assistance from the information sys-
tems department. Companies that rely on desktop
computers tend to have many of the same computers
with the same specs and operating systems, making
tech support that much easier. Mobility introduces a
new layer of variety and complexity to tech support
that companies need to be prepared to handle.
There are significant concerns with securing com-
pany information accessed with mobile devices. If
a device is stolen or compromised, companies need
ways to ensure that sensitive or confidential informa-
tion isn’t freely available to anyone. Mobility puts
assets and data at greater risk than if they were only
located within company walls and on company ma-
chines. Marble Security Labs analyzed 1.2 million
Android and iOS apps and found that the consumer
apps on mobile devices did not adequately protect
business information. Companies often use technolo-
gies that allow them to wipe data from devices re-
motely or encrypt data so that if the device is stolen,
it cannot be used. You’ll find a detailed discussion of
mobile security issues in Chapter 8.
Intel was a pioneer in the BYOD movement and
has successfully implemented an enterprise-wide
policy covering more than 30,000 employee mobile
devices. Another major issue surrounding a corpo-
rate BYOD policy is the potential lack of trust be-
tween workers and management when management
has access to personal data on employee devices. To
deal with this issue, Intel has established clear-cut
guidelines informing employees about exactly what
information can and can’t be seen when adminis-
trators manage personal devices. Intel will quickly
respond to any questions employees might have re-
garding BYOD. The company also allows employees
to choose among different levels of mobile access to
corporate systems, with each tier accompanied by
different levels of security.
SAP, a leading global vendor of enterprise software,
is another tech company that has implemented BYOD
successfully. The company developed a specialized
mobile platform for various work-related applica-
tions, enabling employees to work from anywhere
with their mobile devices. SAP has also created a se-
curity system for decommissioning a mobile device
within a minute whenever a smartphone or tablet
is lost or stolen. All SAP divisions across the globe
have reported some form of success with BYOD. SAP
Australia/New Zealand reports that the policy is key
in attracting younger workers who are attached to
their mobile devices and constantly use the apps.
The global reinsurance giant Swiss Re believes
every employee should be able to work in the way
they choose and has more and more staff using their
own smartphones and tablets to access its intranet
and personal information management (PIM) apps.
Swiss Re successfully implemented BYOD by choos-
ing a secure, highly scalable Enterprise Mobility
Management (EMM) system that could support mul-
tiple operating systems, and a local partner to man-
age all of its technical and organizational aspects.
Over the past six years, 4,500 employee-owned
iPhones and iPads have been added to the system
alongside existing company devices. About one-third
of the smartphones and tablets are company-owned
and the other two-thirds are owned by employees
of Swiss Re. Swiss Re manages these devices using
MobileIron’s EMM system, which enables global
enterprises to secure and manage modern operat-
ing systems in a world of mixed-use mobile devices
and desktops. It incorporates identity, context, and
privacy enforcement to set the appropriate level of
access to enterprise data and services.
The multi-OS EMM solution was rolled out with
the help of local partner Nomasis AG. Likewise,
Android is a possibility in the future. If it meets the
company’s security requirements, staff wishing to
use Android devices will probably be allowed to do
so as part of Swiss Re’s BYOD strategy, obviously
within the framework of MobileIron.
Supporting nearly all current mobile operating sys-
tems is a big technical and organizational challenge
for Swiss Re, but management feels it has been worth-
while. Mobile devices have helped the company expe-
rience a significant rise in user productivity, because
staff can access documents more quickly, whether
they’re in the office or traveling on business.
Blackstone, a global investment and advisory firm,
has implemented a BYOD policy, but it has placed
limitations on the types of devices employees can
use. Blackstone’s BYOD policy only allows employ-
ees to use their own Apple products such as iPads.
For that company, Apple devices were the easiest to
support and required little maintenance compared
to other mobile tools. Any other devices would add
to the workload of Blackstone’s IT department, thus
eliminating the cost savings that often come with
BYOD. Due to Apple’s popularity, few employees
have objected.
At Venafi, a cybersecurity company, employees
have the option of bringing their own smartphones,
tablets, and notebooks to work with them or using
208 Part Two Information Technology Infrastructure
in the immediate future. Khan notes that the hospi-
tality industry and many others still want employees
to use corporate-owned devices for any laptop, tab-
let, or smartphone requiring access to the corporate
network. His business has sensitive information and
needs that level of control. Although the hotel might
possibly save money with BYOD, it’s ultimately all
about productivity.
Sources: “Swiss Re Chooses MobileIron ‘Bring Your Own Device’
Technology,” www.mobileiron.com, accessed March 9, 2018; “5
BYOD Management Case Studies,” Sunviewsoftware.com, ac-
cessed March 9, 2018; Stasmayer Incorporated, “The ‘Bring Your
Own Device’ Trend: Is It Worth It?” www.stasmayer.com, accessed
March 10, 2018; Lisa Phifer, “The Challenges of a Bring Your Own
Device (BYOD) Policy,” Simple MDM, January 5, 2017; Jonathan
Crowl, “The Latest BYOD Trends and Predictions, from Mobile
Focus to Endpoint Management.” Mobile Business Insights, August
14, 2017; Ryan Patrick, “Is a BYOD Strategy Best for Business?” IT
World Canada, March 22, 2016; Linda Gimmeson, “3 Companies
Showing Success With BYOD,” Toolbox.com, July 9, 2015; Alan F.,
“Open Signal: 24,093 Unique and Different Android-Powered
Devices Are Available,” Phonearena.com, August 5, 2015.
CASE STUDY QUESTIONS
5-14 What are the advantages and disadvantages of
allowing employees to use their personal mo-
bile devices for work?
5-15 What management, organization, and technol-
ogy factors should be addressed when deciding
whether to allow employees to use their per-
sonal mobile devices for work?
5-16 Evaluate how the companies described in this
case study dealt with the challenges of BYOD.
5-17 Allowing employees to use their own smart-
phones for work will save the company
money. Do you agree? Why or why not?
company-issued devices. The company has a well-
developed BYOD policy. Venafi’s IT department does
not support employees’ hardware devices because
it would be too difficult to handle all the different
mobile devices and software available to consumers.
That means employees are responsible for trouble-
shooting and repairs of their personal equipment.
However, Venafi does ensure that each device is se-
curely connected to the corporate network.
According to Tammy Moskites, Venafi CISO and
CIO, the biggest challenge in defining a BYOD policy
that leaves everyone satisfied has been balanc-
ing risk with flexibility. Although Venafi has given
employees the choice of using their own mobile
devices, it has also written contracts with language
describing the terms and conditions for bringing
one’s own device into work, including the ability to
remove company data from the device if needed.
Many corporate BYOD policies restrict access
to time-wasting sites like Facebook, YouTube, or
Twitter. But Venafi management believes that instead
of resorting to measures like blocking YouTube or
Facebook and forbidding the use of mobile phones,
companies should focus more on performance. As
long as the employees are motivated and performing
well, they shouldn’t be subjected to unnecessary re-
strictions. Employees typically don’t understand the
implications of BYOD and the dangers of lax security.
Venafi’s IT department tries to educate employees
about realities of BYOD and gives them the power to
use their devices responsibly.
Iftekhar Khan, IT director at Toronto’s Chelsea
Hotel, remains less sanguine. He believes BYOD
might work for his company down the road but not
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
5-18 What are the distinguishing characteristics of cloud computing, and what are the three types of cloud
services?
5-19 What is the total cost of ownership of technology assets, and what are its cost components?
http://www.mobileiron.com
http://Sunviewsoftware.com
Home
http://Toolbox.com
http://Phonearena.com
Chapter 5 IT Infrastructure and Emerging Technologies 209
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210
MyLab MIS
Discussion Questions: 6-5, 6-6, 6-7; Hands-on MIS Projects 6-8, 6-9, 6-10, 6-11;
Writing Assignments: 6-17, 6-18; eText with Conceptual Animations
CHAPTER CASES
Data Management Helps the Charlotte
Hornets Learn More About Their Fans
Kraft Heinz Finds a New Recipe for Analyzing
Its Data
Databases Where the Data Aren’t There
How Reliable Is Big Data?
VIDEO CASES
Dubuque Uses Cloud Computing and
Sensors to Build a Smarter City
Brooks Brothers Closes In on Omnichannel
Retail
Maruti Suzuki Business Intelligence and
Enterprise Databases
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
6-1 What are the problems of managing
data resources in a traditional file
environment?
6-2 What are the major capabilities of
database management systems
(DBMS), and why is a relational DBMS
so powerful?
6-3 What are the principal tools and
technologies for accessing information
from databases to improve business
performance and decision making?
6-4 Why are information policy, data
administration, and data quality
assurance essential for managing the
firm’s data resources?
6-5 How will MIS help my career?
Foundations of Business Intelligence:
Databases and Information
Management6CHAPTER
211
The NBA’s Charlotte Hornets have millions of fans, but until recently they didn’t know very much about them. The Charlotte, North Carolina–based basketball team had many millions of records of fan data—online ticket
and team gear purchases, food and beverage purchases at games, and com-
ments about the team on social media. Every time a fan performs one of these
actions, more data about that fan are created. Three million records of food
and beverage purchase transactions are generated
during each Hornets game. There was too much
unorganized customer data for decision makers to
digest.
All of this accumulating data, which came from
many different sources, started to overtax the
team’s Microsoft Dynamics customer relationship
management system. There were 12 to 15 differ-
ent sources of data on Hornets fan behavior and
they were maintained in separate data repositories
that could not communicate with each other. It be-
came increasingly difficult for the Hornets to un-
derstand their fans and how they were interacting
with the organization.
Five years ago, Hornets management decided
to improve its approach to data management. The
team needed technology that could easily main-
tain data from many different sources and 12 different vendors and it needed
to be able to combine and integrate what amounted to 12 different profiles on
each fan into a single profile. This would enable the Hornets to understand
each fan’s behavior in much greater detail and offer them a more personalized
experience.
Under the leadership of Chris Zeppenfeld, the Hornets’ senior director of
business intelligence, the team implemented a data warehouse that would con-
solidate all of the Hornets’ customer data from its various data sources in a
single location where the data could be easily accessed and analyzed by busi-
ness users. The warehouse was based on a SAP HANA database optimized to
process very large quantities of data at ultra-high speed and included Phizzle
Fan Tracker™ software to cleanse, streamline, and combine millions of fan re-
cords to create a single profile for each Hornets fan. Phizzle Fan Tracker is a
fan engagement platform designed to consolidate, analyze, and act on multiple
data sources. The platform’s data aggregation capabilities, innovative data vi-
sualization tools, and social listening solutions provide sports properties and
brands the capability to gather and analyze digital, social, and real-world fan
engagements. Fan Tracker works with the SAP HANA database to consolidate
Data Management Helps the Charlotte Hornets
Learn More About Their Fans
© Oleksii Sidorov/Shutterstock
212 Part Two Information Technology Infrastructure
customer profiles, analyze and act on real-time online behavior, and consoli-
date all existing data sources to uniquely identify fan records. The solution pro-
vides a unified overview and deeper understanding of each fan, allowing clubs
to offer their fans a more personalized experience.
By using Fan Tracker and a unified data warehouse, the Hornets have com-
piled and synthesized 25 million fan and consumer interactions, saving over $1.5
million in consulting expenses. They now have a real-time data profile for every
one of their 1.5 million fans, which includes up-to-the minute behavioral data
on each fan from third-party applications as well as the Hornets’ own sources.
Each profile reveals detailed insights into a fan’s behavior including sentiment,
purchase history, interactions, and fan value across multiple points of contact.
Zeppenfeld believes that better fan data management has helped the team rank
among the top five NBA franchises for new full season ticket sales each year.
Sources: Jim O’Donnell, “Charlotte Hornets Use Phizzle Built on HANA to Analyze Fan
Behavior,” SearchSAPtechtarget.com, February 11, 2018; “NBA Team Charlotte Hornets/SAP
Case Study,” www.phizzle.com, accessed February 12, 2018; and Mark J. Burns, “Why The
Charlotte Hornets Are Using Phizzle To Streamline Their Data Warehouse,” Sport Techie,
September 2016.
The experience of the Charlotte Hornets illustrates the importance of data management. Business performance depends on what a firm can or can-
not do with its data. The Charlotte Hornets NBA basketball team was a thriv-
ing business, but both operational efficiency and management decision making
were hampered by fragmented data stored in multiple locations that were dif-
ficult to access and analyze. How businesses store, organize, and manage their
data has an enormous impact on organizational effectiveness.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. The Charlotte Hornets had accumulated very large
quantities of fan data from many different sources. Marketing campaigns and
personalized offers to fans were not as effective as they could have been be-
cause it was so difficult to assemble and understand the data required to obtain
a detailed understanding of each customer. The solution was to combine the
Hornets’ customer data from all sources in a data warehouse that provided a
single source of data for reporting and analysis and use Fan Tracker software to
consolidate disparate pieces of customer data into a single profile for each cus-
tomer. The Hornets had to reorganize their data into a standard company-wide
format; establish rules, responsibilities, and procedures for accessing and using
the data; and provide tools for making the data accessible to users for querying
and reporting.
The data warehouse integrated company data from all of its disparate sources
into a single comprehensive database that could be queried directly. The data
were reconciled to prevent multiple profiles on the same customer. The so-
lution improved customer marketing, sales, and service while reducing costs.
The Hornets increased their ability to quickly analyze very large quantities of
data by using SAP HANA high-speed database technology.
The data warehouse boosted operational efficiency and decision making
by making more comprehensive and accurate customer data available and by
http://SearchSAPtechtarget.com
http://www.phizzle.com
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 213
• Very large volume of data
• Data fragmented in isolated
databases and files
• Outdated data management
technology
• Consolidate and
standardize data
• Revise data access
rules and procedures
• Consolidate customer profiles
• Accelerate decision making
• Improve customer analysis
• Reduce costs
• Increase customer
service
• Increase sales• SAP HANA
• Data warehouse
• FanTracker
• Centralize data
management
• Select data
management
technology
Business
Solutions
Management
Organization
Customer Data Warehouse
Technology
Information
System
Business
Challenges
making it easier to access all the business’s data on each customer. By help-
ing the Hornets understand their own customers better, the solution increased
opportunities for selling to customers as well as the effectiveness of marketing
and sales campaigns.
Here are some questions to think about: What was the business impact of the
Hornets’ data management problems? How did better use of the Hornets’ cus-
tomer data improve operational efficiency and management decision making?
6-1 What are the problems of managing data
resources in a traditional file environment?
An effective information system provides users with accurate, timely, and relevant
information. Accurate information is free of errors. Information is timely when it is
available to decision makers when it is needed. Information is relevant when it is
useful and appropriate for the types of work and decisions that require it.
You might be surprised to learn that many businesses don’t have timely, ac-
curate, or relevant information because the data in their information systems
have been poorly organized and maintained. That’s why data management is
so essential. To understand the problem, let’s look at how information systems
arrange data in computer files and traditional methods of file management.
File Organization Terms and Concepts
A computer system organizes data in a hierarchy that starts with bits and bytes
and progresses to fields, records, files, and databases (see Figure 6.1). A bit rep-
resents the smallest unit of data a computer can handle. A group of bits, called a
byte, represents a single character, which can be a letter, a number, or another
symbol. A grouping of characters into a word, a group of words, or a complete
number (such as a person’s name or age) is called a field. A group of related
fields, such as the student’s name, the course taken, the date, and the grade,
comprises a record; a group of records of the same type is called a file.
214 Part Two Information Technology Infrastructure
For example, the records in Figure 6.1 could constitute a student course file.
A group of related files makes up a database. The student course file illustrated
in Figure 6.1 could be grouped with files on students’ personal histories and
financial backgrounds to create a student database.
A record describes an entity. An entity is a person, place, thing, or event
on which we store and maintain information. Each characteristic or quality
describing a particular entity is called an attribute. For example, Student_ID,
Course, Date, and Grade are attributes of the entity COURSE. The specific val-
ues that these attributes can have are found in the fields of the record describ-
ing the entity COURSE.
Problems with the Traditional File Environment
In most organizations, systems tended to grow independently without a compa-
nywide plan. Accounting, finance, manufacturing, human resources, and sales
and marketing all developed their own systems and data files. Figure 6.2 illus-
trates the traditional approach to information processing.
FIGURE 6.1 THE DATA HIERARCHY
A computer system organizes data in a hierarchy that starts with the bit, which repre-
sents either a 0 or a 1. Bits can be grouped to form a byte to represent one character,
number, or symbol. Bytes can be grouped to form a field, and related fields can be
grouped to form a record. Related records can be collected to form a file, and related
files can be organized into a database.
0100 1001 (Letter I in ASCII)
0
IS 101 (Course field)
Student_ID Course Date Grade
39044 IS 101 F18 B+
Bit
Byte
Field
Record
File
Database
Student_ID Course Date Grade
39044 IS 101 F18 B+
59432 IS 101 F18 A
64029 IS 101 F18 C
COURSE
COURSE
File
FINANCIAL
File
PERSONAL
File
Student Database
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 215
Each application, of course, required its own files and its own computer
program to operate. For example, the human resources functional area might
have a personnel master file, a payroll file, a medical insurance file, a pen-
sion file, a mailing list file, and so forth, until tens, perhaps hundreds, of files
and programs existed. In the company as a whole, this process led to multiple
master files created, maintained, and operated by separate divisions or depart-
ments. As this process goes on for 5 or 10 years, the organization is saddled
with hundreds of programs and applications that are very difficult to maintain
and manage. The resulting problems are data redundancy and inconsistency,
program-data dependence, inflexibility, poor data security, and an inability to
share data among applications.
Data Redundancy and Inconsistency
Data redundancy is the presence of duplicate data in multiple data files so
that the same data are stored in more than one place or location. Data redun-
dancy occurs when different groups in an organization independently collect
the same piece of data and store it independently of each other. Data redun-
dancy wastes storage resources and also leads to data inconsistency, where
the same attribute may have different values. For example, in instances of the
entity COURSE illustrated in Figure 6.1, the Date may be updated in some sys-
tems but not in others. The same attribute, Student_ID, might also have dif-
ferent names in different systems throughout the organization. Some systems
might use Student_ID and others might use ID, for example.
Additional confusion can result from using different coding systems to repre-
sent values for an attribute. For instance, the sales, inventory, and manufacturing
systems of a clothing retailer might use different codes to represent clothing size.
FIGURE 6.2 TRADITIONAL FILE PROCESSING
The use of a traditional approach to file processing encourages each functional area in
a corporation to develop specialized applications. Each application requires a unique
data file that is likely to be a subset of the master file. These subsets of the master file
lead to data redundancy and inconsistency, processing inflexibility, and wasted storage
resources.
Users
Users
Users
Users
Application
program 4
A B C D
A B D E
A B E G
A E F G
ACCOUNTING
AND FINANCE
HUMAN
RESOURCES
SALES AND
MARKETING
MANUFACTURING
Derivative files
Master file
Data elements
A to Z
Application
program 3
Application
program 1
Application
program 2
216 Part Two Information Technology Infrastructure
One system might represent clothing size as “extra large,” whereas another might
use the code “XL” for the same purpose. The resulting confusion would make it
difficult for companies to create customer relationship management, supply chain
management, or enterprise systems that integrate data from different sources.
Program-Data Dependence
Program-data dependence refers to the coupling of data stored in files and the
specific programs required to update and maintain those files such that changes
in programs require changes to the data. Every traditional computer program
has to describe the location and nature of the data with which it works. In a
traditional file environment, any change in a software program could require a
change in the data accessed by that program. One program might be modified
from a five-digit to a nine-digit ZIP code. If the original data file were changed
from five-digit to nine-digit ZIP codes, then other programs that required the
five-digit ZIP code would no longer work properly. Such changes could cost mil-
lions of dollars to implement properly.
Lack of Flexibility
A traditional file system can deliver routine scheduled reports after extensive
programming efforts, but it cannot deliver ad hoc reports or respond to unantic-
ipated information requirements in a timely fashion. The information required
by ad hoc requests is somewhere in the system but may be too expensive to
retrieve. Several programmers might have to work for weeks to put together the
required data items in a new file.
Poor Security
Because there is little control or management of data, access to and dissemina-
tion of information may be out of control. Management might have no way of
knowing who is accessing or even making changes to the organization’s data.
Lack of Data Sharing and Availability
Because pieces of information in different files and different parts of the organiza-
tion cannot be related to one another, it is virtually impossible for information to
be shared or accessed in a timely manner. Information cannot flow freely across
different functional areas or different parts of the organization. If users find differ-
ent values for the same piece of information in two different systems, they may
not want to use these systems because they cannot trust the accuracy of their data.
6-2 What are the major capabilities of database
management systems (DBMS), and why
is a relational DBMS so powerful?
Database technology cuts through many of the problems of traditional file
organization. A more rigorous definition of a database is a collection of data
organized to serve many applications efficiently by centralizing the data and
controlling redundant data. Rather than storing data in separate files for each
application, data appear to users as being stored in only one location. A single
database services multiple applications. For example, instead of a corporation
storing employee data in separate information systems and separate files for
personnel, payroll, and benefits, the corporation could create a single common
human resources database (see Figure 6.3).
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 217
Database Management Systems
A database management system (DBMS) is software that enables an orga-
nization to centralize data, manage them efficiently, and provide access to the
stored data by application programs. The DBMS acts as an interface between
application programs and the physical data files. When the application program
calls for a data item, such as gross pay, the DBMS finds this item in the database
and presents it to the application program. Using traditional data files, the pro-
grammer would have to specify the size and format of each data element used
in the program and then tell the computer where they were located.
The DBMS relieves the programmer or end user from the task of understand-
ing where and how the data are actually stored by separating the logical and
physical views of the data. The logical view presents data, as they would be
perceived by end users or business specialists, whereas the physical view shows
how data are actually organized and structured on physical storage media.
The database management software makes the physical database available
for different logical views required by users. For example, for the human re-
sources database illustrated in Figure 6.3, a benefits specialist might require
a view consisting of the employee’s name, social security number, and health
insurance coverage. A payroll department member might need data such as the
employee’s name, social security number, gross pay, and net pay. The data for
all these views are stored in a single database, where they can be more easily
managed by the organization.
How a DBMS Solves the Problems of the Traditional
File Environment
A DBMS reduces data redundancy and inconsistency by minimizing isolated files
in which the same data are repeated. The DBMS may not enable the organization
to eliminate data redundancy entirely, but it can help control redundancy. Even
if the organization maintains some redundant data, using a DBMS eliminates data
FIGURE 6.3 HUMAN RESOURCES DATABASE WITH MULTIPLE VIEWS
A single human resources database provides many different views of data, depending
on the information requirements of the user. Illustrated here are two possible views, one
of interest to a benefits specialist and one of interest to a member of the company’s
payroll department.
Database
Management
System
Name
SSN
Health_Care
Name
SSN
Gross_Pay
Net_Pay
Employee_ID
Name
SSN
Position
Date_Hired
Gross_Pay
Net_Pay
Life_Insurance
Pension_Benefit
Health_Care
Human Resources
Database
Benefits
View
Payroll
View
218 Part Two Information Technology Infrastructure
inconsistency because the DBMS can help the organization ensure that every oc-
currence of redundant data has the same values. The DBMS uncouples programs
and data, enabling data to stand on their own. The description of the data used by
the program does not have to be specified in detail each time a different program
is written. Access and availability of information will be increased and program
development and maintenance costs reduced because users and programmers
can perform ad hoc queries of the database for many simple applications with-
out having to write complicated programs. The DBMS enables the organization
to centrally manage data, their use, and security. Data sharing throughout the
organization is easier because the data are presented to users as being in a single
location rather than fragmented in many different systems and files.
Relational DBMS
Contemporary DBMS use different database models to keep track of enti-
ties, attributes, and relationships. The most popular type of DBMS today for
PCs as well as for larger computers and mainframes is the relational DBMS.
Relational databases represent data as two-dimensional tables (called relations).
Tables may be referred to as files. Each table contains data on an entity and its
attributes. Microsoft Access is a relational DBMS for desktop systems, whereas
DB2, Oracle Database, and Microsoft SQL Server are relational DBMS for large
mainframes and midrange computers. MySQL is a popular open source DBMS.
Let’s look at how a relational database organizes data about suppliers and
parts (see Figure 6.4). The database has a separate table for the entity SUPPLIER
and a table for the entity PART. Each table consists of a grid of columns and
rows of data. Each individual element of data for each entity is stored as a
separate field, and each field represents an attribute for that entity. Fields in a
relational database are also called columns. For the entity SUPPLIER, the sup-
plier identification number, name, street, city, state, and ZIP code are stored as
separate fields within the SUPPLIER table and each field represents an attribute
for the entity SUPPLIER.
The actual information about a single supplier that resides in a table is called
a row. Rows are commonly referred to as records, or in very technical terms, as
tuples. Data for the entity PART have their own separate table.
The field for Supplier_Number in the SUPPLIER table uniquely identifies each
record so that the record can be retrieved, updated, or sorted. It is called a key
field. Each table in a relational database has one field that is designated as its
primary key. This key field is the unique identifier for all the information in any
row of the table and this primary key cannot be duplicated. Supplier_Number is
the primary key for the SUPPLIER table and Part_Number is the primary key for
the PART table. Note that Supplier_Number appears in both the SUPPLIER and
PART tables. In the SUPPLIER table, Supplier_Number is the primary key. When
the field Supplier_Number appears in the PART table, it is called a foreign key and
is essentially a lookup field to look up data about the supplier of a specific part.
Operations of a Relational DBMS
Relational database tables can be combined easily to deliver data required by
users, provided that any two tables share a common data element. Suppose we
wanted to find in this database the names of suppliers who could provide us
with part number 137 or part number 150. We would need information from
two tables: the SUPPLIER table and the PART table. Note that these two files
have a shared data element: Supplier_Number.
In a relational database, three basic operations, as shown in Figure 6.5,
are used to develop useful sets of data: select, join, and project. The select
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 219
operation creates a subset consisting of all records in the file that meet stated
criteria. Select creates, in other words, a subset of rows that meet certain cri-
teria. In our example, we want to select records (rows) from the PART table
where the Part_Number equals 137 or 150. The join operation combines re-
lational tables to provide the user with more information than is available in
individual tables. In our example, we want to join the now-shortened PART
table (only parts 137 or 150 will be presented) and the SUPPLIER table into a
single new table.
The project operation creates a subset consisting of columns in a table, permit-
ting the user to create new tables that contain only the information required. In
our example, we want to extract from the new table only the following columns:
Part_Number, Part_Name, Supplier_Number, and Supplier_Name.
Capabilities of Database Management Systems
A DBMS includes capabilities and tools for organizing, managing, and accessing
the data in the database. The most important are its data definition language,
data dictionary, and data manipulation language.
FIGURE 6.4 RELATIONAL DATABASE TABLES
A relational database organizes data in the form of two-dimensional tables. Illustrated here are tables for the entities
SUPPLIER and PART showing how they represent each entity and its attributes. Supplier_Number is a primary key for
the SUPPLIER table and a foreign key for the PART table.
Columns (Attributes, Fields)
Rows
(Records,
Tuples)
SUPPLIER
Key Field
(Primary Key)
OH
OH
KY
NY
Supplier_State
Dayton
Cleveland
Lexington
Rochester
Supplier_City
74 5th Avenue
1277 Gandolly Street
8233 Micklin Street
4315 Mill Drive
Supplier_Street
CBM Inc.
B. R. Molds
Jackson Composites
Bryant Corporation
Supplier_Name
8259
8261
8263
8444
Supplier_Number
45220
49345
56723
11344
Supplier_Zip
PART
Primary Key Foreign Key
8259
8259
8261
8259
Supplier_Number
22.00
31.00
54.00
10.00
Unit_Price
Door latch
844412.00Side mirror
82636.00Door molding
Door lock
Compressor
Door handle
Part_Name
137
145
152
150
155
178
Part_Number
220 Part Two Information Technology Infrastructure
FIGURE 6.5 THE THREE BASIC OPERATIONS OF A RELATIONAL DBMS
The select, join, and project operations enable data from two different tables to
be combined and only selected attributes to be displayed.
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Chapter 6 Foundations of Business Intelligence: Databases and Information Management 221
DBMS have a data definition capability to specify the structure of the con-
tent of the database. It would be used to create database tables and to define the
characteristics of the fields in each table. This information about the database
would be documented in a data dictionary. A data dictionary is an automated
or manual file that stores definitions of data elements and their characteristics.
Microsoft Access has a rudimentary data dictionary capability that displays in-
formation about the name, description, size, type, format, and other properties of
each field in a table (see Figure 6.6). Data dictionaries for large corporate databases
may capture additional information, such as usage, ownership (who in the orga-
nization is responsible for maintaining the data), authorization, security, and the
individuals, business functions, programs, and reports that use each data element.
Querying and Reporting
DBMS includes tools for accessing and manipulating information in databases.
Most DBMS have a specialized language called a data manipulation language
that is used to add, change, delete, and retrieve the data in the database. This
language contains commands that permit end users and programming special-
ists to extract data from the database to satisfy information requests and de-
velop applications. The most prominent data manipulation language today is
Structured Query Language, or SQL. Figure 6.7 illustrates the SQL query
FIGURE 6.6 ACCESS DATA DICTIONARY FEATURES
Microsoft Access has a rudimentary data dictionary capability that displays information
about the size, format, and other characteristics of each field in a database. Displayed
here is the information maintained in the SUPPLIER table. The small key icon to the left
of Supplier_Number indicates that it is a key field.
Courtesy of Microsoft Corporation
FIGURE 6.7 EXAMPLE OF AN SQL QUERY
Illustrated here are the SQL statements for a query to select suppliers for parts 137 or
150. They produce a list with the same results as Figure 6.5.
SELECT PART.Part_Number, PART.Part_Name, SUPPLIER.Supplier_Number,
SUPPLIER.Supplier_Name
FROM PART, SUPPLIER
WHERE PART.Supplier_Number = SUPPLIER.Supplier_Number AND
Part_Number = 137 OR Part_Number = 150;
222 Part Two Information Technology Infrastructure
that would produce the new resultant table in Figure 6.5. You can find out more
about how to perform SQL queries in our Learning Tracks for this chapter.
Users of DBMS for large and midrange computers, such as DB2, Oracle, or
SQL Server, would employ SQL to retrieve information they needed from the
database. Microsoft Access also uses SQL, but it provides its own set of user-
friendly tools for querying databases and for organizing data from databases
into more polished reports.
In Microsoft Access, you will find features that enable users to create queries
by identifying the tables and fields they want and the results and then selecting
the rows from the database that meet particular criteria. These actions in turn
are translated into SQL commands. Figure 6.8 illustrates how the same query
as the SQL query to select parts and suppliers would be constructed using the
Microsoft Access query-building tools.
Microsoft Access and other DBMS include capabilities for report generation
so that the data of interest can be displayed in a more structured and polished
format than would be possible just by querying. Crystal Reports is a popular
report generator for large corporate DBMS, although it can also be used with
Access. Access also has capabilities for developing desktop system applications.
These include tools for creating data entry screens, reports, and developing the
logic for processing transactions.
Designing Databases
To create a database, you must understand the relationships among the data,
the type of data that will be maintained in the database, how the data will be
used, and how the organization will need to change to manage data from a
companywide perspective. The database requires both a conceptual design and
a physical design. The conceptual, or logical, design of a database is an abstract
model of the database from a business perspective, whereas the physical design
shows how the database is actually arranged on direct-access storage devices.
FIGURE 6.8 AN ACCESS QUERY
Illustrated here is how the query in Figure 6.7 would be constructed using Microsoft
Access query-building tools. It shows the tables, fields, and selection criteria used for
the query.
Courtesy of Microsoft Corporation
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 223
Normalization and Entity-Relationship Diagrams
The conceptual database design describes how the data elements in the da-
tabase are to be grouped. The design process identifies relationships among
data elements and the most efficient way of grouping data elements together to
meet business information requirements. The process also identifies redundant
data elements and the groupings of data elements required for specific appli-
cation programs. Groups of data are organized, refined, and streamlined until
an overall logical view of the relationships among all the data in the database
emerges.
To use a relational database model effectively, complex groupings of data
must be streamlined to minimize redundant data elements and awkward many-
to-many relationships. The process of creating small, stable, yet flexible and
adaptive data structures from complex groups of data is called normalization.
Figures 6.9 and 6.10 illustrate this process.
In the particular business modeled here, an order can have more than one
part, but each part is provided by only one supplier. If we build a relation called
ORDER with all the fields included here, we would have to repeat the name and
address of the supplier for every part on the order, even though the order is for
parts from a single supplier. This relationship contains what are called repeat-
ing data groups because there can be many parts on a single order to a given
supplier. A more efficient way to arrange the data is to break down ORDER into
smaller relations, each of which describes a single entity. If we go step by step
and normalize the relation ORDER, we emerge with the relations illustrated in
Figure 6.10. You can find out more about normalization, entity-relationship dia-
gramming, and database design in the Learning Tracks for this chapter.
FIGURE 6.9 AN UNNORMALIZED RELATION FOR ORDER
An unnormalized relation contains repeating groups. For example, there can be many parts and suppliers for each
order. There is only a one-to-one correspondence between Order_Number and Order_Date.
Unit_
Price
Part_
Number
Part_
Name
Part_
Quantity
Order_
Number
Order_
Date
Supplier_
Number
Supplier_
Name
Supplier_
Street
Supplier_
City
Supplier_
State
Supplier_
Zip
ORDER (Before Normalization)
FIGURE 6.10 NORMALIZED TABLES CREATED FROM ORDER
After normalization, the original relation ORDER has been broken down into four smaller relations. The relation ORDER
is left with only two attributes, and the relation LINE_ITEM has a combined, or concatenated, key consisting of Order_
Number and Part_Number.
Part_
Number
Part_
Name
Unit_
Price
Supplier_
Number
Order_
Number
Order_
Date
Supplier_
Street
Supplier_
City
Supplier_
State
Supplier_
Zip
PART LINE ITEM
SUPPLIER ORDER
Key Key
Supplier_
Number
Supplier_
Name
Key Key
Part_
Number
Part_
Quantity
Order_
Number
224 Part Two Information Technology Infrastructure
Relational database systems try to enforce referential integrity rules to en-
sure that relationships between coupled tables remain consistent. When one
table has a foreign key that points to another table, you may not add a record
to the table with the foreign key unless there is a corresponding record in the
linked table. In the database we examined earlier in this chapter, the foreign key
Supplier_Number links the PART table to the SUPPLIER table. We may not add
a new record to the PART table for a part with Supplier_Number 8266 unless
there is a corresponding record in the SUPPLIER table for Supplier_Number
8266. We must also delete the corresponding record in the PART table if we
delete the record in the SUPPLIER table for Supplier_Number 8266. In other
words, we shouldn’t have parts from nonexistent suppliers!
Database designers document their data model with an entity-relationship
diagram, illustrated in Figure 6.11. This diagram illustrates the relationship be-
tween the entities SUPPLIER, PART, LINE_ITEM, and ORDER. The boxes rep-
resent entities. The lines connecting the boxes represent relationships. A line
connecting two entities that ends in two short marks designates a one-to-one
relationship. A line connecting two entities that ends with a crow’s foot topped
by a short mark indicates a one-to-many relationship. Figure 6.11 shows that one
ORDER can contain many LINE_ITEMs. (A PART can be ordered many times
and appear many times as a line item in a single order.) Each PART can have
only one SUPPLIER, but many PARTs can be provided by the same SUPPLIER.
It can’t be emphasized enough: If the business doesn’t get its data model
right, the system won’t be able to serve the business well. The company’s sys-
tems will not be as effective as they could be because they’ll have to work with
data that may be inaccurate, incomplete, or difficult to retrieve. Understanding
the organization’s data and how they should be represented in a database is per-
haps the most important lesson you can learn from this course.
For example, Famous Footwear, a shoe store chain with more than 800 loca-
tions in 49 states, could not achieve its goal of having “the right style of shoe in
the right store for sale at the right price” because its database was not properly
designed for rapidly adjusting store inventory. The company had an Oracle
relational database running on a midrange computer, but the database was de-
signed primarily for producing standard reports for management rather than
for reacting to marketplace changes. Management could not obtain precise data
on specific items in inventory in each of its stores. The company had to work
around this problem by building a new database where the sales and inventory
data could be better organized for analysis and inventory management.
Non-relational Databases, Cloud Databases,
and Blockchain
For more than 30 years, relational database technology has been the gold
standard. Cloud computing, unprecedented data volumes, massive work-
loads for web services, and the need to store new types of data require
FIGURE 6.11 AN ENTITY-RELATIONSHIP DIAGRAM
This diagram shows the relationships between the entities SUPPLIER, PART, LINE_ITEM, and ORDER that might be
used to model the database in Figure 6.10.
provides
is supplied by
is ordered
contains
belongs to
includes
ORDERLINE_ITEMPARTSUPPLIER
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 225
database alternatives to the traditional relational model of organizing data
in the form of tables, columns, and rows. Companies are turning to “NoSQL”
non-relational database technologies for this purpose. Non-relational da-
tabase management systems use a more flexible data model and are de-
signed for managing large data sets across many distributed machines and
for easily scaling up or down. They are useful for accelerating simple queries
against large volumes of structured and unstructured data, including web, so-
cial media, graphics, and other forms of data that are difficult to analyze with
traditional SQL-based tools.
There are several different kinds of NoSQL databases, each with its own
technical features and behavior. Oracle NoSQL Database is one example, as is
Amazon’s SimpleDB, one of the Amazon Web Services that run in the cloud.
SimpleDB provides a simple web services interface to create and store mul-
tiple data sets, query data easily, and return the results. There is no need to
predefine a formal database structure or change that definition if new data are
added later.
MetLife’s MongoDB open source NoSQL database brings together data from
more than 70 separate administrative systems, claims systems, and other data
sources, including semi-structured and unstructured data, such as images of
health records and death certificates. The NoSQL database can handle struc-
tured, semi-structured, and unstructured information without requiring te-
dious, expensive, and time-consuming database mapping to normalize all data
to a rigid schema, as required by relational databases.
Cloud Databases and Distributed Databases
Among the services Amazon and other cloud computing vendors provide are
relational database engines. Amazon Relational Database Service (Amazon
RDS) offers MySQL, Microsoft SQL Server, Oracle Database, PostgreSQL, or
Amazon Aurora as database engines. Pricing is based on usage. Oracle has
its own Database Cloud Services using its relational Oracle Database, and
Microsoft Azure SQL Database is a cloud-based relational database service
based on the Microsoft SQL Server DBMS. Cloud-based data management ser-
vices have special appeal for web-focused startups or small to medium-sized
businesses seeking database capabilities at a lower cost than in-house database
products.
Google now offers its Spanner distributed database technology as a cloud
service. A distributed database is one that is stored in multiple physical lo-
cations. Parts or copies of the database are physically stored in one location
and other parts or copies are maintained in other locations. Spanner makes it
possible to store information across millions of machines in hundreds of data
centers around the globe, with special time-keeping tools to synchronize the
data precisely in all of its locations and ensure the data are always consistent.
Google uses Spanner to support its various cloud services, including Google
Photos, AdWords (Google’s online ad system), and Gmail, and is now making
the technology available to other companies that might need such capabilities
to run a global business.
Blockchain
Blockchain is a distributed database technology that enables firms and organi-
zations to create and verify transactions on a network nearly instantaneously
without a central authority. The system stores transactions as a distributed led-
ger among a network of computers The information held in the database is
continually reconciled by the computers in the network.
226 Part Two Information Technology Infrastructure
The blockchain maintains a continuously growing list of records called
blocks. Each block contains a timestamp and link to a previous block. Once a
block of data is recorded on the blockchain ledger, it cannot be altered retroac-
tively. When someone wants to add a transaction, participants in the network
(all of whom have copies of the existing blockchain) run algorithms to evalu-
ate and verify the proposed transaction. Legitimate changes to the ledger are
recorded across the blockchain in a matter of seconds or minutes and records
are protected through cryptography. What makes a blockchain system possible
and attractive to business firms is encryption and authentication of the actors
and participating firms, which ensures that only legitimate actors can enter
information, and only validated transactions are accepted. Once recorded, the
transaction cannot be changed. Figure 6.12 illustrates how blockchain works for
fulfilling an order.
There are many large benefits to firms using blockchain databases.
Blockchain networks radically reduce the cost of verifying users, validating
transactions, and the risks of storing and processing transaction information
across thousands of firms. Instead of thousands of firms building their own pri-
vate transaction systems, then integrating them with suppliers, shippers, and
financial institution systems, blockchain can provide a single, simple, low-cost
transaction system for participating firms. Standardization of recording transac-
tions is aided through the use of smart contracts. Smart contracts are computer
programs that implement the rules governing transactions between firms, e.g.,
what is the price of products, how will they be shipped, when will the transac-
tion be completed, who will finance the transaction, what are financing terms,
and the like.
The simplicity and security that blockchain offers has made it attractive for
storing and securing financial transactions, supply chain transactions, medi-
cal records, and other types of data. Blockchain is a foundation technology for
Bitcoin, Ethereum, and other cryptocurrencies. Chapter 8 provides more detail
on securing transactions with blockchain.
FIGURE 6.12 HOW BLOCKCHAIN WORKS
A blockchain system is a distributed database that records transactions in a peer-to-peer
network of computers
An order is
submitted by
a user or
customer
User
verification
Transaction
validation
The transaction is
broadcast to a
P2P network of
computers
The transaction is
validated by others
in the network
The block is added
to the chain of
transactions for this
user
Production,
Warehouse,
Logistics add
additional blocks
The order is
fulfilled
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 227
6-3 What are the principal tools and technologies for
accessing information from databases to improve
business performance and decision making?
Businesses use their databases to keep track of basic transactions, such as pay-
ing suppliers, processing orders, keeping track of customers, and paying em-
ployees. But they also need databases to provide information that will help the
company run the business more efficiently and help managers and employees
make better decisions. If a company wants to know which product is the most
popular or who is its most profitable customer, the answer lies in the data.
The Challenge of Big Data
Most data collected by organizations used to be transaction data that could eas-
ily fit into rows and columns of relational database management systems. We
are now witnessing an explosion of data from web traffic, email messages, and
social media content (tweets, status messages), as well as machine-generated
data from sensors (used in smart meters, manufacturing sensors, and electrical
meters) or from electronic trading systems. These data may be unstructured or
semi-structured and thus not suitable for relational database products that or-
ganize data in the form of columns and rows. We now use the term big data to
describe these data sets with volumes so huge that they are beyond the ability
of typical DBMS to capture, store, and analyze.
Big data is often characterized by the “3Vs”: the extreme volume of data, the
wide variety of data types and sources, and the velocity at which data must be
processed. Big data doesn’t designate any specific quantity but usually refers
to data in the petabyte and exabyte range—in other words, billions to trillions
of records, many from different sources. Big data are produced in much larger
quantities and much more rapidly than traditional data. For example, a single
jet engine is capable of generating 10 terabytes of data in just 30 minutes, and
there are more than 25,000 airline flights each day. Twitter generates more
than 8 terabytes of data daily. According to the International Data Center (IDC)
technology research firm, data are more than doubling every two years, so the
amount of data available to organizations is skyrocketing.
Businesses are interested in big data because they can reveal more patterns
and interesting relationships than smaller data sets, with the potential to pro-
vide new insights into customer behavior, weather patterns, financial market
activity, or other phenomena. For example, Shutterstock, the global online
image marketplace, stores 24 million images, adding 10,000 more each day.
To find ways to optimize the buying experience, Shutterstock analyzes its big
data to find out where its website visitors place their cursors and how long they
hover over an image before making a purchase. Big data is also finding many
uses in the public sector, For example, city governments have been using big
data to manage traffic flows and to fight crime.
However, to derive business value from these data, organizations need new
technologies and tools capable of managing and analyzing nontraditional data
along with their traditional enterprise data. They also need to know what
questions to ask of the data and limitations of big data. Capturing, storing, and
analyzing big data can be expensive, and information from big data may not
necessarily help decision makers. It’s important to have a clear understanding
of the problem big data will solve for the business. The chapter-ending case
explores these issues.
228 Part Two Information Technology Infrastructure
Business Intelligence Infrastructure
Suppose you wanted concise, reliable information about current operations,
trends, and changes across the entire company. If you worked in a large com-
pany, the data you need might have to be pieced together from separate sys-
tems, such as sales, manufacturing, and accounting, and even from external
sources, such as demographic or competitor data. Increasingly, you might need
to use big data. A contemporary infrastructure for business intelligence has
an array of tools for obtaining useful information from all the different types
of data used by businesses today, including semi-structured and unstructured
big data in vast quantities. These capabilities include data warehouses and data
marts, Hadoop, in-memory computing, and analytical platforms. Some of these
capabilities are available as cloud services.
Data Warehouses and Data Marts
The traditional tool for analyzing corporate data for the past two decades has
been the data warehouse. A data warehouse is a database that stores current
and historical data of potential interest to decision makers throughout the com-
pany. The data originate in many core operational transaction systems, such
as systems for sales, customer accounts, and manufacturing, and may include
data from website transactions. The data warehouse extracts current and his-
torical data from multiple operational systems inside the organization. These
data are combined with data from external sources and transformed by correct-
ing inaccurate and incomplete data and restructuring the data for management
reporting and analysis before being loaded into the data warehouse.
The data warehouse makes the data available for anyone to access as needed,
but the data cannot be altered. A data warehouse system also provides a range
of ad hoc and standardized query tools, analytical tools, and graphical reporting
facilities.
Companies often build enterprise-wide data warehouses, where a central
data warehouse serves the entire organization, or they create smaller, decen-
tralized warehouses called data marts. A data mart is a subset of a data ware-
house in which a summarized or highly focused portion of the organization’s
data is placed in a separate database for a specific population of users. For ex-
ample, a company might develop marketing and sales data marts to deal with
customer information. Bookseller Barnes & Noble used to maintain a series of
data marts—one for point-of-sale data in retail stores, another for college book-
store sales, and a third for online sales.
Hadoop
Relational DBMS and data warehouse products are not well suited for organiz-
ing and analyzing big data or data that do not easily fit into columns and rows
used in their data models. For handling unstructured and semi-structured data
in vast quantities, as well as structured data, organizations are using Hadoop.
Hadoop is an open source software framework managed by the Apache Software
Foundation that enables distributed parallel processing of huge amounts of
data across inexpensive computers. It breaks a big data problem down into sub-
problems, distributes them among up to thousands of inexpensive computer
processing nodes, and then combines the result into a smaller data set that is
easier to analyze. You’ve probably used Hadoop to find the best airfare on the
Internet, get directions to a restaurant, do a search on Google, or connect with
a friend on Facebook.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 229
Hadoop consists of several key services, including the Hadoop Distributed
File System (HDFS) for data storage and MapReduce for high-performance
parallel data processing. HDFS links together the file systems on the numer-
ous nodes in a Hadoop cluster to turn them into one big file system. Hadoop’s
MapReduce was inspired by Google’s MapReduce system for breaking down
processing of huge data sets and assigning work to the various nodes in a clus-
ter. HBase, Hadoop’s non-relational database, provides rapid access to the data
stored on HDFS and a transactional platform for running high-scale real-time
applications.
Hadoop can process large quantities of any kind of data, including struc-
tured transactional data, loosely structured data such as Facebook and Twitter
feeds, complex data such as web server log files, and unstructured audio and
video data. Hadoop runs on a cluster of inexpensive servers, and processors
can be added or removed as needed. Companies use Hadoop for analyzing
very large volumes of data as well as for a staging area for unstructured and
semi-structured data before they are loaded into a data warehouse. Yahoo uses
Hadoop to track users’ behavior so it can modify its home page to fit their in-
terests. Life sciences research firm NextBio uses Hadoop and HBase to process
data for pharmaceutical companies conducting genomic research. Top database
vendors such as IBM, Hewlett-Packard, Oracle, and Microsoft have their own
Hadoop software distributions. Other vendors offer tools for moving data into
and out of Hadoop or for analyzing data within Hadoop.
In-Memory Computing
Another way of facilitating big data analysis is to use in-memory computing,
which relies primarily on a computer’s main memory (RAM) for data storage.
(Conventional DBMS use disk storage systems.) Users access data stored in
system primary memory, thereby eliminating bottlenecks from retrieving and
reading data in a traditional, disk-based database and dramatically shortening
query response times. In-memory processing makes it possible for very large
sets of data, amounting to the size of a data mart or small data warehouse, to
reside entirely in memory. Complex business calculations that used to take
hours or days are able to be completed within seconds, and this can even be ac-
complished using handheld devices.
The previous chapter describes some of the advances in contemporary com-
puter hardware technology that make in-memory processing possible, such as
powerful high-speed processors, multicore processing, and falling computer
memory prices. These technologies help companies optimize the use of mem-
ory and accelerate processing performance while lowering costs.
Leading in-memory database products include SAP HANA, Oracle Database
In-Memory, and Teradata Intelligent Memory. The chapter-opening case on the
Charlotte Hornets and the Interactive Session on the Kraft Company show how
organizations are benefiting from in-memory technology.
Analytic Platforms
Commercial database vendors have developed specialized high-speed analytic
platforms using both relational and non-relational technology that are opti-
mized for analyzing large data sets. Analytic platforms feature preconfigured
hardware-software systems that are specifically designed for query process-
ing and analytics. For example, the IBM PureData System for Analytics fea-
tures tightly integrated database, server, and storage components that handle
complex analytic queries 10 to 100 times faster than traditional systems.
230 Part Two Information Technology Infrastructure
When the Kraft Foods Group and Heinz finalized
their merger in July 2015, it was the marriage of two
giants. The new Kraft Heinz Company became the
fifth-largest consumer-packaged food and beverage
organization in the world. The combined company
has more than 200 global brands, $26.5 billion in
revenue, and over 40,000 employees. Eight of the
brands each have annual revenue exceeding $1
billion: Heinz, Maxwell House, Kraft Lunchables,
Planters, Velveeta, Philadelphia, and Oscar Mayer.
Running these companies required huge amounts
of data from all of these brands. This is clearly the
world of big data.
To remain profitable, enterprises in the fast-
moving consumer goods industry require very lean
operations. The uncertain global economy has damp-
ened consumer spending, so companies such as
Kraft Heinz must constantly identify opportunities
for improving operational efficiencies to protect their
profit margins. Kraft Heinz decided to deal with this
challenge by focusing on optimizing its supply chain,
manufacturing optimal quantities of each of its prod-
ucts, and delivering them to retailers at the best time
and least cost to capitalize on consumer demand.
Managing a supply chain as large as that of Kraft
Heinz requires timely and accurate data on sales
forecasts, manufacturing plans, and logistics, often
from multiple sources. To ensure that Kraft Heinz
would be able to use all of its enterprise business
data effectively, management decided to split the
data among two large SAP enterprise resource plan-
ning (ERP) systems, one for North American busi-
ness and the other for all other global business.
The combined company also had to rethink its data
warehouse.
Before the merger, the North America business
had maintained nearly 18 terabytes of data in a SAP
Business Warehouse and was using SAP Business
Warehouse Accelerator to facilitate operational re-
porting. SAP Business Warehouse is SAP’s data ware-
house software for consolidating organizational data
and supporting data analytics and reporting. The
SAP Business Warehouse (BW) Accelerator is used
to speed up database queries. Kraft Heinz manage-
ment wanted decision makers to obtain more fine-
grained views of the data that would reveal new
opportunities for improving efficiency, self-service
reporting, and real-time analytics.
SAP BW Accelerator was not suitable for these
tasks. It could optimize query runtime (the period
of time when a query program is running) only
for a specific subset of data in the warehouse, and
was limited to reporting on selected views of the
data. It could not deal with data load and calcu-
lation performance and required replication of
Business Warehouse data in a separate accelerator.
With mushrooming data on the merged company’s
sales, logistics, and manufacturing, the warehouse
was too overtaxed to generate timely reports for
decision makers. Moreover, Kraft Heinz’s complex
data model made building new reports very time-
consuming—it could take as much as six months to
complete. Kraft Heinz needed a solution that would
deliver more detailed reports more quickly without
affecting the performance of underlying operational
systems.
Kraft Heinz business users had been build-
ing some of their own reports using SAP
BusinessObjects Analysis edition for Microsoft
Office, which integrates with Microsoft Excel and
PowerPoint. This tool allows ad hoc multidimen-
sional analysis. What these users needed was to be
able to build self-service reports from a single source
of data and find an efficient way to collate data from
multiple sources to obtain an enterprise-wide view
of what was going on.
Kraft Heinz decided to migrate its data warehouse
from its legacy database to SAP BW powered by SAP
HANA, SAP’s in-memory database platform, which
dramatically improves the efficiency at which data
can be loaded and processed, calculations can be
computed, and queries and reports can be run. The
new data warehouse would be able to integrate with
existing SAP ERP applications driving day-to-day
business operations. The company worked with IBM
Global Services consultants to cleanse and stream-
line its existing databases. It archived and purged
unwanted or unused data, with the IT department
working closely with business professionals to jointly
determine what was essential, what was still being
used, and what data thought to be unused had been
moved to a different functional area of the company.
INTERACTIVE SESSION TECHNOLOGY
Kraft Heinz Finds a New Recipe for Analyzing Its Data
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 231
1. Identify the problem in this case study. To
what extent was it a technology problem?
Were any management and organizational fac-
tors involved?
2. How was information technology affecting busi-
ness performance at Kraft Heinz?
3. How did new technology provide a solution to the
problem? How effective was the solution?
4. Identify the management, organizational, and
technology factors that had to be addressed in se-
lecting and implementing Kraft-Heinz’s new data
warehouse solution.
Cleansing and streamlining data reduced the data-
base size almost 50 percent, to 9 terabytes.
According to Sundar Dittakavi, Kraft Heinz Group
Leader of Global Business Intelligence, in addition
to providing better insights, the new data warehouse
environment has achieved a 98 percent improve-
ment in the production of standard reports. This is
due to the 83 percent reduction in load time to exe-
cution time to make the data available, and reduction
in execution time to complete the analysis. Global
key performance indicators for the Kraft side of the
business are built into SAP HANA.
Kraft Heinz can now accommodate exploding
volumes of data and database queries easily, while
maintaining enough processing power to handle un-
expected issues. The company is also able to build
new reports much faster and the flexibility of SAP
HANA makes it much easier to change the com-
pany’s data model. Now Kraft Heinz can produce
new reports for business users in weeks instead of
months and give decision makers the insights they
need to boost efficiency and lower operating costs.
Sources: Ken Murphy, “The Kraft-Heinz Company Unlocks Recipe
for Strategic Business Insight,” SAP Insider Profiles, January 25, 2017;
“The Kraft Heinz Company Migrates SAP Business Warehouse to the
Lightning-Fast SAP HANA Database,” IBM Corp. and SAP SE 2016;
and www.kraftheinzcompany.com, accessed February 15, 2018.
CASE STUDY QUESTIONS
Analytic platforms also include in-memory systems and NoSQL non-relational
database management systems and are now available as cloud services.
Figure 6.13 illustrates a contemporary business intelligence technology in-
frastructure using the technologies we have just described. Current and histori-
cal data are extracted from multiple operational systems along with web data,
social media data, Internet of Things (IoT) machine-generated data, unstruc-
tured audio/visual data, and other data from external sources. Some companies
are starting to pour all of these types of data into a data lake. A data lake is a re-
pository for raw unstructured data or structured data that for the most part has
not yet been analyzed, and the data can be accessed in many ways. The data
lake stores these data in their native format until they are needed. The Hadoop
Distributed File System (HDFS) is often used to store the data lake contents
across a set of clustered computer nodes, and Hadoop clusters may be used to
pre-process some of these data for use in the data warehouse, data marts, or an
analytic platform, or for direct querying by power users. Outputs include re-
ports and dashboards as well as query results. Chapter 12 discusses the various
types of BI users and BI reporting in greater detail.
Analytical Tools: Relationships, Patterns, Trends
Once data have been captured and organized using the business intelligence
technologies we have just described, they are available for further analysis using
software for database querying and reporting, multidimensional data analysis
(OLAP), and data mining. This section will introduce you to these tools, with
more detail about business intelligence analytics and applications in Chapter 12.
http://www.kraftheinzcompany.com
232 Part Two Information Technology Infrastructure
Online Analytical Processing (OLAP)
Suppose your company sells four different products—nuts, bolts, washers, and
screws—in the East, West, and Central regions. If you wanted to ask a fairly
straightforward question, such as how many washers were sold during the past
quarter, you could easily find the answer by querying your sales database. But
what if you wanted to know how many washers were sold in each of your sales
regions and compare actual results with projected sales?
To obtain the answer, you would need online analytical processing
(OLAP). OLAP supports multidimensional data analysis, enabling users to
view the same data in different ways using multiple dimensions. Each aspect
of information—product, pricing, cost, region, or time period—represents a dif-
ferent dimension. So, a product manager could use a multidimensional data
analysis tool to learn how many washers were sold in the East in June, how
that compares with the previous month and the previous June, and how it com-
pares with the sales forecast. OLAP enables users to obtain online answers to
ad hoc questions such as these in a fairly rapid amount of time, even when the
data are stored in very large databases, such as sales figures for multiple years.
Figure 6.14 shows a multidimensional model that could be created to rep-
resent products, regions, actual sales, and projected sales. A matrix of actual
sales can be stacked on top of a matrix of projected sales to form a cube with six
faces. If you rotate the cube 90 degrees one way, the face showing will be prod-
uct versus actual and projected sales. If you rotate the cube 90 degrees again,
you will see region versus actual and projected sales. If you rotate 180 degrees
from the original view, you will see projected sales and product versus region.
FIGURE 6.13 CONTEMPORARY BUSINESS INTELLIGENCE INFRASTRUCTURE
A contemporary business intelligence infrastructure features capabilities and tools to manage
and analyze large quantities and different types of data from multiple sources. Easy-to-use
query and reporting tools for casual business users and more sophisticated analytical toolsets
for power users are included.
Hadoop
Data Lake
Data
Warehouse
Data
Mart
Casual users
• Queries
• Reports
• Dashboards
Power users
• Queries
• Reports
• OLAP
• Data mining
Historical
Data
IoT
Data
Audio/
Video Data
External
Data
Analytic
Platform
Extract, transform,
load
Operational
Data
Web and
Social Media
Data
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 233
Cubes can be nested within cubes to build complex views of data. A company
would use either a specialized multidimensional database or a tool that creates
multidimensional views of data in relational databases.
Data Mining
Traditional database queries answer such questions as “How many units of
product number 403 were shipped in February 2018?” OLAP, or multidimen-
sional analysis, supports much more complex requests for information, such as
“Compare sales of product 403 relative to plan by quarter and sales region for
the past two years.” With OLAP and query-oriented data analysis, users need to
have a good idea about the information for which they are looking.
Data mining is more discovery-driven. Data mining provides insights into
corporate data that cannot be obtained with OLAP by finding hidden patterns
and relationships in large databases and inferring rules from them to predict
future behavior. The patterns and rules are used to guide decision making
and forecast the effect of those decisions. The types of information obtainable
from data mining include associations, sequences, classifications, clusters, and
forecasts.
• Associations are occurrences linked to a single event. For instance, a study of
supermarket purchasing patterns might reveal that, when corn chips are pur-
chased, a cola drink is purchased 65 percent of the time, but when there is a
promotion, cola is purchased 85 percent of the time. This information helps
managers make better decisions because they have learned the profitability
of a promotion.
• In sequences, events are linked over time. We might find, for example, that if
a house is purchased, a new refrigerator will be purchased within two weeks
65 percent of the time, and an oven will be bought within one month of the
home purchase 45 percent of the time.
• Classification recognizes patterns that describe the group to which an item
belongs by examining existing items that have been classified and by infer-
ring a set of rules. For example, businesses such as credit card or telephone
companies worry about the loss of steady customers. Classification helps
discover the characteristics of customers who are likely to leave and can
FIGURE 6.14 MULTIDIMENSIONAL DATA MODEL
This view shows product versus region. If you rotate the cube 90 degrees, the face that
will show is product versus actual and projected sales. If you rotate the cube 90 degrees
again, you will see region versus actual and projected sales. Other views are possible.
Projected
Actual
Nuts
BoltsPRODUCT
Washers
Screws
East
West
Central
REGION
234 Part Two Information Technology Infrastructure
provide a model to help managers predict who those customers are so that
the managers can devise special campaigns to retain such customers.
• Clustering works in a manner similar to classification when no groups have
yet been defined. A data mining tool can discover different groupings within
data, such as finding affinity groups for bank cards or partitioning a database
into groups of customers based on demographics and types of personal
investments.
• Although these applications involve predictions, forecasting uses predictions
in a different way. It uses a series of existing values to forecast what other
values will be. For example, forecasting might find patterns in data to help
managers estimate the future value of continuous variables, such as sales
figures.
These systems perform high-level analyses of patterns or trends, but they
can also drill down to provide more detail when needed. There are data min-
ing applications for all the functional areas of business and for government and
scientific work. One popular use for data mining is to provide detailed analyses
of patterns in customer data for one-to-one marketing campaigns or for identi-
fying profitable customers.
Caesars Entertainment, formerly known as Harrah’s Entertainment, is the
largest gaming company in the world. It continually analyzes data about its
customers gathered when people play its slot machines or use its casinos and
hotels. The corporate marketing department uses this information to build a
detailed gambling profile, based on a particular customer’s ongoing value to
the company. For instance, data mining lets Caesars know the favorite gaming
experience of a regular customer at one of its riverboat casinos along with that
person’s preferences for room accommodations, restaurants, and entertain-
ment. This information guides management decisions about how to cultivate
the most profitable customers, encourage those customers to spend more, and
attract more customers with high revenue-generating potential. Business intel-
ligence improved Caesars’s profits so much that it became the centerpiece of
the firm’s business strategy.
Text Mining and Web Mining
Unstructured data, most in the form of text files, is believed to account for more
than 80 percent of useful organizational information and is one of the major
sources of big data that firms want to analyze. Email, memos, call center tran-
scripts, survey responses, legal cases, patent descriptions, and service reports
are all valuable for finding patterns and trends that will help employees make
better business decisions. Text mining tools are now available to help busi-
nesses analyze these data. These tools are able to extract key elements from
unstructured natural language text, discover patterns and relationships, and
summarize the information.
Businesses might turn to text mining to analyze transcripts of calls to cus-
tomer service centers to identify major service and repair issues or to measure
customer sentiment about their company. Sentiment analysis software is able
to mine text comments in an email message, blog, social media conversation, or
survey forms to detect favorable and unfavorable opinions about specific sub-
jects. For example, Kraft Foods uses a Community Intelligence Portal and senti-
ment analysis to tune into consumer conversations about its products across
numerous social networks, blogs, and other websites. Kraft tries to make sense
of relevant comments rather than just track brand mentions and can identify
customers’ emotions and feelings when they talk about how they barbecue and
what sauces and spices they use.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 235
The web is another rich source of unstructured big data for revealing patterns,
trends, and insights into customer behavior. The discovery and analysis of useful
patterns and information from the World Wide Web are called web mining.
Businesses might turn to web mining to help them understand customer behavior,
evaluate the effectiveness of a particular website, or quantify the success of a mar-
keting campaign. For instance, marketers use the Google Trends service, which
tracks the popularity of various words and phrases used in Google search queries,
to learn what people are interested in and what they are interested in buying.
Web mining looks for patterns in data through content mining, structure
mining, and usage mining. Web content mining is the process of extracting
knowledge from the content of web pages, which may include text, image,
audio, and video data. Web structure mining examines data related to the struc-
ture of a particular website. For example, links pointing to a document indicate
the popularity of the document, while links coming out of a document indicate
the richness or perhaps the variety of topics covered in the document. Web
usage mining examines user interaction data recorded by a web server when-
ever requests for a website’s resources are received. The usage data records the
user’s behavior when the user browses or makes transactions on the website
and collects the data in a server log. Analyzing such data can help companies
determine the value of particular customers, cross-marketing strategies across
products, and the effectiveness of promotional campaigns.
The chapter-ending case describes organizations’ experiences as they use the
analytical tools and business intelligence technologies we have described to
grapple with “big data” challenges.
Databases and the Web
Have you ever tried to use the web to place an order or view a product catalog?
If so, you were using a website linked to an internal corporate database. Many
companies now use the web to make some of the information in their internal
databases available to customers and business partners.
Suppose, for example, a customer with a web browser wants to search an on-
line retailer’s database for pricing information. Figure 6.15 illustrates how that
customer might access the retailer’s internal database over the web. The user
accesses the retailer’s website over the Internet using a web browser on his or
her client PC or mobile device. The user’s web browser software requests data
from the organization’s database, using HTML commands to communicate with
the web server. Apps provide even faster access to corporate databases.
Because many back-end databases cannot interpret commands written in
HTML, the web server passes these requests for data to software that translates
HTML commands into SQL so the commands can be processed by the DBMS
FIGURE 6.15 LINKING INTERNAL DATABASES TO THE WEB
Users access an organization’s internal database through the web using their desktop PC
browsers or mobile apps.
Internet
Client with
web browser
Web
server
Application
server
Database
server Database
236 Part Two Information Technology Infrastructure
working with the database. In a client/server environment, the DBMS resides
on a dedicated computer called a database server. The DBMS receives the
SQL requests and provides the required data. Middleware transfers information
from the organization’s internal database back to the web server for delivery in
the form of a web page to the user.
Figure 6.15 shows that the middleware working between the web server and
the DBMS is an application server running on its own dedicated computer (see
Chapter 5). The application server software handles all application operations,
including transaction processing and data access, between browser-based com-
puters and a company’s back-end business applications or databases. The ap-
plication server takes requests from the web server, runs the business logic to
process transactions based on those requests, and provides connectivity to the
organization’s back-end systems or databases. Alternatively, the software for
handling these operations could be a custom program or a CGI script. A CGI
script is a compact program using the Common Gateway Interface (CGI) specifi-
cation for processing data on a web server.
There are a number of advantages to using the web to access an organiza-
tion’s internal databases. First, web browser software is much easier to use than
proprietary query tools. Second, the web interface requires few or no changes
to the internal database. It costs much less to add a web interface in front of a
legacy system than to redesign and rebuild the system to improve user access.
Accessing corporate databases through the web is creating new efficiencies,
opportunities, and business models. ThomasNet.com provides an up-to-date
online directory of more than 500,000 suppliers of industrial products, such as
chemicals, metals, plastics, rubber, and automotive equipment. Formerly called
Thomas Register, the company used to send out huge paper catalogs with this
information. Now it provides this information to users online via its website
and has become a smaller, leaner company.
Other companies have created entirely new businesses based on access to
large databases through the web. One is the social networking service Facebook,
which helps users stay connected with each other and meet new people. Facebook
features “profiles” with information on over 2.2 billion active users with infor-
mation about themselves, including interests, friends, photos, and groups with
which they are affiliated. Facebook maintains a very large database to house and
manage all of this content. There are also many web-enabled databases in the
public sector to help consumers and citizens access helpful information.
6-4 Why are information policy, data administration,
and data quality assurance essential for
managing the firm’s data resources?
Setting up a database is only a start. In order to make sure that the data for your
business remain accurate, reliable, and readily available to those who need them,
your business will need special policies and procedures for data management.
Establishing an Information Policy
Every business, large and small, needs an information policy. Your firm’s data
are an important resource, and you don’t want people doing whatever they
want with them. You need to have rules on how the data are to be organized and
maintained and who is allowed to view the data or change them.
http://ThomasNet.com
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 237
An information policy specifies the organization’s rules for sharing, dis-
seminating, acquiring, standardizing, classifying, and inventorying informa-
tion. Information policy lays out specific procedures and accountabilities,
identifying which users and organizational units can share information,
where information can be distributed, and who is responsible for updat-
ing and maintaining the information. For example, a typical information
policy would specify that only selected members of the payroll and human
resources department would have the right to change and view sensitive
employee data, such as an employee’s salary or social security number, and
that these departments are responsible for making sure that such employee
data are accurate.
If you are in a small business, the information policy would be established
and implemented by the owners or managers. In a large organization, manag-
ing and planning for information as a corporate resource often require a formal
data administration function. Data administration is responsible for the spe-
cific policies and procedures through which data can be managed as an orga-
nizational resource. These responsibilities include developing an information
policy, planning for data, overseeing logical database design and data dictionary
development, and monitoring how information systems specialists and end-
user groups use data.
You may hear the term data governance used to describe many of
these activities. Promoted by IBM, data governance deals with the policies
and processes for managing the availability, usability, integrity, and secu-
rity of the data employed in an enterprise with special emphasis on pro-
moting privacy, security, data quality, and compliance with government
regulations.
A large organization will also have a database design and management group
within the corporate information systems division that is responsible for de-
fining and organizing the structure and content of the database and maintain-
ing the database. In close cooperation with users, the design group establishes
the physical database, the logical relations among elements, and the access
rules and security procedures. The functions it performs are called database
administration.
Ensuring Data Quality
A well-designed database and information policy will go a long way toward en-
suring that the business has the information it needs. However, additional steps
must be taken to ensure that the data in organizational databases are accurate
and remain reliable.
What would happen if a customer’s telephone number or account balance
were incorrect? What would be the impact if the database had the wrong price
for the product you sold or your sales system and inventory system showed
different prices for the same product? Data that are inaccurate, untimely, or
inconsistent with other sources of information lead to incorrect decisions,
product recalls, and financial losses. Gartner, Inc. reported that more than
25 percent of the critical data in large Fortune 1000 companies’ databases is
inaccurate or incomplete, including bad product codes and product descrip-
tions, faulty inventory descriptions, erroneous financial data, incorrect sup-
plier information, and incorrect employee data. Some of these data quality
problems are caused by redundant and inconsistent data produced by mul-
tiple systems feeding a data warehouse. For example, the sales ordering sys-
tem and the inventory management system might both maintain data on the
238 Part Two Information Technology Infrastructure
organization’s products. However, the sales ordering system might use the
term Item Number and the inventory system might call the same attribute
Product Number. The sales, inventory, or manufacturing systems of a clothing
retailer might use different codes to represent values for an attribute. One
system might represent clothing size as “medium,” whereas the other system
might use the code “M” for the same purpose. During the design process for
the warehouse database, data describing entities, such as a customer, prod-
uct, or order, should be named and defined consistently for all business areas
using the database.
Think of all the times you’ve received several pieces of the same direct mail
advertising on the same day. This is very likely the result of having your name
maintained multiple times in a database. Your name may have been misspelled
or you used your middle initial on one occasion and not on another or the in-
formation was initially entered onto a paper form and not scanned properly
into the system. Because of these inconsistencies, the database would treat
you as different people! We often receive redundant mail addressed to Laudon,
Lavdon, Lauden, or Landon.
If a database is properly designed and enterprise-wide data standards are
established, duplicate or inconsistent data elements should be minimal. Most
data quality problems, however, such as misspelled names, transposed num-
bers, or incorrect or missing codes, stem from errors during data input. The in-
cidence of such errors is rising as companies move their businesses to the web
and allow customers and suppliers to enter data into their websites that directly
update internal systems.
Before a new database is in place, organizations need to identify and correct
their faulty data and establish better routines for editing data once their data-
base is in operation. Analysis of data quality often begins with a data quality
audit, which is a structured survey of the accuracy and level of completeness
of the data in an information system. Data quality audits can be performed by
surveying entire data files, surveying samples from data files, or surveying end
users for their perceptions of data quality.
Data cleansing, also known as data scrubbing, consists of activities for de-
tecting and correcting data in a database that are incorrect, incomplete, improp-
erly formatted, or redundant. Data cleansing not only corrects errors but also
enforces consistency among different sets of data that originated in separate
information systems. Specialized data-cleansing software is available to auto-
matically survey data files, correct errors in the data, and integrate the data in a
consistent companywide format.
Data quality problems are not just business problems. They also pose se-
rious problems for individuals, affecting their financial condition and even
their jobs. For example, inaccurate or outdated data about consumers’ credit
histories maintained by credit bureaus can prevent creditworthy individu-
als from obtaining loans or lower their chances of finding or keeping a
job. And as the Interactive Session on Organization describes, incomplete
or inaccurate databases also pose problems for criminal justice and public
safety.
A small minority of companies allow individual departments to be in
charge of maintaining the quality of their own data. However, best data ad-
ministration practices call for centralizing data governance, standardization
of organizational data, data quality maintenance, and accessibility to data
assets.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 239
On November 5, 2017 Devin Patrick Kelley walked
into the First Baptist Church in Sutherland Springs,
Texas toting a Ruger AR-556 semi-automatic rifle
and fired round after round into the congregation
gathered for Sunday morning services. Within a few
minutes, he had killed 26 people and injured 20
others. Kelley was later found dead in his SUV with
a self-inflicted gunshot wound. The attack was the
deadliest mass shooting by an individual in Texas,
the fifth-deadliest mass shooting in the United States,
as well as the deadliest shooting in an American
place of worship in modern history.
This tragedy could have been avoided. Kelley was
prohibited by law from purchasing or possessing
firearms and ammunition due to a 2012 domestic vio-
lence conviction in a court martial while he was serv-
ing in the U.S. Air Force. The Air Force failed to record
the conviction in the Federal Bureau of Investigation
(FBI) National Crime Information Center (NCIC) da-
tabase, which is used by the National Instant Check
System (NICS) to flag prohibited gun purchases. This
allowed Kelley to pass background checks and pur-
chase four guns, one in each of the past four years.
Federally licensed firearm dealers are required
to check the credentials of every potential buyer
against the NICS system containing millions of crimi-
nal history records and protection orders. The sys-
tem is supposed to flag any potential gun buyer who
falls in various categories prohibiting a sale including
fugitives, convicted felons, or those with dishonor-
able discharges from the military.
The Air Force acknowledged that it did not inform
federal authorities about the domestic violence convic-
tion, which should have prevented Kelley from buying
firearms. Ann Stefanek, an Air Force spokesperson,
stated that the Air Force would conduct a comprehen-
sive review to ensure records in other cases have been
reported correctly. The Defense Department plans to
review how all U.S. military services report such cases
into the background-check system. Members of the
U.S. Senate have called for legislation to improve the
completeness of NICS recordkeeping.
Individuals familiar with how NICS works ob-
served that large gaps in information sharing between
the military and the Justice Department have created
a blind spot in background checks of veterans, al-
lowing those barred from possessing weapons to get
clearance. They believed that the failure to flag Kelley
more likely reflected a systemic flaw rather than a
one-time miss. Robert Belair, a Washington privacy
lawyer and expert on the FBI’s background-screening
system, said the Air Force and other branches of the
military seldom submit court-martial records to the
FBI’s screening database when the offense doesn’t
lead to a dishonorable discharge because this has
never been a priority for the military.
According to a 2016 report by the U.S.
Government Accountability Office (GAO), the FBI
has struggled to collect domestic abuse records for
background checks, in part because incomplete or
missing criminal histories make it harder to deter-
mine if someone should be banned from obtaining
a gun. The GAO focused on reporting by state and
local authorities and reported that between 2006 and
2015 about 6,700 firearms were incorrectly trans-
ferred to individuals with domestic violence records.
Federal law requires federal departments, in-
cluding the military branches, to notify the Justice
Department at least quarterly about any records they
have showing that someone is disqualified from buy-
ing a gun. At the state level, however, compliance
is voluntary unless specified by state law or federal
funding requirements. It isn’t known how many
court-martial records are submitted to the FBI, which
said it couldn’t provide the information.
Gaps in databases have also affected other aspects
of law enforcement, such as sentencing and parole.
The decision to parole O.J. Simpson in October
2017 is an example. Before voting to release O.J.
Simpson from prison after nine years, the Nevada
parole board discussed in detail the robbery that
had put him behind bars and his conduct as an
inmate. Members of the Nevada Board of Parole
Commissioners stated that before Simpson’s 2008
conviction for a Las Vegas hotel robbery, Simpson
had no history of a criminal conviction. Although
Simpson was acquitted in 1995 of the murders of
his former wife Nicole Brown Simpson and Ronald
Goldman, in 1989 he had pleaded no contest in Los
Angeles to misdemeanor battery of Ms. Simpson,
who was then his wife. The Nevada parole board did
not have that information. The 1989 conviction was
not considered when a four-member panel voted
unanimously to release him in October 2017.
INTERACTIVE SESSION ORGANIZATIONS
Databases Where the Data Aren’t There
6-5 How will MIS help my career?
Here is how Chapter 6 and this book can help you find a job as an entry-level
data analyst.
The Company
Mega Midwest Power, a large diversified energy company headquartered in
Cleveland, Ohio, has an open position for an entry-level data analyst. The com-
pany is involved in the distribution, transmission, and generation of electricity
as well as energy management and other energy-related services for 5 million
customers in the Midwest and mid-Atlantic regions.
Position Description
Job responsibilities include:
• Maintaining the integrity of substation equipment and related data in mul-
tiple databases, including SAP.
• Querying databases in multiple systems.
• Modifying systems for proper data management and procedural controls.
• Recommending and implementing process changes based on data problems
that are identified.
• Conducting business-specific research, gathering data, and compiling reports
and summaries.
• Expanding knowledge of policies, practices, and procedures.
240 Part Two Information Technology Infrastructure
1. Define the problem described in this case. How
serious a problem is it?
2. What management, organization, and technology
factors contributed to this problem?
3. What is the political and social impact of incom-
plete recordkeeping in the FBI NCIC and NICS
databases?
When states such as Nevada weigh the risk posed
by an inmate, they routinely look through their own
records, and also check with the NCIC. Mr. Simpson’s
1989 conviction did not appear in the NCIC history
when Nevada officials prepared a pre-sentencing
report after his 2008 conviction. David M. Smith,
hearings examiner for the Nevada parole board, said
the parole commissioners relied in part on the infor-
mation in that 2008 report in assessing whether Mr.
Simpson should be released. Smith believed it was
impossible to tell whether knowledge of Simpson’s
misdemeanor conviction would have made a differ-
ence in the Nevada parole board’s decision.
Omission of Simpson’s 1989 conviction in the fed-
eral system again highlights the problem of major gaps
in federal criminal databases, which rely primarily
on accurate and complete reporting by local and state
agencies. The Justice Department has reported, for
example, that states fail to transmit most of their active
arrest warrants from their own databases into the fed-
eral system and often neglect to update records to show
whether cases resulted in convictions. Some states still
rely on paper files, making it likelier that they will not
end up in the federal electronic records database, a
problem that is more common with older records.
Sources: Kristina Peterson and Jacob Gershman, “Lapses in Gun Buy-
ers’ Records Come Under Scrutiny,” Wall Street Journal, November
7, 2017; Melissa Jeltsen, “Air Force Failed to Enter Church Shoot-
er’s Domestic Violence Record In U.S. Database,” Huffington Post,
November 6, 2017; Richard Perez-Pena, “Nevada Parole Board Un-
aware of O.J. Simpson’s Old Conviction,” New York Times, August
11, 2017; and Eli Rosenberg, Mark Berman, and Wesley Lowery,
“Texas Church Gunman Escaped Mental Health Facility in 2012 after
Threatening Military Superiors,” Washington Post, November 7, 2017.
CASE STUDY QUESTIONS
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 241
Job Requirements
• BA/BS degree in business, finance, accounting, economics, engineering, or
related discipline
• 1–2 years professional work experience desirable
• Knowledge of Microsoft Office tools (Excel, PowerPoint, Access, and Word)
• Strong analytical capabilities, including attention to detail, problem solving,
and decision making
• Strong oral and written communication and teamwork skills
• Familiarity with transmission substation equipment desirable
Interview Questions
1. What do you know about substation equipment? Have you ever worked with
SAP for Utilities?
2. What do you know about data management and databases? Have you ever
worked with data management software? If so, what exactly have you done
with it?
3. Tell us what you can do with Access and Excel. What kinds of problems have
you used these tools to solve? Did you take courses in Access or Excel?
4. What experience do you have analyzing problems and developing specific
solutions? Can you give an example of a problem you helped solve?
Author Tips
1. Do some research on the electric utility industry equipment mainte-
nance and software for electric utility asset management and predictive
maintenance. Read blogs from IBM, Deloitte, and Intel about predictive
maintenance and watch YouTube videos from GE and IBM on this topic.
2. Review Chapter 6 of this text on data management and databases, along
with the Chapter 12 discussion of operational intelligence. Inquire what you
would be expected to do with databases in this job position.
3. Do some research on the capabilities of SAP for Utilities and ask exactly how
you would be using this software and what skills would be required. Watch
SAP’s YouTube video on SAP for Utilities.
6-1 What are the problems of managing data resources in a traditional file environment?
Traditional file management techniques make it difficult for organizations to keep track of all of the
pieces of data they use in a systematic way and to organize these data so that they can be easily ac-
cessed. Different functional areas and groups were allowed to develop their own files independently.
Over time, this traditional file management environment creates problems such as data redundancy
and inconsistency, program-data dependence, inflexibility, poor security, and lack of data sharing and
availability. A database management system (DBMS) solves these problems with software that permits
centralization of data and data management so that businesses have a single consistent source for all
their data needs. Using a DBMS minimizes redundant and inconsistent files.
6-2 What are the major capabilities of database management systens (DBMS), and why is a relational
DBMS so powerful?
The principal capabilities of a DBMS include a data definition capability, a data dictionary capability,
and a data manipulation language. The data definition capability specifies the structure and content of the
REVIEW SUMMARY
242 Part Two Information Technology Infrastructure
database. The data dictionary is an automated or manual file that stores information about the data in the
database, including names, definitions, formats, and descriptions of data elements. The data manipulation
language, such as SQL, is a specialized language for accessing and manipulating the data in the database.
The relational database has been the primary method for organizing and maintaining data in in-
formation systems because it is so flexible and accessible. It organizes data in two-dimensional tables
called relations with rows and columns. Each table contains data about an entity and its attributes.
Each row represents a record, and each column represents an attribute or field. Each table also con-
tains a key field to uniquely identify each record for retrieval or manipulation. Relational database
tables can be combined easily to deliver data required by users, provided that any two tables share a
common data element. Non-relational databases are becoming popular for managing types of data that
can’t be handled easily by the relational data model. Both relational and non-relational database prod-
ucts are available as cloud computing services. A distributed database is one that is stored in multiple
physical locations, including remote cloud computing centers.
Designing a database requires both a logical design and a physical design. The logical design mod-
els the database from a business perspective. The organization’s data model should reflect its key busi-
ness processes and decision-making requirements. The process of creating small, stable, flexible, and
adaptive data structures from complex groups of data when designing a relational database is termed
normalization. A well-designed relational database will not have many-to-many relationships, and all
attributes for a specific entity will only apply to that entity. It will try to enforce referential integrity
rules to ensure that relationships between coupled tables remain consistent. An entity-relationship
diagram graphically depicts the relationship between entities (tables) in a relational database.
6-3 What are the principal tools and technologies for accessing information from databases to improve
business performance and decision making?
Contemporary data management technology has an array of tools for obtaining useful information
from all the different types of data used by businesses today, including semi-structured and unstruc-
tured big data in vast quantities. These capabilities include data warehouses and data marts, Hadoop,
in-memory computing, and analytical platforms. OLAP represents relationships among data as a mul-
tidimensional structure, which can be visualized as cubes of data and cubes within cubes of data,
enabling more sophisticated data analysis. Data mining analyzes large pools of data, including the
contents of data warehouses, to find patterns and rules that can be used to predict future behavior and
guide decision making. Text mining tools help businesses analyze large unstructured data sets consist-
ing of text. Web mining tools focus on analysis of useful patterns and information from the web, ex-
amining the structure of websites and activities of website users, as well as the contents of web pages.
Conventional databases can be linked via middleware to the web or a web interface to facilitate user
access to an organization’s internal data.
6-4 Why are information policy, data administration, and data quality assurance essential for managing
the firm’s data resources?
Developing a database environment requires policies and procedures for managing organizational
data as well as a good data model and database technology. A formal information policy governs the
maintenance, distribution, and use of information in the organization. In large corporations, a formal
data administration function is responsible for information policy as well as for data planning, data
dictionary development, and monitoring data usage in the firm.
Data that are inaccurate, incomplete, or inconsistent create serious operational and financial prob-
lems for businesses because they may create inaccuracies in product pricing, customer accounts, and
inventory data and lead to inaccurate decisions about the actions that should be taken by the firm.
Firms must take special steps to make sure they have a high level of data quality. These include using
enterprise-wide data standards, databases designed to minimize inconsistent and redundant data, data
quality audits, and data cleansing software.
Key Terms
Analytic platform, 229
Attribute, 214
Big data, 227
Bit, 213
Blockchain, 225
Byte, 213
Data administration, 237
Data cleansing, 238
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 243
Data definition, 221
Data dictionary, 221
Data governance, 237
Data inconsistency, 215
Data lake, 231
Data manipulation language, 221
Data mart, 228
Data mining, 233
Data quality audit, 238
Data redundancy, 215
Data warehouse, 228
Database, 216
Database administration, 237
Database management system (DBMS), 217
Database server, 236
Distributed database, 225
Entity, 214
Entity-relationship diagram, 224
Field, 213
File, 213
Foreign key, 218
Hadoop, 228
In-memory computing, 229
Information policy, 237
Key field, 218
Non-relational database management systems, 225
Normalization, 223
Online analytical processing (OLAP), 232
Primary key, 218
Program-data dependence, 216
Record, 213
Referential integrity, 224
Relational DBMS, 218
Sentiment analysis, 234
Structured Query Language (SQL), 221
Text mining, 234
Tuple, 218
Web mining, 235
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
6-1 What are the problems of managing data
resources in a traditional file environment?
• List and describe each of the components
in the data hierarchy.
• Define and explain the significance of enti-
ties, attributes, and key fields.
• List and describe the problems of the tradi-
tional file environment.
6-2 What are the major capabilities of database
management systems (DBMS), and why is a
relational DBMS so powerful?
• Define a database and a database manage-
ment system.
• Name and briefly describe the capabilities
of a DBMS.
• Define a relational DBMS and explain how
it organizes data.
• List and describe the three operations of a
relational DBMS.
• Explain why non-relational databases are
useful.
• Define and describe normalization and ref-
erential integrity and explain how they con-
tribute to a well-designed relational database.
• Define and describe an entity-relationship
diagram and explain its role in database
design.
6-3 What are the principal tools and technologies
for accessing information from databases to
improve business performance and decision
making?
• Define big data and describe the technolo-
gies for managing and analyzing it.
• List and describe the components of
a contemporary business intelligence
infrastructure.
• Describe the capabilities of online analyti-
cal processing (OLAP).
• Define data mining, describing how it dif-
fers from OLAP and the types of informa-
tion it provides.
• Explain how text mining and web mining
differ from conventional data mining.
• Describe how users can access informa-
tion from a company’s internal databases
through the web.
6-4 Why are information policy, data administration,
and data quality assurance essential for
managing the firm’s data resources?
• Describe the roles of information policy
and data administration in information
management.
• Explain why data quality audits and data
cleansing are essential.
244 Part Two Information Technology Infrastructure
Discussion Questions
6-5 It has been said there is no bad data, just
bad management. Discuss the implications
of this statement.
6-6 To what extent should end users be
involved in the selection of a database
management system and database design?
MyLab MIS
MyLab MIS
6-7 What are the consequences of an
organization not having an information
policy?
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience in analyzing data quality problems, establishing com-
panywide data standards, creating a database for inventory management, and using the web to search online
databases for overseas business resources. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
6-8 Emerson Process Management, a global supplier of measurement, analytical, and monitoring instruments
and services based in Austin, Texas, had a new data warehouse designed for analyzing customer activity to
improve service and marketing. However, the data warehouse was full of inaccurate and redundant data.
The data in the warehouse came from numerous transaction processing systems in Europe, Asia, and other
locations around the world. The team that designed the warehouse had assumed that sales groups in all these
areas would enter customer names and addresses the same way. In fact, companies in different countries
were using multiple ways of entering quote, billing, shipping, and other data. Assess the potential business
impact of these data quality problems. What decisions have to be made and steps taken to reach a solution?
6-9 Your industrial supply company wants to create a data warehouse where management can obtain a
single corporate-wide view of critical sales information to identify bestselling products, key customers,
and sales trends. Your sales and product information are stored in two different systems: a divisional
sales system running on a Unix server and a corporate sales system running on an IBM mainframe.
You would like to create a single standard format that consolidates these data from both systems. In
MyLab MIS, you can review the proposed format along with sample files from the two systems that
would supply the data for the data warehouse. Then answer the following questions:
• What business problems are created by not having these data in a single standard format?
• How easy would it be to create a database with a single standard format that could store the data from
both systems? Identify the problems that would have to be addressed.
• Should the problems be solved by database specialists or general business managers? Explain.
• Who should have the authority to finalize a single companywide format for this information in the
data warehouse?
Achieving Operational Excellence: Building a Relational Database for Inventory Management
Software skills: Database design, querying, and reporting
Business skills: Inventory management
6-10 In this exercise, you will use database software to design a database for managing inventory for a small
business. Sylvester’s Bike Shop, located in San Francisco, California, sells road, mountain, hybrid,
leisure, and children’s bicycles. Currently, Sylvester’s purchases bikes from three suppliers but plans to
add new suppliers in the near future. Using the information found in the tables in MyLab MIS, build a
simple relational database to manage information about Sylvester’s suppliers and products. Once you
have built the database, perform the following activities.
• Prepare a report that identifies the five most expensive bicycles. The report should list the bicycles
in descending order from most expensive to least expensive, the quantity on hand for each, and the
markup percentage for each.
• Prepare a report that lists each supplier, its products, the quantities on hand, and associated reorder
levels. The report should be sorted alphabetically by supplier. For each supplier, the products should
be sorted alphabetically.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 245
• Prepare a report listing only the bicycles that are low in stock and need to be reordered. The report
should provide supplier information for the items identified.
• Write a brief description of how the database could be enhanced to further improve management of
the business. What tables or fields should be added? What additional reports would be useful?
Improving Decision Making: Searching Online Databases for Overseas Business Resources
Software skills: Online databases
Business skills: Researching services for overseas operations
6-11 This project develops skills in searching web-enabled databases with information about products and
services in faraway locations.
Your company is located in Greensboro, North Carolina, and manufactures office furniture of various
types. You are considering opening a facility to manufacture and sell your products in Australia. You would like
to contact organizations that offer many services necessary for you to open your Australian office and manu-
facturing facility, including lawyers, accountants, import-export experts, and telecommunications equipment
and support firms. Access the following online databases to locate companies that you would like to meet with
during your upcoming trip: Australian Business Directory Online, AustraliaTrade Now, and the Nationwide Busi-
ness Directory of Australia. If necessary, use search engines such as Yahoo and Google.
• List the companies you would contact on your trip to determine whether they can help you with these
and any other functions you think are vital to establishing your office.
• Rate the databases you used for accuracy of name, completeness, ease of use, and general helpfulness.
Collaboration and Teamwork Project
Identifying Entities and Attributes in an Online Database
6-12 With your team of three or four other students, select an online database to explore, such as AOL Music, iGo.
com, or the Internet Movie Database. Explore one of these websites to see what information it provides. Then
list the entities and attributes that the company running the website must keep track of in its databases. Dia-
gram the relationship between the entities you have identified. If possible, use Google Docs and Google Drive
or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.
http://iGo.com
http://iGo.com
246 Part Two Information Technology Infrastructure
How Reliable Is Big Data?
CASE STUDY
Today’s companies are dealing with an ava-lanche of data from social media, search, and sensors, as well as from traditional sources.
According to one estimate, 2.5 quintillion bytes of
data per day are generated around the world. Making
sense of “big data” to improve decision making and
business performance has become one of the pri-
mary opportunities for organizations of all shapes
and sizes, but it also represents big challenges.
Businesses such as Amazon, YouTube, and Spotify
have flourished by analyzing the big data they collect
about customer interests and purchases to create mil-
lions of personalized recommendations. A number
of online services analyze big data to help consum-
ers, including services for finding the lowest price on
autos, computers, mobile phone plans, clothing, air-
fare, hotel rooms, and many other types of goods and
services. Big data is also providing benefits in sports
(see the chapter-opening case), education, science,
health care, and law enforcement.
Analyzing billions of data points collected on pa-
tients, healthcare providers, and the effectiveness
of prescriptions and treatments has helped the UK
National Health Service (NHS) save about 581 mil-
lion pounds (U.S. $784 million). The data are housed
in an Oracle Exadata Database Machine, which can
quickly analyze very large volumes of data (review
this chapter’s discussion of analytic platforms). NHS
has used its findings from big data analysis to create
dashboards identifying patients taking 10 or more
medications at once, and which patients are taking
too many antibiotics. Compiling very large amounts
of data about drugs and treatments given to cancer
patients and correlating that information with pa-
tient outcomes has helped NHS identify more effec-
tive treatment protocols.
New York City analyzes all the crime-related
data it collects to lower the crime rate. Its CompStat
crime-mapping program uses a comprehensive city-
wide database of all reported crimes or complaints,
arrests, and summonses in each of the city’s 76
precincts to report weekly on crime complaint and
arrest activity at the precinct, patrol borough, and
citywide levels. CompStat data can be displayed on
maps showing crime and arrest locations, crime
hot spots, and other relevant information to help
precinct commanders quickly identify patterns and
trends and deploy police personnel where they are
most needed. Big data on criminal activity also pow-
ers New York City’s Crime Strategies Unit, which tar-
gets the worst offenders for aggressive prosecution.
Healthcare companies are currently analyzing big
data to determine the most effective and economi-
cal treatments for chronic illnesses and common
diseases and provide personalized care recommenda-
tions to patients.
There are limits to using big data. A number of
companies have rushed to start big data projects
without first establishing a business goal for this new
information or key performance metrics to measure
success. Swimming in numbers doesn’t necessarily
mean that the right information is being collected
or that people will make smarter decisions. Experts
in big data analysis believe too many companies, se-
duced by the promise of big data, jump into big data
projects with nothing to show for their efforts. They
start amassing mountains of data with no clear objec-
tive or understanding of exactly how analyzing big
data will achieve their goal or what questions they
are trying to answer. Organizations also won’t benefit
from big data that has not been properly cleansed,
organized, and managed—think data quality.
Just because something can be measured doesn’t
mean it should be measured. Suppose, for instance,
that a large company wants to measure its web-
site traffic in relation to the number of mentions
on Twitter. It builds a digital dashboard to display
the results continuously. In the past, the company
had generated most of its sales leads and eventual
sales from trade shows and conferences. Switching
to Twitter mentions as the key metric to measure
changes the sales department’s focus. The depart-
ment pours its energy and resources into monitoring
website clicks and social media traffic, which pro-
duce many unqualified leads that never lead to sales.
Although big data is very good at detecting corre-
lations, especially subtle correlations that an analysis
of smaller data sets might miss, big data analysis
doesn’t necessarily show causation or which correla-
tions are meaningful. For example, examining big
data might show that from 2006 to 2011 the United
States murder rate was highly correlated with the
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 247
market share of Internet Explorer, since both de-
clined sharply. But that doesn’t necessarily mean
there is any meaningful connection between the
two phenomena. Data analysts need some business
knowledge of the problem they are trying to solve
with big data.
Big data predictive models don’t necessarily
give you a better idea of what will happen in the
future. Meridian Energy Ltd., an electricity genera-
tor and distributor operating in New Zealand and
Australia, moved away from using an aging predic-
tive equipment maintenance system. The software
was supposed to predict the maintenance needs
of all the large equipment the company owns and
operates, including generators, wind turbines, trans-
formers, circuit breakers, and industrial batteries.
However, the system used outdated modeling
techniques and could not actually predict equipment
failures. It ran simulations of different scenarios and
predicted when assets would fail the simulated tests.
The recommendations of the software were use-
less because they did not accurately predict which
pieces of equipment actually failed in the real world.
Meridian eventually replaced the old system with
IBM’s Predictive Maintenance and Quality software,
which bases predictions on more real-time data from
equipment.
All data sets and data-driven forecasting models
reflect the biases of the people selecting the data and
performing the analysis. Several years ago, Google
developed what it thought was a leading-edge algo-
rithm using data it collected from web searches to de-
termine exactly how many people had influenza and
how the disease was spreading. It tried to calculate
the number of people with flu in the United States by
relating people’s location to flu-related search que-
ries on Google. Google consistently overestimated flu
rates, when compared to conventional data collected
afterward by the U.S. Centers for Disease Control
(CDC). Several scientists suggested that Google was
“tricked” by widespread media coverage of that year’s
severe flu season in the United States, which was fur-
ther amplified by social media coverage. The model
developed for forecasting flu trends was based on a
flawed assumption—that the incidence of flu-related
searches on Googles was a precise indicator of the
number of people who actually came down with the
flu. Google’s algorithm only looked at numbers, not
the context of the search results.
In addition to election tampering by hostile na-
tions, insufficient attention to context and flawed
assumptions may have played a role in the failure
of most political experts to predict Donald Trump’s
victory over Hillary Clinton in the 2016 presiden-
tial election. Trump’s victory ran counter to almost
every major forecast, which had predicted Clinton’s
chances of winning to be between 70 to 99 percent.
Tons of data had been analyzed by political ex-
perts and the candidates’ campaign teams. Clinton
ran an overwhelmingly data-driven campaign, and
big data had played a large role in Obama’s victo-
ries in 2008 and 2012. Clinton’s team added to the
database the Obama campaigns had built, which
connected personal data from traditional sources,
such as reports from pollsters and field workers,
with other data from social media posts and other
online behavior as well as data used to predict con-
sumer behavior. The Clinton team assumed that the
same voters who supported Obama would turn out
for their candidate, and focused on identifying vot-
ers in areas with a likelihood of high voter turnout.
However, turnout for Clinton among the key groups
who had supported Obama—women, minorities, col-
lege graduates, and blue-collar workers—fell short of
expectations. (Trump had turned to big data as well,
but put more emphasis on tailoring campaign mes-
sages to targeted voter groups.)
Political experts were misled into thinking
Clinton’s victory was assured because some predic-
tive models lacked context in explaining potentially
wide margins of error. There were shortcomings in
polling, analysis, and interpretation, and analysts
did not spend enough time examining how the data
used in the predictive models were created. Many
polls used in election forecasts underestimated the
strength of Trump’s support. State polls were inac-
curate, perhaps failing to capture Republicans who
initially refused to vote for Trump and then changed
their minds at the last moment. Polls from Wisconsin
shortly before the election had put Clinton well
ahead of Trump. Polls are important for election
predictions, but they are only one of many sources
of data that should be consulted. Predictive models
were unable to fully determine who would actually
turn out to vote as opposed to how people thought
they would vote. Analysts overlooked signs that
Trump was forging ahead in the battleground states.
Britain had a similar surprise when polls mistakenly
predicted the nation would vote in June 2016 to stay
in the European Union.
And let’s not forget that big data poses some
challenges to information security and privacy.
248 Part Two Information Technology Infrastructure
As Chapter 4 pointed out, companies are now ag-
gressively collecting and mining massive data sets
on people’s shopping habits, incomes, hobbies,
residences, and (via mobile devices) movements
from place to place. They are using such big data
to discover new facts about people, to classify them
based on subtle patterns, to flag them as “risks” (for
example, loan default risks or health risks), to predict
their behavior, and to manipulate them for maxi-
mum profit.
When you combine someone’s personal infor-
mation with pieces of data from many different
sources, you can infer new facts about that person
(such as the fact that they are showing early signs
of Parkinson’s disease, or are unconsciously drawn
toward products that are colored blue or green). If
asked, most people might not want to disclose such
information, but they might not even know such in-
formation about them exists. Privacy experts worry
that people will be tagged and suffer adverse con-
sequences without due process, the ability to fight
back, or even knowledge that they have been dis-
criminated against.
Sources: Linda Currey Post, “Big Data Helps UK National Health
Service Lower Costs, Improve Treatments,” Forbes, February 7,
2018; Michael Jude, “Data Preparation Is the Key to Big Data
Success,” InfoWorld, February 8, 2018; Rajkumar Venkatesan and
Christina Black, “Using Big Data: 3 Reasons It Fails and 4 Ways to
Make It Work,” University of Virginia Darden School of Business
Press Release, February 8, 3018; Ed Burns, “When Predictive
Models Are Less Than Presidential,” Business Information,
February 2017; Aaron Timms, “Is Donald Trump’s Surprise Win a
Failure of Big Data? Not Really,” Fortune, November 14, 2016; Steve
Lohr and Natasha Singer, “The Data Said Clinton Would Win. Why
You Shouldn’t Have Believed It,” New York Times, November 10,
2016; Nicole Laskowski and Niel Nikolaisen: “Seven Big Data
Problems and How to Avoid Them,” TechTarget Inc., 2016; Joseph
Stromberg, “Why Google Flu Trends Can’t Track the Flu (Yet),”
smithsonianmag.com, March 13, 2014; and Gary Marcus and
Ernest Davis, “Eight (No, Nine!) Problems With Big Data,” New
York Times, April 6, 2014.
CASE STUDY QUESTIONS
6-13 What business benefits did the organizations
described in this case achieve by analyzing and
using big data?
6-14 Identify two decisions at the organizations
described in this case that were improved by
using big data and two decisions that big data
did not improve.
6-15 List and describe the limitations to using big
data.
6-16 Should all organizations try to collect and
analyze big data? Why or why not? What man-
agement, organization, and technology issues
should be addressed before a company decides
to work with big data?
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
6-17 Identify the five problems of a traditional file environment and explain how a database management
system solves them.
6-18 Discuss how the following facilitate the management of big data: Hadoop, in-memory computing, ana-
lytic platforms.
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250
MyLab MIS
Discussion Questions: 7-5, 7-6, 7-7; Hands-on MIS Projects: 7-8, 7-9, 7-10, 7-11;
Writing Assignments: 7-17, 7-18; eText with Conceptual Animations
CHAPTER CASES
Tour de France Wins with Wireless
Technology
Net Neutrality: The Battle Rages On
Monitoring Employees on Networks:
Unethical or Good Business?
Google, Apple, and Facebook Battle for Your
Internet Experience
VIDEO CASES
Telepresence Moves out of the Boardroom
and into the Field
Virtual Collaboration with IBM Sametime
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
7-1 What are the principal components of
telecommunications networks and key
networking technologies?
7-2 What are the different types of
networks?
7-3 How do the Internet and Internet
technology work, and how do
they support communication and
e-business?
7-4 What are the principal technologies
and standards for wireless networking,
communication, and Internet access?
7-5 How will MIS help my career?
Telecommunications, the Internet,
and Wireless Technology7CHAPTER
251
Every July about two hundred cyclists race across 2,200 miles of the most difficult terrain in France, including steep roads in the Pyrenees and Alps. The Tour de France is considered the world’s greatest bicycle race.
The first Tour de France took place 1903, as a way of promoting sales of
L’Auto newspapers, initially attracting mostly local competitors and spectators.
Thanks to newspapers, radio, and television, coverage and prestige of the
event expanded. As with other competitive sports, such as football, baseball,
tennis, and soccer, today’s Tour de France fans don’t just want to just watch
a sport; they want to engage with it, and they expect more information and
interaction—data-enhanced viewing, live streaming, video on demand, mobile
apps, and social media interaction. Digital technology has become essential for
attracting fans, athletes, sponsors, and broadcasters.
Up until 2014, Tour de France
was a technology laggard. The sport
doesn’t easily generate real-time sta-
tistics. The only source of real-time
information was a chalkboard held
up by a race executive sitting as a
passenger on a motorbike ahead of
the cyclists. TV viewers could see
timings and the race from numerous
camera angles, but little more.
Today, data from Tour de France
racing bikes are relayed to TV view-
ers within two seconds. A small,
lightweight tracking sensor is at-
tached to a clip below the saddle of
every competing rider’s bike. The
sensor contains a global positioning
system (GPS) chip, a radio frequency
(RF) chip, and a rechargeable bat-
tery. Each sensor transmits data about the bike’s GPS position and speed every
second, generating over 3 billion data points during the course of the race. These
real-time data are combined with feeds from other sources, such as weather
services, road gradients, and historical race data from the past few years. Race
organizers, broadcasters, teams, TV viewers, and fans using the Tour de France
mobile app can now access detailed statistics on the progress of the race and in-
dividual riders. Riders wear earpiece radios that relay real-time data to them as
they are cycling. The system does not include biometric data to monitor riders’
physical performance—the teams keep these data private.
Tour de France Wins with Wireless Technology
© Radu Razvan/Shutterstock
252 Part Two Information Technology Infrastructure
Dimension Data, a global IT services firm headquartered in South Africa,
built and operates Tour de France’s digital infrastructure. The sensor data from
each racing bike are relayed to planes and helicopters flying overhead to cover
the race for television. Race data are transmitted to Dimension Data’s cloud ser-
vice, hosted in remote data centers in London and Amsterdam, where powerful
algorithms developed by cycling experts analyze the data, including external
feeds, to generate real-time information for broadcasters, social media, and the
Tour de France race app. Getting the data from bike to viewer only takes two
seconds. The system is able to make predictions before and during the race
based on current and historic data about riders and the state of the race; for
example, the likelihood that the main body of riders might catch up to break-
away riders. The system can also generate rider profiles showing each rider’s
strengths and weaknesses across different race conditions based on historical
race results and performance.
Digital technology has dramatically increased Tour de France fan involve-
ment. Fans are able to see live performance information on their TVs and dis-
cuss the results on social media. In 2014, there were only 6 million views of
video clips put out by the Tour de France organization. By 2016, that num-
ber had soared to 55 million. Seventeen million people access the live-tracking
website. The goal is to pull you, the fan, into the race, and it appears Tour de
France has succeeded.
Sources: www.letour.fr/en, accessed September 12, 2018; Bryan Glick, “Tour de France
Pumps Tech,” Computer Weekly, August 15–21, 2017; “Tour de France Behind the Scenes:
How Dimension Data Rider Live Tracking Works,” DCRainmaker, July 13, 2017; Dave
Michels, “Adding an IoT Dimension to the Tour de France,” Network World, May 23, 2017;
and Scott Gibson, “5 Ways Tour de France Is Winning the Digital Race in 2017,” Dimension
Data, June 29, 2017.
The experience of the Tour de France illustrates some of the powerful capabilities and opportunities provided by contemporary networking tech-
nology. The annual Tour de France bicycle race now uses wireless networking
and wireless sensor technology to closely track cyclists’ speed and position in
relation to other variables affecting race outcome, and to deliver race informa-
tion instantaneously to fans and broadcasters.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. The Tour de France race takes place over a vast and
topographically challenging terrain, where it is very difficult to track riders and
generate real-time race statistics. This legendary race has many fans, but man-
agement realized it could expand its fan base and deepen fan engagement by
taking advantage of opportunities presented by wireless networking technology
and the Internet of Things (IoT). The Tour de France is thus able to provide
real-time race statistics, rider profiles, predictions about race outcomes, and
content for TV broadcasts and social media, increasing the popularity of the
sport and fans’ interest. Tour de France cyclists and teams can use this informa-
tion to improve their performance.
http://www.letour.fr/en
Chapter 7 Telecommunications, the Internet, and Wireless Technology 253
Here are some questions to think about: Why has wireless technology played
such a key role at the Tour de France? Describe how the technology changed
the way the Tour de France provided and used data from its races.
7-1 What are the principal components
of telecommunications networks and
key networking technologies?
If you run or work in a business, you can’t do without networks. You need
to communicate rapidly with your customers, suppliers, and employees. Until
about 1990, businesses used the postal system or telephone system with voice
or fax for communication. Today, however, you and your employees use com-
puters, email, text messaging, the Internet, mobile phones, and mobile com-
puters connected to wireless networks for this purpose. Networking and the
Internet are now nearly synonymous with doing business.
Networking and Communication Trends
Firms in the past used two fundamentally different types of networks: tele-
phone networks and computer networks. Telephone networks historically
handled voice communication, and computer networks handled data traffic.
Telephone companies built telephone networks throughout the twentieth cen-
tury by using voice transmission technologies (hardware and software), and
these companies almost always operated as regulated monopolies throughout
the world. Computer companies originally built computer networks to transmit
data between computers in different locations.
Thanks to continuing telecommunications deregulation and information
technology innovation, telephone and computer networks are converging into
a single digital network using shared Internet-based standards and technology.
Business
Solutions
Management
Organization
Wireless Race Tracking
System
Technology
Information
System
Business
Problem
• Vast topographically challenging location
• Opportunities from new technology
• Revise race
tracking process
• Obtain external
data
• Monitor rider progress
and location
• Predict race outcome
• Generate rider profiles
• Generate real-time race statistics
• Increase fan involvement
• Expand fan bases
• Tracking sensors
• Mobile app
• Cloud computing
service
• Data analytics
• Social media
• Select race
technology
254 Part Two Information Technology Infrastructure
Telecommunications providers today, such as AT&T and Verizon, offer data
transmission, Internet access, mobile phone service, and television program-
ming as well as voice service. Cable companies, such as Cablevision and
Comcast, offer voice service and Internet access. Computer networks have ex-
panded to include Internet telephone and video services.
Both voice and data communication networks have also become more pow-
erful (faster), more portable (smaller and mobile), and less expensive. For
instance, the typical Internet connection speed in 2000 was 56 kilobits per
second, but today the majority of U.S. households have high-speed broadband
connections provided by telephone and cable TV companies running at 3 to
20 megabits (millions of bits per second). The cost for this service has fallen ex-
ponentially, from 50 cents per kilobit in 2000 to a tiny fraction of a cent today.
Increasingly, voice and data communication, as well as Internet access, are
taking place over broadband wireless platforms such as mobile phones, mo-
bile handheld devices, and PCs in wireless networks. More than 70 percent of
Internet users (232 million people) in the United States use smartphones and
tablets to access the Internet, as well as desktop PCs.
What Is a Computer Network?
If you had to connect the computers for two or more employees in the same
office, you would need a computer network. In its simplest form, a network
consists of two or more connected computers. Figure 7.1 illustrates the major
hardware, software, and transmission components in a simple network: a cli-
ent computer and a dedicated server computer, network interfaces, a con-
nection medium, network operating system software, and either a hub or a
switch.
FIGURE 7.1 COMPONENTS OF A SIMPLE COMPUTER NETWORK
Illustrated here is a simple computer network consisting of computers, a network operating system (NOS)
residing on a dedicated server computer, cable (wiring) connecting the devices, switches, and a router.
Switch
Server
Switch
PC
PC
Router
Other Networks
Internet
NOS
Chapter 7 Telecommunications, the Internet, and Wireless Technology 255
Each computer on the network contains a network interface device to link
the computer to the network. The connection medium for linking network
components can be a telephone wire, coaxial cable, or radio signal in the case of
cell phone and wireless local area networks (Wi-Fi networks).
The network operating system (NOS) routes and manages communica-
tions on the network and coordinates network resources. It can reside on every
computer in the network or primarily on a dedicated server computer for all
the applications on the network. A server is a computer on a network that per-
forms important network functions for client computers, such as displaying
web pages, storing data, and storing the network operating system (hence con-
trolling the network). Microsoft Windows Server and Linux are the most widely
used network operating systems.
Most networks also contain a switch or a hub acting as a connection point
between the computers. Hubs are simple devices that connect network com-
ponents, sending a packet of data to all other connected devices. A switch has
more intelligence than a hub and can filter and forward data to a specified des-
tination on the network.
What if you want to communicate with another network, such as the
Internet? You would need a router. A router is a communications processor
that routes packets of data through different networks, ensuring that the data
sent get to the correct address.
Network switches and routers have proprietary software built into their
hardware for directing the movement of data on the network. This can cre-
ate network bottlenecks and makes the process of configuring a network more
complicated and time-consuming. Software-defined networking (SDN) is a
networking approach in which many of these control functions are managed by
one central program, which can run on inexpensive commodity servers that are
separate from the network devices themselves. This is especially helpful in a
cloud computing environment with many pieces of hardware because it allows
a network administrator to manage traffic loads in a flexible and more efficient
manner.
Networks in Large Companies
The network we’ve just described might be suitable for a small business, but
what about large companies with many locations and thousands of employees?
As a firm grows, its small networks can be tied together into a corporate-wide
networking infrastructure. The network infrastructure for a large corporation
consists of a large number of these small local area networks linked to other
local area networks and to firmwide corporate networks. A number of power-
ful servers support a corporate website, a corporate intranet, and perhaps an
extranet. Some of these servers link to other large computers supporting back-
end systems.
Figure 7.2 provides an illustration of these more-complex, larger-scale
corporate-wide networks. Here the corporate network infrastructure supports
a mobile sales force using mobile phones and smartphones, mobile employees
linking to the company website, and internal company networks using mobile
wireless local area networks (Wi-Fi networks). In addition to these computer
networks, the firm’s infrastructure may include a separate telephone network
that handles most voice data. Many firms are dispensing with their traditional
telephone networks and using Internet telephones that run on their existing
data networks (described later).
As you can see from this figure, a large corporate network infrastructure uses
a wide variety of technologies—everything from ordinary telephone service
256 Part Two Information Technology Infrastructure
and corporate data networks to Internet service, wireless Internet, and mobile
phones. One of the major problems facing corporations today is how to inte-
grate all the different communication networks and channels into a coherent
system that enables information to flow from one part of the corporation to
another and from one system to another.
Key Digital Networking Technologies
Contemporary digital networks and the Internet are based on three key tech-
nologies: client/server computing, the use of packet switching, and the de-
velopment of widely used communications standards (the most important of
which is Transmission Control Protocol/Internet Protocol, or TCP/IP) for link-
ing disparate networks and computers.
Client/Server Computing
Client/server computing, introduced in Chapter 5, is a distributed computing
model in which some of the processing power is located within small, inexpen-
sive client computers and resides literally on desktops or laptops or in handheld
devices. These powerful clients are linked to one another through a network
that is controlled by a network server computer. The server sets the rules of
communication for the network and provides every client with an address so
others can find it on the network.
Client/server computing has largely replaced centralized mainframe comput-
ing in which nearly all the processing takes place on a central large mainframe
FIGURE 7.2 CORPORATE NETWORK INFRASTRUCTURE
Today’s corporate network infrastructure is a collection of many networks from the pub-
lic switched telephone network to the Internet to corporate local area networks linking
workgroups, departments, or office floors.
Internet
Service
Provider
Telephone
System
Mobile
Phones/
Smartphones
Corporate
Website
Intranet and
Extranet
Servers
Internet
Corporate
Wired
LAN
Mobile Wi-Fi
Network
Wireless
LAN
Telephone
Service
Provider
Wireless
Internet
Service
Provider
Chapter 7 Telecommunications, the Internet, and Wireless Technology 257
computer. Client/server computing has extended computing to departments,
workgroups, factory floors, and other parts of the business that could not be
served by a centralized architecture. It also makes it possible for personal com-
puting devices such as PCs, laptops, and mobile phones to be connected to
networks such as the Internet. The Internet is the largest implementation of
client/server computing.
Packet Switching
Packet switching is a method of slicing digital messages into parcels called
packets, sending the packets along different communication paths as they be-
come available, and then reassembling the packets once they arrive at their
destinations (see Figure 7.3). Prior to the development of packet switching,
computer networks used leased, dedicated telephone circuits to communicate
with other computers in remote locations. In circuit-switched networks, such as
the telephone system, a complete point-to-point circuit is assembled, and then
communication can proceed. These dedicated circuit-switching techniques
were expensive and wasted available communications capacity—the circuit was
maintained regardless of whether any data were being sent.
Packet switching is more efficient. Messages are first broken down into small
fixed bundles of data called packets. The packets include information for di-
recting the packet to the right address and for checking transmission errors
along with the data. The packets are transmitted over various communica-
tions channels by using routers, each packet traveling independently. Packets
of data originating at one source will be routed through many paths and net-
works before being reassembled into the original message when they reach
their destinations.
TCP/IP and Connectivity
In a typical telecommunications network, diverse hardware and software com-
ponents need to work together to transmit information. Different components
in a network communicate with each other by adhering to a common set of
FIGURE 7.3 PACKET-SWITCHED NETWORKS AND PACKET
COMMUNICATIONS
Data are grouped into small packets, which are transmitted independently over various
communications channels and reassembled at their final destination.
Packet 2
Reassembled
Message
Packet 3
Data
Packet 1
Message
Packet Number
Message Number
Destination
258 Part Two Information Technology Infrastructure
rules called protocols. A protocol is a set of rules and procedures governing
transmission of information between two points in a network.
In the past, diverse proprietary and incompatible protocols often forced
business firms to purchase computing and communications equipment from
a single vendor. However, today, corporate networks are increasingly using a
single, common, worldwide standard called Transmission Control Protocol/
Internet Protocol (TCP/IP). TCP/IP was developed during the early 1970s
to support U.S. Department of Defense Advanced Research Projects Agency
(DARPA) efforts to help scientists transmit data among different types of com-
puters over long distances.
TCP/IP uses a suite of protocols, the main ones being TCP and IP. TCP re-
fers to the Transmission Control Protocol, which handles the movement of data
between computers. TCP establishes a connection between the computers, se-
quences the transfer of packets, and acknowledges the packets sent. IP refers to
the Internet Protocol (IP), which is responsible for the delivery of packets and
includes the disassembling and reassembling of packets during transmission.
Figure 7.4 illustrates the four-layered Department of Defense reference model
for TCP/IP, and the layers are described as follows:
1. Application layer. The Application layer enables client application programs
to access the other layers and defines the protocols that applications use to
exchange data. One of these application protocols is the Hypertext Transfer
Protocol (HTTP), which is used to transfer web page files.
2. Transport layer. The Transport layer is responsible for providing the Applica-
tion layer with communication and packet services. This layer includes TCP
and other protocols.
3. Internet layer. The Internet layer is responsible for addressing, routing, and
packaging data packets called IP datagrams. The Internet Protocol is one of
the protocols used in this layer.
4. Network Interface layer. At the bottom of the reference model, the Network
Interface layer is responsible for placing packets on and receiving them from
the network medium, which could be any networking technology.
Two computers using TCP/IP can communicate even if they are based on
different hardware and software platforms. Data sent from one computer to
the other passes downward through all four layers, starting with the sending
FIGURE 7.4 THE TRANSMISSION CONTROL PROTOCOL/INTERNET
PROTOCOL (TCP/IP) REFERENCE MODEL
This figure illustrates the four layers of the TCP/IP reference model for communications.
Application
Computer A Computer B
Application
Transport Transport
Internet Internet
Network
Interface
Network
Interface
Chapter 7 Telecommunications, the Internet, and Wireless Technology 259
computer’s Application layer and passing through the Network Interface layer.
After the data reach the recipient host computer, they travel up the layers and
are reassembled into a format the receiving computer can use. If the receiving
computer finds a damaged packet, it asks the sending computer to retransmit
it. This process is reversed when the receiving computer responds.
7-2 What are the different types of networks?
Let’s look more closely at alternative networking technologies available to
businesses.
Signals: Digital Versus Analog
There are two ways to communicate a message in a network: an analog signal
or a digital signal. An analog signal is represented by a continuous waveform
that passes through a communications medium and has been used for audio
communication. The most common analog devices are the telephone handset,
the speaker on your computer, or your iPhone earphone, all of which create
analog waveforms that your ear can hear.
A digital signal is a discrete, binary waveform rather than a continuous wave-
form. Digital signals communicate information as strings of two discrete states:
1 bits and 0 bits, which are represented as on-off electrical pulses. Computers
use digital signals and require a modem to convert these digital signals into ana-
log signals that can be sent over (or received from) telephone lines, cable lines,
or wireless media that use analog signals (see Figure 7.5). Modem stands for
modulator-demodulator. Cable modems connect your computer to the Internet
by using a cable network. DSL modems connect your computer to the Internet
using a telephone company’s landline network. Wireless modems perform the
same function as traditional modems, connecting your computer to a wireless
network that could be a cell phone network or a Wi-Fi network.
Types of Networks
There are many kinds of networks and ways of classifying them. One way of
looking at networks is in terms of their geographic scope (see Table 7.1).
Local Area Networks
If you work in a business that uses networking, you are probably connecting to
other employees and groups via a local area network. A local area network
(LAN) is designed to connect personal computers and other digital devices
FIGURE 7.5 FUNCTIONS OF THE MODEM
A modem is a device that translates digital signals into analog form (and vice versa) so
that computers can transmit data over analog networks such as telephone and cable
networks.
• Telephone line
• Cable system
• Wireless media
• Analog device
Computer
Modem
11
0 0 0
Digital Analog
260 Part Two Information Technology Infrastructure
within a half-mile or 500-meter radius. LANs typically connect a few comput-
ers in a small office, all the computers in one building, or all the computers in
several buildings in close proximity. LANs also are used to link to long-distance
wide area networks (WANs, described later in this section) and other networks
around the world, using the Internet.
Review Figure 7.1, which could serve as a model for a small LAN that might
be used in an office. One computer is a dedicated network server, providing
users with access to shared computing resources in the network, including soft-
ware programs and data files.
The server determines who gets access to what and in which sequence. The
router connects the LAN to other networks, which could be the Internet, or an-
other corporate network, so that the LAN can exchange information with net-
works external to it. The most common LAN operating systems are Windows
and Linux.
Ethernet is the dominant LAN standard at the physical network level, speci-
fying the physical medium to carry signals between computers, access control
rules, and a standardized set of bits that carry data over the system. Originally,
Ethernet supported a data transfer rate of 10 megabits per second (Mbps).
Newer versions, such as Gigabit Ethernet, support a data transfer rate of 1 giga-
bit per second (Gbps).
The LAN illustrated in Figure 7.1 uses a client/server architecture in
which the network operating system resides primarily on a single server,
and the server provides much of the control and resources for the network.
Alternatively, LANs may use a peer-to-peer architecture. A peer-to-peer net-
work treats all processors equally and is used primarily in small networks with
ten or fewer users. The various computers on the network can exchange data
by direct access and can share peripheral devices without going through a sep-
arate server.
Larger LANs have many clients and multiple servers, with separate serv-
ers for specific services such as storing and managing files and databases
(file servers or database servers), managing printers (print servers), storing
and managing email (mail servers), or storing and managing web pages (web
servers).
Metropolitan and Wide Area Networks
Wide area networks (WANs) span broad geographical distances—regions,
states, continents, or the entire globe. The most universal and powerful WAN
is the Internet. Computers connect to a WAN through public networks, such
as the telephone system or private cable systems, or through leased lines or
satellites. A metropolitan area network (MAN) is a network that spans a
metropolitan area, usually a city and its major suburbs. Its geographic scope
falls between a WAN and a LAN.
TABLE 7.1 TYPES OF NETWORKS
TYPE AREA
Local area network (LAN) Up to 500 meters (half a mile); an office or floor of a
building
Campus area network (CAN) Up to 1,000 meters (a mile); a college campus or
corporate facility
Metropolitan area network (MAN) A city or metropolitan area
Wide area network (WAN) A regional, transcontinental, or global area
Chapter 7 Telecommunications, the Internet, and Wireless Technology 261
Transmission Media and Transmission Speed
Networks use different kinds of physical transmission media, including twisted
pair wire, coaxial cable, fiber-optic cable, and media for wireless transmission.
Each has advantages and limitations. A wide range of speeds is possible for
any given medium, depending on the software and hardware configuration.
Table 7.2 compares these media.
Bandwidth: Transmission Speed
The total amount of digital information that can be transmitted through any
telecommunications medium is measured in bits per second (bps). One signal
change, or cycle, is required to transmit one or several bits; therefore, the trans-
mission capacity of each type of telecommunications medium is a function of
its frequency. The number of cycles per second that can be sent through that
medium is measured in hertz—one hertz is equal to one cycle of the medium.
The range of frequencies that can be accommodated on a particular telecom-
munications channel is called its bandwidth. The bandwidth is the difference
between the highest and lowest frequencies that can be accommodated on a
single channel. The greater the range of frequencies, the greater the bandwidth
and the greater the channel’s transmission capacity.
7-3 How do the Internet and Internet
technology work, and how do they support
communication and e-business?
The Internet has become an indispensable personal and business tool—but what
exactly is the Internet? How does it work, and what does Internet technology
have to offer for business? Let’s look at the most important Internet features.
What Is the Internet?
The Internet is the world’s most extensive public communication system.
It’s also the world’s largest implementation of client/server computing and
internetworking, linking millions of individual networks all over the world.
TABLE 7.2 PHYSICAL TRANSMISSION MEDIA
TRANSMISSION MEDIUM DESCRIPTION SPEED
Twisted pair wire (CAT 5) Strands of copper wire twisted in pairs for voice and data communications.
CAT 5 is the most common 10 Mbps LAN cable. Maximum recommended
run of 100 meters.
10–100+ Mbps
Coaxial cable Thickly insulated copper wire, which is capable of high-speed data
transmission and less subject to interference than twisted wire. Currently
used for cable TV and for networks with longer runs (more than 100 meters).
Up to 1 Gbps
Fiber-optic cable Strands of clear glass fiber, transmitting data as pulses of light generated by
lasers. Useful for high-speed transmission of large quantities of data. More
expensive than other physical transmission media; used for last-mile delivery
to customers and the Internet backbone.
15 Mbps to 6+ Tbps
Wireless transmission media Based on radio signals of various frequencies and includes both terrestrial
and satellite microwave systems and cellular networks. Used for long-
distance, wireless communication, and Internet access.
Up to 600+ Mbps
262 Part Two Information Technology Infrastructure
This global network of networks began in the early 1970s as a U.S. Department
of Defense project to link scientists and university professors around the world.
Most homes and small businesses connect to the Internet by subscribing to
an Internet service provider. An Internet service provider (ISP) is a com-
mercial organization with a permanent connection to the Internet that sells
temporary connections to retail subscribers. EarthLink, NetZero, and AT&T are
ISPs. Individuals also connect to the Internet through their business firms, uni-
versities, or research centers that have designated Internet domains.
There is a variety of services for ISP Internet connections. Connecting via
a traditional telephone line and modem, at a speed of 56.6 kilobits per sec-
ond (Kbps), used to be the most common form of connection worldwide, but
high-speed broadband connections have largely replaced it. Digital subscriber
line, cable, satellite Internet connections, and T lines provide these broadband
services.
Digital subscriber line (DSL) technologies operate over existing telephone
lines to carry voice, data, and video at transmission rates ranging from 385
Kbps all the way up to 3 Mbps, depending on usage patterns and distance. Fios
(Verizon’s fiber optic cable service) can deliver over 900 Mbps, although most
home service delivers 100 Mbps. Cable Internet connections provided by
cable television vendors use digital cable coaxial lines to deliver high-speed
Internet access to homes and businesses. They can provide high-speed access
to the Internet of up to 50 Mbps, although most providers offer service rang-
ing from 3 Mbps to 20 Mbps. Where DSL and cable services are unavailable, it
is possible to access the Internet via satellite, although some satellite Internet
connections have slower upload speeds than other broadband services.
T1 and T3 are international telephone standards for digital communication.
They are leased, dedicated lines suitable for businesses or government agen-
cies requiring high-speed guaranteed service levels. T1 lines offer guaranteed
delivery at 1.54 Mbps, and T3 lines offer delivery at 45 Mbps. The Internet does
not provide similar guaranteed service levels but, simply, best effort.
Internet Addressing and Architecture
The Internet is based on the TCP/IP networking protocol suite described ear-
lier in this chapter. Every device connected to the Internet (or another TCP/IP
network) is assigned a unique Internet Protocol (IP) address consisting of a
string of numbers.
When a user sends a message to another user on the Internet or another
TCP/IP network, the message is first decomposed into packets. Each packet
contains its destination address. The packets are then sent from the client to
the network server and from there on to as many other servers as necessary to
arrive at a specific computer with a known address. At the destination address,
the packets are reassembled into the original message.
The Domain Name System
Because it would be incredibly difficult for Internet users to remember long
strings of numbers, an IP address can be represented by a natural language con-
vention called a domain name. The Domain Name System (DNS) converts
domain names to IP addresses. DNS servers maintain a database containing IP
addresses mapped to their corresponding domain names. To access a computer
on the Internet, users need only specify its domain name, such as Expedia.com,
DNS has a hierarchical structure (see Figure 7.6). At the top of the DNS hi-
erarchy is the root domain. The child domain of the root is called a top-level
http://Expedia.com
Chapter 7 Telecommunications, the Internet, and Wireless Technology 263
domain, and the child domain of a top-level domain is called a second-level
domain. Top-level domains are two- and three-character names you are famil-
iar with from surfing the web; for example, .com, .edu, .gov, and the various
country codes such as .ca for Canada or .it for Italy. Second-level domains
have two parts, designating a top-level name and a second-level name—such
as buy.com, nyu.edu, or amazon.ca. A host name at the bottom of the hi-
erarchy designates a specific computer on either the Internet or a private
network.
The following list shows the most common domain extensions currently
available and officially approved. Countries also have domain names such as
.uk, .au, and .fr (United Kingdom, Australia, and France, respectively), and
there is a new class of internationalized top-level domains that use non-English
characters. In the future, this list will expand to include many more types of
organizations and industries as follows:
.com Commercial organizations/businesses
.edu Educational institutions
.gov U.S. government agencies
.mil U.S. military
.net Network computers
.org Any type of organization
.biz Business firms
.info Information providers
Internet Architecture and Governance
Internet data traffic is carried over transcontinental high-speed backbone
networks that generally operate in the range of 155 Mbps to 2.5 Gbps (see
Figure 7.7). These trunk lines are typically owned by long-distance telephone
FIGURE 7.6 THE DOMAIN NAME SYSTEM
The Domain Name System is a hierarchical system with a root domain, top-level
domains, second-level domains, and host computers at the third level.
expedia
sales.google.com
computer1.sales.google.com
congress
other
domains
“.”
edu
Internet Root Domain
Top-level domains
Second-level domains
Third-level domains
Hosts
google
sales
Computer1
gov org netcom
http://buy.com
264 Part Two Information Technology Infrastructure
companies (called network service providers) or by national governments. Local
connection lines are owned by regional telephone and cable television com-
panies in the United States and in other countries that connect retail users in
homes and businesses to the Internet. The regional networks lease access to
ISPs, private companies, and government institutions.
Each organization pays for its own networks and its own local Internet con-
nection services, a part of which is paid to the long-distance trunk line owners.
Individual Internet users pay ISPs for using their service, and they generally
pay a flat subscription fee, no matter how much or how little they use the
Internet. A debate is now raging on whether this arrangement should continue
or whether heavy Internet users who download large video and music files
should pay more for the bandwidth they consume. The Interactive Session
on Organizations explores this topic by examining the pros and cons of net
neutrality.
No one owns the Internet, and it has no formal management. However,
worldwide Internet policies are established by a number of professional
organizations and government bodies, including the Internet Architecture
Board (IAB), which helps define the overall structure of the Internet; the
Internet Corporation for Assigned Names and Numbers (ICANN), which
manages the domain name system; and the World Wide Web Consortium
(W3C), which sets Hypertext Markup Language and other programming
standards for the web.
FIGURE 7.7 INTERNET NETWORK ARCHITECTURE
The Internet backbone connects to regional networks, which in turn provide access to
Internet service providers, large firms, and government institutions. Network access
points (NAPs) and metropolitan area exchanges (MAEs) are hubs where the backbone
intersects regional and local networks and where backbone owners connect with one
another.
Regional
Hosts
Regional Hubs (MAEs and NAPs)
Domain
Local ISP
Regular
Phone
Line
Domain
nyu.edu
T1
Line Regional
Hosts
SMTP
Mail
POP3
Mail
MAE
MAE
Client IP
Address
Client IP
Address
Campus Network
O�ces
Home
Backbone
Chapter 7 Telecommunications, the Internet, and Wireless Technology 265
What kind of Internet user are you? Do you primar-
ily use the Net to do a little email and online bank-
ing? Or are you online all day, watching YouTube
videos, downloading music files, or playing online
games? Do you use your iPhone to stream TV shows
and movies on a regular basis? If you’re a power
Internet or smartphone user, you are consuming a
great deal of bandwidth.
To manage all the data flowing over the Internet,
it will be necessary to build new networks. Internet
service providers (ISPs) assert that expanding their
networks would require passing on burdensome costs
to consumers. These companies believe differential
pricing methods, which include data caps and metered
use—charging based on the amount of bandwidth
consumed—are the fairest way to finance necessary
investments in their network infrastructures. However,
metering Internet use is not universally accepted be-
cause of an ongoing debate about net neutrality.
Net neutrality is the idea that Internet service pro-
viders must allow customers equal access to content
and applications, regardless of the source or nature
of the content. Until recently, the Internet has been
neutral, with all Internet traffic treated equally on
a first-come, first-served basis by Internet backbone
owners. However, this arrangement prevents tele-
communications and cable companies from charging
differentiated prices based on the amount of band-
width consumed by the content being delivered over
the Internet.
Net neutrality advocates include the Electronic
Frontier Foundation; data-intensive web businesses
such as Netflix, Amazon, and Google; major con-
sumer groups; and a host of bloggers and small busi-
nesses. They argue that differentiated pricing would
impose heavy costs on heavy bandwidth users such
as YouTube, Skype, and other innovative services,
preventing high-bandwidth startup companies from
gaining traction. Net neutrality supporters also argue
that without net neutrality, ISPs that are also cable
companies, such as Comcast, might block online
streaming video from Netflix or Hulu to force cus-
tomers to use the cable company’s on-demand movie
rental services.
It was thought that the issue of net neutrality
had been definitively settled by the 2015 ruling of
the Federal Communications Commission (FCC)
under the Obama administration, which considered
broadband Internet services as a utility under Title
II of the Communications Act. This ruling gave the
FCC broad power over Internet providers. Internet
service providers could not discriminate against any
lawful content by blocking websites or apps, slow the
transmission of data based on the nature of the con-
tent as long as it was legal, or create an Internet fast
lane for companies and consumers who pay premi-
ums and a slow lane for those who don’t.
All that changed under the Trump administration,
which opposes net neutrality as part of its push for
government-wide deregulation. In December 2017,
the FCC voted to repeal its net neutrality rules for
Internet providers. Trump’s FCC chair, Ajit Pai, has
asserted that before net neutrality rules were put
into effect in 2015, service providers had not engaged
in any of the practices the rules prohibit. Pai believes
that ending net neutrality could help lower prices
for consumers, because Internet service providers
could offset their costs with the use of paid prioritiza-
tion deals with websites for faster delivery of their
content.
Pro-net neutrality groups immediately countered,
predicting that repealing net neutrality would lead
to a faster, pricier, and more confusing Internet.
Deregulation could create a “two-tier” Internet, in
which Internet service providers will start charging
fees to websites and apps, and slow down or block
the sites that don’t pay up. As a result, users will
have unfettered access to only part of the Internet,
with the rest either inaccessible or slow.
Consumer advocates have further argued that if
net neutrality rules are eliminated, broadband pro-
viders will begin selling Internet services in bundles,
similar to how cable television is sold today. For ex-
ample, if you wanted to access Facebook and Twitter
under a bundling system, you might have to pay for
a premium social media package. Consumers could
suffer from pay-to-play deals. A fast lane could be
occupied by big Internet and media companies and
affluent households, while everyone else would be
relegated to a slow lane.
Some small businesses worry that repealing
net neutrality would create an unfair playing field
INTERACTIVE SESSION ORGANIZATIONS
Net Neutrality: The Battle Rages On
266 Part Two Information Technology Infrastructure
1. What is net neutrality? Who’s in favor of net neu-
trality? Who’s opposed? Why?
2. What would be the impact on individual users,
businesses, and government if Internet providers
switched to a tiered service model for transmis-
sion over landlines and wireless?
3. It has been said that net neutrality is the most im-
portant issue facing the Internet since the advent
of the Internet. Discuss the implications of this
statement.
4. Are you in favor of enforcing Internet neutrality?
Why or why not?
favoring industry giants. Websites and services of
e-commerce startups might run slower than those
run by the big Internet players such as Netflix or
Facebook. Remote workers of all kinds, including
freelancers and franchisees could similarly face
higher costs to do their jobs from home.
Opponents of net neutrality have countered that
the biggest barrier to a company becoming the
next Google, Facebook, Netflix, or Amazon isn’t
the end of net neutrality but Google, Facebook,
Netflix, and Amazon themselves. These compa-
nies are already spending vast sums of money
to push their ever-higher bandwidth content to
consumers. Many lawsuits challenging the FCC’s
new Internet policy have been filed since the new
FCC rules took effect. The battle for net neutrality
is not over.
Sources: Cecelia Kang, “Flurry of Lawsuits Filed to Fight Repeal of
Net Neutrality,” New York Times, January 16, 2018; Nick Piette, “Net
Neutrality: Why It’s Vital for Digital Transformation,” Information
Week, February 9, 2018; Aaron Byrd and Natalia V. Osipova, “Why
Net Neutrality Was Repealed and How It Affects You,” New York
Times, December 21, 2017; and “Christopher Mims, Get Ready for
a Faster, Pricier, and More Confusing Internet,” Wall Street Journal,
December 18, 2017.
CASE STUDY QUESTIONS
These organizations influence government agencies, network owners, ISPs,
and software developers with the goal of keeping the Internet operating as effi-
ciently as possible. The Internet must also conform to the laws of the sovereign
nation-states in which it operates as well as to the technical infrastructures that
exist within the nation-states. Although in the early years of the Internet and
the web there was very little legislative or executive interference, this situation
is changing as the Internet plays a growing role in the distribution of informa-
tion and knowledge, including content that some find objectionable.
The Future Internet: IPv6 and Internet2
The Internet was not originally designed to handle billions of users and the
transmission of massive quantities of data. Because of sheer Internet popula-
tion growth, the world is about to run out of available IP addresses using the
old addressing convention. The old system based on 32-bit addresses is being
replaced by a new version of IP addressing called IPv6 (Internet Protocol ver-
sion 6), which contains 128-bit addresses (2 to the power of 128), or more than
a quadrillion possible unique addresses. IPv6 is compatible with most modems
and routers sold today, and IPv6 will fall back to the old addressing system if
IPv6 is not available on local networks. The transition to IPv6 will take several
years as systems replace older equipment.
Internet2 is an advanced networking consortium representing more than
500 U.S. universities, private businesses, and government agencies working
with 94,000 institutions across the United States and international network-
ing partners from more than 100 countries. To connect these communities,
Internet2 developed a high-capacity, 100 Gbps network that serves as a test
Chapter 7 Telecommunications, the Internet, and Wireless Technology 267
bed for leading-edge technologies that may eventually migrate to the public
Internet, including large-scale network performance measurement and man-
agement tools, secure identity and access management tools, and capabilities
such as scheduling high-bandwidth, high-performance circuits.
Internet Services and Communication Tools
The Internet is based on client/server technology. Individuals using the
Internet control what they do through client applications on their computers,
such as web browser software. The data, including email messages and web
pages, are stored on servers. A client uses the Internet to request information
from a particular web server on a distant computer, and the server sends the re-
quested information back to the client over the Internet. Client platforms today
include not only PCs and other computers but also smartphones and tablets.
Internet Services
A client computer connecting to the Internet has access to a variety of services.
These services include email, chatting and instant messaging, electronic dis-
cussion groups, Telnet, File Transfer Protocol (FTP), and the web. Table 7.3
provides a brief description of these services.
Each Internet service is implemented by one or more software programs. All
the services may run on a single server computer, or different services may be
allocated to different machines. Figure 7.8 illustrates one way these services
can be arranged in a multitiered client/server architecture.
Email enables messages to be exchanged from computer to computer, with
capabilities for routing messages to multiple recipients, forwarding messages,
and attaching text documents or multimedia files to messages. Most email
today is sent through the Internet. The cost of email is far lower than equiva-
lent voice, postal, or overnight delivery costs, and email messages can arrive
anywhere in the world in a matter of seconds.
Chatting enables two or more people who are simultaneously connected to
the Internet to hold live, interactive conversations. Chat systems now support
voice and video chat as well as written conversations. Many online retail busi-
nesses offer chat services on their websites to attract visitors, to encourage re-
peat purchases, and to improve customer service.
Instant messaging is a type of chat service that enables participants to cre-
ate their own private chat channels. The instant messaging system alerts the
user whenever someone on his or her private list is online so that the user can
initiate a chat session with other individuals. Instant messaging systems for con-
sumers include Yahoo! Messenger, Google Hangouts, AOL Instant Messenger,
TABLE 7.3 MAJOR INTERNET SERVICES
CAPABILITY FUNCTIONS SUPPORTED
Email Person-to-person messaging; document sharing
Chatting and instant messaging Interactive conversations
Newsgroups Discussion groups on electronic bulletin boards
Telnet Logging on to one computer system and doing work on
another
File Transfer Protocol (FTP) Transferring files from computer to computer
World Wide Web Retrieving, formatting, and displaying information (including
text, audio, graphics, and video) by using hypertext links
268 Part Two Information Technology Infrastructure
and Facebook Messenger. Companies concerned with security use proprietary
communications and messaging systems such as IBM Sametime.
Newsgroups are worldwide discussion groups posted on Internet electronic
bulletin boards on which people share information and ideas on a defined topic
such as radiology or rock bands. Anyone can post messages on these bulletin
boards for others to read.
Employee use of email, instant messaging, and the Internet is supposed to
increase worker productivity, but the accompanying Interactive Session on
Management shows that this may not always be the case. Many company man-
agers now believe they need to monitor and even regulate their employees’
online activity, but is this ethical? Although there are some strong business
reasons companies may need to monitor their employees’ email and web ac-
tivities, what does this mean for employee privacy?
Voice over IP
The Internet has also become a popular platform for voice transmission and
corporate networking. Voice over IP (VoIP) technology delivers voice infor-
mation in digital form using packet switching, avoiding the tolls charged by
local and long-distance telephone networks (see Figure 7.9). Calls that would
ordinarily be transmitted over public telephone networks travel over the corpo-
rate network based on the Internet protocol, or over the public Internet. Voice
calls can be made and received with a computer equipped with a microphone
and speakers or with a VoIP-enabled telephone.
Cable firms such as Time Warner and Cablevision provide VoIP service
bundled with their high-speed Internet and cable offerings. Skype offers free
VoIP worldwide using a peer-to-peer network, and Google has its own free VoIP
service.
Although up-front investments are required for an IP phone system, VoIP
can reduce communication and network management costs by 20 to 30 per-
cent. For example, VoIP saves Virgin Entertainment Group $700,000 per year in
FIGURE 7.8 CLIENT/SERVER COMPUTING ON THE INTERNET
Client computers running web browsers and other software can access an array of services on servers over the
Internet. These services may all run on a single server or on multiple specialized servers.
Sales
Production
Accounting
HR
• Web browser
• Other client
software
• Web (HTTP) server
• Simple Mail Transfer
Protocol (SMTP)
• Domain Name Serving
(DNS) utility
• File Transfer Protocol
(FTP)
• Network News Transfer
Protocol (NNTP)
Smartphone
InternetClient Server
Web
pages
Data-
bases
Mail
files
Application
server
Database
server
Back-end
systems
Chapter 7 Telecommunications, the Internet, and Wireless Technology 269
long-distance bills. In addition to lowering long-distance costs and eliminating
monthly fees for private lines, an IP network provides a single voice-data in-
frastructure for both telecommunications and computing services. Companies
no longer have to maintain separate networks or provide support services and
personnel for each type of network.
Unified Communications
In the past, each of the firm’s networks for wired and wireless data, voice com-
munications, and videoconferencing operated independently of each other and
had to be managed separately by the information systems department. Now,
however, firms can merge disparate communications modes into a single uni-
versally accessible service using unified communications technology. Unified
communications integrates disparate channels for voice communications,
data communications, instant messaging, email, and electronic conferencing
into a single experience by which users can seamlessly switch back and forth
between different communication modes. Presence technology shows whether
a person is available to receive a call.
CenterPoint Properties, a major Chicago area industrial real estate com-
pany, used unified communications technology to create collaborative web-
sites for each of its real estate deals. Each website provides a single point for
accessing structured and unstructured data. Integrated presence technology
lets team members email, instant message, call, or videoconference with
one click.
Virtual Private Networks
What if you had a marketing group charged with developing new products
and services for your firm with members spread across the United States? You
would want them to be able to email each other and communicate with the
home office without any chance that outsiders could intercept the communica-
tions. Large private networking firms offer secure, private, dedicated networks
to customers, but this is expensive. A lower-cost solution is to create a virtual
private network within the public Internet.
FIGURE 7.9 HOW VOICE OVER IP WORKS
A VoIP phone call digitizes and breaks up a voice message into data packets that may travel along
different routes before being reassembled at the final destination. A processor nearest the call’s desti-
nation, called a gateway, arranges the packets in the proper order and directs them to the telephone
number of the receiver or the IP address of the receiving computer.
A A
Y Y
C
C
X
X
B
Internet
User
Gateway
How are you?
( )
Fine, thank you!
( )
Gateway
User
B
A CB
How are you?
( )A CB
A CB
Z
Z
YX Z
Fine, thank you!
( )YX Z
Y XZ
270 Part Two Information Technology Infrastructure
The Internet has become an extremely valuable
business tool, but it’s also a huge distraction for
workers on the job. Employees are wasting valuable
company time by surfing inappropriate websites
(Facebook, shopping, sports, etc.), sending and re-
ceiving personal email, texting to friends, and down-
loading videos and music. According to a survey by
International Data Corp (IDC), 30 to 40 percent of
Internet access is spent on non-work-related brows-
ing, and a staggering 60 percent of all online pur-
chases are made during working hours.
Many companies have begun monitoring employee
use of email and the Internet, sometimes without their
knowledge. Many tools are now available for this pur-
pose, including Veriato Investigator, OsMonitor, Work
Examiner, Mobistealth, and Spytech. These products
enable companies to record online searches, monitor
file downloads and uploads, record keystrokes, keep
tabs on emails, create transcripts of chats, or take
certain screenshots of images displayed on computer
screens. Instant messaging, text messaging, and social
media monitoring are also increasing. Microsoft offers
software called MyAnalytics, which assembles data
from emails, calendars, and other sources to show em-
ployees how they spend their time, how often they are
in touch with key contacts, and whether they multi-
task too much. It also aggregates the data for managers
to see how their teams are doing.
Although U.S. companies have the legal right to
monitor employee Internet and email activity while
they are at work, is such monitoring unethical, or is
it simply good business?
Managers worry about the loss of time and em-
ployee productivity when employees are focusing on
personal rather than company business. Too much
time on personal business translates into lost reve-
nue. Some employees may even be billing time they
spend pursuing personal interests online to clients,
thus overcharging them.
If personal traffic on company networks is too
high, it can also clog the company’s network so that
legitimate business work cannot be performed. GMI
Insurance Services, which serves the U.S. transporta-
tion industry, found that employees were download-
ing a great deal of music and streaming video and
storing the files on company servers. GMI’s server
backup space was being eaten up.
When employees use email or the web (includ-
ing social networks) at employer facilities or with
employer equipment, anything they do, includ-
ing anything illegal, carries the company’s name.
Therefore, the employer can be traced and held lia-
ble. Management in many firms fear that racist, sexu-
ally explicit, or other potentially offensive material
accessed or traded by their employees could result in
adverse publicity and even lawsuits for the firm. Even
if the company is found not to be liable, responding
to lawsuits could run up huge legal bills. Companies
also fear leakage of confidential information and
trade secrets through email or social networks. U.S.
companies have the legal right to monitor what em-
ployees are doing with company equipment during
business hours. The question is whether electronic
surveillance is an appropriate tool for maintaining an
efficient and positive workplace. Some companies try
to ban all personal activities on corporate networks—
zero tolerance. Others block employee access to spe-
cific websites or social sites, closely monitor email
messages, or limit personal time on the web.
IT Authorities, a Tampa, Florida–based infrastruc-
ture management and support organization, is using
Veriato 360 employee monitoring software to help
improve employee productivity. The company im-
plemented the software in 2016 to reduce what it be-
lieved to be “inefficient activities.” According to CEO
Jason Caras, knowing that managers can see whether
employees are working and exactly how they are
working is a huge deterrent to wasteful activity. For
IT Authorities specifically, Veriato 360 tracks and
records the websites employees are visiting, what
documents they are transmitting (and how), what
they are sending (and to whom) in email and instant
messaging, and even how long they might have been
away from their computers at any given time. With
Veriato 360, companies such as IT Authorities are
able to identify “normal” patterns of activity for an
individual’s job, as well as any anomalies, so they
can quickly address any potential productivity loss
before it costs their company thousands or even mil-
lions of dollars in lost work.
A Proofpoint survey found that one in five large
U.S. companies had fired an employee for violating
email policies. Among managers who fired employ-
ees for Internet misuse, the majority did so because
INTERACTIVE SESSION MANAGEMENT
Monitoring Employees on Networks: Unethical or Good Business?
Chapter 7 Telecommunications, the Internet, and Wireless Technology 271
1. Should managers monitor employee email and
Internet usage? Why or why not?
2. Describe an effective email and web use policy for
a company.
3. Should managers inform employees that their web
behavior is being monitored? Or should managers
monitor secretly? Why or why not?
the employees’ email contained sensitive, confiden-
tial, or embarrassing information.
No solution is problem-free, but many consultants
believe companies should write corporate policies on
employee email, social media, and Internet use. Many
workers are unaware that employers have the right
to monitor and collect data about them. The policies
should include explicit ground rules that state, by posi-
tion or level, under what circumstances employees can
use company facilities for email, blogging, or web surf-
ing. The policies should also inform employees whether
these activities are monitored and explain why.
The rules should be tailored to specific business
needs and organizational cultures. For example,
investment firms will need to allow many of their
employees access to other investment sites. A com-
pany dependent on widespread information shar-
ing, innovation, and independence could very well
find that monitoring creates more problems than it
solves.
Sources: “Technology Is Making It Possible for Employers to
Monitor More Work Activity than Ever,” Economist, April 3, 2018;
www. privacyrights.org, accessed April 5, 2018; “Electronic Surveillance
of Employees,” www.thebalance.com, accessed April 5, 2018; “Office
Slacker Stats,” www.staffmonitoring.com, accessed May 3, 2017;
“How Do Employers Monitor Internet Usage at Work?” wisegeek.org,
accessed April 15, 2017; and Veriato,“Veriato 360 Helps IT Authorities
Quickly Increase Employee Productivity,” March 15, 2017.
CASE STUDY QUESTIONS
A virtual private network (VPN) is a secure, encrypted, private network
that has been configured within a public network to take advantage of the
economies of scale and management facilities of large networks, such as the
Internet (see Figure 7.10). A VPN provides your firm with secure, encrypted
communications at a much lower cost than the same capabilities offered by tra-
ditional non-Internet providers that use their private networks to secure com-
munications. VPNs also provide a network infrastructure for combining voice
and data networks.
Several competing protocols are used to protect data transmitted over the
public Internet, including Point-to-Point Tunneling Protocol (PPTP). In a process
called tunneling, packets of data are encrypted and wrapped inside IP packets.
By adding this wrapper around a network message to hide its content, business
firms create a private connection that travels through the public Internet.
The Web
The web is the most popular Internet service. It’s a system with universally
accepted standards for storing, retrieving, formatting, and displaying informa-
tion by using a client/server architecture. Web pages are formatted using hy-
pertext, embedded links that connect documents to one another and that also
link pages to other objects, such as sound, video, or animation files. When you
click a graphic and a video clip plays, you have clicked a hyperlink. A typical
website is a collection of web pages linked to a home page.
Hypertext
Web pages are based on a standard Hypertext Markup Language (HTML),
which formats documents and incorporates dynamic links to other documents
and other objects stored in the same or remote computers (see Chapter 5). Web
http://www.privacyrights.org
http://www.thebalance.com
http://www.staffmonitoring.com
272 Part Two Information Technology Infrastructure
FIGURE 7.10 A VIRTUAL PRIVATE NETWORK USING THE INTERNET
This VPN is a private network of computers linked using a secure tunnel connection over
the Internet. It protects data transmitted over the public Internet by encoding the data
and wrapping them within the Internet protocol. By adding a wrapper around a network
message to hide its content, organizations can create a private connection that travels
through the public Internet.
D
CA
B
Internet
Data
Data
pages are accessible through the Internet because web browser software operat-
ing your computer can request web pages stored on an Internet host server by
using the Hypertext Transfer Protocol (HTTP). HTTP is the communica-
tions standard that transfers pages on the web. For example, when you type a
web address in your browser, such as http://www.sec.gov, your browser sends
an HTTP request to the sec.gov server requesting the home page of sec.gov.
HTTP is the first set of letters at the start of every web address, followed by
the domain name, which specifies the organization’s server computer that is
storing the web page. Most companies have a domain name that is the same
as or closely related to their official corporate name. The directory path and
web page name are two more pieces of information within the web address
that help the browser track down the requested page. Together, the address
is called a uniform resource locator (URL). When typed into a browser, a
URL tells the browser software exactly where to look for the information. For
example, in the URL http://www.megacorp.com/content/features/082610.
html, http names the protocol that displays web pages, www.megacorp.com
is the domain name, content/features is the directory path that identifies
where on the domain web server the page is stored, and 082610.html is the
web page name and the name of the format it is in. (It is an HTML page.)
Web Servers
A web server is software for locating and managing stored web pages. It locates
the web pages a user requests on the computer where they are stored and delivers
the web pages to the user’s computer. Server applications usually run on dedicated
computers, although they can all reside on a single computer in small organizations.
The leading web servers in use today are Microsoft Internet Information
Services (IIS) and Apache HTTP Server. Apache is an open source product that
is free of charge and can be downloaded from the web.
Searching for Information on the Web
No one knows for sure how many web pages there really are. The surface web
is the part of the web that search engines visit and about which information is
recorded. For instance, Google indexed an estimated 35 trillion pages in 2017, and
http://www.sec.gov
http://www.megacorp.com/content/features/082610.html
http://www.megacorp.com/content/features/082610.html
http://www.megacorp.com
Chapter 7 Telecommunications, the Internet, and Wireless Technology 273
this reflects a large portion of the publicly accessible web page population, esti-
mated to be 60 trillion pages. But there is a deep web that contains an estimated
1 trillion additional pages, many of them proprietary (such as the pages of Wall
Street Journal Online, which cannot be visited without a subscription or access
code), or that are stored in protected corporate databases. Facebook, with web
pages of text, photos, and media for more than 2 billion members, is a closed web,
and its pages are not completely searchable by Google or other search engines.
A small portion of the deep web called the dark web has been intentionally hid-
den from search engines, uses masked IP addresses, and is accessible only with a
special web browser in order to preserve anonymity.
Search Engines Obviously, with so many web pages, finding specific ones that
can help you or your business, nearly instantly, is an important problem. The ques-
tion is, how can you find the one or two pages you really want and need out of bil-
lions of indexed web pages? Search engines attempt to solve the problem of finding
useful information on the web nearly instantly and, arguably, they are the killer
app of the Internet era. Today’s search engines can sift through HTML files; files of
Microsoft Office applications; PDF files; and audio, video, and image files. There are
hundreds of search engines in the world, but the vast majority of search results come
from Google, Baidu, Yahoo, and Microsoft’s Bing (see Figure 7.11). While we typically
think of Amazon as an online store, it is also a powerful product search engine.
Web search engines started out in the early 1990s as relatively simple soft-
ware programs that roamed the nascent web, visiting pages and gathering in-
formation about the content of each page. The first search engines were simple
keyword indexes of all the pages they visited, leaving users with lists of pages
that may not have been truly relevant to their search.
In 1994, Stanford University computer science students David Filo and Jerry
Yang created a hand-selected list of their favorite web pages and called it “Yet
Another Hierarchical Officious Oracle,” or Yahoo. Yahoo was not initially a search
engine but rather an edited selection of websites organized by categories the edi-
tors found useful. Currently, Yahoo relies on Microsoft’s Bing for search results.
In 1998, Larry Page and Sergey Brin, two other Stanford computer science
students, released their first version of Google. This search engine was differ-
ent. Not only did it index each web page’s words but it also ranked search results
FIGURE 7.11 TOP DESKTOP/LAPTOP WEB SEARCH ENGINES WORLDWIDE
Google is the world’s most popular search engine.
Source: Based on data from Net Market Share, April 2018.
Google
72.9%
Baidu
12.8%
Bing
7.7%
Yahoo
4.9%
Others
1.7%
274 Part Two Information Technology Infrastructure
based on the relevance of each page. Page patented the idea of a page ranking
system (called PageRank System), which essentially measures the popularity of
a web page by calculating the number of sites that link to that page as well as
the number of pages to which it links. The premise is that popular web pages
are more relevant to users. Brin contributed a unique web crawler program that
indexed not only keywords on a page but also combinations of words (such as
authors and the titles of their articles). These two ideas became the foundation
for the Google search engine. Figure 7.12 illustrates how Google works.
Mobile Search Mobile search from smartphones and tablets makes up more
than 50 percent of all searches and will expand rapidly in the next few years.
Google, Amazon, and Yahoo have developed new search interfaces to make
searching and shopping from smartphones more convenient. Google revised its
search algorithm to favor sites that look good on smartphone screens. Although
smartphones are widely used to shop, actual purchases typically take place on
laptops or desktops, followed by tablets.
Semantic Search Another way for search engines to become more discrimi-
nating and helpful is to make search engines capable of understanding what
we are really looking for. Called semantic search, the goal is to build a search
engine that can really understand human language and behavior. Google and
other search engine firms are attempting to refine search engine algorithms to
capture more of what the user intended and the meaning of a search. Rather
FIGURE 7.12 HOW GOOGLE WORKS
The Google search engine is continuously crawling the web, indexing the content of each page, calculating its
popularity, and storing the pages so that it can respond quickly to user requests to see a page. The entire process
takes about half a second.
6. Results delivered
to user, 10 to a page.
5. Small text
summaries are
prepared for each
Web page.
4. Using the PageRank software, the system
measures the “importance” or popularity
of each page by solving an equation with
more than 500 million variables and two
billion terms. These are likely the “best”
pages for the query.
3. Request is sent to Google’s index
servers that describe which pages
contain the keywords matching
the query and where those pages
are stored on the document servers.
2. Google’s Web servers receive the
request. Google uses millions of
PCs linked together and connected
to the Internet to handle incoming
requests and produce the results.
1. User enters query.
Chapter 7 Telecommunications, the Internet, and Wireless Technology 275
than evaluate each word separately in a search, Google’s Hummingbird search
algorithm tries to evaluate an entire sentence, focusing on the meaning behind
the words. For instance, if your search is a long sentence like “Google annual
report selected financial data 2018,” Hummingbird should be able to figure out
that you really want Google’s parent company Alphabet’s SEC Form 10K report
filed with the Securities and Exchange Commission in February 2018.
Google searches also take advantage of Knowledge Graph, an effort of the
search algorithm to anticipate what you might want to know more about as
you search on a topic. Results of the knowledge graph appear on the right of
the screen on many search result pages and contain more information about the
topic or person you are searching on. For example, if you search “Lake Tahoe,” the
search engine will return basic facts about Tahoe (altitude, average temperature,
and local fish), a map, and hotel accommodations. Google has made predictive
search part of most search results. This part of the search algorithm guesses what
you are looking for and suggests search terms as you type your search words.
Social Search One problem with Google and mechanical search engines is that
they are so thorough. Enter a search for “ultra computers” and, in 0.2 seconds,
you will receive over 300 million responses! Social search is an effort to provide
fewer, more relevant, and trustworthy search results based on a person’s network
of social contacts. In contrast to the top search engines that use a mathematical
algorithm to find pages that satisfy your query, social search would highlight con-
tent that was created or touched by members of your social network.
Facebook Search is a social network search engine that responds to user
search queries with information from the user’s social network of friends and
connections. Facebook Search relies on the huge amount of data on Facebook
that is, or can be, linked to individuals and organizations. You might use
Facebook Search to search for Boston restaurants that your friends like or pic-
tures of your friends before 2016.
Visual Search and the Visual Web Although search engines were originally
designed to search text documents, the explosion of photos and videos on the In-
ternet created a demand for searching and classifying these visual objects. Facial
recognition software can create a digital version of a human face. Facebook has a
tag suggest function to assist users in tagging their friends in photos. You can also
search for people on Facebook by using their digital image to find and identify
them. Facebook is now using artificial intelligence technology to make its facial
recognition capabilities more accurate.
Searching photos, images, and video has become increasingly important as the
web becomes more visual. The visual web refers to websites such as Pinterest,
where pictures replace text documents, where users search pictures, and where
pictures of products replace display ads for products. Pinterest is a social net-
working site that provides users (as well as brands) with an online board to which
they can pin interesting pictures. Pinterest had 200 million active monthly users
worldwide in 2018. Instagram is another example of the visual web. Instagram is
a photo and video sharing site that allows users to take pictures, enhance them,
and share them with friends on other social sites such as Facebook and Twitter.
In 2018, Instagram had 800 million monthly active users.
Intelligent Agent Shopping Bots Chapter 11 describes the capabilities of soft-
ware agents with built-in intelligence that can gather or filter information and per-
form other tasks to assist users. Shopping bots use intelligent agent software for
searching the Internet for shopping information. Shopping bots such as MySimon
or PriceGrabber, and travel search tools like Trivago, can help people interested
276 Part Two Information Technology Infrastructure
in making a purchase or renting a vacation room filter and retrieve information
according to criteria the users have established, and in some cases negotiate with
vendors for price and delivery terms.
Search Engine Marketing Search engines have become major advertising
platforms and shopping tools by offering what is now called search engine
marketing. Searching for information is one of the web’s most popular activi-
ties; it is estimated that 242 million people in the United States will use search
engines by 2019 and 215 million will use mobile search by that time. With this
huge audience, search engines are the foundation for the most lucrative form of
online marketing and advertising: search engine marketing. When users enter a
search term on Google, Bing, Yahoo, or any of the other sites serviced by these
search engines, they receive two types of listings: sponsored links, for which
advertisers have paid to be listed (usually at the top of the search results page),
and unsponsored, organic search results. In addition, advertisers can purchase
small text boxes on the side of search results pages. The paid, sponsored adver-
tisements are the fastest growing form of Internet advertising and are powerful
new marketing tools that precisely match consumer interests with advertising
messages at the right moment. Search engine marketing monetizes the value of
the search process. In 2018, search engine marketing was expected to generate
$42 billion, or 44.2 percent of digital ad spending, nearly half of all online ad-
vertising ($93 billion) (eMarketer, 2018). About 90 percent of Google’s revenue
of $110 billion in 2017 came from online advertising, and 90 percent of that ad
revenue came from search engine marketing (Alphabet, 2018).
Because search engine marketing is so effective (it has the highest click-
through rate and the highest return on ad investment), companies seek to
optimize their websites for search engine recognition. The better optimized
the page is, the higher a ranking it will achieve in search engine result listings.
Search engine optimization (SEO) is the process of improving the quality
and volume of web traffic to a website by employing a series of techniques that
help a website achieve a higher ranking with the major search engines when
certain keywords and phrases are put into the search field. One technique is
to make sure that the keywords used in the website description match the key-
words likely to be used as search terms by prospective customers. For example,
your website is more likely to be among the first ranked by search engines if it
uses the keyword lighting rather than lamps if most prospective customers are
searching for lighting. It is also advantageous to link your website to as many
other websites as possible because search engines evaluate such links to de-
termine the popularity of a web page and how it is linked to other content on
the web.
Search engines can be gamed by scammers who create thousands of phony
website pages and link them to a single retailer’s site in an attempt to fool
Google’s search engine. Firms can also pay so-called link farms to link to their
site. Google changed its search algorithm in 2012 to deal with this problem by
examining the quality of links more carefully with the intent of down-ranking
sites that have a suspicious pattern of sites linking to them.
In general, search engines have been very helpful to small businesses that
cannot afford large marketing campaigns. Because shoppers are looking for a
specific product or service when they use search engines, they are what mar-
keters call hot prospects—people who are looking for information and often
intending to buy. Moreover, search engines charge only for click-throughs to
a site. Merchants do not have to pay for ads that don’t work, only for ads that
receive a click. Consumers benefit from search engine marketing because ads
Chapter 7 Telecommunications, the Internet, and Wireless Technology 277
for merchants appear only when consumers are looking for a specific prod-
uct. Thus, search engine marketing saves consumers cognitive energy and re-
duces search costs (including the cost of transportation needed to search for
products physically). One study estimated the global value of search to both
merchants and consumers to be more than $800 billion, with about 65 percent
of the benefit going to consumers in the form of lower search costs and lower
prices (McKinsey & Company, 2011).
Sharing Information on the Web
Today’s websites don’t just contain static content—they enable people to collab-
orate, share information, and create new services and content online. Today’s
web can support interactivity, real-time user control, social participation (shar-
ing), and user-generated content. The technologies and services behind these
features include cloud computing, software mashups and apps, blogs, RSS,
wikis, and social networks. We have already described cloud computing, mash-
ups, and apps in Chapter 5 and introduced social networks in Chapter 2.
A blog, the popular term for a weblog, is a personal website that typically
contains a series of chronological entries (newest to oldest) by its author and
links to related web pages. The blog may include a blogroll (a collection of links
to other blogs) and trackbacks (a list of entries in other blogs that refer to a post
on the first blog). Most blogs allow readers to post comments on the blog entries
as well. The act of creating a blog is often referred to as blogging. Blogs can be
hosted by a third-party service such as Blogger.com or TypePad.com, and blog-
ging features have been incorporated into social networks such as Facebook
and collaboration platforms such as IBM Notes. WordPress is a leading open
source blogging tool and content management system. Microblogging, used
in Twitter or other platforms with serious space or size constraints, is a type of
blogging that features very small elements of content such as short sentences,
individual images, or video links.
Blog pages are usually based on templates provided by the blogging service
or software. Therefore, millions of people without HTML skills of any kind can
post their own web pages and share content with others. The totality of blog-
related websites is often referred to as the blogosphere. Although blogs have
become popular personal publishing tools, they also have business uses (see
Chapters 2 and 10).
If you’re an avid blog reader, you might use RSS to keep up with your favor-
ite blogs without constantly checking them for updates. RSS, which stands for
Really Simple Syndication or Rich Site Summary, pulls specified content from
websites and feeds it automatically to users’ computers. RSS reader software
gathers material from the websites or blogs that you tell it to scan and brings
new information from those sites to you. RSS readers are available through
websites such as Google and Yahoo, and they have been incorporated into the
major web browsers and email programs.
Blogs allow visitors to add comments to the original content, but they do not
allow visitors to change the original posted material. Wikis, in contrast, are col-
laborative websites on which visitors can add, delete, or modify content, includ-
ing the work of previous authors. Wiki comes from the Hawaiian word for “quick.”
Wiki software typically provides a template that defines layout and elements
common to all pages, displays user-editable software program code, and then
renders the content into an HTML-based page for display in a web browser.
Some wiki software allows only basic text formatting, whereas other tools allow
the use of tables, images, or even interactive elements, such as polls or games.
http://Blogger.com
http://TypePad.com
278 Part Two Information Technology Infrastructure
Most wikis provide capabilities for monitoring the work of other users and cor-
recting mistakes.
Because wikis make information sharing so easy, they have many business
uses. The U.S. Department of Homeland Security’s National Cyber Security
Center (NCSC) deployed a wiki to facilitate information sharing with other fed-
eral agencies on threats, attacks, and responses and as a repository for technical
and standards information. Pixar Wiki is a collaborative community wiki for
publicizing the work of Pixar Animation Studios. The wiki format allows any-
one to create or edit an article about a Pixar film.
Social networking sites enable users to build communities of friends and
professional colleagues. Members typically create a profile—a web page for
posting photos, videos, audio files, and text—and then share these profiles with
others on the service identified as their friends or contacts. Social networking
sites are highly interactive, offer real-time user control, rely on user-generated
content, and are broadly based on social participation and sharing of content
and opinions. Leading social networking sites include Facebook, Twitter, and
LinkedIn (for professional contacts).
Social networking has radically changed how people spend their time online;
how people communicate and with whom; how business people stay in touch
with customers, suppliers, and employees; how providers of goods and services
learn about their customers; and how advertisers reach potential customers.
The large social networking sites are also application development platforms
where members can create and sell software applications to other members
of the community. Facebook alone has more than 7 million apps and websites
integrated with it, including applications for gaming, video sharing, and com-
municating with friends and family. We talk more about business applications
of social networking in Chapters 2 and 10, and you can find social networking
discussions in many other chapters of this book.
The Future Web
The future Internet is becoming visible. Its key features are more tools for in-
dividuals to make sense out of the trillions of pages on the Internet, or the mil-
lions of apps available for smartphones and a visual, even three-dimensional
(3D) web where you can walk through pages in a 3D environment. (Review the
discussion of semantic search and visual search earlier in this chapter.)
Even closer in time is a pervasive web that controls everything from a city’s
traffic lights and water usage, to the lights in your living room, to your car’s
rear view mirror, not to mention managing your calendar and appointments.
This is referred to as the Internet of Things (IoT) and is based on billions of
Internet-connected sensors throughout our physical world. Objects, animals,
or people are provided with unique identifiers and the ability to transfer data
over a network without requiring human-to-human or human-to-computer in-
teraction. Firms such as General Electric, IBM, HP, and Oracle, and hundreds
of smaller startups, are exploring how to build smart machines, factories, and
cities through extensive use of remote sensors and fast cloud computing. We
provide more detail on this topic in the following section.
The App Internet is another element in the future web. The growth of apps
within the mobile platform is astounding. More than 80 percent of mobile min-
utes in the United States are generated through apps, as opposed to browsers.
Apps give users direct access to content and are much faster than loading a
browser and searching for content.
Other complementary trends leading toward a future web include more
widespread use of cloud computing and software as a service (SaaS) business
Chapter 7 Telecommunications, the Internet, and Wireless Technology 279
models, ubiquitous connectivity among mobile platforms and Internet access
devices, and the transformation of the web from a network of separate siloed
applications and content into a more seamless and interoperable whole.
7-4 What are the principal technologies
and standards for wireless networking,
communication, and Internet access?
Welcome to the wireless revolution! Cell phones, smartphones, tablets, and
wireless-enabled personal computers have morphed into portable media and
computing platforms that let you perform many of the computing tasks you
used to do at your desk, and a whole lot more. We introduced smartphones in
our discussions of the mobile digital platform in Chapters 1 and 5. Smartphones
such as the iPhone, Android phones, and BlackBerry combine the functional-
ity of a cell phone with that of a mobile laptop computer with Wi-Fi capability.
This makes it possible to combine music, video, Internet access, and telephone
service in one device. A large part of the Internet is becoming a mobile, access-
anywhere, broadband service for the delivery of video, music, and web search.
Cellular Systems
Today 81 percent of U.S. adults own mobile phones, and 69 percent own smart-
phones (eMarketer, 2018). Mobile is now the leading digital platform, with total
activity on smartphones and tablets accounting for two-thirds of digital media
time spent, and smartphone apps alone capturing more than half of digital
media time (Comscore, 2017).
Digital cellular service uses several competing standards. In Europe and
much of the rest of the world outside the United Sates, the standard is Global
System for Mobile Communications (GSM). GSM’s strength is its international
roaming capability. There are GSM cell phone systems in the United States,
including T-Mobile and AT&T.
A competing standard in the United States is Code Division Multiple Access
(CDMA), which is the system Verizon and Sprint use. CDMA was developed by
the military during World War II. It transmits over several frequencies, occupies
the entire spectrum, and randomly assigns users to a range of frequencies over
time, making it more efficient than GSM.
Earlier generations of cellular systems were designed primarily for voice and
limited data transmission in the form of short text messages. Today wireless
carriers offer 3G and 4G networks. 3G networks, with transmission speeds
ranging from 144 Kbps for mobile users in, say, a car, to more than 2 Mbps
for stationary users, offer transmission speeds appropriate for email and web
browsing, but are too slow for videos. 4G networks have much higher speeds,
up to 100 Mbps download and 50 Mbps upload, with more than enough capacity
for watching high-definition video on your smartphone. Long Term Evolution
(LTE) and mobile Worldwide Interoperability for Microwave Access (WiMax—
see the following section) are the current 4G standards.
The next generation of wireless technology, called 5G, is still under devel-
opment. 5G will support transmission of huge amounts of data in the gigabit
range, with fewer transmission delays and the ability to connect many more
devices (such as sensors and smart devices) at once than existing cellular sys-
tems. 5G technology will be needed for self-driving vehicles, smart cities, and
280 Part Two Information Technology Infrastructure
extensive use of the Internet of Things. AT&T, Verizon, and other carriers are
starting to launch 5G networks.
Wireless Computer Networks and Internet Access
An array of technologies provides high-speed wireless access to the Internet for
PCs and mobile devices. These new high-speed services have extended Internet ac-
cess to numerous locations that could not be covered by traditional wired Internet
services and have made ubiquitous computing, anywhere, anytime, a reality.
Bluetooth
Bluetooth is the popular name for the 802.15 wireless networking standard,
which is useful for creating small personal area networks (PANs). It links up
to eight devices within a 10-meter area using low-power, radio-based communi-
cation and can transmit up to 722 Kbps in the 2.4-GHz band.
Wireless phones, pagers, computers, printers, and computing devices using
Bluetooth communicate with each other and even operate each other without
direct user intervention (see Figure 7.13). For example, a person could direct a
notebook computer to send a document file wirelessly to a printer. Bluetooth
connects wireless keyboards and mice to PCs or cell phones to earpieces with-
out wires. Bluetooth has low power requirements, making it appropriate for
battery-powered handheld computers or cell phones.
Although Bluetooth lends itself to personal networking, it has uses in large
corporations. For example, FedEx drivers use Bluetooth to transmit the deliv-
ery data captured by their handheld computers to cellular transmitters, which
forward the data to corporate computers. Drivers no longer need to spend time
docking their handheld units physically in the transmitters, and Bluetooth has
saved FedEx $20 million per year.
FIGURE 7.13 A BLUETOOTH NETWORK (PAN)
Bluetooth enables a variety of devices, including cell phones, smartphones, wireless
keyboards and mice, PCs, and printers, to interact wirelessly with each other within a
small, 30-foot (10-meter) area. In addition to the links shown, Bluetooth can be used to
network similar devices to send data from one PC to another, for example.
Wireless keyboard
Printer
User computer
Smartphone
Chapter 7 Telecommunications, the Internet, and Wireless Technology 281
Wi-Fi and Wireless Internet Access
The 802.11 set of standards for wireless LANs and wireless Internet access is
also known as Wi-Fi. The first of these standards to be widely adopted was
802.11b, which can transmit up to 11 Mbps in the unlicensed 2.4-GHz band and
has an effective distance of 30 to 50 meters. The 802.11g standard can transmit
up to 54 Mbps in the 2.4-GHz range. 802.11n is capable of transmitting over 100
Mbps. Today’s PCs and tablets have built-in support for Wi-Fi, as do the iPhone,
iPad, and other smartphones.
In most Wi-Fi communication, wireless devices communicate with a wired
LAN using access points. An access point is a box consisting of a radio receiver/
transmitter and antennas that links to a wired network, router, or hub.
Figure 7.14 illustrates an 802.11 wireless LAN that connects a small number
of mobile devices to a larger wired LAN and to the Internet. Most wireless de-
vices are client machines. The servers that the mobile client stations need to
use are on the wired LAN. The access point controls the wireless stations and
acts as a bridge between the main wired LAN and the wireless LAN. The access
point also controls the wireless stations.
The most popular use for Wi-Fi today is for high-speed wireless Internet ser-
vice. In this instance, the access point plugs into an Internet connection, which
could come from a cable service or DSL telephone service. Computers within
range of the access point use it to link wirelessly to the Internet.
Hotspots are locations with one or more access points providing wireless
Internet access and are often in public places. Some hotspots are free or do not
FIGURE 7.14 AN 802.11 WIRELESS LAN
Mobile laptop computers equipped with network interface cards link to the wired LAN
by communicating with the access point. The access point uses radio waves to transmit
network signals from the wired network to the client adapters, which convert them to data
that the mobile device can understand. The client adapter then transmits the data from
the mobile device back to the access point, which forwards the data to the wired network.
Router
Internet
Access point
Wired network
282 Part Two Information Technology Infrastructure
require any additional software to use; others may require activation and the
establishment of a user account by providing a credit card number over the web.
Businesses of all sizes are using Wi-Fi networks to provide low-cost wire-
less LANs and Internet access. Wi-Fi hotspots can be found in hotels, airport
lounges, libraries, cafes, and college campuses to provide mobile access to the
Internet. Dartmouth College is one of many campuses where students now use
Wi-Fi for research, course work, and entertainment.
Wi-Fi technology poses several challenges, however. One is Wi-Fi’s security
features, which make these wireless networks vulnerable to intruders. We pro-
vide more detail about Wi-Fi security issues in Chapter 8.
Another drawback of Wi-Fi networks is susceptibility to interference from
nearby systems operating in the same spectrum, such as wireless phones, mi-
crowave ovens, or other wireless LANs. However, wireless networks based on
the 802.11n standard solve this problem by using multiple wireless antennas
in tandem to transmit and receive data and technology called MIMO (multiple
input multiple output) to coordinate multiple simultaneous radio signals.
WiMax
A surprisingly large number of areas in the United States and throughout the world
do not have access to Wi-Fi or fixed broadband connectivity. The range of Wi-Fi
systems is no more than 300 feet from the base station, making it difficult for rural
groups that don’t have cable or DSL service to find wireless access to the Internet.
The Institute of Electrical and Electronics Engineers (IEEE) developed a fam-
ily of standards known as WiMax to deal with these problems. WiMax, which
stands for Worldwide Interoperability for Microwave Access, is the popular term
for IEEE Standard 802.16. It has a wireless access range of up to 31 miles and
transmission speed of 30–40 Mbps (and up to 1 Gbps for fixed stations).
WiMax antennas are powerful enough to beam high-speed Internet connec-
tions to rooftop antennas of homes and businesses that are miles away. Cellular
handsets and laptops with WiMax capabilities are appearing in the marketplace.
Mobile WiMax is one of the 4G network technologies we discussed earlier in
this chapter.
RFID and Wireless Sensor Networks
Mobile technologies are creating new efficiencies and ways of working through-
out the enterprise. In addition to the wireless systems we have just described,
radio frequency identification systems and wireless sensor networks are having
a major impact.
Radio Frequency Identification (RFID) and Near Field
Communication (NFC)
Radio frequency identification (RFID) systems provide a powerful technol-
ogy for tracking the movement of goods throughout the supply chain. RFID
systems use tiny tags with embedded microchips containing data about an item
and its location to transmit radio signals over a short distance to RFID readers.
The RFID readers then pass the data over a network to a computer for process-
ing. Unlike bar codes, RFID tags do not need line-of-sight contact to be read.
The RFID tag is electronically programmed with information that can
uniquely identify an item plus other information about the item such as its loca-
tion, where and when it was made, or its status during production. The reader
emits radio waves in ranges anywhere from 1 inch to 100 feet. When an RFID tag
comes within the range of the reader, the tag is activated and starts sending data.
Chapter 7 Telecommunications, the Internet, and Wireless Technology 283
The reader captures these data, decodes them, and sends them back over a wired
or wireless network to a host computer for further processing (see Figure 7.15).
Both RFID tags and antennas come in a variety of shapes and sizes.
In inventory control and supply chain management, RFID systems capture
and manage more detailed information about items in warehouses or in pro-
duction than bar coding systems. If a large number of items are shipped to-
gether, RFID systems track each pallet, lot, or even unit item in the shipment.
This technology may help companies such as Walmart improve receiving and
storage operations by improving their ability to see exactly what stock is stored
in warehouses or on retail store shelves. Macy’s uses RFID technology to track
individual items for sale on store shelves.
Walmart has installed RFID readers at store receiving docks to record the
arrival of pallets and cases of goods shipped with RFID tags. The RFID reader
reads the tags a second time just as the cases are brought onto the sales floor
from backroom storage areas. Software combines sales data from Walmart’s
point-of-sale systems and the RFID data regarding the number of cases brought
out to the sales floor. The program determines which items will soon be de-
pleted and automatically generates a list of items to pick in the warehouse to
replenish store shelves before they run out. This information helps Walmart
reduce out-of-stock items, increase sales, and further shrink its costs.
The cost of RFID tags used to be too high for widespread use, but now it starts
at around 7 cents per tag in the United States. As the price decreases, RFID is
starting to become cost-effective for many applications.
In addition to installing RFID readers and tagging systems, companies may
need to upgrade their hardware and software to process the massive amounts
of data produced by RFID systems—transactions that could add up to tens or
hundreds of terabytes.
Software is used to filter, aggregate, and prevent RFID data from overloading
business networks and system applications. Applications often need to be rede-
signed to accept large volumes of frequently generated RFID data and to share
those data with other applications. Major enterprise software vendors now offer
RFID-ready versions of their supply chain management applications.
FIGURE 7.15 HOW RFID WORKS
RFID uses low-powered radio transmitters to read data stored in a tag at distances ranging from
1 inch to 100 feet. The reader captures the data from the tag and sends them over a network to a
host computer for processing.
RFID
Reader
Has an antenna that constantly
transmits. When it senses a tag,
it wakes it up, interrogates it,
and decodes the data. Then it
transmits the data to a host system
over wired or wireless connections.
A microchip holds data
including an identification
number. The rest of the tag
is an antenna that transmits
data to a reader.
Processes the data from the tag
that have been transmitted by the
reader.
Host computer
Radio waves
Tag
284 Part Two Information Technology Infrastructure
Tap-and-go services like Apple Pay or Google Wallet use an RFID-related
technology called near field communication (NFC). NFC is a short-range
wireless connectivity standard that uses electromagnetic radio fields to enable
two compatible devices to exchange data when brought within a few centime-
ters of each other. A smartphone or other NFC-compatible device sends out
radio frequency signals that interact with an NFC tag found in compatible card
readers or smart posters. The signals create a current that flows through the
NFC tag, allowing the device and the tag to communicate with one another. In
most cases the tag is passive and only sends out information while the other
device (such as a smartphone) is active and can both send and receive informa-
tion. (There are NFC systems where both components are active.)
NFC is used in wireless payment services, to retrieve information, and even
to exchange videos or information with friends on the go. You could share a
website link by passing your phone over a friend’s phone, while waving the
phone in front of a poster or display containing an NFC tag could show informa-
tion about what you’re viewing at a museum or exhibit.
Wireless Sensor Networks
If your company wanted state-of-the art technology to monitor building secu-
rity or detect hazardous substances in the air, it might deploy a wireless sensor
network. Wireless sensor networks (WSNs) are networks of interconnected
wireless devices that are embedded in the physical environment to provide
measurements of many points over large spaces. These devices have built-
in processing, storage, and radio frequency sensors and antennas. They are
linked into an interconnected network that routes the data they capture to a
computer for analysis. These networks range from hundreds to thousands of
nodes. Figure 7.16 illustrates one type of wireless sensor network, with data
from individual nodes flowing across the network to a server with greater pro-
cessing power. The server acts as a gateway to a network based on Internet
technology.
FIGURE 7.16 A WIRELESS SENSOR NETWORK
The small circles represent lower-level nodes, and the larger circles represent higher-
level nodes. Lower-level nodes forward data to each other or to higher-level nodes,
which transmit data more rapidly and speed up network performance.
Internet
Chapter 7 Telecommunications, the Internet, and Wireless Technology 285
Wireless sensor networks are valuable for uses such as monitoring environ-
mental changes; monitoring traffic or military activity; protecting property; ef-
ficiently operating and managing machinery and vehicles; establishing security
perimeters; monitoring supply chain management; or detecting chemical, bio-
logical, or radiological material.
Output from RFID systems and wireless networks is fueling the Internet of
Things (IoT), introduced earlier in this chapter, in which machines such as jet
engines, power plant turbines, or agricultural sensors constantly gather data
and send the data over the Internet for analysis. The data might signal the need
to take action such as replacing a part that’s close to wearing out, restocking
a product on a store shelf, starting the watering system for a soybean field, or
slowing down a turbine. Over time, more and more everyday physical objects
will be connected to the Internet and will be able to identify themselves to other
devices, creating networks that can sense and respond as data changes. The
Tour de France race tracking system, described in the chapter-opening case, is
an example of an IoT application. You’ll find more examples of the Internet of
Things in Chapters 2 and 12.
7-5 How will MIS help my career?
Here is how Chapter 7 and this book can help you find a job as an automotive
digital advisor.
The Company
A1 Western Car Dealers, a large and fast-growing southern California automo-
bile dealership, is looking for an automotive digital advisor to run its digital
marketing program. The company has more than 500 vehicles for sale, 170 em-
ployees, and three locations for selling and servicing new and used vehicles.
Position Description
The automotive digital assistant will be part of a team assisting the dealership group
with online marketing, including search engine optimization (SEO) and search
engine marketing (SEM), social media and reputation management, and website
management. Job responsibilities include coordinating efforts for the dealership
owner, dealership managers, and marketing manager in the following areas:
• Online advertising, SEO, and SEM.
• Social media management, including managing the dealership’s overall social
media and content calendar and developing new content.
• Online reputation management.
• Website management.
• Maintaining the dealership’s blog.
Job Requirements
• College graduate in marketing
• Knowledge of digital marketing and social media
• Microsoft Office skills
• Knowledge of automotive sales and content management systems desirable
286 Part Two Information Technology Infrastructure
Interview Questions
1. Have you ever taken any digital marketing courses?
2. Have you any experience running a digital marketing campaign? Did you
use SEO and SEM? How did you measure the effectiveness of your social
media campaign and audience growth?
3. Do you have any experience with social media management software?
4. Do you have any experience with online reputation management or online
inventory management?
5. Have you ever maintained a blog?
6. What is your level of proficiency with Microsoft Office software?
Author Tips
1. Review the discussions of search, search engine marketing, and blogs in this
chapter and also the discussions of e-commerce marketing and building an
e-commerce presence in Chapter 10.
2. Use the web to learn more about SEO, SEM, social media management,
and online reputation management and software tools used for this work.
Look into how to generate metrics reports using standardized tools and
how to put together analyses and recommendations based on the social
media data.
3. Look at how major auto dealers in large metropolitan areas are using social
media channels. Are they creating content on YouTube, Instagram, Face-
book, and Twitter? Which channels are generating higher levels of audience
engagement?
4. Inquire about exactly what you would have to do for website management
and required software skills.
5. Inquire about the Microsoft Office skills you would need for this job. Bring
examples of the work you have done with this software.
7-1 What are the principal components of telecommunications networks and key networking technologies?
A simple network consists of two or more connected computers. Basic network components include
computers, network interfaces, a connection medium, network operating system software, and either a
hub or a switch. The networking infrastructure for a large company includes the traditional telephone
system, mobile cellular communication, wireless local area networks, videoconferencing systems, a cor-
porate website, intranets, extranets, and an array of local and wide area networks, including the Internet.
Contemporary networks have been shaped by the rise of client/server computing, the use of packet
switching, and the adoption of Transmission Control Protocol/Internet Protocol (TCP/IP) as a univer-
sal communications standard for linking disparate networks and computers, including the Internet.
Protocols provide a common set of rules that enable communication among diverse components in a
telecommunications network.
7-2 What are the different types of networks?
The principal physical transmission media are twisted copper telephone wire, coaxial copper cable,
fiber-optic cable, and wireless transmission.
Local area networks (LANs) connect PCs and other digital devices within a 500-meter radius and are
used today for many corporate computing tasks. Wide area networks (WANs) span broad geographical
REVIEW SUMMARY
Chapter 7 Telecommunications, the Internet, and Wireless Technology 287
distances, ranging from several miles to entire continents and are often private networks that are inde-
pendently managed. Metropolitan area networks (MANs) span a single urban area.
Digital subscriber line (DSL) technologies, cable Internet connections, and T1 lines are often used
for high-capacity Internet connections.
7-3 How do the Internet and Internet technology work, and how do they support communication and
e-business?
The Internet is a worldwide network of networks that uses the client/server model of comput-
ing and the TCP/IP network reference model. Every computer on the Internet is assigned a unique
numeric IP address. The Domain Name System (DNS) converts IP addresses to more user-friendly
domain names. Worldwide Internet policies are established by organizations and government bodies
such as the Internet Architecture Board (IAB) and the World Wide Web Consortium (W3C).
Major Internet services include email, newsgroups, chatting, instant messaging, Telnet, FTP, and
the web. Web pages are based on Hypertext Markup Language (HTML) and can display text, graphics,
video, and audio. Website directories, search engines, and RSS technology help users locate the infor-
mation they need on the web. RSS, blogs, social networking, and wikis are current information-sharing
capabilities of the web. The future web will feature more semantic search, visual search, prevalence of
apps, and interconnectedness of many different devices (Internet of Things).
Firms are also starting to realize economies by using VoIP technology for voice transmission and
virtual private networks (VPNs) as low-cost alternatives to private WANs.
7-4 What are the principal technologies and standards for wireless networking, communication, and
Internet access?
Cellular networks are evolving toward high-speed, high-bandwidth, digital packet-switched trans-
mission. Broadband 3G networks are capable of transmitting data at speeds ranging from 144 Kbps
to more than 2 Mbps. 4G networks are capable of transmission speeds of 100 Mbps, and 5G networks
capable of transmitting in the gigabit range are starting to be rolled out.
Major cellular standards include Code Division Multiple Access (CDMA), which is used primarily
in the United States, and Global System for Mobile Communications (GSM), which is the standard in
Europe and much of the rest of the world.
Standards for wireless computer networks include Bluetooth (802.15) for small personal area net-
works (PANs), Wi-Fi (802.11) for local area networks (LANs), and WiMax (802.16) for metropolitan area
networks (MANs).
Radio frequency identification (RFID) systems provide a powerful technology for tracking the move-
ment of goods by using tiny tags with embedded data about an item and its location. RFID readers read the
radio signals transmitted by these tags and pass the data over a network to a computer for processing. Wire-
less sensor networks (WSNs) are networks of interconnected wireless sensing and transmitting devices that
are embedded in the physical environment to provide measurements of many points over large spaces.
Key Terms
3G networks, 279
4G networks, 279
5G networks, 279
Bandwidth, 261
Blog, 277
Blogosphere, 277
Bluetooth, 280
Broadband, 254
Cable Internet connections, 262
Chat, 267
Digital subscriber line (DSL), 262
Domain name, 262
Domain Name System (DNS), 262
Email, 267
File Transfer Protocol (FTP), 267
Hertz, 261
Hotspots, 281
Hubs, 255
Hypertext Transfer Protocol (HTTP), 272
Instant messaging, 267
Internet of Things (IoT), 278
Internet Protocol (IP) address, 262
Internet service provider (ISP), 262
Internet2, 266
IPv6, 266
Local area network (LAN), 259
Metropolitan area network (MAN), 260
Microblogging, 277
Modem, 259
Near field communication (NFC), 284
Network operating system (NOS), 255
Packet switching, 257
Peer-to-peer, 260
Personal area networks (PANs), 280
288 Part Two Information Technology Infrastructure
Predictive search, 275
Protocol, 258
Radio frequency identification (RFID), 282
Router, 255
RSS, 277
Search engine marketing, 276
Search engine optimization (SEO), 276
Search engines, 273
Semantic search, 274
Shopping bots, 275
Smartphones, 279
Social networking, 278
Social search, 275
Software-defined networking (SDN), 255
Switch, 255
T1 lines, 262
Telnet, 267
Transmission Control Protocol/Internet Protocol
(TCP/IP), 258
Unified communications, 269
Uniform resource locator (URL), 272
Virtual private network (VPN), 271
Visual web, 275
Voice over IP (VoIP), 268
Website, 271
Wide area networks (WANs), 260
Wi-Fi, 281
Wiki, 277
WiMax, 282
Wireless sensor networks (WSNs), 284
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
7-1 What are the principal components of
telecommunications networks and key
networking technologies?
• Describe the features of a simple network
and the network infrastructure for a large
company.
• Name and describe the principal technolo-
gies and trends that have shaped contempo-
rary telecommunications systems.
7-2 What are the different types of networks?
• Define an analog and a digital signal.
• Distinguish between a LAN, MAN, and WAN.
7-3 How do the Internet and Internet technology
work, and how do they support communication
and e-business?
• Define the Internet, describe how it works,
and explain how it provides business value.
• Explain how the Domain Name System
(DNS) and IP addressing system work.
• List and describe the principal Internet
services.
• Define and describe VoIP and virtual pri-
vate networks and explain how they pro-
vide value to businesses.
• List and describe alternative ways of locat-
ing information on the web.
• Describe how online search technologies
are used for marketing.
7-4 What are the principal technologies
and standards for wireless networking,
communication, and Internet access?
• Define Bluetooth, Wi-Fi, WiMax, and 3G,
4G, and 5G networks.
• Describe the capabilities of each and for which
types of applications each is best suited.
• Define RFID, explain how it works, and de-
scribe how it provides value to businesses.
• Define WSNs, explain how they work, and de-
scribe the kinds of applications that use them.
Discussion Questions
7-5 It has been said that within the next few
years, smartphones will become the single
most important digital device we own.
Discuss the implications of this statement.
7-6 Should all major retailing and manufacturing
companies switch to RFID? Why or why not?
MyLab MIS
MyLab MIS
7-7 What are some of the issues to consider in
determining whether the Internet would
provide your business with a competitive
advantage?
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience evaluating and selecting communications technology,
using spreadsheet software to improve selection of telecommunications services, and using web search engines
for business research. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Chapter 7 Telecommunications, the Internet, and Wireless Technology 289
Management Decision Problems
7-8 Your company supplies ceramic floor tiles to Home Depot, Lowe’s, and other home improvement stores.
You have been asked to start using radio frequency identification tags on each case of tiles you ship to
help your customers improve the management of your products and those of other suppliers in their
warehouses. Use the web to identify the cost of hardware, software, and networking components for an
RFID system for your company. What factors should be considered? What are the key decisions that have
to be made in determining whether your firm should adopt this technology?
7-9 BestMed Medical Supplies Corporation sells medical and surgical products and equipment from more
than 700 manufacturers to hospitals, health clinics, and medical offices. The company employs 500
people at seven locations in western and midwestern states, including account managers, customer
service and support representatives, and warehouse staff. Employees communicate by traditional
telephone voice services, email, instant messaging, and cell phones. Management is inquiring about
whether the company should adopt a system for unified communications. What factors should
be considered? What are the key decisions that must be made in determining whether to adopt
this technology? Use the web, if necessary, to find out more about unified communications and
its costs.
Improving Decision Making: Using Spreadsheet Software to Evaluate Wireless Services
Software skills: Spreadsheet formulas, formatting
Business skills: Analyzing telecommunications services and costs
7-10 In this project, you’ll use the web to research alternative wireless services and use spreadsheet software
to calculate wireless service costs for a sales force.
You would like to equip your sales force of 35, based in St. Louis, Missouri, with mobile phones that have
capabilities for voice transmission, text messaging, Internet access, and taking and sending photos. Use the
web to select two wireless providers that offer nationwide voice and data service as well as good service in your
home area. Examine the features of the mobile handsets and wireless plans offered by each of these vendors.
Assume that each of the 35 salespeople will need to spend three hours per weekday between 8 a.m. and 6 p.m.
on mobile voice communication, send 30 text messages per weekday, use 1 gigabyte of data per month, and
send five photos per week. Use your spreadsheet software to determine the wireless service and handset that
will offer the best pricing per user over a two-year period. For the purposes of this exercise, you do not need to
consider corporate discounts.
Achieving Operational Excellence: Using Web Search Engines for Business Research
Software skills: Web search tools
Business skills: Researching new technologies
7-11 This project will help develop your Internet skills in using web search engines for business research.
Use Google and Bing to obtain information about ethanol as an alternative fuel for motor vehicles. If you
wish, try some other search engines as well. Compare the volume and quality of information you find with each
search tool. Which tool is the easiest to use? Which produced the best results for your research? Why?
Collaboration and Teamwork Project
Evaluating Smartphones
7-12 Form a group with three or four of your classmates. Compare the capabilities of Apple’s iPhone with a
smartphone from another vendor with similar features. Your analysis should consider the purchase cost
of each device, the wireless networks where each device can operate, plan and handset costs, and the
services available for each device. You should also consider other capabilities of each device, including
available software, security features, and the ability to integrate with existing corporate or PC applica-
tions. Which device would you select? On what criteria would you base your selection? If possible, use
Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your
findings for the class.
290 Part Two Information Technology Infrastructure
always played a large part in the Apple ecosystem,
and they have emerged as a major revenue source.
Apple has more than 1.3 billion active devices in cir-
culation, creating a huge installed base of users will-
ing to purchase services and a source of new revenue
streams. Apple’s services business, which includes
Apple’s music (both downloads and subscriptions),
video sales and rentals, books, apps (including in-app
purchases, subscriptions and advertising), iCloud
storage, and payments, has been growing at a double-
digit rate.
As Apple rolls out more gadgets, such as the
Watch and HomePod, its services revenue will
continue to expand and diversify. According to
CEO Tim Cook, Apple has become one of the larg-
est service businesses in the world. This service-
driven strategy is not without worry because both
Google and Facebook offer stiff competition in the
services area.
Google continues to be the world’s leading search
engine, accounting for about 75 percent of web
searches from laptop and desktop devices and over
90 percent of the mobile search market. (Google
is also the default search engine for the iPhone).
About 84 percent of the revenue from Google’s par-
ent company Alphabet comes from ads, most of
them on Google’s search engine. Google dominates
online advertising. However, Google is slipping in its
position as the gateway to the Internet. New search
startups focus on actions and apps instead of the
web. Facebook has become an important gateway
to the web as well. In 2005, Google had purchased
the Android open source mobile operating system
to compete in mobile computing. Google provides
Android at no cost to smartphone manufacturers,
generating revenue indirectly through app purchases
and advertising. Many different manufacturers have
adopted Android as a standard. In contrast, Apple al-
lows only its own devices to use its proprietary oper-
ating system, and all the apps it sells can run only on
Apple products. Android is deployed on over 80 per-
cent of smartphones worldwide; is the most common
operating system for tablets; and runs on watches,
car dashboards, and TVs—more than 4,000 distinct
devices. Google wants to extend Android to as many
devices as possible.
Three Internet titans—Google, Apple, and Facebook—are in an epic struggle to dominate your Internet experience, and caught in the
crossfire are search, music, video, and other media
along with the devices you use for all of these things.
Mobile devices with advanced functionality and ubiq-
uitous Internet access are rapidly overtaking tradi-
tional desktop machines as the most popular form of
computing. Today, people spend more than half their
time online using mobile devices that take advantage
of a growing cloud of computing capacity. It’s no sur-
prise, then, that today’s tech titans are aggressively
battling for control of this brave new online world.
Apple, which started as a personal computer com-
pany, quickly expanded into software and consumer
electronics. Since upending the music industry with
its iPod MP3 player, and the iTunes digital music ser-
vice, Apple took mobile computing by storm with the
iPhone, iPod Touch, and iPad. Now Apple wants to be
the computing platform of choice for the Internet.
Apple’s competitive strength is based not on its
hardware platform alone but on its superior user in-
terface and mobile software applications, in which it
is a leader. Apple’s App Store offers more than 2 mil-
lion apps for mobile and tablet devices. Applications
greatly enrich the experience of using a mobile
device, and whoever creates the most appealing set
of devices and applications will derive a significant
competitive advantage over rival companies. Apps
are the new equivalent of the traditional browser.
Apple thrives on its legacy of innovation. In
2011, it unveiled Siri (Speech Interpretation and
Recognition Interface), a combination search/navi-
gation tool and personal assistant. Siri promises per-
sonalized recommendations that improve as it gains
user familiarity—all from a verbal command. Google
countered by quickly releasing its own AI tool,
Google Now. Facebook has developed an intelligent
assistant called M.
Apple faces strong competition for its phones and
tablets both in the United States and in developing
markets like China from inexpensive Chinese smart-
phones and from Samsung Android phones that have
larger screens and lower prices. iPhone sales have
started to slow, but Apple is not counting on hard-
ware devices alone for future growth. Services have
Google, Apple, and Facebook Battle
for Your Internet Experience
CASE STUDY
Chapter 7 Telecommunications, the Internet, and Wireless Technology 291
People use Facebook to stay connected with their
friends and family and to express what matters most
to them. Facebook Platform enables developers to
build applications and websites that integrate with
Facebook to reach its global network of users and to
build personalized and social products. Facebook is
so pervasive and appealing that it has become users’
primary gateway to the Internet. For a lot of people,
Facebook is the Internet. Whatever they do on the
Internet is through Facebook.
Facebook has persistently worked on ways to con-
vert its popularity and trove of user data into adver-
tising dollars, with the expectation that these dollars
will increasingly come from mobile smartphones
and tablets. As of early 2018, over 95 percent of ac-
tive user accounts worldwide accessed the social
network via smartphone. Facebook ads allow compa-
nies to target its users based on their real identities
and expressed interests rather than educated guesses
derived from web-browsing habits and other online
behavior.
At the end of the first quarter of 2018, 98 percent
of Facebook’s global revenue came from advertising,
and 89 percent of that ad revenue was from mobile
advertising. Many of those ads are highly targeted
by age, gender, and other demographics. Facebook is
now a serious competitor to Google in the mobile ad
market and is even trying to compete with emerg-
ing mobile platforms. Together, Facebook and Google
dominate the digital ad industry and have been re-
sponsible for almost all of its growth. Facebook has
overhauled its home page to give advertisers more
opportunities and more information with which
to target markets. The company is expanding ad-
vertising in products such as the Instagram feed,
Stories, WhatsApp, Facebook Watch, and Messenger,
although the majority of ad revenue still comes
from its news feed. Facebook has its own personal-
ized search tool to challenge Google’s dominance of
search. Facebook CEO Mark Zuckerberg is convinced
that social networking is the ideal way to use the web
and to consume all of the other content people might
desire, including news and video. That makes it an
ideal marketing platform for companies. But he also
knows that Facebook can’t achieve long-term growth
and prosperity based on social networking alone.
During the past few years Facebook has moved into
virtual reality, messaging, video, and more.
Facebook is challenging YouTube as the premier
destination for personal videos, developing its own
TV programming, and making its messages “smarter”
Google’s Android could gain even more market
share in the coming years, which could be problem-
atic for Apple as it tries to maintain customer loyalty
and keep software developers focused on the iOS
platform. Whoever has the dominant smartphone op-
erating system will have control over the apps where
smartphone users spend most of their time and
built-in channels for serving ads to mobile devices.
Although Google search technology can’t easily navi-
gate the mobile apps where users are spending most
of their time, Google is starting to index the content
inside mobile apps and provide links pointing to that
content featured in Google’s search results on smart-
phones. Since more than half of global search que-
ries come from mobile devices, the company revised
its search algorithms to add “mobile friendliness” to
the 200 or so factors it uses to rank websites on its
search engine. This favors sites that look good on
smartphone screens. The cost-per-click paid for mo-
bile ads has trailed desktop ads, but the gap between
computer and mobile ads fees is narrowing. Google
instituted a design change to present a cleaner mo-
bile search page.
Seven Google products and services, including
Search, YouTube, and Maps, have more than a billion
users each. The Android operating system software
has over 2 billion monthly active users. Google’s ulti-
mate goal is to knit its services and devices together
so that Google users will interact with the company
seamlessly all day long and everyone will want to use
Google. Much of Google’s efforts to make its search
and related services more powerful and user-friendly
in the years ahead are based on the company’s invest-
ments in artificial intelligence and machine learning
(see Chapter 11). These technologies already have
been implemented in applications such as voice
search, Google Translate, and spam filtering. The goal
is to evolve search into more of a smart assistance
capability, where computers can understand what
people are saying and respond conversationally with
the right information at the right moment. Allo is a
smart messaging app for iOS and Android that can
learn your texting patterns over time to make conver-
sations more expressive and productive. It suggests
automatic replies to incoming messages, and you can
get suggestions and even book a restaurant reserva-
tion without leaving the chat. Google Assistant is
meant to provide a continuing, conversational dia-
logue between users and the search engine.
Facebook is the world’s largest social networking
service, with over 2 billion monthly active users.
292 Part Two Information Technology Infrastructure
by deploying chatbots. Chatbots are stripped-down
software agents that understand what you type or
say and respond by answering questions or executing
tasks, and they run in the background of Facebook’s
Messenger service (see Chapter 11). Within Facebook
Messenger, you can order a ride from Uber, get news
updates, check your flight status, or use augmented
reality to imagine what a new Nike sneaker looks
like by superimposing a 3-D model of that sneaker
atop images or video. A new standalone app will
allow users to stream videos in their news feed
through set-top boxes such as Apple Inc.’s Apple TV
and Amazon.com Inc.’s Fire TV, as well as Samsung
Internet-connected TVs.
Zuckerberg has said that he intends to help bring
the next billion people online by attracting users
in developing countries with affordable web con-
nectivity. Facebook has launched several services in
emerging markets, such as the Free Basics service
designed to get people online so they can explore
web applications, including its social network.
Facebook wants to beam the Internet to underserved
areas through the use of drones and satellites along
with other technologies. Zuckerberg thinks that
Facebook could eventually be an Internet service
provider to underserved areas.
Monetization of personal data drives both Facebook
and Google’s business models. However, this prac-
tice also threatens individual privacy. The consumer
surveillance underlying Facebook and Google’s free
services has come under siege from users, regulators,
and legislators on both sides of the Atlantic. Calls for
restricting Facebook and Google’s collection and use
of personal data have gathered steam, especially after
recent revelations about Russian agents trying to use
Facebook to sway American voters and Facebook’s
uncontrolled sharing of user data with third-party
companies (see the Chapter 4 ending case study).
Both companies will have to come to terms with
the European Union’s new privacy law, called the
General Data Protection Regulation (GDPR), that re-
quires companies to obtain consent from users before
processing their data, and which may inspire more
stringent privacy legislation in the United States.
Business models that depend less on ads and more
on subscriptions have been proposed, although any
effort to curb the use of consumer data would put the
business model of the ad-supported Internet—and
possibly Facebook and Google—at risk. Apple em-
phasizes its privacy protection features and does not
share customer data with others.
These tech giants are also being scrutinized for
monopolistic behavior. In the United States, Google
drives 89 percent of Internet search, 95 percent of
young adults on the Internet use a Facebook prod-
uct, and Google and Apple provide 99 percent of
mobile phone operating systems. Critics have called
for breaking up these mega-companies or regulating
them as Standard Oil and AT&T once were. In July
2018 European regulators fined Google $5 billion for
forcing cellphone makers that use the company’s
Android operating system to install Google search
and browser apps. Have these companies become so
large that they are squeezing consumers and innova-
tion? How governments answer this question will
also affect how Apple, Google, and Facebook will fare
and what kind of Internet experience they will be
able to provide.
Sources: Associated Press, “EU Fines Google a Record $5 Million
over Mobile Practices,” July 18, 2018; Christopher Mims, “How
Apps, Music and More Can Buoy Apple Beyond the iPhone,” Wall
Street Journal, February 4, 2018; “Search Engine Market Share,”
www.netmarketshare.com, accessed April 16, 2018; “Facebook’s
Advertising Revenue Worldwide from 2009 to 2017 (in Million U.S.
Dollars),” statista.com, accessed April 17, 2018; David Streitfeld,
Natasha Singer, and Steven Erlanger, “How Calls for Privacy May
Upend Business for Facebook and Google,” New York Times, March
24, 2018; Natasha Singer, “Timeline: Facebook and Google Under
Regulators’ Glare,” New York Times, March 24, 2018; David Streitfeld,
“Google Wants to Be Everywhere with Everyone,” New York Times,
May 17, 2017; Tim Bajarin, “Learning This 1 Thing Helped Me
Understand Apple’s Strategy,” Time, April 3, 2017; and Mathew
Ingram, “How Google and Facebook Have Taken Over the Digital
Ad Industry,” Fortune, January 4, 2017.
CASE STUDY QUESTIONS
7-13 Compare the business models and core compe-
tencies of Google, Apple, and Facebook.
7-14 Why is mobile computing so important to
these three firms? Evaluate the mobile strate-
gies of each firm.
7-15 Which company and business model do you
think is most likely to dominate the Internet,
and why?
7-16 What difference would it make to a business or
to an individual consumer if Apple, Google, or
Facebook dominated the Internet experience?
Explain your answer.
http://Amazon.com
http://www.netmarketshare.com
http://statista.com
Chapter 7 Telecommunications, the Internet, and Wireless Technology 293
Chapter 7 References
Alphabet, Inc. “Form 10K for the Fiscal Year Ending December 31,
2017.” Securities and Exchange Commission, filed February
1, 2018.
Chiang, I. Robert, and Jhih-Hua Jhang-Li. “Delivery Consolidation
and Service Competition Among Internet Service Providers.”
Journal of Management Information Systems 34, No. 3 (Winter
2014).
Comscore. “The 2017 Mobile App Report.” (2017).
Eliason, Andy. “23 Search Engine Facts and Stats You Oughta
Know.” SEO.com, accessed May 8, 2017.
eMarketer. “US Ad Spending: The eMarketer Forecast for 2018.”
(2018).
“Facebook Company Statistics.” www.statisticbrain.com, accessed
April 18, 2018.
IBM Global Technology Services. “Software-Defined Networking in
the New Business Frontier.” (July 2015).
Iyer, Bala. “To Project the Trajectory of the Internet of Things,
Look to the Software Industry.” Harvard Business Review
(February 25, 2016).
Manyika, James, Michael Chui, Peter Bisson, Jonathan Woetzel,
Richard Dobbs, Jacques Bughin, and Dan Aharon. “ Unlocking
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
7-17 Compare the capabilities of today’s web with those of the future web.
7-18 How do social search, semantic search, and mobile search differ from searching for information on the
web using conventional search engines?
the Potential of the Internet of Things.” McKinsey Global
Institute (2015).
McKinsey & Company. “The Impact of Internet Technologies:
Search.” (July 2011).
Miller, Rich. “5G Wireless: A New Network to Enable the Data
Deluge.” Data Center Frontier (July 13, 2017).
National Telecommunications and Information Agency. “NTIA
Announces Intent to Transition Key Internet Domain Name
Functions.” (March 14, 2014).
Panko, Raymond R., and Julia L. Panko. Business Data Networks
and Security, 11th ed. (Upper Saddle River, NJ: Prentice-Hall,
2018).
Pew Research Center. “Mobile Fact Sheet.” (January 12, 2017).
Segan, Sascha. “What Is 5G?” PC Magazine (May 1, 2017).
Varian, Hal. “Executive Assistants for Everyone.” MIT Sloan
Management Review (Fall 2016).
Wang, Weiquan, and Izak Benbasat. “Empirical Assessment of
Alternative Designs for Enhancing Different Types of Trust-
ing Beliefs in Online Recommendation Agents.” Journal of
Management Information Systems 33, No. 3 (2016).
http://SEO.com
http://www.statisticbrain.com
294
MyLab MIS
Discussion Questions: 8-5, 8-6, 8-7; Hands-on MIS Projects: 8-8, 8-9, 8-10, 8-11;
Writing Assignments: 8-17, 8-18; eText with Conceptual Animations
CHAPTER CASES
Hackers Target the U.S. Presidential Election:
What Happened?
Meltdown and Spectre Haunt the World’s
Computers
How Secure Is the Cloud?
Is the Equifax Hack the Worst Ever—and Why?
VIDEO CASES
Stuxnet and Cyberwarfare
Cyberespionage: The Chinese Threat
Instructional Videos:
Sony PlayStation Hacked; Data Stolen from
77 Million Users
Meet the Hackers: Anonymous Statement on
Hacking Sony
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
8-1 Why are information systems vulnerable
to destruction, error, and abuse?
8-2 What is the business value of security
and control?
8-3 What are the components of an
organizational framework for security
and control?
8-4 What are the most important tools
and technologies for safeguarding
information resources?
8-5 How will MIS help my career?
Securing Information Systems8CHAPTER
295
In September 2015, Special Agent Adrian Hawkins of the U.S. Federal Bureau of Investigation (FBI) phoned the Democratic National Committee (DNC) with troubling news about its computer network: At least one DNC com-
puter system had been penetrated by hackers linked to the Russian govern-
ment. Yared Tamene, the DNC tech-support contractor who fielded the calls,
conducted a cursory search of the DNC computer system logs to look for signs
of hacking. He stated that he did not look too hard, even after Special Agent
Hawkins called back and left messages repeatedly over the next several weeks,
because he thought the call might be a prank call from an imposter.
The DNC hack was the first sign of a Russian-led cyberwarfare campaign to
disrupt the 2016 presidential election. DNC chairwoman Debbie Wasserman
Schultz was forced to resign, and a torrent of confidential documents from the
DNC and the Clinton campaign were released by WikiLeaks to the press during
the campaign. In a stunning upset, Donald
Trump won the presidential election, and his
victory may have been facilitated by revela-
tions in the leaked documents.
Several Russian hacker groups associated
with Russian intelligence were identified as
the source of the cyberattacks. The Russian
hackers had moved freely through the DNC
network for nearly 7 months before top DNC
officials were alerted to the attack and hired
cybersecurity firm CrowdStrike to beef up
their system protection. The DNC computer
system was replaced, and all laptops were
turned in and their hard drives wiped clean
to get rid of infected information.
In the meantime, the hackers gained ac-
cess to systems of the Clinton campaign. The
hackers did not have to use any sophisticated tools to gain access and were able
to deploy phishing emails to trick legitimate system users into revealing pass-
words for accessing the system. Clinton campaign aide Charles Delavan clicked
on an email sent to the personal account of campaign chairman John Podesta
thinking it was legitimate and opened another door for the Russians. Whenever
someone clicked on a phishing message, the Russians would enter the network,
“exfiltrate” documents of interest, and stockpile them for intelligence purposes.
By the summer of 2016, Democrats’ private emails and confidential documents
were posted on WikiLeaks and other websites day after day and reported by the
media.
Hackers Target the U.S. Presidential Election:
What Happened?
© Andriy Popov/123RF
296 Part Two Information Technology Infrastructure
The DNC thought it was well protected against cyberattacks but only had a
fraction of the security budget that a corporation its size would have. It had a
standard email spam-filtering service for blocking phishing attacks and malware
created to resemble legitimate email, but it did not have the most advanced sys-
tems in place to track suspicious traffic.
Hacking during the 2016 presidential election went beyond the DNC and the
Clinton campaign. Russian hackers tried to infiltrate at least 21 states’ election
systems and to delete or alter voter data in Illinois. (Officials don’t believe the
attackers changed any result.)
On July 13, 2018 a federal grand jury indicted 12 Russian intelligence of-
ficers as part of special counsel Robert Mueller’s investigation into alleged
Russian meddling during the 2016 presidential campaign. The officers were
charged with engaging in a sustained effort to hack networks of the Democratic
Congressional Campaign Committee, the Democratic National Committee, and
Hillary Clinton’s campaign. There is mounting evidence that Russian hackers
are continuing to target U.S. state election systems, looking for opportunities to
influence primaries, the 2018 midterm Congressional elections, and eventually
the 2020 presidential campaign. Russian hackers have also been actively trying
to influence elections in Europe as well.
Sources: Lucien Bruggeman and Mike Levine, “Mueller indicts 12 Russian Intel Officers for
Hacking Democrats,” Good Morning America, July 13, 2018; Joseph O’Sullivan, “With Russian
Hacking Fresh in Mind, Washington State Beefs Up Elections Cybersecurity,” Seattle Times,
July 8, 2018; Erin Kelly, “Russia So Far Not Mounting Robust Hacking Effort Against U.S.
Election, Official Says,” USA Today, July 11, 2018; Harold Stark, “How Russia ‘Hacked’ Us in
2016 [And What We did Wrong],” Forbes, January 24, 2017; Sue Marquette Poremba, “Data
Security Lessons from the DNC Hack,” ITBusinessEdge, March 7, 2017; Mark Moore, “Russian
Hackers Infiltrated Voter Databases in Dozens of States,” New York Post, June 13, 2017;
and Eric Lipton, David E. Sanger, and Scott Shane, “The Perfect Weapon: How Russian
Cyberpower Invaded the U.S.,” New York Times, December 13, 2016.
Efforts to disrupt the 2016 U.S presidential election and other recent elec-tions illustrate some of the reasons why organizations need to pay special
attention to information systems security. IT security breaches that enabled
Russian hackers to penetrate information systems used by the Democratic
Party have the potential to change the course of elections—and possibly the fate
of nations. Weak IT security has been responsible for many billions of dollars of
corporate and consumer financial losses as well.
The chapter-opening diagram calls attention to important points raised by this
case and this chapter. The DNC and the Clinton campaign lacked IT security
awareness, tools, and expertise to prevent employees from naively responding to
hackers’ phishing attacks. Also at work were human ignorance, error, and careless-
ness, evidenced by the DNC’s unwillingness to respond quickly to the FBI’s hacker
attack warning and DNC and Clinton campaign members’ inability to identify
bogus phishing emails. Although the DNC and the Clinton campaign thought they
had sufficient security tools to fend off unwanted intruders, they were not enough
to protect them and the presidential campaign from Russian influence. Eventually
the Democrats hired outside security experts to beef up system protection.
Chapter 8 Securing Information Systems 297
Business
Solutions
Management
Organization
IT Security Systems
Technology
Information
System
Business
Problem
• Weak network security
• Limited financial resources
• Develop manual
procedures for
security systems
• Deploy IT security
consultants
• Prevent data theft
• Prevent unauthorized
system access
• Protect political reputation?
• Protect voting systems?
• Malware detection
technology
• Isolate systems
and networks
• Develop security
policies and plan
• Select security
technologies
We will probably never really know exactly how much revelations from the
emails exposed by the hackers affected the 2016 election outcome. But we do
know that what happened was very serious and most likely a preview of future
electoral trouble around the world. Equally disturbing, the security vulnerabili-
ties that facilitated the DNC and Clinton campaign hacks are commonplace in
businesses and other organizations as well.
Here are some questions to think about: What security vulnerabilities were
exploited by the hackers? What management, organizational, and technologi-
cal factors contributed to these security weaknesses? What was the business
impact of these problems? Could the election hacking have been prevented?
8-1 Why are information systems vulnerable
to destruction, error, and abuse?
Can you imagine what would happen if you tried to link to the Internet without
a firewall or antivirus software? Your computer would be disabled within a few
seconds, and it might take you many days to recover. If you used the computer
to run your business, you might not be able to sell to your customers or place
orders with your suppliers while it was down. And you might find that your
computer system had been penetrated by outsiders, who perhaps stole or de-
stroyed valuable data, including confidential payment data from your custom-
ers. If too much data was destroyed or divulged, your business might never be
able to recover!
In short, if you operate a business today, you need to make security and
control a top priority. Security refers to the policies, procedures, and techni-
cal measures used to prevent unauthorized access, alteration, theft, or physical
damage to information systems. Controls are methods, policies, and organi-
zational procedures that ensure the safety of the organization’s assets, the ac-
curacy and reliability of its records, and operational adherence to management
standards.
298 Part Two Information Technology Infrastructure
Why Systems are Vulnerable
When large amounts of data are stored in electronic form, they are vulnerable
to many kinds of threats. Through communications networks, information sys-
tems in different locations are interconnected. The potential for unauthorized
access or damage is not limited to a single location but can occur at many
access points in the network. Figure 8.1 illustrates the most common threats
against contemporary information systems. They can stem from technical,
organizational, and environmental factors compounded by poor management
decisions. In the multitier client/server computing environment illustrated
here, vulnerabilities exist at each layer and in the communications between
the layers. Users at the client layer can cause harm by introducing errors or by
accessing systems without authorization. It is possible to access data flowing
over networks, steal valuable data during transmission, or alter data with-
out authorization. Radiation may disrupt a network at various points as well.
Intruders can launch denial-of-service attacks or malicious software to disrupt
the operation of websites. Those capable of penetrating corporate systems can
steal, destroy, or alter corporate data stored in databases or files.
Systems malfunction if computer hardware breaks down, is not configured
properly, or is damaged by improper use or criminal acts. Errors in program-
ming, improper installation, or unauthorized changes cause computer software
to fail. Power failures, floods, fires, or other natural disasters can also disrupt
computer systems.
Domestic or offshore partnering with another company contributes to sys-
tem vulnerability if valuable information resides on networks and computers
outside the organization’s control. Without strong safeguards, valuable data
could be lost, be destroyed, or fall into the wrong hands, revealing important
trade secrets or information that violates personal privacy.
Portability makes cell phones, smartphones, and tablet computers easy to lose
or steal. Smartphones share the same security weaknesses as other Internet de-
vices and are vulnerable to malicious software and penetration from outsiders.
Smartphones that corporate employees use often contain sensitive data such as
FIGURE 8.1 CONTEMPORARY SECURITY CHALLENGES AND
VULNERABILITIES
The architecture of a web-based application typically includes a web client, a server, and
corporate information systems linked to databases. Each of these components presents
security challenges and vulnerabilities. Floods, fires, power failures, and other electrical
problems can cause disruptions at any point in the network.
• Unauthorized
access
Client
(User)
Communications
Lines
Corporate
Servers
Corporate
Systems
Hardware
Operating Systems
Software
• Errors
• Tapping • Hacking
• Theft of data
• Copying data
• Alteration of data
• Hardware failure
• Software failure
• Malware
• Theft and fraud
• Vandalism
• Denial-of-service
attacks
• Sniffing
• Theft and
fraud
• Radiation
• Message
alteration
Data-
bases
Chapter 8 Securing Information Systems 299
sales figures, customer names, phone numbers, and email addresses. Intruders
may also be able to access internal corporate systems through these devices.
Internet Vulnerabilities
Large public networks, such as the Internet, are more vulnerable than internal
networks because they are virtually open to anyone. The Internet is so huge
that when abuses do occur, they can have an enormously widespread impact.
When the Internet links to the corporate network, the organization’s informa-
tion systems are even more vulnerable to actions from outsiders.
Vulnerability has also increased from widespread use of email, instant mes-
saging (IM), and peer-to-peer (P2P) file-sharing programs. Email may contain
attachments that serve as springboards for malicious software or unauthorized
access to internal corporate systems. Employees may use email messages to
transmit valuable trade secrets, financial data, or confidential customer infor-
mation to unauthorized recipients. Instant messaging activity over the Internet
can in some cases be used as a back door to an otherwise secure network.
Sharing files over P2P networks, such as those for illegal music sharing, can
also transmit malicious software or expose information on either individual or
corporate computers to outsiders.
Wireless Security Challenges
Both Bluetooth and Wi-Fi networks are susceptible to hacking by eavesdroppers.
Local area networks (LANs) using the 802.11 standard can be easily penetrated
by outsiders armed with laptops, wireless cards, external antennae, and hack-
ing software. Hackers use these tools to detect unprotected networks, monitor
network traffic, and, in some cases, gain access to the Internet or to corporate
networks.
Wi-Fi transmission technology was designed to make it easy for stations to
find and hear one another. The service set identifiers (SSIDs) that identify the
access points in a Wi-Fi network are broadcast multiple times and can be picked
up fairly easily by intruders’ sniffer programs (see Figure 8.2). Wireless net-
works in many locations do not have basic protections against war driving,
in which eavesdroppers drive by buildings or park outside and try to intercept
wireless network traffic.
An intruder who has associated with an access point by using the correct
SSID is capable of accessing other resources on the network. For example, the
intruder could use the Windows operating system to determine which other
users are connected to the network, access their computer hard drives, and
open or copy their files.
Intruders also use the information they have gleaned to set up rogue access
points on a different radio channel in physical locations close to users to force
a user’s radio network interface controller (NIC) to associate with the rogue ac-
cess point. Once this association occurs, hackers using the rogue access point
can capture the names and passwords of unsuspecting users.
Malicious Software: Viruses, Worms, Trojan Horses,
and Spyware
Malicious software programs are referred to as malware and include a variety
of threats such as computer viruses, worms, and Trojan horses. (See Table 8.1.)
A computer virus is a rogue software program that attaches itself to other
software programs or data files to be executed, usually without user knowledge
or permission. Most computer viruses deliver a payload. The payload may be
300 Part Two Information Technology Infrastructure
relatively benign, such as instructions to display a message or image, or it may
be highly destructive—destroying programs or data, clogging computer mem-
ory, reformatting a computer’s hard drive, or causing programs to run improp-
erly. Viruses typically spread from computer to computer when humans take
an action, such as sending an email attachment or copying an infected file.
Worms are independent computer programs that copy themselves from one
computer to other computers over a network. Unlike viruses, worms can oper-
ate on their own without attaching to other computer program files and rely
TABLE 8.1 EXAMPLES OF MALICIOUS CODE
NAME TYPE DESCRIPTION
Cryptolocker Ransomware/Trojan Hijacks users’ photos, videos, and text documents; encrypts them with virtually
unbreakable asymmetric encryption; and demands ransom payment for them.
Conficker Worm First detected in November 2008 and still a problem. Uses flaws in Windows
software to take over machines and link them into a virtual computer that can be
commanded remotely. Had more than 5 million computers worldwide under its
control. Difficult to eradicate.
Sasser.ftp Worm First appeared in May 2004. Spread over the Internet by attacking random IP
addresses. Causes computers to continually crash and reboot and infected
computers to search for more victims. Affected millions of computers worldwide
and caused an estimated $14.8 billion to $18.6 billion in damages.
ILOVEYOU Virus First detected on May 3, 2000. Script virus written in Visual Basic script and
transmitted as an attachment to email with the subject line ILOVEYOU. Overwrites
music, image, and other files with a copy of itself and did an estimated $10 billion
to $15 billion in damage.
FIGURE 8.2 WI-FI SECURITY CHALLENGES
Many Wi-Fi networks can be penetrated easily by intruders using sniffer programs to
obtain an address to access the resources of a network without authorization.
Legitimate user
Authentication request
Intruder
Success
Response
Challenge
Chapter 8 Securing Information Systems 301
less on human behavior to spread rapidly from computer to computer. Worms
destroy data and programs as well as disrupt or even halt the operation of com-
puter networks.
Worms and viruses are often spread over the Internet from files of downloaded
software; from files attached to email transmissions; or from compromised email
messages, online ads, or instant messaging. Viruses have also invaded comput-
erized information systems from infected external storage devices or infected
machines. Especially prevalent today are drive-by downloads, consisting of
malware that comes with a downloaded file that a user intentionally or unin-
tentionally requests.
Hackers can do to a smartphone just about anything they can do to any
Internet-connected device: request malicious files without user intervention,
delete files, transmit files, install programs running in the background to moni-
tor user actions, and potentially convert the smartphone to a robot in a botnet
to send email and text messages to anyone. According to IT security experts,
mobile devices now pose the greatest security risks, outpacing those from
larger computers. Kaspersky Lab reported that it had detected 5.7 million mo-
bile malicious installation packages in 2017 (Kaspersky Lab, 2018).
Android, which is the world’s leading mobile operating system, is the mobile
platform targeted by most hackers. Mobile device viruses pose serious threats
to enterprise computing because so many wireless devices are now linked to
corporate information systems.
Blogs, wikis, and social networking sites such as Facebook, Twitter, and
LinkedIn have emerged as new conduits for malware. Members are more likely
to trust messages they receive from friends, even if this communication is not
legitimate. For example, a malware strain called FacexWorm appeared inside
Facebook Messenger in 2018. Clicking a link via Facebook Messenger takes the
victim to a fake YouTube page, which tries to trick the user into installing a
YouTube extension for the popular Chrome browser. From there the malware
can steal passwords or try to steal cryptocurrency funds such as Bitcoin.
The Internet of Things (IoT) introduces additional security challenges from
the Internet-linked devices themselves, their platforms and operating systems,
their communications, and even the systems to which they’re connected. New
security tools will be required to protect IoT devices and platforms from both
information attacks and physical tampering, to encrypt their communications,
and to address new challenges such as attacks that drain batteries. Many IoT
devices such as sensors have simple processors and operating systems that may
not support sophisticated security approaches.
Panda Security reported that in 2017 it had identified and neutralized a total of
75 million malware files, about 285,000 new samples a day (Panda Security, 2017).
Many malware infections are Trojan horses. A Trojan horse is a software
program that appears to be benign but then does something other than ex-
pected. The Trojan horse is not itself a virus because it does not replicate, but
it is often a way for viruses or other malicious code to be introduced into a
computer system. The term Trojan horse is based on the huge wooden horse
the Greeks used to trick the Trojans into opening the gates to their fortified city
during the Trojan War.
An example of a modern-day Trojan horse is the ZeuS (Zbot) Trojan, which
infected more than 3.6 million computers in 2009 and still poses a threat. It has
been used to steal login credentials for banking by surreptitiously capturing
people’s keystrokes as they use their computers. Zeus is spread mainly through
drive-by downloads and phishing, and recent variants have been difficult to
eradicate.
302 Part Two Information Technology Infrastructure
SQL injection attacks exploit vulnerabilities in poorly coded web application
software to introduce malicious program code into a company’s systems and
networks. These vulnerabilities occur when a web application fails to validate
properly or filter data a user enters on a web page, which might occur when order-
ing something online. An attacker uses this input validation error to send a rogue
SQL query to the underlying database to access the database, plant malicious
code, or access other systems on the network. Malware known as ransomware
is proliferating on both desktop and mobile devices. Ransomware tries to extort
money from users by taking control of their computers, blocking access to files,
or displaying annoying pop-up messages. For example, the ransomware called
WannaCry that attacked computers in more than 150 countries in May 2017
encrypts an infected computer’s files, forcing users to pay hundreds of dollars
to regain access. You can get ransomware from downloading an infected attach-
ment, clicking a link inside an email, or visiting the wrong website.
Some types of spyware also act as malicious software. These small programs
install themselves surreptitiously on computers to monitor user web-surfing ac-
tivity and serve up advertising. Thousands of forms of spyware have been docu-
mented. Many users find such spyware annoying and an infringement on their
privacy. Some forms of spyware are especially nefarious. Keyloggers record
every keystroke made on a computer to steal serial numbers for software, to
launch Internet attacks, to gain access to email accounts, to obtain passwords to
protected computer systems, or to pick up personal information such as credit
card or bank account numbers. The Zeus Trojan described earlier uses keylog-
ging. Other spyware programs reset web browser home pages, redirect search
requests, or slow performance by taking up too much computer resources.
Hackers and Computer Crime
A hacker is an individual who intends to gain unauthorized access to a com-
puter system. Within the hacking community, the term cracker is typically used
to denote a hacker with criminal intent, although in the public press, the terms
hacker and cracker are used interchangeably. Hackers gain unauthorized access
by finding weaknesses in the security protections websites and computer sys-
tems employ. Hacker activities have broadened beyond mere system intru-
sion to include theft of goods and information as well as system damage and
cybervandalism, the intentional disruption, defacement, or even destruction
of a website or corporate information system.
Spoofing and Sniffing
Hackers attempting to hide their true identities often spoof, or misrepresent, them-
selves by using fake email addresses or masquerading as someone else. Spoofing
may also involve redirecting a web link to an address different from the intended
one, with the site masquerading as the intended destination. For example, if
hackers redirect customers to a fake website that looks almost exactly like the true
site, they can then collect and process orders, effectively stealing business as well
as sensitive customer information from the true site. We will provide more detail
about other forms of spoofing in our discussion of computer crime.
A sniffer is a type of eavesdropping program that monitors information trav-
eling over a network. When used legitimately, sniffers help identify potential
network trouble spots or criminal activity on networks, but when used for crim-
inal purposes, they can be damaging and very difficult to detect. Sniffers enable
hackers to steal proprietary information from anywhere on a network, includ-
ing email messages, company files, and confidential reports.
Chapter 8 Securing Information Systems 303
Denial-of-Service Attacks
In a denial-of-service (DoS) attack, hackers flood a network server or web
server with many thousands of false communications or requests for services
to crash the network. The network receives so many queries that it cannot
keep up with them and is thus unavailable to service legitimate requests. A
distributed denial-of-service (DDoS) attack uses numerous computers to in-
undate and overwhelm the network from numerous launch points.
Although DoS attacks do not destroy information or access restricted areas
of a company’s information systems, they often cause a website to shut down,
making it impossible for legitimate users to access the site. For busy e-commerce
sites, these attacks are costly; while the site is shut down, customers cannot
make purchases. Especially vulnerable are small and midsize businesses whose
networks tend to be less protected than those of large corporations.
Perpetrators of DDoS attacks often use thousands of zombie PCs infected
with malicious software without their owners’ knowledge and organized into
a botnet. Hackers create these botnets by infecting other people’s computers
with bot malware that opens a back door through which an attacker can give
instructions. The infected computer then becomes a slave, or zombie, serving
a master computer belonging to someone else. When hackers infect enough
computers, they can use the amassed resources of the botnet to launch DDoS
attacks, phishing campaigns, or unsolicited spam email.
Ninety percent of the world’s spam and 80 percent of the world’s malware
are delivered by botnets. A recent example is the Mirai botnet, which infected
numerous IoT devices (such as Internet-connected surveillance cameras) in
October 2016 and then used them to launch a DDoS attack against Dyn, whose
servers monitor and reroute Internet traffic. The Mirai botnet overwhelmed the
Dyn servers, taking down Etsy, GitHub, Netflix, Shopify, SoundCloud, Spotify,
Twitter, and a number of other major websites. A Mirai botnet variant attacked
financial firms in January 2018.
Computer Crime
Most hacker activities are criminal offenses, and the vulnerabilities of systems
we have just described make them targets for other types of computer crime
as well. Computer crime is defined by the U.S. Department of Justice as “any
violations of criminal law that involve a knowledge of computer technology for
their perpetration, investigation, or prosecution.” Table 8.2 provides examples
of the computer as both a target and an instrument of crime.
No one knows the magnitude of computer crime—how many systems are
invaded, how many people engage in the practice, or the total economic dam-
age. According to the Ponemon Institute’s 2017 Annual Cost of Cyber Crime
Study, the average annualized cost of cybercrime security for benchmarked
companies in seven different countries was $11.7 million (Ponemon Institute,
2017a). Many companies are reluctant to report computer crimes because the
crimes may involve employees or that publicizing vulnerability will hurt their
reputations. The most economically damaging kinds of computer crime are
DoS attacks, activities of malicious insiders, and web-based attacks.
Identity Theft
With the growth of the Internet and electronic commerce, identity theft has be-
come especially troubling. Identity theft is a crime in which an imposter ob-
tains key pieces of personal information, such as social security numbers, driver’s
license numbers, or credit card numbers, to impersonate someone else. The
information may be used to obtain credit, merchandise, or services in the name
304 Part Two Information Technology Infrastructure
of the victim or to provide the thief with false credentials. Identity theft has flour-
ished on the Internet, with credit card files a major target of website hackers (see
the chapter-ending case study). According to the 2018 Identity Fraud Study by
Javelin Strategy & Research, identity fraud affected 16.7 million U.S. consumers
in 2017, and they lost nearly $17 billion to identity fraud that year (Javelin, 2018).
One increasingly popular tactic is a form of spoofing called phishing. Phishing
involves setting up fake websites or sending email messages that look like those of
legitimate businesses to ask users for confidential personal data. The email mes-
sage instructs recipients to update or confirm records by providing social security
numbers, bank and credit card information, and other confidential data, either by
responding to the email message, by entering the information at a bogus website,
or by calling a telephone number. eBay, PayPal, Amazon.com, Walmart, and a
variety of banks have been among the top spoofed companies. In a more targeted
form of phishing called spear phishing, messages appear to come from a trusted
source, such as an individual within the recipient’s own company or a friend.
Phishing techniques called evil twins and pharming are harder to detect. Evil
twins are wireless networks that pretend to offer trustworthy Wi-Fi connec-
tions to the Internet, such as those in airport lounges, hotels, or coffee shops.
The bogus network looks identical to a legitimate public network. Fraudsters
try to capture passwords or credit card numbers of unwitting users who log on
to the network.
Pharming redirects users to a bogus web page, even when the individual
types the correct web page address into his or her browser. This is possible if
pharming perpetrators gain access to the Internet address information Internet
service providers (ISPs) store to speed up web browsing and flawed software on
ISP servers allows the fraudsters to hack in and change those addresses.
According to the Ponemon Institute’s 2017 Cost of a Data Breach Study, the
average cost of a data breach among the 419 companies it surveyed globally was
$3.62 million (Ponemon, 2017b). Moreover, brand damage can be significant
although hard to quantify. In addition to the data breaches described in case
studies for this chapter, Table 8.3 describes other major data breaches.
The U.S. Congress addressed the threat of computer crime in 1986 with the
Computer Fraud and Abuse Act, which makes it illegal to access a computer
TABLE 8.2 EXAMPLES OF COMPUTER CRIME
COMPUTERS AS TARGETS OF CRIME
Breaching the confidentiality of protected computerized data
Accessing a computer system without authority
Knowingly accessing a protected computer to commit fraud
Intentionally accessing a protected computer and causing damage negligently or deliberately
Knowingly transmitting a program, program code, or command that intentionally causes damage to a protected computer
Threatening to cause damage to a protected computer
COMPUTERS AS INSTRUMENTS OF CRIME
Theft of trade secrets
Unauthorized copying of software or copyrighted intellectual property, such as articles, books, music, and video
Schemes to defraud
Using email or messaging for threats or harassment
Intentionally attempting to intercept electronic communication
Illegally accessing stored electronic communications, including email and voice mail
Transmitting or possessing child pornography by using a computer
http://Amazon.com
Chapter 8 Securing Information Systems 305
system without authorization. Most states have similar laws, and nations in
Europe have comparable legislation. Congress passed the National Information
Infrastructure Protection Act in 1996 to make malware distribution and hacker
attacks to disable websites federal crimes.
U.S. legislation, such as the Wiretap Act, Wire Fraud Act, Economic Espionage
Act, Electronic Communications Privacy Act, CAN-SPAM Act, and Protect Act
of 2003, covers computer crimes involving intercepting electronic communica-
tion, using electronic communication to defraud, stealing trade secrets, illegally
accessing stored electronic communications, using email for threats or harass-
ment, and transmitting or possessing child pornography. A proposed federal
Data Security and Breach Notification Act would mandate organizations that
possess personal information to put in place “reasonable” security procedures
to keep the data secure and notify anyone affected by a data breach, but it has
not been enacted.
Click Fraud
When you click an ad displayed by a search engine, the advertiser typically
pays a fee for each click, which is supposed to direct potential buyers to its
products. Click fraud occurs when an individual or computer program fraudu-
lently clicks an online ad without any intention of learning more about the
advertiser or making a purchase. Click fraud has become a serious problem at
Google and other websites that feature pay-per-click online advertising.
Some companies hire third parties (typically from low-wage countries) to
click a competitor’s ads fraudulently to weaken them by driving up their mar-
keting costs. Click fraud can also be perpetrated with software programs doing
the clicking, and botnets are often used for this purpose. Search engines such as
Google attempt to monitor click fraud and have made some changes to curb it.
TABLE 8.3 MAJOR DATA BREACHES
DATA BREACH DESCRIPTION
Yahoo In September and December 2016, Yahoo disclosed that it had been the target of two of the
biggest data breaches ever, with sensitive information stolen from more than 1 billion user
accounts in 2013 and 500 million in 2014. State-sponsored hackers found a way to forge
credentials to log into some users’ accounts without a password. These data breaches forced
Yahoo to lower its selling price by $300 million when it was acquired by Verizon in June
2017. In October 2017, Verizon reported that every single Yahoo account had actually been
hacked—3 billion accounts, including email, Tumblr, Flickr, and Fantasy.
Anthem Health Insurance In February 2015, hackers stole the personal information on more than 80 million customers
of the giant health insurer, including names, birthdays, medical IDs, social security numbers,
and income data. No medical or credit information was stolen. This was the largest
healthcare breach ever recorded.
Sony In November 2014, hackers stole more than 100 terabytes of corporate data, including trade
secrets, email, personnel records, and copies of films for future release. Malware erased data
from Sony’s corporate systems, leading to hundreds of millions of dollars in losses as well
as a tarnished brand image. Sony was hacked earlier in April 2011 when intruders obtained
personal information, including credit, debit, and bank account numbers, from more than
100 million PlayStation Network users and Sony Online Entertainment users.
Home Depot Hacked in 2014 with a malicious software program that plundered store registers
while disguising itself as antivirus software. Fifty-six million credit card accounts were
compromised, and 53 million customer email addresses were stolen.
eBay Cyberattack on eBay servers during February and March 2014 compromised a database
containing customer names, encrypted passwords, email addresses, physical addresses,
phone numbers, and birthdates; 145 million people were affected.
306 Part Two Information Technology Infrastructure
Global Threats: Cyberterrorism and Cyberwarfare
The cyber criminal activities we have described—launching malware, DoS
attacks, and phishing probes—are borderless. Attack servers for malware are
now hosted in more than 200 countries and territories. The leading sources of
malware attacks include the United States, China, Brazil, India, Germany, and
Russia. The global nature of the Internet makes it possible for cybercriminals to
operate—and to do harm—anywhere in the world.
Internet vulnerabilities have also turned individuals and even entire
nation-states into easy targets for politically motivated hacking to conduct sabo-
tage and espionage. Cyberwarfare is a state-sponsored activity designed to crip-
ple and defeat another state or nation by penetrating its computers or networks
to cause damage and disruption. One example is the efforts of Russian hackers
to disrupt the U.S. elections described in the chapter-opening case. The infa-
mous 2014 hack on Sony has been attributed to state actors from North Korea.
In 2017, the WannaCry and Petya cyber attacks, masquerading as ransomware,
caused large-scale disruptions in Ukraine as well as to the UK’s National Health
Service, pharmaceutical giant Merck, and other organizations around the world.
Russians were suspected of conducting a cyberattack on Ukraine during a pe-
riod of political turmoil in 2014. Cyberwarfare also includes defending against
these types of attacks.
Cyberwarfare is more complex than conventional warfare. Although many
potential targets are military, a country’s power grids, dams, financial systems,
communications networks, and even voting systems can also be crippled.
Non-state actors such as terrorists or criminal groups can mount attacks, and
it is often difficult to tell who is responsible. Nations must constantly be on the
alert for new malware and other technologies that could be used against them,
and some of these technologies developed by skilled hacker groups are openly
for sale to interested governments.
Cyberwarfare attacks have become much more widespread, sophisticated,
and potentially devastating. Between 2011 and 2015, foreign hackers stole
source code and blueprints to the oil and water pipelines and power grid of the
United States and infiltrated the Department of Energy’s networks 150 times.
Over the years, hackers have stolen plans for missile tracking systems, satellite
navigation devices, surveillance drones, and leading-edge jet fighters.
According to U.S. intelligence, more than 30 countries are developing offen-
sive cyberattack capabilities, including Russia, China, Iran, and North Korea.
Their cyberarsenals include collections of malware for penetrating industrial,
military, and critical civilian infrastructure controllers; email lists and text for
phishing attacks on important targets; and algorithms for DoS attacks. U.S.
cyberwarfare efforts are concentrated in the United States Cyber Command,
which coordinates and directs the operations and defense of Department of
Defense information networks and prepares for military cyberspace operations.
Cyberwarfare poses a serious threat to the infrastructure of modern societies,
since their major financial, health, government, and industrial institutions rely
on the Internet for daily operations.
Internal Threats: Employees
We tend to think the security threats to a business originate outside the or-
ganization. In fact, company insiders pose serious security problems. Studies
have found that user lack of knowledge is the single greatest cause of network
security breaches. Many employees forget their passwords to access computer
systems or allow coworkers to use them, which compromises the system.
Chapter 8 Securing Information Systems 307
Malicious intruders seeking system access sometimes trick employees into re-
vealing their passwords by pretending to be legitimate members of the com-
pany in need of information. This practice is called social engineering, and
the chapter-opening case shows how it was used to gain access to the Clinton
campaign system.
Software Vulnerability
Software errors pose a constant threat to information systems, causing untold
losses in productivity and sometimes endangering people who use or depend
on systems. Growing complexity and size of software programs, coupled with
demands for rapid delivery to markets, have contributed to an increase in soft-
ware flaws or vulnerabilities. For example, in February 2017 Cloudflare, a ser-
vice provider that helps optimize website performance and security, reported
that it had just fixed a software defect that had leaked sensitive data for months.
The data included user passwords, cookies, and other authentication data.
Although the amount of data leaked appeared to be small, the bug could have
affected any of Cloudflare’s 5.5 million customers (McMillan, 2017).
A major problem with software is the presence of hidden bugs or program
code defects. Studies have shown that it is virtually impossible to eliminate
all bugs from large programs. The main source of bugs is the complexity of
decision-making code. A relatively small program of several hundred lines
will contain tens of decisions leading to hundreds or even thousands of paths.
Important programs within most corporations are usually much larger, contain-
ing tens of thousands or even millions of lines of code, each with many times
the choices and paths of the smaller programs.
Zero defects cannot be achieved in larger programs. Complete testing simply
is not possible. Fully testing programs that contain thousands of choices and
millions of paths would require thousands of years. Even with rigorous testing,
you would not know for sure that a piece of software was dependable until the
product proved itself after much operational use.
Flaws in commercial software not only impede performance but also cre-
ate security vulnerabilities that open networks to intruders. Each year security
firms identify thousands of software vulnerabilities in Internet and PC software.
An example is the Heartbleed bug, which is a flaw in OpenSSL, an open-source
encryption technology that an estimated two-thirds of web servers use. Hackers
could exploit the bug to access visitors’ personal data as well as a site’s encryp-
tion keys, which can be used to collect even more protected data.
Especially troublesome are zero-day vulnerabilities, which are holes in the
software unknown to its creator. Hackers then exploit this security hole before
the vendor becomes aware of the problem and hurries to fix it. This type of
vulnerability is called zero-day because the author of the software has zero days
after learning about it to patch the code before it can be exploited in an attack.
Sometimes security researchers spot the software holes, but more often, they
remain undetected until an attack has occurred.
To correct software flaws once they are identified, the software vendor cre-
ates small pieces of software called patches to repair the flaws without disturb-
ing the proper operation of the software. It is up to users of the software to track
these vulnerabilities, test, and apply all patches. This process is called patch
management.
Because a company’s IT infrastructure is typically laden with multiple busi-
ness applications, operating system installations, and other system services,
maintaining patches on all devices and services a company uses is often
308 Part Two Information Technology Infrastructure
time-consuming and costly. Malware is being created so rapidly that compa-
nies have very little time to respond between the time a vulnerability and a
patch are announced and the time malicious software appears to exploit the
vulnerability.
Newly Discovered Vulnerabilities in Microprocessor Design
The Interactive Session on Technology describes newly discovered vulner-
abilities stemming from flaws in the design of computer microprocessor chips,
which enable hackers using malicious software programs to gain access to
data that were thought to be completely protected. These vulnerabilities affect
nearly every computer chip manufactured in the last 20 years.
8-2 What is the business value of security
and control?
Companies have very valuable information assets to protect. Systems often
house confidential information about individuals’ taxes, financial assets, medi-
cal records, and job performance reviews. They also can contain information
on corporate operations, including trade secrets, new product development
plans, and marketing strategies. Government systems may store information
on weapons systems, intelligence operations, and military targets. These infor-
mation assets have tremendous value, and the repercussions can be devastating
if they are lost, destroyed, or placed in the wrong hands. Systems that are un-
able to function because of security breaches, disasters, or malfunctioning tech-
nology can have permanent impacts on a company’s financial health. Some
experts believe that 40 percent of all businesses will not recover from applica-
tion or data losses that are not repaired within three days.
Inadequate security and control may result in serious legal liability.
Businesses must protect not only their own information assets but also those
of customers, employees, and business partners. Failure to do so may open the
firm to costly litigation for data exposure or theft. An organization can be held
liable for needless risk and harm created if the organization fails to take appro-
priate protective action to prevent loss of confidential information, data corrup-
tion, or breach of privacy. For example, Target had to pay $39 million to several
U.S. banks servicing Mastercard that were forced to reimburse Target customers
millions of dollars when those customers lost money due to a massive 2013
hack of Target’s payment systems affecting 40 million people. Target also paid
$67 million to Visa for the data hack and $10 million to settle a class-action
lawsuit brought by Target customers. Developing a sound security and control
framework that protects business information assets is of critical importance to
the entire enterprise, including senior management. It can no longer be limited
to the IT department (Rothrock et al., 2018).
Legal and Regulatory Requirements for Electronic
Records Management
U.S. government regulations are forcing companies to take security and con-
trol more seriously by mandating the protection of data from abuse, exposure,
and unauthorized access. Firms face new legal obligations for the retention and
storage of electronic records as well as for privacy protection.
Chapter 8 Securing Information Systems 309
In early January 2018, computer users all over
the world were shocked to learn that nearly every
computer chip manufactured in the last 20 years
contained fundamental security flaws that make it
possible for attackers to obtain access to data that
were thought to be completely protected. Security
researchers had discovered the flaws in late 2017.
The flaws arise from features built into the chips that
help them run faster. The vulnerability enables a ma-
licious program to gain access to data it should never
be able to see.
There are two specific variations of these flaws,
called Meltdown and Spectre. Meltdown was
so named because it “melts” security boundar-
ies normally enforced by hardware. By exploiting
Meltdown, an attacker can use a program running
on a computer to gain access to data from all over
that machine that the program shouldn’t normally
be able to see, including data belonging to other pro-
grams and data to which only administrators should
have access. (A system administrator is responsible
for the upkeep, configuration, and reliable operation
of computer systems.) Meltdown only affects specific
kinds of Intel chips produced since 1995.
Spectre is not manufacturer-specific and affects
nearly all modern processors. It requires more in-
timate knowledge of the victim program’s inner
workings. Spectre’s name comes from speculative
execution, in which a chip is able to start work on
predicted future operations in order to work faster.
In this case, the system is tricked into incorrectly
anticipating application behavior. The name also
suggests that Spectre will be much more difficult to
neutralize. Other attacks in the same family will no
doubt be discovered, and Spectre will be haunting us
for some time.
With both Meltdown and Spectre, an attacker can
make a program reveal some of its own data that
should have been kept secret. For example, Spectre
could harness JavaScript code on a website to trick
a web browser into revealing user and password in-
formation. Meltdown could be exploited to view data
owned by other users and also virtual servers hosted
on the same hardware, which is especially danger-
ous for cloud computing host computers. The most
worrisome aspect of Meltdown and Spectre is that
security vulnerabilities are not from flawed software
but from the fundamental design of hardware plat-
forms beneath the software.
There is no evidence that Spectre and Meltdown
have been exploited, but this would be difficult to de-
tect. Moreover, the security flaws are so fundamental
and widespread that they could become catastrophic,
especially for cloud computing services where many
users share machines. According to researchers at
global security software firm McAfee, these vulner-
abilities are especially attractive to malicious ac-
tors because the attack surface is so unprecedented
and the impacts of leaking highly sensitive data are
so harmful. According to Forester, performance of
laptops, desktops, tablets, and smartphones will be
less affected. The fundamental vulnerability behind
Meltdown and Spectre is at the hardware level, and
thus cannot be patched directly. Technology software
vendors are only able to release software fixes that
work around the problems. Such fixes mitigate vul-
nerabilities by altering or disabling the way software
code makes use of speculative execution and caching
features built into the underlying hardware. (Caching
is a technique to speed computer memory access
by locating a small amount of memory storage on
the CPU chip rather than from a separate RAM chip
for memory.) Since these features were designed to
improve system performance, working around them
can slow systems down. Experts initially predicted
system performance could be degraded as much as
30 percent, but a slowdown of 5 to 10 percent seems
more typical.
Major software vendors have rolled out work-
around patches. Cloud vendors have taken measures
to patch their underlying infrastructures, with their
customers expected to install the patches for their op-
erating systems and applications. Microsoft released
operating system patches for Windows 7 and all later
versions, which also apply to Microsoft’s Internet
Explorer and Edge browsers. Apple released patched
versions of its Safari browser and iOS, macOS, and
tvOS operating systems. Google provided a list
of which Chromebook models will or won’t need
patches and released a patch for its Chrome browser.
Older operating systems such as Windows XP and
millions of third-party low-cost Android phones that
INTERACTIVE SESSION TECHNOLOGY
Meltdown and Spectre Haunt the World’s Computers
If you work in the healthcare industry, your firm will need to comply with
the Health Insurance Portability and Accountability Act (HIPAA) of 1996.
HIPAA outlines medical security and privacy rules and procedures for sim-
plifying the administration of healthcare billing and automating the transfer
of healthcare data between healthcare providers, payers, and plans. It requires
members of the healthcare industry to retain patient information for six years
and ensure the confidentiality of those records. It specifies privacy, security,
and electronic transaction standards for healthcare providers handling patient
information, providing penalties for breaches of medical privacy, disclosure of
patient records by email, or unauthorized network access.
If you work in a firm providing financial services, your firm will need to com-
ply with the Financial Services Modernization Act of 1999, better known as the
Gramm-Leach-Bliley Act after its congressional sponsors. This act requires
financial institutions to ensure the security and confidentiality of customer
data. Data must be stored on a secure medium, and special security measures
must be enforced to protect such data on storage media and during transmittal.
If you work in a publicly traded company, your company will need to com-
ply with the Public Company Accounting Reform and Investor Protection Act of
2002, better known as the Sarbanes-Oxley Act after its sponsors Senator Paul
Sarbanes of Maryland and Representative Michael Oxley of Ohio. This act was
designed to protect investors after the financial scandals at Enron, WorldCom,
and other public companies. It imposes responsibility on companies and their
management to safeguard the accuracy and integrity of financial information
that is used internally and released externally. One of the Learning Tracks for
this chapter discusses Sarbanes-Oxley in detail.
1. How dangerous are Spectre and Meltdown?
Explain your answer.
2. Compare the threats of Spectre and Meltdown to
cloud computing centers, corporate data centers,
and individual computer and smartphone users.
3. How would you protect against Spectre and
Meltdown if you were running a public cloud com-
puting center, if you ran a corporate data center,
and if you were an individual computer user?
don’t get security updates from Google will most
likely never be patched. Organizations should apply
updates and patches to browser software as soon as
they are available. And since these vulnerabilities
could enable attackers to steal passwords from user
device memory when running JavaScript from a web
page, it is recommended that users be instructed to
always close their web browsers when not in use.
Forrester also recommends that enterprises should
use other techniques to protect data from users and
organizations that have not applied the fixes.
However, the only way to truly fix Meltdown and
Spectre is to replace affected processors. Redesigning
and producing new processors and architectures may
take five to ten years to hit the market. If anything
good can be said about Spectre and Meltdown, it is that
they have focused more global attention on software
and hardware security and the need to develop more
robust system architectures for secure computing.
Sources: Josh Fruhlinger, “Spectre and Meltdown Explained: What
They Are, How They Work, What’s at Risk,” CSO, January 15, 2018;
Warwick Ashford, “Meltdown and Spectre a Big Deal for Enterprises,”
Computer Weekly, January 9, 2018; Laura Hautala, “Spectre and
Meltdown: Details You Need on Those Big Chip Flaws,” CNET,
January 8, 2018.
CASE STUDY QUESTIONS
310 Part Two Information Technology Infrastructure
Chapter 8 Securing Information Systems 311
Sarbanes-Oxley is fundamentally about ensuring that internal controls are
in place to govern the creation and documentation of information in financial
statements. Because information systems are used to generate, store, and trans-
port such data, the legislation requires firms to consider information systems
security and other controls required to ensure the integrity, confidentiality, and
accuracy of their data. Each system application that deals with critical financial
reporting data requires controls to make sure the data are accurate. Controls
to secure the corporate network, prevent unauthorized access to systems and
data, and ensure data integrity and availability in the event of disaster or other
disruption of service are essential as well.
Electronic Evidence and Computer Forensics
Security, control, and electronic records management have become essential
for responding to legal actions. Much of the evidence today for stock fraud,
embezzlement, theft of company trade secrets, computer crime, and many civil
cases is in digital form. In addition to information from printed or typewritten
pages, legal cases today increasingly rely on evidence represented as digital
data stored on portable storage devices, CDs, and computer hard disk drives
as well as in email, instant messages, and e-commerce transactions over the
Internet.
In a legal action, a firm is obligated to respond to a discovery request for
access to information that may be used as evidence, and the company is re-
quired by law to produce those data. The cost of responding to a discovery
request can be enormous if the company has trouble assembling the required
data or the data have been corrupted or destroyed. Courts now impose severe
financial and even criminal penalties for improper destruction of electronic
documents.
An effective electronic document retention policy ensures that electronic
documents, email, and other records are well organized, accessible, and neither
retained too long nor discarded too soon. It also reflects an awareness of how to
preserve potential evidence for computer forensics. Computer forensics is the
scientific collection, examination, authentication, preservation, and analysis of
data held on or retrieved from computer storage media in such a way that the
information can be used as evidence in a court of law. It deals with the follow-
ing problems:
• Recovering data from computers while preserving evidential integrity
• Securely storing and handling recovered electronic data
• Finding significant information in a large volume of electronic data
• Presenting the information to a court of law
Electronic evidence may reside on computer storage media in the form of
computer files and as ambient data, which are not visible to the average user.
An example might be a file that has been deleted on a PC hard drive. Data that
a computer user may have deleted on computer storage media can often be re-
covered through various techniques. Computer forensics experts try to recover
such hidden data for presentation as evidence.
An awareness of computer forensics should be incorporated into a firm’s
contingency planning process. The CIO, security specialists, information sys-
tems staff, and corporate legal counsel should all work together to have a plan
in place that can be executed if a legal need arises. You can find out more about
computer forensics in the Learning Tracks for this chapter.
312 Part Two Information Technology Infrastructure
8-3 What are the components of an organizational
framework for security and control?
Even with the best security tools, your information systems won’t be reliable
and secure unless you know how and where to deploy them. You’ll need to
know where your company is at risk and what controls you must have in place
to protect your information systems. You’ll also need to develop a security pol-
icy and plans for keeping your business running if your information systems
aren’t operational.
Information Systems Controls
Information systems controls are both manual and automated and consist of
general and application controls. General controls govern the design, secu-
rity, and use of computer programs and the security of data files in general
throughout the organization’s information technology infrastructure. On the
whole, general controls apply to all computerized applications and consist of a
combination of hardware, software, and manual procedures that create an over-
all control environment.
General controls include software controls, physical hardware controls, com-
puter operations controls, data security controls, controls over the systems
development process, and administrative controls. Table 8.4 describes the func-
tions of each of these controls.
Application controls are specific controls unique to each computerized
application, such as payroll or order processing. They include both auto-
mated and manual procedures that ensure that only authorized data are com-
pletely and accurately processed by that application. Application controls
can be classified as (1) input controls, (2) processing controls, and (3) output
controls.
Input controls check data for accuracy and completeness when they enter the
system. There are specific input controls for input authorization, data conver-
sion, data editing, and error handling. Processing controls establish that data are
complete and accurate during updating. Output controls ensure that the results of
TABLE 8.4 GENERAL CONTROLS
TYPE OF GENERAL CONTROL DESCRIPTION
Software controls Monitor the use of system software and prevent unauthorized access and use of
software programs, system software, and computer programs.
Hardware controls Ensure that computer hardware is physically secure and check for equipment
malfunction. Organizations that are critically dependent on their computers also must
make provisions for backup or continued operation to maintain constant service.
Computer operations controls Oversee the work of the computer department to ensure that programmed
procedures are consistently and correctly applied to the storage and processing of
data. They include controls over the setup of computer processing jobs and backup
and recovery procedures for processing that ends abnormally.
Data security controls Ensure that valuable business data files maintained internally or by an external
hosting service are not subject to unauthorized access, change, or destruction while
they are in use or in storage.
Implementation controls Audit the systems development process at various points to ensure that the process
is properly controlled and managed.
Administrative controls Formalize standards, rules, procedures, and control disciplines to ensure that the
organization’s general and application controls are properly executed and enforced.
Chapter 8 Securing Information Systems 313
computer processing are accurate, complete, and properly distributed. You can
find more detail about application and general controls in our Learning Tracks.
Information systems controls should not be an afterthought. They need to
be incorporated into the design of a system and should consider not only how
the system will perform under all possible conditions but also the behavior of
organizations and people using the system.
Risk Assessment
Before your company commits resources to security and information systems
controls, it must know which assets require protection and the extent to which
these assets are vulnerable. A risk assessment helps answer these questions
and determine the most cost-effective set of controls for protecting assets.
A risk assessment determines the level of risk to the firm if a specific activ-
ity or process is not properly controlled. Not all risks can be anticipated and
measured, but most businesses will be able to acquire some understanding of
the risks they face. Business managers working with information systems spe-
cialists should try to determine the value of information assets, points of vul-
nerability, the likely frequency of a problem, and the potential for damage. For
example, if an event is likely to occur no more than once a year, with a maxi-
mum of a $1000 loss to the organization, it is not wise to spend $20,000 on the
design and maintenance of a control to protect against that event. However, if
that same event could occur at least once a day, with a potential loss of more
than $300,000 a year, $100,000 spent on a control might be entirely appropriate.
Table 8.5 illustrates sample results of a risk assessment for an online order
processing system that processes 30,000 orders per day. The likelihood of each
exposure occurring over a one-year period is expressed as a percentage. The
next column shows the highest and lowest possible loss that could be expected
each time the exposure occurred and an average loss calculated by adding the
highest and lowest figures and dividing by two. The expected annual loss for
each exposure can be determined by multiplying the average loss by its prob-
ability of occurrence.
This risk assessment shows that the probability of a power failure occurring in
a one-year period is 30 percent. Loss of order transactions while power is down
could range from $5000 to $200,000 (averaging $102,500) for each occurrence,
depending on how long processing is halted. The probability of embezzlement
occurring over a yearly period is about 5 percent, with potential losses ranging
from $1000 to $50,000 (and averaging $25,500) for each occurrence. User errors
have a 98 percent chance of occurring over a yearly period, with losses ranging
from $200 to $40,000 (and averaging $20,100) for each occurrence.
After the risks have been assessed, system builders will concentrate on the
control points with the greatest vulnerability and potential for loss. In this case,
controls should focus on ways to minimize the risk of power failures and user
errors because anticipated annual losses are highest for these areas.
TABLE 8.5 ONLINE ORDER PROCESSING RISK ASSESSMENT
EXPOSURE
PROBABILITY OF
OCCURRENCE (%) LOSS RANGE/AVERAGE ($)
EXPECTED
ANNUAL LOSS ($)
Power failure 30% $5000–$200,000 ($102,500) $30,750
Embezzlement 5% $1000–$50,000 ($25,500) $1275
User error 98% $200–$40,000 ($20,100) $19,698
314 Part Two Information Technology Infrastructure
Security Policy
After you’ve identified the main risks to your systems, your company will need
to develop a security policy for protecting the company’s assets. A security
policy consists of statements ranking information risks, identifying acceptable
security goals, and identifying the mechanisms for achieving these goals. What
are the firm’s most important information assets? Who generates and controls
this information in the firm? What existing security policies are in place to
protect the information? What level of risk is management willing to accept for
each of these assets? Is it willing, for instance, to lose customer credit data once
every 10 years? Or will it build a security system for credit card data that can
withstand the once-in-a-hundred-years disaster? Management must estimate
how much it will cost to achieve this level of acceptable risk.
The security policy drives other policies determining acceptable use of the
firm’s information resources and which members of the company have access
to its information assets. An acceptable use policy (AUP) defines acceptable
uses of the firm’s information resources and computing equipment, including
desktop and laptop computers, mobile devices, telephones, and the Internet. A
good AUP defines unacceptable and acceptable actions for every user and speci-
fies consequences for noncompliance.
Figure 8.3 is one example of how an organization might specify the access
rules for different levels of users in the human resources function. It specifies
what portions of a human resource database each user is permitted to access,
based on the information required to perform that person’s job. The database
contains sensitive personal information such as employees’ salaries, benefits,
and medical histories.
FIGURE 8.3 ACCESS RULES FOR A PERSONNEL SYSTEM
These two examples represent two security profiles or data security patterns that might
be found in a personnel system. Depending on the security profile, a user would have
certain restrictions on access to various systems, locations, or data in an organization.
User: Personnel Dept. Clerk
SECURITY PROFILE 1
SECURITY PROFILE 2
Location: Division 1
00753, 27834, 37665, 44116
27321
Type of Access
Type of Access
Read Only
Read and Update
None
None
None
Employee Identification
Codes with This Profile:
Data Field
Restrictions
All employee data for
Division 1 only
User: Divisional Personnel Manager
Location: Division 1
Employee Identification
Codes with This Profile:
Data Field
Restrictions
All employee data for
Division 1 only
• Medical history data
• Salary
• Pensionable earnings
Chapter 8 Securing Information Systems 315
The access rules illustrated here are for two sets of users. One set of users
consists of all employees who perform clerical functions, such as inputting
employee data into the system. All individuals with this type of profile can
update the system but can neither read nor update sensitive fields, such as sal-
ary, medical history, or earnings data. Another profile applies to a divisional
manager, who cannot update the system but who can read all employee data
fields for his or her division, including medical history and salary. We pro-
vide more detail about the technologies for user authentication later on in this
chapter.
Disaster Recovery Planning and Business
Continuity Planning
If you run a business, you need to plan for events, such as power outages,
floods, earthquakes, or terrorist attacks, that will prevent your information sys-
tems and your business from operating. Disaster recovery planning devises
plans for the restoration of disrupted computing and communications services.
Disaster recovery plans focus primarily on the technical issues involved in
keeping systems up and running, such as which files to back up and the main-
tenance of backup computer systems or disaster recovery services.
For example, MasterCard maintains a duplicate computer center in Kansas
City, Missouri, to serve as an emergency backup to its primary computer
center in St. Louis. Rather than build their own backup facilities, many
firms contract with cloud-based disaster recovery services or firms such as
SunGard Availability Services that provide sites with spare computers around
the country where subscribing firms can run their critical applications in an
emergency.
Business continuity planning focuses on how the company can restore
business operations after a disaster strikes. The business continuity plan iden-
tifies critical business processes and determines action plans for handling
mission-critical functions if systems go down. For example, Healthways, a
well-being improvement company headquartered in Franklin, Tennessee, im-
plemented a business continuity plan that identified the business processes of
nearly 70 departments across the enterprise and the impact of system down-
time on those processes. Healthways pinpointed its most critical processes and
worked with each department to devise an action plan.
Business managers and information technology specialists need to work to-
gether on both types of plans to determine which systems and business pro-
cesses are most critical to the company. They must conduct a business impact
analysis to identify the firm’s most critical systems and the impact a systems
outage would have on the business. Management must determine the maxi-
mum amount of time the business can survive with its systems down and
which parts of the business must be restored first.
The Role of Auditing
How does management know that information systems security and controls
are effective? To answer this question, organizations must conduct comprehen-
sive and systematic audits. An information systems audit examines the firm’s
overall security environment as well as controls governing individual informa-
tion systems. The auditor should trace the flow of sample transactions through
the system and perform tests, using, if appropriate, automated audit software.
The information systems audit may also examine data quality.
316 Part Two Information Technology Infrastructure
Security audits review technologies, procedures, documentation, training, and
personnel. A thorough audit will even simulate an attack or disaster to test the
response of the technology, information systems staff, and business employees.
The audit lists and ranks all control weaknesses and estimates the probabil-
ity of their occurrence. It then assesses the financial and organizational impact
of each threat. Figure 8.4 is a sample auditor’s listing of control weaknesses for
a loan system. It includes a section for notifying management of such weak-
nesses and for management’s response. Management is expected to devise a
plan for countering significant weaknesses in controls.
8-4 What are the most important tools
and technologies for safeguarding
information resources?
Businesses have an array of technologies for protecting their information
resources. They include tools for managing user identities, preventing unau-
thorized access to systems and data, ensuring system availability, and ensuring
software quality.
Identity Management and Authentication
Midsize and large companies have complex IT infrastructures and many sys-
tems, each with its own set of users. Identity management software auto-
mates the process of keeping track of all these users and their system privileges,
FIGURE 8.4 SAMPLE AUDITOR’S LIST OF CONTROL WEAKNESSES
This chart is a sample page from a list of control weaknesses that an auditor might
find in a loan system in a local commercial bank. This form helps auditors record and
evaluate control weaknesses and shows the results of discussing those weaknesses
with management as well as any corrective actions management takes.
Nature of Weakness
and Impact
User accounts with
missing passwords
Network configured
to allow some
sharing of system
files
Software patches
can update
production programs
without final approval
from Standards and
Controls group
Function: Loans
Location: Peoria, IL
Chance for Error/Abuse
JustificationYes/
No
Yes
Yes
No
Leaves system open
to unauthorized
outsiders or attackers
Exposes critical
system files to hostile
parties connected to
the network
All production programs
require management
approval; Standards and
Controls group assigns
such cases to a temporary
production status
Prepared by: J. Ericson
Date: June 16, 2018
Notification to Management
Management responseReport
date
5/10/18
5/10/18
Eliminate accounts
without passwords
Ensure only required
directories are
shared and that they
are protected with
strong passwords
Received by: T. Benson
Review date: June 28, 2018
Chapter 8 Securing Information Systems 317
assigning each user a unique digital identity for accessing each system. It also
includes tools for authenticating users, protecting user identities, and control-
ling access to system resources.
To gain access to a system, a user must be authorized and authenticated.
Authentication refers to the ability to know that a person is who he or she
claims to be. Authentication is often established by using passwords known
only to authorized users. An end user uses a password to log on to a computer
system and may also use passwords for accessing specific systems and files.
However, users often forget passwords, share them, or choose poor passwords
that are easy to guess, which compromises security. Password systems that
are too rigorous hinder employee productivity. When employees must change
complex passwords frequently, they often take shortcuts, such as choosing
passwords that are easy to guess or keeping their passwords at their worksta-
tions in plain view. Passwords can also be sniffed if transmitted over a network
or stolen through social engineering.
New authentication technologies, such as tokens, smart cards, and biometric
authentication, overcome some of these problems. A token is a physical de-
vice, similar to an identification card, that is designed to prove the identity of a
single user. Tokens are small gadgets that typically fit on key rings and display
passcodes that change frequently. A smart card is a device about the size of
a credit card that contains a chip formatted with access permission and other
data. (Smart cards are also used in electronic payment systems.) A reader de-
vice interprets the data on the smart card and allows or denies access.
Biometric authentication uses systems that read and interpret individual
human traits, such as fingerprints, irises, and voices to grant or deny access.
Biometric authentication is based on the measurement of a physical or behav-
ioral trait that makes each individual unique. It compares a person’s unique
characteristics, such as the fingerprints, face, voice, or retinal image, against
a stored profile of these characteristics to determine any differences between
these characteristics and the stored profile. If the two profiles match, access
is granted. Fingerprint and facial recognition technologies are just beginning
This smartphone has a
biometric fingerprint reader
for fast yet secure access
to files and networks. New
models of PCs and smart-
phones are starting to use
biometric identification to
authenticate users.
© Andreypopov/123RF
318 Part Two Information Technology Infrastructure
to be used for security applications, with many PC laptops (and some smart-
phones) equipped with fingerprint identification devices and some models
with built-in webcams and face recognition software. Financial service firms
such as Vanguard and Fidelity have implemented voice authentication systems
for their clients.
The steady stream of incidents in which hackers have been able to access
traditional passwords highlights the need for more secure means of authentica-
tion. Two-factor authentication increases security by validating users through
a multistep process. To be authenticated, a user must provide two means of
identification, one of which is typically a physical token, such as a smartcard
or chip-enabled bank card, and the other of which is typically data, such as
a password or personal identification number (PIN). Biometric data, such as
fingerprints, iris prints, or voice prints, can also be used as one of the authenti-
cating mechanisms. A common example of two-factor authentication is a bank
card; the card itself is the physical item, and the PIN is the other piece of data
that goes with it.
Firewalls, Intrusion Detection Systems, and
Anti-malware Software
Without protection against malware and intruders, connecting to the Internet
would be very dangerous. Firewalls, intrusion detection systems, and anti-
malware software have become essential business tools.
Firewalls
Firewalls prevent unauthorized users from accessing private networks. A
firewall is a combination of hardware and software that controls the flow of
incoming and outgoing network traffic. It is generally placed between the orga-
nization’s private internal networks and distrusted external networks, such as
the Internet, although firewalls can also be used to protect one part of a com-
pany’s network from the rest of the network (see Figure 8.5).
The firewall acts like a gatekeeper that examines each user’s credentials be-
fore it grants access to a network. The firewall identifies names, IP addresses,
applications, and other characteristics of incoming traffic. It checks this infor-
mation against the access rules that the network administrator has programmed
into the system. The firewall prevents unauthorized communication into and
out of the network.
In large organizations, the firewall often resides on a specially designated
computer separate from the rest of the network, so no incoming request directly
accesses private network resources. There are a number of firewall screening
technologies, including static packet filtering, stateful inspection, Network
Address Translation, and application proxy filtering. They are frequently used
in combination to provide firewall protection.
Packet filtering examines selected fields in the headers of data packets flow-
ing back and forth between the trusted network and the Internet, examining
individual packets in isolation. This filtering technology can miss many types
of attacks.
Stateful inspection provides additional security by determining whether pack-
ets are part of an ongoing dialogue between a sender and a receiver. It sets up
state tables to track information over multiple packets. Packets are accepted
or rejected based on whether they are part of an approved conversation or at-
tempting to establish a legitimate connection.
Chapter 8 Securing Information Systems 319
Network Address Translation (NAT) can provide another layer of protection
when static packet filtering and stateful inspection are employed. NAT con-
ceals the IP addresses of the organization’s internal host computer(s) to prevent
sniffer programs outside the firewall from ascertaining them and using that
information to penetrate internal systems.
Application proxy filtering examines the application content of packets. A
proxy server stops data packets originating outside the organization, inspects
them, and passes a proxy to the other side of the firewall. If a user outside the
company wants to communicate with a user inside the organization, the out-
side user first communicates with the proxy application, and the proxy appli-
cation communicates with the firm’s internal computer. Likewise, a computer
user inside the organization goes through the proxy to talk with computers on
the outside.
To create a good firewall, an administrator must maintain detailed internal
rules identifying the people, applications, or addresses that are allowed or re-
jected. Firewalls can deter, but not completely prevent, network penetration
by outsiders and should be viewed as one element in an overall security plan.
Intrusion Detection Systems
In addition to firewalls, commercial security vendors now provide intrusion
detection tools and services to protect against suspicious network traffic and
attempts to access files and databases. Intrusion detection systems feature
full-time monitoring tools placed at the most vulnerable points or hot spots
of corporate networks to detect and deter intruders continually. The system
FIGURE 8.5 A CORPORATE FIREWALL
The firewall is placed between the firm’s private network and the public Internet or another distrusted
network to protect against unauthorized traffic.
Internet Outer
firewall
Web
server
Inner
firewall
Corporate
systems
LANs
Policy
rules
Databases
320 Part Two Information Technology Infrastructure
generates an alarm if it finds a suspicious or anomalous event. Scanning soft-
ware looks for patterns indicative of known methods of computer attacks such
as bad passwords, checks to see whether important files have been removed or
modified, and sends warnings of vandalism or system administration errors.
The intrusion detection tool can also be customized to shut down a particularly
sensitive part of a network if it receives unauthorized traffic.
Anti-malware Software
Defensive technology plans for both individuals and businesses must include
anti-malware protection for every computer. Anti-malware software prevents,
detects, and removes malware, including computer viruses, computer worms,
Trojan horses, spyware, and adware. However, most anti-malware software is
effective only against malware already known when the software was written.
To remain effective, the software must be continually updated. Even then it is
not always effective because some malware can evade detection. Organizations
need to use additional malware detection tools for better protection.
Unified Threat Management Systems
To help businesses reduce costs and improve manageability, security vendors
have combined into a single appliance various security tools, including firewalls,
virtual private networks, intrusion detection systems, and web content filtering
and anti-spam software. These comprehensive security management products
are called unified threat management (UTM) systems. UTM products are
available for all sizes of networks. Leading UTM vendors include Fortinent,
Sophos, and Check Point, and networking vendors such as Cisco Systems and
Juniper Networks provide some UTM capabilities in their products.
Securing Wireless Networks
The initial security standard developed for Wi-Fi, called Wired Equivalent
Privacy (WEP), is not very effective because its encryption keys are relatively
easy to crack. WEP provides some margin of security, however, if users remem-
ber to enable it. Corporations can further improve Wi-Fi security by using it
in conjunction with virtual private network (VPN) technology when accessing
internal corporate data.
In June 2004, the Wi-Fi Alliance industry trade group finalized the 802.11i
specification (also referred to as Wi-Fi Protected Access 2 or WPA2) that re-
places WEP with stronger security standards. Instead of the static encryption
keys used in WEP, the new standard uses much longer keys that continually
change, making them harder to crack. The most recent specification is WPA3,
introduced in 2018.
Encryption and Public Key Infrastructure
Many businesses use encryption to protect digital information that they store,
physically transfer, or send over the Internet. Encryption is the process of
transforming plain text or data into cipher text that cannot be read by anyone
other than the sender and the intended receiver. Data are encrypted by using a
secret numerical code, called an encryption key, that transforms plain data into
cipher text. The message must be decrypted by the receiver.
Two methods for encrypting network traffic on the web are SSL and S-HTTP.
Secure Sockets Layer (SSL) and its successor, Transport Layer Security (TLS),
enable client and server computers to manage encryption and decryption
Chapter 8 Securing Information Systems 321
activities as they communicate with each other during a secure web session.
Secure Hypertext Transfer Protocol (S-HTTP) is another protocol used for
encrypting data flowing over the Internet, but it is limited to individual mes-
sages, whereas SSL and TLS are designed to establish a secure connection be-
tween two computers.
The capability to generate secure sessions is built into Internet client browser
software and servers. The client and the server negotiate what key and what
level of security to use. Once a secure session is established between the client
and the server, all messages in that session are encrypted.
Two methods of encryption are symmetric key encryption and public key
encryption. In symmetric key encryption, the sender and receiver establish a
secure Internet session by creating a single encryption key and sending it to
the receiver so both the sender and receiver share the same key. The strength
of the encryption key is measured by its bit length. Today, a typical key will be
56 to 256 bits long (a string of from 56 to 256 binary digits) depending on the
level of security desired. The longer the key, the more difficult it is to break
the key. The downside is that the longer the key, the more computing power it
takes for legitimate users to process the information.
The problem with all symmetric encryption schemes is that the key itself
must be shared somehow among the senders and receivers, which exposes
the key to outsiders who might just be able to intercept and decrypt the key.
A more secure form of encryption called public key encryption uses two
keys: one shared (or public) and one totally private as shown in Figure 8.6. The
keys are mathematically related so that data encrypted with one key can be
decrypted using only the other key. To send and receive messages, communica-
tors first create separate pairs of private and public keys. The public key is kept
in a directory, and the private key must be kept secret. The sender encrypts a
message with the recipient’s public key. On receiving the message, the recipi-
ent uses his or her private key to decrypt it.
Digital certificates are data files used to establish the identity of users and
electronic assets for protection of online transactions (see Figure 8.7). A digital
certificate system uses a trusted third party, known as a certificate authority
(CA), to validate a user’s identity. There are many CAs in the United States and
around the world, including Symantec, GoDaddy, and Comodo.
The CA verifies a digital certificate user’s identity offline. This information is
put into a CA server, which generates an encrypted digital certificate contain-
ing owner identification information and a copy of the owner’s public key. The
certificate authenticates that the public key belongs to the designated owner.
FIGURE 8.6 PUBLIC KEY ENCRYPTION
A public key encryption system can be viewed as a series of public and private keys that lock data when they
are transmitted and unlock data when they are received. The sender locates the recipient’s public key in a di-
rectory and uses it to encrypt a message. The message is sent in encrypted form over the Internet or a private
network. When the encrypted message arrives, the recipient uses his or her private key to decrypt the data and
read the message.
Decrypt
with
private key
Encrypt
with
public key
Sender ScrambledMessage Recipient
322 Part Two Information Technology Infrastructure
The CA makes its own public key available either in print or perhaps on the
Internet. The recipient of an encrypted message uses the CA’s public key to
decode the digital certificate attached to the message, verifies it was issued by
the CA, and then obtains the sender’s public key and identification informa-
tion contained in the certificate. By using this information, the recipient can
send an encrypted reply. The digital certificate system would enable, for exam-
ple, a credit card user and a merchant to validate that their digital certificates
were issued by an authorized and trusted third party before they exchange data.
Public key infrastructure (PKI), the use of public key cryptography working
with a CA, is now widely used in e-commerce.
Securing Transactions with Blockchain
Blockchain, which we introduced in Chapter 6, is gaining attention as an alter-
native approach for securing transactions and establishing trust among mul-
tiple parties. A blockchain is a chain of digital “blocks” that contain records of
transactions. Each block is connected to all the blocks before and after it, and
the blockchains are continually updated and kept in sync This makes it difficult
to tamper with a single record because one would have to change the block con-
taining that record as well as those linked to it to avoid detection.
Once recorded, a blockchain transaction cannot be changed. The records in a
blockchain are secured through cryptography, and all transactions are encrypted.
Blockchain network participants have their own private keys that are assigned to
the transactions they create and act as a personal digital signature. If a record is
altered, the signature will become invalid, and the blockchain network will know
immediately that something is amiss. Because blockchains aren’t contained in a
central location, they don’t have a single point of failure and cannot be changed
from a single computer. Blockchain is especially suitable for environments with
high security requirements and mutually unknown actors.
FIGURE 8.7 DIGITAL CERTIFICATES
Digital certificates help establish the identity of people or electronic assets. They protect
online transactions by providing secure, encrypted, online communication.
Institution/
individual
subject
Request
certificate
Transaction partner:
online merchant
or customer
Certification
Authorities
(CAs)
Certificate
received
Digital Certificate Serial Number
Version
Issuer Name
Issuance/Expiration Date
Subject Name
Subject Public Key
CA Signature
Other Information
Internet
Chapter 8 Securing Information Systems 323
Ensuring System Availability
As companies increasingly rely on digital networks for revenue and opera-
tions, they need to take additional steps to ensure that their systems and
applications are always available. Firms such as those in the airline and finan-
cial services industries with critical applications requiring online transaction
processing have traditionally used fault-tolerant computer systems for many
years to ensure 100 percent availability. In online transaction processing,
transactions entered online are immediately processed by the computer.
Multitudinous changes to databases, reporting, and requests for information
occur each instant.
Fault-tolerant computer systems contain redundant hardware, software,
and power supply components that create an environment that provides
continuous, uninterrupted service. Fault-tolerant computers use special soft-
ware routines or self-checking logic built into their circuitry to detect hard-
ware failures and automatically switch to a backup device. Parts from these
computers can be removed and repaired without disruption to the computer
or downtime. Downtime refers to periods of time in which a system is not
operational.
Controlling Network Traffic: Deep Packet Inspection
Have you ever tried to use your campus network and found that it was very
slow? It may be because your fellow students are using the network to down-
load music or watch YouTube. Bandwidth-consuming applications such as
file-sharing programs, Internet phone service, and online video can clog and
slow down corporate networks, degrading performance. A technology called
deep packet inspection (DPI) helps solve this problem. DPI examines data
files and sorts out low-priority online material while assigning higher prior-
ity to business-critical files. Based on the priorities established by a network’s
operators, it decides whether a specific data packet can continue to its destina-
tion or should be blocked or delayed while more important traffic proceeds.
Security Outsourcing
Many companies, especially small businesses, lack the resources or expertise
to provide a secure high-availability computing environment on their own.
They can outsource many security functions to managed security service
providers (MSSPs) that monitor network activity and perform vulnerability
testing and intrusion detection. SecureWorks, AT&T, Verizon, IBM, Perimeter
eSecurity, and Symantec are leading providers of MSSP services.
Security Issues for Cloud Computing and the Mobile
Digital Platform
Although cloud computing and the emerging mobile digital platform have the
potential to deliver powerful benefits, they pose new challenges to system se-
curity and reliability. We now describe some of these challenges and how they
should be addressed.
Security in the Cloud
When processing takes place in the cloud, accountability and responsibility
for protection of sensitive data still reside with the company owning that data.
Understanding how the cloud computing provider organizes its services and
manages the data is critical (see the Interactive Session on Management).
324 Part Two Information Technology Infrastructure
Over the last several years, many companies have
altered their IT strategies to shift an increasing share
of their applications and data to public-cloud infra-
structure and platforms. However, using the public
cloud disrupts traditional cybersecurity models that
many companies have built up over years. As a re-
sult, as companies make use of the public cloud,
they need to revise their cybersecurity practices
in order to consume public-cloud services in a way
that enables them both to protect critical data and to
fully exploit the speed and agility that these services
provide.
Managing security and privacy for cloud services
is similar to managing traditional IT infrastructures.
However, the risks may be different because some,
but not all, responsibilities shift to the cloud service
provider. The category of cloud service (IaaS, PaaS,
or SaaS) affects exactly how these responsibilities are
shared. For IaaS, the provider typically supplies and
is responsible for securing basic IT resources such
as machines, storage systems, and networks. The
cloud services customer is typically responsible for
its operating system, applications, and corporate data
placed into the cloud computing environment. This
means that most of the responsibility for securing
the applications and the corporate data falls on the
customer.
Cloud service customers should carefully review
their cloud services agreement with their cloud
provider to make sure their applications and data
hosted in cloud services are secured in accordance
with their security and compliance policies. But
that’s not all. Although many organizations know
how to manage security for their own data center—
they’re unsure of exactly what they need to do
when they shift computing work to the cloud. They
need new tool sets and skill sets to manage cloud
security from their end to configure and launch
cloud instances, manage identity and access con-
trols, update security controls to match configu-
ration changes, and protect workloads and data.
There’s a misconception among many IT depart-
ments that whatever happens in the cloud is not
their responsibility. It is essential to update security
requirements developed for enterprise data centers
to produce requirements suitable for the use of
cloud services. Organizations using cloud services
often need to apply additional controls at the user,
application, and data level.
Cloud service providers have made great strides in
tightening security for their areas of responsibility.
Amazon’s security for its cloud service leaves little
to chance. The company keeps careful constraints
around its staff, watches what they do every day,
and instructs service teams to restrict access to data
through tooling and automation. Amazon also rotates
security credentials for authentication and verifi-
cation of identity and changes them frequently—
sometimes in a matter of hours.
The biggest threats to cloud data for most com-
panies involve lack of software patching or miscon-
figuration. Many organizations have been breached
because they neglected to apply software patches to
newly identified security vulnerabilities when they
became available or waited too long to do so. (See
the discussion of patch management earlier in this
chapter.) Companies have also experienced security
breaches because they did not configure aspects
of cloud security that were their responsibility.
Some users forget to set up AWS bucket password
protection. (A bucket is a logical unit of storage in
Amazon Web Services [AWS] Simple Storage Solution
S3 storage service. Buckets are used to store objects,
which consist of data and metadata that describes
the data.) Others don’t understand basic security
features in Amazon such as resource-based access
policies (access control lists) or bucket permissions
checks, unwittingly exposing data to the public
Internet.
Financial publisher Dow Jones & Co. confirmed
reports in July 2017 that it may have publicly
exposed personal and financial information of
2.2 million customers, including subscribers to
The Wall Street Journal and Barron’s. The leak was
traced back to a configuration error in a reposi-
tory in AWS S3 security. Dow Jones had intended
to provide semi-public access to select customers
over the Internet. However, it wound up granting
access to download the data via a URL to “authen-
ticated users,” which included anyone who reg-
istered (for free) for an AWS account. Accenture,
Verizon, Viacom, Tesla, and Uber Technologies are
INTERACTIVE SESSION MANAGEMENT
How Secure Is the Cloud?
Chapter 8 Securing Information Systems 325
1. What kinds of security problems does cloud com-
puting pose? How serious are they? Explain your
answer.
2. What management, organization, and technology
factors are responsible for cloud security prob-
lems? To what extent is cloud security a manage-
ment issue?
3. What steps can organizations take to make their
cloud-based systems more secure?
4. Should companies use the public cloud to run
their mission-critical systems? Why or why not?
other high-profile names in the steady stream of
companies that have exposed sensitive information
via AWS S3 security misconfigurations. Such mis-
configurations were often performed by employ-
ees who lacked security experience when security
configurations should have been handled by skilled
IT professionals. Stopping AWS bucket miscon-
figurations may also require enacting policies that
limit the damage caused by careless or untrained
employees.
Although customers have their choice of secu-
rity configurations for the cloud, Amazon has been
taking its own steps to prevent misconfigurations.
In November 2017, the company updated its AWS
dashboard, encasing public in bright orange on the
AWS S3 console so that cloud customers could eas-
ily see the status of access permissions to buckets
and their objects. This helps everyone see more
easily when an Amazon S3 bucket is open to the
public. Amazon also added default encryption to
all objects when they are stored in an AWS bucket
and access control lists for cross-region replication.
Another new tool called Zelkova examines AWS S3
security policies to help users identify which one
is more permissive than the others. Amazon Macie
is a managed service that uses machine learning
to detect personally identifiable information and
intellectual property, and has been available for S3
since August 2017.
Sources: Kathleen Richards, “New Cloud Threats as Attackers
Embrace the Power of the Cloud,” SearchCloudSecurity.com, April
3, 2018; “AWS S3 Security Falls Short at High-profile Companies,”
SearchCloudSecurity.com, April 2018; “Making a Secure Transition to
the Public Cloud,” McKinsey & Company, January 2018; and “Security
for Cloud Computing: Ten Steps to Ensure Success,” Cloud Standards
Customer Council, December 2017.
CASE STUDY QUESTIONS
Cloud computing is highly distributed. Cloud applications reside in large
remote data centers and server farms that supply business services and
data management for multiple corporate clients. To save money and keep
costs low, cloud computing providers often distribute work to data centers
around the globe where work can be accomplished most efficiently. When
you use the cloud, you may not know precisely where your data are being
hosted.
Virtually all cloud providers use encryption to secure the data they handle
while the data are being transmitted. However, if the data are stored on devices
that also store other companies’ data, it’s important to ensure that these stored
data are encrypted as well. DDoS attacks are especially harmful because they
render cloud services unavailable to legitimate customers.
Companies expect their systems to be running 24/7. Cloud providers still
experience occasional outages, but their reliability has increased to the point
where a number of large companies are using cloud services for part of their
IT infrastructures. Most keep their critical systems in-house or in private
clouds.
Cloud users need to confirm that regardless of where their data are stored,
they are protected at a level that meets their corporate requirements. They
http://SearchCloudSecurity.com
http://SearchCloudSecurity.com
326 Part Two Information Technology Infrastructure
should stipulate that the cloud provider store and process data in specific ju-
risdictions according to the privacy rules of those jurisdictions. Cloud clients
should find how the cloud provider segregates their corporate data from those
of other companies and ask for proof that encryption mechanisms are sound.
It’s also important to know how the cloud provider will respond if a disaster
strikes, whether the provider will be able to restore your data completely, and
how long this should take. Cloud users should also ask whether cloud provid-
ers will submit to external audits and security certifications. These kinds of
controls can be written into the service level agreement (SLA) before signing
with a cloud provider. The Cloud Security Alliance (CSA) has created indus-
trywide standards for cloud security, specifying best practices to secure cloud
computing.
Securing Mobile Platforms
If mobile devices are performing many of the functions of computers, they
need to be secured like desktops and laptops against malware, theft, acci-
dental loss, unauthorized access, and hacking attempts. Mobile devices ac-
cessing corporate systems and data require special protection. Companies
should make sure that their corporate security policy includes mobile de-
vices, with additional details on how mobile devices should be supported,
protected, and used. They will need mobile device management tools to au-
thorize all devices in use; to maintain accurate inventory records on all mo-
bile devices, users, and applications; to control updates to applications; and
to lock down or erase lost or stolen devices so they can’t be compromised.
Data loss prevention technology can identify where critical data are saved,
who is accessing the data, how data are leaving the company, and where the
data are going. Firms should develop guidelines stipulating approved mobile
platforms and software applications as well as the required software and pro-
cedures for remote access of corporate systems. The organization’s mobile
security policy should forbid employees from using unsecured, consumer-
based applications for transferring and storing corporate documents and files
or sending such documents and files to oneself by email without encryption.
Companies should encrypt communication whenever possible. All mobile
device users should be required to use the password feature found in every
smartphone.
Ensuring Software Quality
In addition to implementing effective security and controls, organizations can
improve system quality and reliability by employing software metrics and rig-
orous software testing. Software metrics are objective assessments of the sys-
tem in the form of quantified measurements. Ongoing use of metrics allows the
information systems department and end users to measure the performance of
the system jointly and identify problems as they occur. Examples of software
metrics include the number of transactions that can be processed in a specified
unit of time, online response time, the number of payroll checks printed per
hour, and the number of known bugs per hundred lines of program code. For
metrics to be successful, they must be carefully designed, formal, objective,
and used consistently.
Early, regular, and thorough testing will contribute significantly to system
quality. Many view testing as a way to prove the correctness of work they have
done. In fact, we know that all sizable software is riddled with errors, and we
must test to uncover these errors.
Chapter 8 Securing Information Systems 327
Good testing begins before a software program is even written, by using a
walkthrough—a review of a specification or design document by a small group
of people carefully selected based on the skills needed for the particular ob-
jectives being tested. When developers start writing software programs, cod-
ing walkthroughs can also be used to review program code. However, code
must be tested by computer runs. When errors are discovered, the source is
found and eliminated through a process called debugging. You can find out
more about the various stages of testing required to put an information system
into operation in Chapter 12. Our Learning Tracks also contain descriptions of
methodologies for developing software programs that contribute to software
quality.
8-5 How will MIS help my career?
Here is how Chapter 8 and this book can help you find an entry-level job as an
identity access and management support specialist.
The Company
No. 1 Value Supermarkets, a major supermarket grocery store chain headquar-
tered in Plano, Texas, is looking to fill an entry-level position for an identity
access and management support specialist. The company has 59 retail loca-
tions in 23 Texas cities, more than 8,000 workers, and nearly a million weekly
shoppers.
Position Description
The identity access and management support specialist will be responsible
for monitoring the company’s identity management system to ensure that the
company is meeting its audit and compliance controls. This position reports to
the company’s security operations manager. Job responsibilities include:
• Performing data integrity testing of identity management system integrations
with business applications.
• Integrating Windows Active Directory files with the identity management
system.
• Maintaining information on system user roles and privileges.
Job Requirements
• Bachelor’s degree
• Proficiency with computers
• Ability to multitask and work independently
• Attention to detail
• Strong time management skills
• Ability to communicate with both technical and non-technical staff
Interview Questions
1. What do you know about authentication and identity management? Have
you ever worked with identity management or other IT security systems?
What did you do with this software?
328 Part Two Information Technology Infrastructure
2. Have you ever worked with Windows Active Directory? What exactly did you
do with this software?
3. What knowledge and experience do you have with ensuring data integrity?
4. Can you give an example of a situation where you had to multitask and man-
age your time and how you handled it?
5. Can you tell us about the computer experience you’ve had? What software
tools have you worked with?
Author Tips
1. Review the last two sections of this chapter, especially the discussions of
identity management and authentication. Also review the Chapter 6 discus-
sions of data integrity and data quality.
2. Use the web to find out more about identity management, data integrity
testing, leading identity management software tools, and Windows Active
Directory.
3. Use the web to find out more about the company, the kinds of systems it
uses, and who might be using those systems.
8-1 Why are information systems vulnerable to destruction, error, and abuse?
Digital data are vulnerable to destruction, misuse, error, fraud, and hardware or software fail-
ures. The Internet is designed to be an open system and makes internal corporate systems more
vulnerable to actions from outsiders. Hackers can unleash denial-of-service (DoS) attacks or pen-
etrate corporate networks, causing serious system disruptions. Wi-Fi networks can easily be pen-
etrated by intruders using sniffer programs to obtain an address to access the resources of the
network. Malware can disable systems and websites, with mobile devices a major target. The
dispersed nature of cloud computing makes it difficult to track unauthorized activity or to apply
controls from afar. Software presents problems because software bugs may be impossible to elimi-
nate and because software vulnerabilities can be exploited by hackers and malicious software. End
users often introduce errors.
8-2 What is the business value of security and control?
Lack of sound security and control can cause firms relying on computer systems for their core
business functions to lose sales and productivity. Information assets, such as confidential employee
records, trade secrets, or business plans, lose much of their value if they are revealed to outsiders or if
they expose the firm to legal liability. Laws, such as HIPAA, the Sarbanes-Oxley Act, and the Gramm-
Leach-Bliley Act, require companies to practice stringent electronic records management and adhere
to strict standards for security, privacy, and control. Legal actions requiring electronic evidence and
computer forensics also require firms to pay more attention to security and electronic records manage-
ment.
8-3 What are the components of an organizational framework for security and control?
Firms need to establish a good set of both general and application controls for their information sys-
tems. A risk assessment evaluates information assets, identifies control points and control weaknesses,
and determines the most cost-effective set of controls. Firms must also develop a coherent corporate
security policy and plans for continuing business operations in the event of disaster or disruption.
REVIEW SUMMARY
Chapter 8 Securing Information Systems 329
Key Terms
Acceptable use policy (AUP), 314
Anti-malware software, 320
Application controls, 312
Authentication, 317
Biometric authentication, 317
Botnet, 303
Bugs, 307
Business continuity planning, 315
Click fraud, 305
Computer crime, 303
Computer forensics, 311
Computer virus, 299
Controls, 297
Cybervandalism, 302
Cyberwarfare, 306
Deep packet inspection (DPI), 323
Denial-of-service (DoS) attack, 303
Digital certificates, 321
Disaster recovery planning, 315
Distributed denial-of-service (DDoS) attack, 303
Downtime, 323
Drive-by download, 301
Encryption, 320
Evil twin, 304
Fault-tolerant computer systems, 323
Firewall, 318
General controls, 312
Gramm-Leach-Bliley Act, 310
Hacker, 302
HIPAA, 310
Identity management, 316
Identity theft, 303
Information systems audit, 315
Intrusion detection systems, 319
Keyloggers, 302
Malware, 299
Managed security service providers (MSSPs), 323
Online transaction processing, 323
Password, 317
Patches, 307
Pharming, 304
Phishing, 304
Public key encryption, 321
Public key infrastructure (PKI), 322
Ransomware, 302
Risk assessment, 313
Sarbanes-Oxley Act, 310
Secure Hypertext Transfer Protocol (S-HTTP), 321
Secure Sockets Layer (SSL), 320
Security, 297
Security policy, 314
Smart card, 317
Sniffer, 302
Social engineering, 307
Spoofing, 302
Spyware, 302
SQL injection attack, 302
Token, 317
Trojan horse, 301
Two-factor authentication, 318
Unified threat management (UTM), 320
War driving, 299
Worm, 300
Zero-day vulnerabilities, 307
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
The security policy includes policies for acceptable use and identity management. Comprehensive and
systematic information systems auditing helps organizations determine the effectiveness of security and
controls for their information systems.
8-4 What are the most important tools and technologies for safeguarding information resources?
Firewalls prevent unauthorized users from accessing a private network when it is linked to the Internet.
Intrusion detection systems monitor private networks for suspicious network traffic and attempts to access
corporate systems. Passwords, tokens, smart cards, and biometric authentication are used to authenticate
system users. Anti-malware software checks computer systems for infections by viruses and worms and
often eliminates the malicious software. Encryption, the coding and scrambling of messages, is a widely
used technology for securing electronic transmissions over unprotected networks. Blockchain technology
enables companies to create and verify tamper-proof transactions on a network without a central authority.
Digital certificates combined with public key encryption provide further protection of electronic transac-
tions by authenticating a user’s identity. Companies can use fault-tolerant computer systems to make sure
that their information systems are always available. Use of software metrics and rigorous software testing
help improve software quality and reliability.
330 Part Two Information Technology Infrastructure
Discussion Questions
8-5 Security isn’t simply a technology issue, it’s
a business issue. Discuss.
8-6 If you were developing a business
continuity plan for your company, where
would you start? What aspects of the
business would the plan address?
MyLab MIS
MyLab MIS
8-7 Suppose your business had an e-commerce
website where it sold goods and accepted
credit card payments. Discuss the major
security threats to this website and their
potential impact. What can be done to
minimize these threats?
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience analyzing security vulnerabilities, using spreadsheet
software for risk analysis, and using web tools to research security outsourcing services. Visit MyLab MIS to access
this chapter’s Hands-On MIS Projects.
• Define computer crime. Provide two
examples of crime in which computers are
targets and two examples in which computers
are used as instruments of crime.
• Define identity theft and phishing and
explain why identity theft is such a big
problem today.
• Describe the security and system reliability
problems employees create.
• Explain how software defects affect system
reliability and security.
8-2 What is the business value of security and control?
• Explain how security and control provide
value for businesses.
• Describe the relationship between security
and control and recent U.S. government regu-
latory requirements and computer forensics.
8-3 What are the components of an organizational
framework for security and control?
• Define general controls and describe each
type of general control.
• Define application controls and describe
each type of application control.
• Describe the function of risk assessment
and explain how it is conducted for infor-
mation systems.
• Define and describe the following: security
policy, acceptable use policy, and identity
management.
• Explain how information systems auditing
promotes security and control.
8-4 What are the most important tools and
technologies for safeguarding information
resources?
• Name and describe three authentication
methods.
• Describe the roles of firewalls, intrusion
detection systems, and anti-malware
software in promoting security.
• Explain how encryption protects
information.
• Describe the role of encryption and
digital certificates in a public key
infrastructure.
• Distinguish between disaster recov-
ery planning and business continuity
planning.
• Identify and describe the security problems
cloud computing poses.
• Describe measures for improving software
quality and reliability.
Review Questions
8-1 Why are information systems vulnerable to
destruction, error, and abuse?
• List and describe the most common threats
against contemporary information systems.
• Define malware and distinguish among a
virus, a worm, and a Trojan horse.
• Define a hacker and explain how hackers
create security problems and damage
systems.
Chapter 8 Securing Information Systems 331
Management Decision Problems
8-8 Zynga is a leading online gaming company, offering web and mobile versions of games such as Farmville,
Zynga Poker, Hit it Rich!, and CSR Racing. Zynga’s games are available on a number of global platforms,
including Apple iOS, Google Android, Facebook, and Zynga.com, and have been played by over 1 billion
people. Prepare a security analysis for this Internet-based business. What kinds of threats should it
anticipate? What would be their impact on the business? What steps can it take to prevent damage to its
websites and continuing operations?’
8-9 A survey of your firm’s IT infrastructure has identified a number of security vulnerabilities. Review the
data about these vulnerabilities, which can be found in a table in MyLab MIS. Use the table to answer the
following questions:
• Calculate the total number of vulnerabilities for each platform. What is the potential impact on the or-
ganization of the security problems for each computing platform?
• If you only have one information systems specialist in charge of security, which platforms should you
address first in trying to eliminate these vulnerabilities? Second? Third? Last? Why?
• Identify the types of control problems these vulnerabilities illustrate and explain the measures that
should be taken to solve them.
• What does your firm risk by ignoring the security vulnerabilities identified?
Improving Decision Making: Using Spreadsheet Software to Perform a Security
Risk Assessment
Software skills: Spreadsheet formulas and charts
Business skills: Risk assessment
8-10 This project uses spreadsheet software to calculate anticipated annual losses from various security
threats identified for a small company.
Mercer Paints is a paint manufacturing company located in Alabama that uses a network to link its busi-
ness operations. A security risk assessment that management requested identified a number of potential expo-
sures. These exposures, their associated probabilities, and average losses are summarized in a table, which can
be found in MyLab MIS. Use the table to answer the following questions:
• In addition to the potential exposures listed, identify at least three other potential threats to Mercer
Paints, assign probabilities, and estimate a loss range.
• Use spreadsheet software and the risk assessment data to calculate the expected annual loss for each
exposure.
• Present your findings in the form of a chart. Which control points have the greatest vulnerability?
What recommendations would you make to Mercer Paints? Prepare a written report that summarizes
your findings and recommendations.
Improving Decision Making: Evaluating Security Outsourcing Services
Software skills: Web browser and presentation software
Business skills: Evaluating business outsourcing services
8-11 This project will help develop your Internet skills in using the web to research and evaluate security
outsourcing services.
You have been asked to help your company’s management decide whether to outsource security or keep
the security function within the firm. Search the web to find information to help you decide whether to out-
source security and to locate security outsourcing services.
• Present a brief summary of the arguments for and against outsourcing computer security for your
company.
• Select two firms that offer computer security outsourcing services and compare them and their
services.
http://Zynga.com
332 Part Two Information Technology Infrastructure
• Prepare an electronic presentation for management, summarizing your findings. Your presentation
should make the case of whether your company should outsource computer security. If you believe
your company should outsource, the presentation should identify which security outsourcing service
you selected and justify your decision.
Collaboration and Teamwork Project
Evaluating Security Software Tools
8-12 With a group of three or four students, use the web to research and evaluate security products from two
competing vendors, such as for anti-malware software, firewalls, or antispyware software. For each prod-
uct, describe its capabilities, for what types of businesses it is best suited, and its cost to purchase and
install. Which is the best product? Why? If possible, use Google Docs and Google Drive or Google Sites to
brainstorm, organize, and develop a presentation of your findings for the class.
Chapter 8 Securing Information Systems 333
Is the Equifax Hack the Worst Ever—and Why?
CASE STUDY
Equifax (along with TransUnion and Experian) is one of the three main U.S. credit bureaus, which maintain vast repositories of personal
and financial data used by lenders to determine
credit-worthiness when consumers apply for a credit
card, mortgage, or other loans. The company handles
data on more than 820 million consumers and more
than 91 million businesses worldwide and manages a
database with employee information from more than
7,100 employers, according to its website. These data
are provided by banks and other companies directly
to Equifax and the other credit bureaus. Consumers
have little choice over how credit bureaus collect and
store their personal and financial data.
Equifax has more data on you than just about any-
one else. If any company needs airtight security for
its information systems, it should be credit reporting
bureaus such as Equifax. Unfortunately this has not
been the case.
On September 7, 2017 Equifax reported that from
mid-May through July 2017 hackers had gained
access to some of its systems and potentially the
personal information of about 143 million U.S.
consumers, including Social Security numbers and
driver’s license numbers. Credit card numbers for
209,000 consumers and personal information used in
disputes for 182,000 people were also compromised.
Equifax reported the breach to law enforcement and
also hired a cybersecurity firm to investigate. The
size of the breach, importance, and quantity of per-
sonal information compromised by this breach are
considered unprecedented.
Immediately after Equifax discovered the breach,
three top executives, including Chief Financial
Officer John Gamble, sold shares worth a combined
$1.8 million, according to Securities and Exchange
Commission filings. A company spokesman claimed
the three executives had no knowledge that an
intrusion had occurred at the time they sold their
shares on August 1 and August 2. Bloomberg re-
ported that the share sales were not planned in
advance. On October 4, 2017 Equifax CEO Richard
Smith testified before Congress and apologized for
the breach.
The size of the Equifax data breach was second
only to the Yahoo breach of 2013, which affected data
of all of Yahoo’s 3 billion customers. The Equifax
breach was especially damaging because of the
amount of sensitive personal and financial data
stored by Equifax that was stolen, and the role such
data play in securing consumers’ bank accounts,
medical histories, and access to financing. In one
swoop the hackers gained access to several essential
pieces of personal information that could help attack-
ers commit fraud. According to Avivah Litan, a fraud
analyst at Gartner Inc., on a scale of risk to consum-
ers of 1 to 10, this is a 10.
After taking Equifax public in 2005, CEO Smith
transformed the company from a slow-growing
credit-reporting company (1–2 percent organic
growth per year) into a global data powerhouse.
Equifax bought companies with databases housing
information about consumers’ employment histories,
savings, and salaries, and expanded internationally.
The company bought and sold pieces of data that en-
abled lenders, landlords, and insurance companies to
make decisions about granting credit, hiring job seek-
ers, and renting an apartment. Equifax was trans-
formed into a lucrative business housing $12 trillion
of consumer wealth data. In 2016, the company gen-
erated $3.1 billion in revenue.
Competitors privately observed that Equifax
did not upgrade its technological capabilities to
keep pace with its aggressive growth. Equifax ap-
peared to be more focused on growing data it could
commercialize.
Hackers gained access to Equifax systems contain-
ing customer names, Social Security numbers, birth
dates, and addresses. These four pieces of data are
generally required for individuals to apply for vari-
ous types of consumer credit, including credit cards
and personal loans. Criminals who have access to
such data could use it to obtain approval for credit
using other people’s names. Credit specialist and for-
mer Equifax manager John Ulzheimer calls this is a
“nightmare scenario” because all four critical pieces
of information for identity theft are in one place.
The hack involved a known vulnerability in
Apache Struts, a type of open-source software
Equifax and other companies use to build websites.
This software vulnerability had been publicly identi-
fied in March 2017, and a patch to fix it was released
334 Part Two Information Technology Infrastructure
at that time. That means Equifax had the information
to eliminate this vulnerability two months before the
breach occurred. It did nothing.
Weaknesses in Equifax security systems were
evident well before the big hack. A hacker was able
to access credit-report data between April 2013 and
January 2014. The company discovered that it mis-
takenly exposed consumer data as a result of a “tech-
nical error” that occurred during a 2015 software
change. Breaches in 2016 and 2017 compromised in-
formation on consumers’ W-2 forms that were stored
by Equifax units. Additionally, Equifax disclosed in
February 2017 that a “technical issue” compromised
credit information of some consumers who used
identity-theft protection services from LifeLock.
Analyses earlier in 2017 performed by four com-
panies that rank the security status of companies
based on publicly available information showed that
Equifax was behind on basic maintenance of web-
sites that could have been involved in transmitting
sensitive consumer information. Cyberrisk analysis
firm Cyence rated the danger of a data breach at
Equifax during the next 12 months at 50 percent.
It also found the company performed poorly when
compared with other financial-services companies.
The other analyses gave Equifax a higher overall
ranking, but the company fared poorly in overall
web-services security, application security, and soft-
ware patching.
A security analysis by Fair Isaac Corporation
(FICO), a data analytics company focusing on credit
scoring services, found that by July 14 public-facing
websites run by Equifax had expired certificates, er-
rors in the chain of certificates, or other web-security
issues. Certificates are used to validate that a user’s
connection with a website is legitimate and secure.
The findings of the outside security analyses ap-
pear to conflict with public declarations by Equifax
executives that cybersecurity was a top priority.
Senior executives had previously said cybersecurity
was one of the fastest-growing areas of expense for
the company. Equifax executives touted Equifax’s
focus on security in an investor presentation that
took place weeks after the company had discovered
the attack.
Equifax has not revealed specifics about the at-
tack, but either its databases were not encrypted or
hackers were able to exploit an application vulnera-
bility that provided access to data in an unencrypted
state. Experts think—and hope—that the hackers
were unable to access all of Equifax’s encrypted
databases to match up information such as driver li-
cense or Social Security numbers needed to create a
complete data profile for identity theft.
Equifax management stated that although the
hack potentially accessed data on approximately 143
million U.S. consumers, it had found no evidence of
unauthorized activity in the company’s core credit
reporting databases. The hack triggered an uproar
among consumers, financial organizations, privacy
advocates, and the press. Equifax lost one-third of
its stock market value. Equifax CEO Smith resigned,
with the CSO (chief security officer) and CIO depart-
ing the company as well. Banks will have to replace
approximately 209,000 credit cards that were stolen
in the breach, a major expense. Lawsuits are in the
works.
Unfortunately the worst impact will be on con-
sumers themselves, because the theft of uniquely
identifying personal information such as Social
Security numbers, address history, debt history, and
birth dates could have a permanent effect. These
pieces of critical personal data could be floating
around the Dark Web for exploitation and identity
theft for many years. Such information would help
hackers answer the series of security questions
that are often required to access financial accounts.
According to Pamela Dixon, executive director of
the World Privacy Forum, “This is about as bad as it
gets.” If you have a credit report, there’s at least a 50
percent chance or more that your data were stolen in
this breach.
The data breach exposed Equifax to legal and
financial challenges, although the regulatory envi-
ronment is likely to become more lenient under the
current presidential administration. It already is too
lenient. Credit reporting bureaus such as Equifax are
very lightly regulated. Given the scale of the data
compromised, the punishment for breaches is close
to nonexistent. There is no federally sanctioned
insurance or audit system for data storage, the way
the Federal Deposit Insurance Corporation provides
insurance for banks after losses. For many types of
data, there are few licensing requirements for hous-
ing personally identifiable information. In many
cases, terms-of-service documents indemnify compa-
nies against legal consequences for breaches.
Experts said it was highly unlikely that any
regulatory body would shut Equifax down over this
breach. The company is considered too critical to the
American financial system. The two regulators that
do have jurisdiction over Equifax, the Federal Trade
Chapter 8 Securing Information Systems 335
Commission and the Consumer Financial Protection
Bureau, declined to comment on any potential pun-
ishments over the credit agency’s breach.
Even after one of the most serious data
breaches in history, no one is really in a position
to stop Equifax from continuing to do business
as usual. And the scope of the problem is much
wider. Public policy has no good way to heav-
ily punish companies that fail to safeguard our
data. The United States and other countries have
allowed the emergence of huge phenomenally
detailed databases full of personal information
available to financial companies, technology com-
panies, medical organizations, advertisers, insur-
ers, retailers, and the government.
Equifax has offered very weak remedies for con-
sumers. People can go to the Equifax website to see
if their information has been compromised. The
site asks customers to provide their last name and
the last six digits of their Social Security number.
However, even if they do that, they do not neces-
sarily learn whether they were affected. Instead,
the site provides an enrollment date for its protec-
tion service. Equifax offered a free year of credit
protection service to consumers enrolling before
November 2017. Obviously, all of these measures
won’t help much because stolen personal data will
be available to hackers on the Dark Web for years
to come. Governments involved in state-sponsored
cyberwarfare are able to use the data to populate
databases of detailed personal and medical informa-
tion that can be used for blackmail or future attacks.
Ironically, the credit-protection service that Equifax
is offering requires subscribers to waive their legal
rights to seek compensation from Equifax for their
losses in order to use the service, while Equifax goes
unpunished. On March 1, 2018, Equifax announced
that the breach had compromised an additional 2.4
million more Americans’ names and driver’s license
numbers.
Harmful data breaches keep happening. In al-
most all cases, even when the data concerns tens or
hundreds of millions of people, companies such as
Equifax and Yahoo that were hacked continue to op-
erate. There will be hacks—and afterward, there will
be more. Companies need to be even more diligent
about incorporating security into every aspect of
their IT infrastructure and systems development ac-
tivities. According to Litan, to prevent data breaches
such as Equifax’s, organizations need many layers of
security controls. They need to assume that preven-
tion methods are going to fail.
Sources: Selena Larson, “Equifax Says Hackers Stole More than
Previously Reported,” CNN, March 1, 2018; AnnaMaria Andriotis
and Michael Rapoport, “Equifax Upends CEO’s Drive to Be a Data
Powerhouse,” Wall Street Journal, September 22, 2017; AnnaMaria
Andriotis and Robert McMillan, “Equifax Security Showed Signs of
Trouble Months Before Hack,” Wall Street Journal, September 26,
2017; AnnaMaria Andriotis and Ezequiel Minaya, “Equifax Reports
Data Breach Possibly Affecting 143 Million Consumers,” Wall Street
Journal, September 7, 2017; Tara Siegel Bernard and Stacy Cowley,
“Equifax Hack Exposes Regulatory Gaps, Leaving Customers
Vulnerable,” New York Times, September 8, 2017; Farhad Manjoo,
“Seriously, Equifax? This Is a Breach No One Should Get Away
With,” New York Times, September 8, 2017; Eileen Chang, “Why
Equifax Breach of 143 Million Consumers Should Freak You Out,”
thestreet.com, September 8, 2017; Tara Siegel Bernard, Tiffany
Hsu, Nicole Perlroth, and Ron Lieber, “Equifax Says Cyberattack
May Have Affected 143 Million Customers,” New York Times,
September 7, 2017; and Nicole Perlroth and Cade Metz, “What We
Know and Don’t Know About the Equifax Hack,” New York Times,
September 14, 2017.
CASE STUDY QUESTIONS
8-13 Identify and describe the security and control
weaknesses discussed in this case.
8-14 What management, organization, and technol-
ogy factors contributed to these problems?
8-15 Discuss the impact of the Equifax hack.
8-16 How can future data breaches like this one be
prevented? Explain your answer.
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
8-17 Describe three spoofing tactics employed in identity theft by using information systems.
8-18 Describe four reasons mobile devices used in business are difficult to secure.
http://thestreet.com
336 Part Two Information Technology Infrastructure
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Bauer, Harald, Ondrej Burkacky, and Christian Knochenhauer.
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(May 2017).
Carson, Brant, Giulio Romanelli, Patricia Walsh, and Askhat Zhu-
maev. “Blockchain Beyond the Hype: What Is the Strategic
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Cloud Standards Customer Council. “Security for Cloud
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Esteves, Jose, Elisabete Ramalho, and Guillermo de Haro. “To
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Goode, Sigi, Hartmut Hoehle, Viswanath Venkatesh, and Susan
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rate Reputation and Crisis Response Strategies in Data Breach
Management.” Journal of Management Information Systems 35
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crime Deterrence and International Legislation: Evidence
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Moody, Gregory D., Mikko Siponen, and Seppo Pahnila. “Toward
a Unified Model of Information Security Policy Compliance.”
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Panko, Raymond R., and Julie L. Panko. Business Data Networks
and Security, 11th ed. (Upper Saddle River, NJ: Pearson, 2019).
Ponemon Institute. “2017 Cost of Cybercrime Study and the Risk
of Business Innovation.” (2017a).
___________. “2017 Cost of Data Breach Study: Global Analysis.”
(2017b).
Rothrock, Ray A., James Kaplan, and Friso Van der Oord. “The
Board’s Role in Managing Cybersecurity Risks.” MIT Sloan
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Samtani, Sagar, Ryan Chinn, Hsinchun Chen, and Jay F. Nuna-
maker. “Exploring Emerging Hacker Assets and Key Hackers
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337
Key System Applications
for the Digital Age
PART THREE examines the core information system applications businesses are using today
to improve operational excellence and decision making. These applications include enterprise
systems; systems for supply chain management, customer relationship management, artificial
intelligence, and knowledge management; e-commerce applications; and business intelligence
systems. This part answers questions such as: How can enterprise applications improve busi-
ness performance? How do firms use e-commerce to extend the reach of their businesses?
How can systems improve decision making and help companies benefit from artificial intel-
ligence and knowledge management?
PART THREE
CHAPTER 9
Achieving Operational Excellence and
Customer Intimacy: Enterprise Applications
CHAPTER 10
E-commerce: Digital Markets, Digital
Goods
CHAPTER 11
Managing Knowledge and Artificial
Intelligence
CHAPTER 12
Enhancing Decision Making
338
MyLab MIS
Discussion Questions: 9-5, 9-6, 9-7; Hands-on MIS Projects: 9-8, 9-9, 9-10, 9-11;
Writing Assignments: 9-17, 9-18; eText with Conceptual Animations
CHAPTER CASES
Avon Beautifies Its Supply Chain
Soma Bay Prospers with ERP in the Cloud
Kenya Airways Flies High with Customer
Relationship Management
Clemens Food Group Delivers with New
Enterprise Applications
VIDEO CASES
Life Time Fitness Gets in Shape with
Salesforce CRM
Instructional Video:
GSMS Protects Patients by Serializing Every
Bottle of Drugs
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
9-1 How do enterprise systems help
businesses achieve operational
excellence?
9-2 How do supply chain management
systems coordinate planning,
production, and logistics with
suppliers?
9-3 How do customer relationship
management systems help firms
achieve customer intimacy?
9-4 What are the challenges that
enterprise applications pose, and how
are enterprise applications taking
advantage of new technologies?
9-5 How will MIS help my career?
Achieving Operational Excellence
and Customer Intimacy: Enterprise
Applications9CHAPTER
339
Avon Products Inc. is the oldest beauty company in the United States, and has been in business for over 130 years. It manufactures and sells cosmetics, fragrances, toiletries, accessories, apparel, and various
decorative home furnishings. Avon is also the world’s leading direct seller of
beauty and related products, with 6 million independent door-to-door sales
representatives in 143 countries and over $8 billion in annual revenue. Avon
also sells through other channels, including the Internet, catalog, and physi-
cal outlets.
To survive in a highly competitive, fast-changing industry, motivate repre-
sentatives, and stimulate sales, Avon launches marketing campaigns with fresh
products and promotions every few weeks. To be successful, Avon must be able
to anticipate and react quickly to market trends and customer preferences. Avon
processes 50,000 orders each day and there is little margin for error. Avon’s
warehouses must stock the items customers want and deliver them quickly,
often to remote locations around the
globe.
Until recently, Avon’s global sup-
ply chain was not up to the task. Avon
had recently expanded operations in
Europe, the Middle East, and Africa,
but there was no central planning
function responsible for demand, in-
ventory, and supply planning across
the enterprise. Production planning
at Avon’s three factories in Germany,
the United Kingdom, and Poland was
highly manual, inflexible, and incapa-
ble of supporting Avon’s growth in new
markets.
To improve how the company
dealt with product availability and
inventory, Avon implemented
JDA Software’s Manufacturing and
Intelligent Fulfillment solutions to centralize planning for demand, inven-
tory, and supply across its entire global enterprise. The software helps Avon
achieve consistent forecast accuracy in an environment that includes chal-
lenges of shorter product lifecycles, seasonality, multiple sales channels,
frequent promotions, and continuously changing localized shopper prefer-
ences. JDA Intelligent Fulfillment helps companies make intelligent and
profitable distribution decisions. The software helps reduce inventory lev-
els and costs, improve customer service, and support more agile, profitable,
Avon Beautifies Its Supply Chain
© Casimiro PT/Shutterstock
340 Part Three Key System Applications for the Digital Age
and responsive operations, meeting the needs of many different types of
Avon markets in a single implementation.
The JDA software collects supply chain data about inventory, future sales de-
mands, transport schedules, and sales history from Avon’s many markets. The
system uses these data along with JDA advanced planning parameters to create
a strategic distribution and manufacturing plan. The system also provides Avon
with a list of inventory imbalances, service risks, and shipping requirements.
Avon can now streamline order processing across borders and respond more
quickly to changes in customer demand.
JDA’s capabilities for advanced planning and distribution, coupled with
its flexibility, made it possible for Avon to meet the needs of many different
types of Avon markets with a single system. Avon implemented the JDA soft-
ware across 29 markets in Europe, Middle East, and Africa (EMEA) within four
months, delivering training across the EMEA region in eight languages. Since
Avon implemented the JDA supply chain solution, its cost of servicing cus-
tomers has been reduced, while its customer service rating has increased to
99.5 percent. Inventory levels have dropped by 17 percent in just six months,
providing immediate savings of $20 million. Avon now has complete visibility
into all aspects of its supply chain and will be able to enter new countries and
markets much more easily.
Sources: https://jda.com, accessed January 21, 2018; https://about.avon.com, accessed
January 20, 2018; and “Avon Supply Chain Makeover,” JDA Software Group, 2016.
Avon’s problems with planning, inventory, and supply in a global mul-tichannel marketplace illustrate the critical role of supply chain man-
agement systems in business. Avon’s business performance was impeded
because it could not balance supply and constantly changing demand for
its products in many different markets around the world. Avon’s existing
systems were highly manual and lacked the flexibility to support Avon’s
growth in new markets. Products were not always available when customers
ordered them. Sometimes this left the company holding too much inventory
it couldn’t sell or not enough at the right time or place to fulfill customer
orders.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Avon competes in the global beauty industry where
customer tastes change rapidly, demand is very volatile, and the company is
expected to come up quickly with enticing new products. The company’s sup-
ply chain is far-reaching and complex, servicing customers ordering items in
many different locations around the globe. Avon’s legacy systems were unable
to coordinate demand, inventory, and supply planning across its entire global
enterprise. Implementing JDA software tools for supply chain planning and
fulfillment has made it much easier for Avon’s management to access and ana-
lyze demand data for forecasting, inventory planning, and fulfillment, greatly
improving both decision making and operational efficiency across the global
enterprise.
https://jda.com
https://about.avon.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 341
Here are some questions to think about: How is Avon’s business model
affected by having an inefficient supply chain? How did JDA software tools
improve the way Avon ran its business?
9-1 How do enterprise systems help businesses
achieve operational excellence?
Around the globe, companies are increasingly becoming more connected, both
internally and with other companies. If you run a business, you’ll want to be
able to react instantaneously when a customer places a large order or when a
shipment from a supplier is delayed. You may also want to know the impact of
these events on every part of the business and how the business is performing
at any point in time, especially if you’re running a large company. Enterprise
systems provide the integration to make this possible. Let’s look at how they
work and what they can do for the firm.
What are Enterprise Systems?
Imagine that you had to run a business based on information from tens or even
hundreds of databases and systems, none of which could speak to one another.
Imagine your company had 10 major product lines, each produced in separate
factories, and each with separate and incompatible sets of systems controlling
production, warehousing, and distribution.
At the very least, your decision making would often be based on manual
hard-copy reports, often out of date, and it would be difficult to understand
what is happening in the business as a whole. Sales personnel might not be
able to tell at the time they place an order whether the ordered items are in
inventory, and manufacturing could not easily use sales data to plan for new
production. You now have a good idea of why firms need a special enterprise
system to integrate information.
Business
Solutions
Management
Organization
Centralized Planning
& Distribution
Technology
Information
System
Business
Problem
• Volatile demand
• Global operations
• Complex supply chain
• Manual processes
• Revise supply
chain processes
• Forecast demand more
accurately
• Centralize planning
globally for demand,
inventory, and supply
• Create strategic distribution
& manufacturing plan
• Reduce costs
• Increase sales
• Increase customer
satisfaction
• Deploy JDA
Manufacturing and
Intelligent Fulfillment
• Plan production
• Establish inventory
requirements
• Select new
technology
342 Part Three Key System Applications for the Digital Age
Chapter 2 introduced enterprise systems, also known as enterprise resource
planning (ERP) systems, which are based on a suite of integrated software mod-
ules and a common central database. The database collects data from many
divisions and departments in a firm and from a large number of key business
processes in manufacturing and production, finance and accounting, sales and
marketing, and human resources, making the data available for applications
that support nearly all an organization’s internal business activities. When new
information is entered by one process, the information is made immediately
available to other business processes (see Figure 9.1).
If a sales representative places an order for tire rims, for example, the sys-
tem verifies the customer’s credit limit, schedules the shipment, identifies the
best shipping route, and reserves the necessary items from inventory. If inven-
tory stock is insufficient to fill the order, the system schedules the manufacture
of more rims, ordering the needed materials and components from suppliers.
Sales and production forecasts are immediately updated. General ledger and
corporate cash levels are automatically updated with the revenue and cost in-
formation from the order. Users can tap into the system and find out where that
particular order is at any minute. Management can obtain information at any
point in time about how the business is operating. The system can also generate
enterprise-wide data for management analyses of product cost and profitability.
Enterprise Software
Enterprise software is built around thousands of predefined business pro-
cesses that reflect best practices. Table 9.1 describes some of the major business
processes that enterprise software supports.
Companies implementing this software first have to select the functions of the
system they wish to use and then map their business processes to the predefined
FIGURE 9.1 HOW ENTERPRISE SYSTEMS WORK
Enterprise systems feature a set of integrated software modules and a central database by
which business processes and functional areas throughout the enterprise can share data.
• Materials
• Orders • Hours worked
• Cash on hand
• Accounts receivable
• Customer credit
• Revenue
• Labor cost
• Job skills
• Sales forecasts
• Return requests
• Price changes
• Production schedules
• Shipment dates
• Production capacity
• Purchases
Finance &
Accounting
Manufacturing &
Production
Centralized
Database
Sales &
Marketing
Human
Resources
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 343
business processes in the software. (One of our Learning Tracks shows how SAP
enterprise software handles the procurement process for a new piece of equip-
ment.) Configuration tables provided by the software manufacturer enable the
firm to tailor a particular aspect of the system to the way it does business. For
example, the firm could use these tables to select whether it wants to track rev-
enue by product line, geographical unit, or distribution channel.
If the enterprise software does not support the way the organization does
business, companies can rewrite some of the software to support the way their
business processes work. However, enterprise software is unusually complex,
and extensive customization may degrade system performance, compromising
the information and process integration that are the main benefits of the sys-
tem. If companies want to reap the maximum benefits from enterprise soft-
ware, they must change the way they work to conform to the business pro-
cesses defined by the software.
To implement a new enterprise system, Tasty Baking Company identified
its existing business processes and then translated them into the business pro-
cesses built into the SAP ERP software it had selected. To ensure that it obtained
the maximum benefits from the enterprise software, Tasty Baking Company de-
liberately planned for customizing less than 5 percent of the system and made
very few changes to the SAP software itself. It used as many tools and features
that were already built into the SAP software as it could. SAP has more than
3,000 configuration tables for its enterprise software.
Leading enterprise software vendors include SAP, Oracle, IBM, Infor Global
Solutions, and Microsoft. Versions of enterprise software packages are designed
for small and medium-sized businesses and on-demand software services run-
ning in the cloud (see the chapter-opening case and Section 9-4).
Business Value of Enterprise Systems
Enterprise systems provide value by both increasing operational efficiency and
providing firmwide information to help managers make better decisions. Large
companies with many operating units in different locations have used enter-
prise systems to enforce standard practices and data so that everyone does busi-
ness the same way worldwide.
Coca-Cola, for instance, implemented a SAP enterprise system to standardize
and coordinate important business processes in 200 countries. Lack of stan-
dard, companywide business processes had prevented the company from using
its worldwide buying power to obtain lower prices for raw materials and from
reacting rapidly to market changes.
TABLE 9.1 BUSINESS PROCESSES SUPPORTED BY ENTERPRISE SYSTEMS
Financial and accounting processes, including general ledger, accounts payable, accounts receivable, fixed assets, cash
management and forecasting, product-cost accounting, cost-center accounting, asset accounting, tax accounting, credit
management, and financial reporting
Human resources processes, including personnel administration, time accounting, payroll, personnel planning and
development, benefits accounting, applicant tracking, time management, compensation, workforce planning, performance
management, and travel expense reporting
Manufacturing and production processes, including procurement, inventory management, purchasing, shipping,
production planning, production scheduling, material requirements planning, quality control, distribution, transportation
execution, and plant and equipment maintenance
Sales and marketing processes, including order processing, quotes, contracts, product configuration, pricing, billing,
credit checking, incentive and commission management, and sales planning
344 Part Three Key System Applications for the Digital Age
Enterprise systems help firms respond rapidly to customer requests for in-
formation or products. Because the system integrates order, manufacturing,
and delivery data, manufacturing is better informed about producing only what
customers have ordered, procuring exactly the right number of components or
raw materials to fill actual orders, staging production, and minimizing the time
that components or finished products are in inventory.
Alcoa, the world’s leading producer of aluminum and aluminum products
with operations spanning 31 countries and more than 200 locations, had ini-
tially been organized around lines of business, each of which had its own set of
information systems. Many of these systems were redundant and inefficient.
Alcoa’s costs for executing requisition-to-pay and financial processes were much
higher, and its cycle times were longer than those of other companies in its in-
dustry. (Cycle time refers to the total elapsed time from the beginning to the
end of a process.) The company could not operate as a single worldwide entity.
After implementing enterprise software from Oracle, Alcoa eliminated many
redundant processes and systems. The enterprise system helped Alcoa reduce
requisition-to-pay cycle time by verifying receipt of goods and automatically gen-
erating receipts for payment. Alcoa’s accounts payable transaction processing
dropped 89 percent. Alcoa was able to centralize financial and procurement activ-
ities, which helped the company reduce nearly 20 percent of its worldwide costs.
Enterprise systems provide much valuable information for improving
management decision making. Corporate headquarters has access to up-to-
the- minute data on sales, inventory, and production and uses this information
to create more accurate sales and production forecasts. Enterprise software
includes analytical tools to use data the system captures to evaluate overall
organizational performance. Enterprise system data have common standard-
ized definitions and formats that are accepted by the entire organization.
Performance figures mean the same thing across the company. Enterprise sys-
tems allow senior management to find out easily at any moment how a par-
ticular organizational unit is performing, determine which products are most
or least profitable, and calculate costs for the company as a whole. For example,
Alcoa’s enterprise system includes functionality for global human resources
management that shows correlations between investment in employee train-
ing and quality, measures the companywide costs of delivering services to
employees, and measures the effectiveness of employee recruitment, compen-
sation, and training. The Interactive Session on Management describes more of
these benefits in detail.
9-2 How do supply chain management
systems coordinate planning, production,
and logistics with suppliers?
If you manage a small firm that makes a few products or sells a few services,
chances are you will have a small number of suppliers. You could coordinate
your supplier orders and deliveries by using just a telephone and fax machine.
But if you manage a firm that produces more complex products and services,
you will have hundreds of suppliers, and each of your suppliers will have its
own set of suppliers. Suddenly, you will need to coordinate the activities of hun-
dreds or even thousands of other firms to produce your products and services.
Supply chain management (SCM) systems, which we introduced in Chapter 2,
are an answer to the problems of supply chain complexity and scale.
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 345
Soma Bay is a 10-million-square-mile resort com-
munity on the Egyptian shore of the Red Sea. It has
many attractions that make it a first-class vacation
paradise, including five hotels, a championship golf
course, water sport facilities, a world-class spa, and
luxury vacation homes. Soma Bay Development
Company is headquartered in Hurghada, Egypt and
has more than 2,000 employees.
Unfortunately, political upheavals and economic
conditions have taken a toll on occupancy rates and
profitability. When President Hosni Mubarak was
overthrown during the Egyptian revolution of 2011,
there was a sharp devaluation of Egyptian currency.
In the years that followed, political conditions stabi-
lized and the Egyptian economy recovered, but the
tourism industry lost U.S. $1.3 billion after the down-
ing of a commercial airliner over the Sinai Desert in
late 2015. Soma Bay Development Company’s hotel
occupancy rates plummeted from more than 50 per-
cent in 2015 to 25 percent in the first quarter of 2016.
Foreign exchange fluctuations and political up-
heavals are forces beyond Soma Bay’s control, but
what the company’s management can do during
downturns is react intelligently by closely monitor-
ing operations and costs. This is possible thanks to
the company’s use of a JD Edwards Enterprise One
ERP system from Oracle with applications and data
residing in Oracle’s Cloud Infrastructure as a Service
(Oracle Cloud IaaS).
In the past, Soma Bay Development Company had
tried to run much of the company using unwieldy
Excel-based systems. Managers had to manually ma-
nipulate spreadsheets to understand the basic drivers
of profitability, and it often took too long to obtain
the information needed for sound decision making.
These systems made it difficult for Soma Bay to man-
age its aggressive growth plans, which included con-
struction of 1000 new homes over a five-year period.
Mohammed Serry, Soma Bay Company’s CFO, and
his team selected JD Edwards Enterprise One for a
solution because it could create standardized busi-
ness processes across functional areas and provide
timely reports that explain the profitability of each
business unit using a standard chart of accounts.
The software can identify the profitability drivers
and growth drivers of a business. Enterprise One
seamlessly combines data from the general ledger
and other financial systems with data from opera-
tional systems.
Soma Bay’s Enterprise One cloud platform makes
it easy to create cash flow reports, project manage-
ment reports, accounts receivable aging reports,
facility management reports, and key performance
indicator reports throughout Soma Bay’s distributed
organization. Company management also appreci-
ates Oracle Cloud IaaS disaster recovery capabilities.
Several years ago, water from an upper floor flooded
Soma Bay’s Cairo data center. The company was able
to restore data and resume operations quickly be-
cause it had backups stored in Oracle Cloud.
JD Edwards Enterprise One contains more than
80 separate application modules designed to sup-
port a wide range of business processes. The soft-
ware suite also features mobile applications that
support both iOS and Android and can be used on
smartphones and tablets. Soma Bay uses the JD
Edwards Enterprise One modules for Financials,
Procurement, Inventory Management, Job Cost, Real
Estate Management, Homebuilder Management,
Capital Asset Maintenance, Service Management,
and Time and Labor. JD Edwards Enterprise One
Homebuilder Management helps Soma Bay coordi-
nate activities and analyze profitability throughout
its home-building cycle down to the lot level. JD
Edwards Enterprise One Real Estate Management
streamlines financial, operational, and facilities man-
agement processes for finished properties, coordinat-
ing tasks among teams and providing a comprehen-
sive management view of each unit. The Job Cost
module shows ongoing costs for the real estate busi-
ness, which helps management allocate expenses for
materials, labor, and other needs and also track ex-
penses against the budgets and forecasts established
at the outset of each facilities management project.
Managers can identify projects with codes and merge
them with financial account numbers to determine
budget expenses versus actual expenses. They can
thereby verify if complex projects are on track and
share expense data among divisions.
The Enterprise One software creates currency-
neutral financial reports. This helps reconcile
revenue from Soma Bay’s tourism division (which
INTERACTIVE SESSION MANAGEMENT
Soma Bay Prospers with ERP in the Cloud
1. Identify and describe the problem discussed in
this case. What management, organization, and
technology factors contributed to the problem?
2. Why was an ERP system required for a solution?
How did having a cloud-based ERP system con-
tribute to the solution?
3. What were the business benefits of Soma Bay’s
new enterprise system? How did it change deci-
sion making and the way the company operated?
caters to Germany and other parts of Europe) with
its home sales division (which is aimed primarily at
Egyptians) to neutralize the effect of different cur-
rencies on financial results. Home building accounts
for about 25 percent of corporate revenue.
Having a dual revenue stream mitigates risks. If
the tourism business is slow, Soma Bay still has rev-
enue from the real estate business, and vice versa.
The ERP system provides the data required to closely
track costs. For example, in 2017 Soma Bay spent
100 million Egyptian pounds (equivalent to approxi-
mately U.S. $5.7 million) on new construction. The
Enterprise One system provided the information
about cash management and cash flow for sustain-
ing this level of expansion. Soma Bay can carefully
monitor cash flow and payments to contractors.
During the 2016 downturn, Soma Bay used the
Enterprise One cost management and profitability
capabilities to provide detailed financial data that
helped managers carefully control fixed operating
expenses, helping to minimize losses. Enterprise
One provided a solid understanding of costs and
profitability, even though revenue came from differ-
ent currencies and markets. It was able to show the
impact of falling occupancy rates on the business, ex-
cluding foreign exchange effect, to help management
measure overall performance by legal entity. This
knowledge helped Soma Bay weather the downturn
and implement an aggressive turnaround plan.
Today, 95 percent of Soma Bay staff members
use the Enterprise One software in some capacity.
The company has a more stable operating model.
Occupancy rates at its five hotels are rising. Soma
Bay Development Company is building 500 vaca-
tion homes in six seaside communities. According
to Cherif Samir, Financial Controller for Soma Bay,
being able to track every penny the company spends
on a project has revolutionized the business.
Sources: www.searchoracle.com, accessed January 30, 2018; David
Baum, “Destination: Cloud,” Profit Magazine, Fall 2017; and www.
somabay.com, accessed January 31, 2018.
CASE STUDY QUESTIONS
346 Part Three Key System Applications for the Digital Age
The Supply Chain
A firm’s supply chain is a network of organizations and business processes for
procuring raw materials, transforming these materials into intermediate and
finished products, and distributing the finished products to customers. It links
suppliers, manufacturing plants, distribution centers, retail outlets, and custom-
ers to supply goods and services from source through consumption. Materials,
information, and payments flow through the supply chain in both directions.
Goods start out as raw materials and, as they move through the supply chain,
are transformed into intermediate products (also referred to as components or
parts) and, finally, into finished products. The finished products are shipped to
distribution centers and from there to retailers and customers. Returned items
flow in the reverse direction from the buyer back to the seller.
Let’s look at the supply chain for Nike sneakers as an example. Nike designs,
markets, and sells sneakers, socks, athletic clothing, and accessories through-
out the world. Its primary suppliers are contract manufacturers with factories
in China, Thailand, Indonesia, Brazil, and other countries. These companies
fashion Nike’s finished products.
http://www.searchoracle.com
http://www.somabay.com
http://www.somabay.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 347
Nike’s contract suppliers do not manufacture sneakers from scratch. They
obtain components for the sneakers—the laces, eyelets, uppers, and soles—
from other suppliers and then assemble them into finished sneakers. These
suppliers in turn have their own suppliers. For example, the suppliers of soles
have suppliers for synthetic rubber, suppliers for chemicals used to melt the
rubber for molding, and suppliers for the molds into which to pour the rubber.
Suppliers of laces have suppliers for their thread, for dyes, and for the plastic
lace tips.
Figure 9.2 provides a simplified illustration of Nike’s supply chain for sneak-
ers; it shows the flow of information and materials among suppliers, Nike,
Nike’s distributors, retailers, and customers. Nike’s contract manufacturers
are its primary suppliers. The suppliers of soles, eyelets, uppers, and laces are
the secondary (Tier 2) suppliers. Suppliers to these suppliers are the tertiary
(Tier 3) suppliers.
The upstream portion of the supply chain includes the company’s suppli-
ers, the suppliers’ suppliers, and the processes for managing relationships with
them. The downstream portion consists of the organizations and processes for
distributing and delivering products to the final customers. Companies that
manufacture, such as Nike’s contract suppliers of sneakers, also manage their
own internal supply chain processes for transforming materials, components,
and services their suppliers furnish into finished products or intermediate
products (components or parts) for their customers and for managing materials
and inventory.
The supply chain illustrated in Figure 9.2 has been simplified. It only shows
two contract manufacturers for sneakers and only the upstream supply chain
for sneaker soles. Nike has hundreds of contract manufacturers turning out fin-
ished sneakers, socks, and athletic clothing, each with its own set of suppliers.
FIGURE 9.2 NIKE’S SUPPLY CHAIN
This figure illustrates the major entities in Nike’s supply chain and the flow of information upstream and
downstream to coordinate the activities involved in buying, making, and moving a product. Shown here is a
simplified supply chain, with the upstream portion focusing only on the suppliers for sneakers and sneaker soles.
Capacity, inventory level, delivery schedule, payment terms
Orders, return requests, repair and service requests, payments
Downstream
Tier 3
Suppliers
Tier 2
Suppliers
Upstream
Tier 1
Suppliers
Contract
Supplier
Nike Distributor Retailer Customer
Contract
Supplier
348 Part Three Key System Applications for the Digital Age
The upstream portion of Nike’s supply chain actually comprises thousands
of entities. Nike also has numerous distributors and many thousands of retail
stores where its shoes are sold, so the downstream portion of its supply chain is
also large and complex.
Information Systems and Supply Chain Management
Inefficiencies in the supply chain, such as parts shortages, underused plant
capacity, excessive finished goods inventory, or high transportation costs,
are caused by inaccurate or untimely information. For example, manufactur-
ers may keep too many parts in inventory because they do not know exactly
when they will receive their next shipments from their suppliers. Suppliers
may order too few raw materials because they do not have precise information
on demand. These supply chain inefficiencies waste as much as 25 percent of a
company’s operating costs.
If a manufacturer had perfect information about exactly how many units of
product customers wanted, when they wanted them, and when they could be
produced, it would be possible to implement a highly efficient just-in-time
strategy. Components would arrive exactly at the moment they were needed,
and finished goods would be shipped as they left the assembly line.
In a supply chain, however, uncertainties arise because many events can-
not be foreseen—uncertain product demand, late shipments from suppliers,
defective parts or raw materials, or production process breakdowns. To satisfy
customers, manufacturers often deal with such uncertainties and unforeseen
events by keeping more material or products in inventory than they think they
may actually need. The safety stock acts as a buffer for the lack of flexibility in
the supply chain. Although excess inventory is expensive, low fill rates are also
costly because business may be lost from canceled orders.
One recurring problem in supply chain management is the bullwhip effect,
in which information about the demand for a product gets distorted as it passes
from one entity to the next across the supply chain. A slight rise in demand for
an item might cause different members in the supply chain—distributors, man-
ufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and tertiary
suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each has
enough just in case. These changes ripple throughout the supply chain, mag-
nifying what started out as a small change from planned orders and creating
excess inventory, production, warehousing, and shipping costs (see Figure 9.3).
For example, Procter & Gamble (P&G) found it had excessively high inven-
tories of its Pampers disposable diapers at various points along its supply chain
because of such distorted information. Although customer purchases in stores
were fairly stable, orders from distributors spiked when P&G offered aggressive
price promotions. Pampers and Pampers’ components accumulated in ware-
houses along the supply chain to meet demand that did not actually exist. To
eliminate this problem, P&G revised its marketing, sales, and supply chain pro-
cesses and used more accurate demand forecasting.
The bullwhip effect is tamed by reducing uncertainties about demand and supply
when all members of the supply chain have accurate and up-to-date information.
If all supply chain members share dynamic information about inventory levels,
schedules, forecasts, and shipments, they have more precise knowledge about
how to adjust their sourcing, manufacturing, and distribution plans. Supply chain
management systems provide the kind of information that helps members of the
supply chain make better purchasing and scheduling decisions.
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 349
Supply Chain Management Software
Supply chain software is classified as either software to help businesses plan
their supply chains (supply chain planning) or software to help them execute
the supply chain steps (supply chain execution). Supply chain planning
systems enable the firm to model its existing supply chain, generate demand
forecasts for products, and develop optimal sourcing and manufacturing plans.
Such systems help companies make better decisions, such as determining how
much of a specific product to manufacture in a given time period; establishing
inventory levels for raw materials, intermediate products, and finished goods;
determining where to store finished goods; and identifying the transportation
mode to use for product delivery.
For example, if a large customer places a larger order than usual or changes
that order on short notice, it can have a widespread impact throughout the
supply chain. Additional raw materials or a different mix of raw materials may
need to be ordered from suppliers. Manufacturing may have to change job
scheduling. A transportation carrier may have to reschedule deliveries. Supply
chain planning software makes the necessary adjustments to production and
FIGURE 9.3 THE BULLWHIP EFFECT
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further
back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors,
manufacturers, and suppliers.
Downstream
Tier 3
Suppliers
Tier 2
Suppliers
Upstream
Tier 1
Suppliers
Manufacturer Distributor Retailer Customer
350 Part Three Key System Applications for the Digital Age
distribution plans. Information about changes is shared among the relevant
supply chain members so that their work can be coordinated. One of the
most important—and complex—supply chain planning functions is demand
planning, which determines how much product a business needs to make to
satisfy all its customers’ demands. JDA Software, SAP, and Oracle all offer sup-
ply chain management solutions.
Supply chain execution systems manage the flow of products through dis-
tribution centers and warehouses to ensure that products are delivered to the
right locations in the most efficient manner. They track the physical status of
goods, the management of materials, warehouse and transportation operations,
and financial information involving all parties. An example is the Warehouse
Management System (WMS) that Haworth Incorporated uses. Haworth is a
world-leading manufacturer and designer of office furniture, with distribution
centers in four states. The WMS tracks and controls the flow of finished goods
from Haworth’s distribution centers to its customers. Acting on shipping plans
for customer orders, the WMS directs the movement of goods based on immedi-
ate conditions for space, equipment, inventory, and personnel.
Global Supply Chains and the Internet
Before the Internet, supply chain coordination was hampered by the difficulties
of making information flow smoothly among disparate internal supply chain
systems for purchasing, materials management, manufacturing, and distribu-
tion. It was also difficult to share information with external supply chain part-
ners because the systems of suppliers, distributors, or logistics providers were
based on incompatible technology platforms and standards. Enterprise and
supply chain management systems enhanced with Internet technology supply
some of this integration.
A manager uses a web interface to tap into suppliers’ systems to determine
whether inventory and production capabilities match demand for the firm’s
products. Business partners use web-based supply chain management tools to
collaborate online on forecasts. Sales representatives access suppliers’ produc-
tion schedules and logistics information to monitor customers’ order status.
Global Supply Chain Issues
More and more companies are entering international markets, outsourcing
manufacturing operations, and obtaining supplies from other countries as well
as selling abroad. Their supply chains extend across multiple countries and
regions. There are additional complexities and challenges to managing a global
supply chain.
Global supply chains typically span greater geographic distances and time
differences than domestic supply chains and have participants from a number
of countries. Performance standards may vary from region to region or from
nation to nation. Supply chain management may need to reflect foreign govern-
ment regulations and cultural differences.
The Internet helps companies manage many aspects of their global supply
chains, including sourcing, transportation, communications, and international
finance. Today’s apparel industry, for example, relies heavily on outsourcing to
contract manufacturers in China and other low-wage countries. Apparel com-
panies are starting to use the web to manage their global supply chain and pro-
duction issues. (Review the discussion of Li & Fung in Chapter 3.)
In addition to contract manufacturing, globalization has encouraged out-
sourcing warehouse management, transportation management, and related
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 351
operations to third-party logistics providers, such as UPS Supply Chain Solutions
and Schneider National. These logistics services offer web-based software to
give their customers a better view of their global supply chains. Customers can
check a secure website to monitor inventory and shipments, helping them run
their global supply chains more efficiently.
Demand-Driven Supply Chains: From Push to Pull
Manufacturing and Efficient Customer Response
In addition to reducing costs, supply chain management systems facilitate ef-
ficient customer response, enabling the workings of the business to be driven
more by customer demand. (We introduced efficient customer response sys-
tems in Chapter 3.)
Earlier supply chain management systems were driven by a push-based
model (also known as build-to-stock). In a push-based model, production mas-
ter schedules are based on forecasts or best guesses of demand for products, and
products are pushed to customers. With new flows of information made possible
by web-based tools, supply chain management more easily follows a pull-based
model. In a pull-based model, also known as a demand-driven or build-to-order
model, actual customer orders or purchases trigger events in the supply chain.
Transactions to produce and deliver only what customers have ordered move up
the supply chain from retailers to distributors to manufacturers and eventually
to suppliers. Only products to fulfill these orders move back down the supply
chain to the retailer. Manufacturers use only actual order demand information
to drive their production schedules and the procurement of components or raw
materials, as illustrated in Figure 9.4. Walmart’s continuous replenishment sys-
tem described in Chapter 3 is an example of the pull-based model.
The Internet and Internet technology make it possible to move from sequen-
tial supply chains, where information and materials flow sequentially from
company to company, to concurrent supply chains, where information flows
in many directions simultaneously among members of a supply chain network.
Complex supply networks of manufacturers, logistics suppliers, outsourced
manufacturers, retailers, and distributors can adjust immediately to changes in
schedules or orders. Ultimately, the Internet will enable a digital logistics ner-
vous system for supply chains (see Figure 9.5).
FIGURE 9.4 PUSH- VERSUS PULL-BASED SUPPLY CHAIN MODELS
The difference between push- and pull-based models is summarized by the slogan
“Make what we sell, not sell what we make.”
Supplier DistributorManufacturer Retailer Customer
Supplier
Supply to
order
Supply to
forecast
Production based
on forecasts
Inventory based
on forecasts
Push-Based Model
Pull-Based Model
Stock based
on forecasts
Purchase what
is on shelves
Produce to
order
Automatically
replenish
warehouse
Automatically
replenish stock
Customer
orders
DistributorManufacturer Retailer Customer
352 Part Three Key System Applications for the Digital Age
Business Value of Supply Chain Management Systems
You have just seen how supply chain management systems enable firms to
streamline both their internal and external supply chain processes and provide
management with more accurate information about what to produce, store, and
move. By implementing a networked and integrated supply chain management
system, companies match supply to demand, reduce inventory levels, improve
delivery service, speed product time to market, and use assets more effectively.
Total supply chain costs represent the majority of operating expenses for
many businesses and in some industries approach 75 percent of the total operat-
ing budget. Reducing supply chain costs has a major impact on firm profitability.
In addition to reducing costs, supply chain management systems help in-
crease sales. If a product is not available when a customer wants it, customers
often try to purchase it from someone else. More precise control of the supply
chain enhances the firm’s ability to have the right product available for cus-
tomer purchases at the right time.
9-3 How do customer relationship management
systems help firms achieve customer intimacy?
You’ve probably heard phrases such as “the customer is always right” or “the cus-
tomer comes first.” Today these words ring truer than ever. Because competitive
advantage based on an innovative new product or service is often very short lived,
companies are realizing that their most enduring competitive strength may be
their relationships with their customers. Some say that the basis of competition
FIGURE 9.5 THE EMERGING INTERNET-DRIVEN SUPPLY CHAIN
The emerging Internet-driven supply chain operates like a digital logistics nervous
system. It provides multidirectional communication among firms, networks of firms, and
e-marketplaces so that entire networks of supply chain partners can immediately adjust
inventories, orders, and capacities.
Distributors
Retailers
CustomersLogisticsProviders
Virtual
Manufacturers
Contract
Manufacturers
Logistics
Exchanges
Private
Industrial
Networks
Net
Marketplaces
Manufacturers
Suppliers
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 353
has switched from who sells the most products and services to who “owns” the
customer and that customer relationships represent a firm’s most valuable asset.
What Is Customer Relationship Management?
What kinds of information would you need to build and nurture strong, long-
lasting relationships with customers? You’d want to know exactly who your cus-
tomers are, how to contact them, whether they are costly to service and sell
to, what kinds of products and services they are interested in, and how much
money they spend on your company. If you could, you’d want to make sure
you knew each of your customers well, as if you were running a small-town
store. And you’d want to make your good customers feel special.
In a small business operating in a neighborhood, it is possible for business
owners and managers to know their customers well on a personal, face-to-face
basis, but in a large business operating on a metropolitan, regional, national, or
even global basis, it is impossible to know your customer in this intimate way.
In these kinds of businesses, there are too many customers and too many ways
that customers interact with the firm (over the web, the phone, email, blogs,
and in person). It becomes especially difficult to integrate information from all
these sources and deal with the large number of customers.
A large business’s processes for sales, service, and marketing tend to be highly
compartmentalized, and these departments do not share much essential customer
information. Some information on a specific customer might be stored and orga-
nized in terms of that person’s account with the company. Other pieces of informa-
tion about the same customer might be organized by products that were purchased.
In this traditional business environment, there is no convenient way to consolidate
all this information to provide a unified view of a customer across the company.
This is where customer relationship management systems help. Customer
relationship management (CRM) systems, which we introduced in Chapter 2,
capture and integrate customer data from all over the organization, consolidate
the data, analyze the data, and then distribute the results to various systems
and customer touch points across the enterprise. A touch point (also known
as a contact point) is a method of interaction with the customer, such as tele-
phone, email, customer service desk, conventional mail, Facebook, Twitter,
website, wireless device, or retail store. Well-designed CRM systems provide a
single enterprise view of customers that is useful for improving both sales and
customer service (see Figure 9.6.)
Good CRM systems provide data and analytical tools for answering questions
such as these: What is the value of a particular customer to the firm over his or
her lifetime? Who are our most loyal customers? Who are our most profitable
customers? What do these profitable customers want to buy? Firms use the an-
swers to these questions to acquire new customers, provide better service and
support to existing customers, customize their offerings more precisely to cus-
tomer preferences, and provide ongoing value to retain profitable customers.
Customer Relationship Management Software
Commercial CRM software packages range from niche tools that perform limited
functions, such as personalizing websites for specific customers, to large-scale
enterprise applications that capture myriad interactions with customers, ana-
lyze them with sophisticated reporting tools, and link to other major enterprise
applications, such as supply chain management and enterprise systems. The
more comprehensive CRM packages contain modules for partner relationship
management (PRM) and employee relationship management (ERM).
354 Part Three Key System Applications for the Digital Age
PRM uses many of the same data, tools, and systems as customer relation-
ship management to enhance collaboration between a company and its selling
partners. If a company does not sell directly to customers but rather works
through distributors or retailers, PRM helps these channels sell to customers
directly. It provides a company and its selling partners with the ability to trade
information and distribute leads and data about customers, integrating lead
generation, pricing, promotions, order configurations, and availability. It also
provides a firm with tools to assess its partners’ performances so it can make
sure its best partners receive the support they need to close more business.
ERM software deals with employee issues that are closely related to CRM,
such as setting objectives, employee performance management, performance-
based compensation, and employee training. Major CRM application software
vendors include Oracle, SAP, Salesforce.com, and Microsoft Dynamics CRM.
Customer relationship management systems typically provide software and
online tools for sales, customer service, and marketing. We briefly describe
some of these capabilities.
Sales Force Automation
Sales force automation (SFA) modules in CRM systems help sales staff increase
productivity by focusing sales efforts on the most profitable customers, those who
are good candidates for sales and services. SFA modules provide sales prospect
and contact information, product information, product configuration capabilities,
and sales quote generation capabilities. Such software can assemble information
about a particular customer’s past purchases to help the salesperson make per-
sonalized recommendations. SFA modules enable sales, marketing, and shipping
departments to share customer and prospect information easily. SFA increases
each salesperson’s efficiency by reducing the cost per sale as well as the cost of
acquiring new customers and retaining old ones. SFA modules also provide capa-
bilities for sales forecasting, territory management, and team selling.
FIGURE 9.6 CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
CRM systems examine customers from a multifaceted perspective. These systems use a
set of integrated applications to address all aspects of the customer relationship, includ-
ing customer service, sales, and marketing.
Sales
• Telephone sales
• Web sales
• Retail store sales
• Field sales
Service
Marketing • Call center data
• Campaign data
Customer
• Content
• Data analysis
• Web self-service
data
• Wireless data
• Field service
data
• Social
networking
data
http://Salesforce.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 355
Customer Service
Customer service modules in CRM systems provide information and tools to
increase the efficiency of call centers, help desks, and customer support staff.
They have capabilities for assigning and managing customer service requests.
One such capability is an appointment or advice telephone line. When a cus-
tomer calls a standard phone number, the system routes the call to the correct
service person, who inputs information about that customer into the system only
once. When the customer’s data are in the system, any service representative can
handle the customer relationship. Improved access to consistent and accurate
customer information helps call centers handle more calls per day and decrease
the duration of each call. Thus, call centers and customer service groups achieve
greater productivity, reduced transaction time, and higher quality of service at
lower cost. The customer is happier because he or she spends less time on the
phone restating his or her problem to customer service representatives.
CRM systems may also include web-based self-service capabilities: The com-
pany website can be set up to provide inquiring customers personalized support
information as well as the option to contact customer service staff by phone for
additional assistance.
Marketing
CRM systems support direct-marketing campaigns by providing capabilities for
capturing prospect and customer data, for providing product and service infor-
mation, for qualifying leads for targeted marketing, and for scheduling and track-
ing direct-marketing mailings or email (see Figure 9.7). Marketing modules also
include tools for analyzing marketing and customer data, identifying profitable
and unprofitable customers, designing products and services to satisfy specific
customer needs and interests, and identifying opportunities for cross-selling.
Cross-selling is the marketing of complementary products to customers.
(For example, in financial services, a customer with a checking account might
be sold a money market account or a home improvement loan.) CRM tools also
FIGURE 9.7 HOW CRM SYSTEMS SUPPORT MARKETING
Customer relationship management software provides a single point for users to
manage and evaluate marketing campaigns across multiple channels, including email,
direct mail, telephone, the web, and social media.
Responses by Channel for January 2019
Promotional Campaign
Social Media
6.7%
Telephone
30.8%
Direct Mail
29.2%
Email
17.3%
Web
16.0%
356 Part Three Key System Applications for the Digital Age
help firms manage and execute marketing campaigns at all stages, from plan-
ning to determining the rate of success for each campaign.
Figure 9.8 illustrates the most important capabilities for sales, service, and
marketing processes found in major CRM software products. Like enterprise soft-
ware, this software is business-process driven, incorporating hundreds of business
processes thought to represent best practices in each of these areas. To achieve
maximum benefit, companies need to revise and model their business processes
to conform to the best-practice business processes in the CRM software.
Figure 9.9 illustrates how a best practice for increasing customer loyalty
through customer service might be modeled by CRM software. Directly servic-
ing customers provides firms with opportunities to increase customer reten-
tion by singling out profitable long-term customers for preferential treatment.
CRM software can assign each customer a score based on that person’s value
and loyalty to the company and provide that information to help call centers
route each customer’s service request to agents who can best handle that cus-
tomer’s needs. The system would automatically provide the service agent with
a detailed profile of that customer that includes his or her score for value and
loyalty. The service agent would use this information to present special offers
or additional services to the customer to encourage the customer to keep trans-
acting business with the company. You will find more information on other
best-practice business processes in CRM systems in our Learning Tracks.
FIGURE 9.8 CRM SOFTWARE CAPABILITIES
The major CRM software products support business processes in sales, service, and
marketing, integrating customer information from many sources. Included is support for
both the operational and analytical aspects of CRM.
Sales
Account
Management
Marketing
Customer Data
Service
Campaign
Management
Service
Delivery
Lead
Management
Channel Promotions
Management
Customer Satisfaction
Management
Order
Management
Events
Management
Returns
Management
Sales
Planning
Market
Planning
Service
Planning
Field
Sales
Marketing
Operations
Call Center
& Help Desk
Sales
Analytics
Marketing
Analytics
Service
Analytics
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 357
Operational and Analytical CRM
All of the applications we have just described support either the operational or
analytical aspects of customer relationship management. Operational CRM
includes customer-facing applications, such as tools for sales force automa-
tion, call center and customer service support, and marketing automation.
Analytical CRM includes applications that analyze customer data generated
by operational CRM applications to provide information for improving business
performance.
Analytical CRM applications are based on data from operational CRM sys-
tems, customer touch points, and other sources that have been organized in
data warehouses or analytic platforms for use in online analytical process-
ing (OLAP), data mining, and other data analysis techniques (see Chapter 6).
Customer data collected by the organization might be combined with data from
other sources, such as customer lists for direct-marketing campaigns purchased
from other companies or demographic data. Such data are analyzed to identify
buying patterns, to create segments for targeted marketing, and to pinpoint
profitable and unprofitable customers (see Figure 9.10).
Another important output of analytical CRM is the customer’s lifetime value
to the firm. Customer lifetime value (CLTV) is based on the relationship be-
tween the revenue produced by a specific customer, the expenses incurred in
acquiring and servicing that customer, and the expected life of the relationship
between the customer and the company.
Business Value of Customer Relationship
Management Systems
Companies with effective customer relationship management systems realize
many benefits, including increased customer satisfaction, reduced direct-
marketing costs, more effective marketing, and lower costs for customer acqui-
sition and retention. Information from CRM systems increases sales revenue
FIGURE 9.9 CUSTOMER LOYALTY MANAGEMENT PROCESS MAP
This process map shows how a best practice for promoting customer loyalty through customer service would
be modeled by customer relationship management software. The CRM software helps firms identify high-value
customers for preferential treatment.
Receive
service
request
Obtain
customer
information
Customer
database
No
Yes Yes
No
Resolve
service issue
Score
customer
High value
and loyalty?
Provide special
oers and service
Customer
information
available?
Route to
best agent
358 Part Three Key System Applications for the Digital Age
by identifying the most profitable customers and segments for focused market-
ing and cross-selling (see the Interactive Session on Organizations).
Customer churn is reduced as sales, service, and marketing respond better to
customer needs. The churn rate measures the number of customers who stop
using or purchasing products or services from a company. It is an important
indicator of the growth or decline of a firm’s customer base.
9-4 What are the challenges that enterprise
applications pose, and how are enterprise
applications taking advantage of new technologies?
Many firms have implemented enterprise systems and systems for supply
chain and customer relationship management because they are such powerful
instruments for achieving operational excellence and enhancing decision
making. But precisely because they are so powerful in changing the way the or-
ganization works, they are challenging to implement. Let’s briefly examine some
of these challenges as well as new ways of obtaining value from these systems.
Enterprise Application Challenges
Promises of dramatic reductions in inventory costs, order-to-delivery time,
more efficient customer response, and higher product and customer profitabil-
ity make enterprise systems and systems for SCM and CRM very alluring. But
to obtain this value, you must clearly understand how your business has to
change to use these systems effectively.
Enterprise applications involve complex pieces of software that are very ex-
pensive to purchase and implement. It might take a large Fortune 500 company
several years to complete a large-scale implementation of an enterprise system
FIGURE 9.10 ANALYTICAL CRM
Analytical CRM uses a customer data warehouse or analytic platform and tools to
analyze customer data collected from the firm’s customer touch points and from other
sources.
Channels
Other sources
Customer data
Customer data
warehouse
or
analytic platform
• Call center
• Website
• Wireless
• Field sales
• Direct mail
• Email
• Retail store
• Partner
• Social media
• Legacy systems
• OLAP
• Profitable customers
• Market segments
• Customer profiles
• Churn rates
• Data mining
• Other data
analysis tools
• Demographic data
• Third-party data
• Marketing campaign
data
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 359
Kenya Airways is the flag carrier of Kenya and
ranks among the top ten African airlines in terms of
seat capacity, with a fleet of 33 aircraft covering 53
destinations domestically and abroad. It is the only
African airline in the SkyTeam alliance, whose 20
members include Delta Airlines, Air France, Alitalia,
Aeromexico, China Airlines, and Korean Air, and is
expected to live up to a very high global standard.
One area of the business that needed improve-
ment was the airline’s relationship to its customers.
Africa’s current population of 1 billion is expected
to reach 1.5 billion within a decade, with a rapidly
growing middle class in many countries. Until re-
cently, Kenya Airways was unable to fully capitalize
on this market opportunity because it didn’t know
enough about its customers. Although the airline had
added more planes, passenger numbers had been
decreasing, partly due to the fear of Ebola virus out-
breaks, regional terrorism, and increased competi-
tion from Persian Gulf carriers. Profitability suffered.
The airline didn’t know who clicked on its email
campaigns. It was advertising mostly on billboards, in
newspapers, and on flyers, with no way to measure
the effectiveness of those campaigns. Management
could not tell what its sales representatives in differ-
ent offices were doing. Data on customers were lo-
cated in many different repositories, such as spread-
sheets and files in company and partner travel agent
offices, reservation systems, and airport check-ins,
and the data were not integrated. Without a single
repository for customer data, Kenya Airways was
unable to identify the preferences, special needs, or
other personal characteristics of its “guests,” who in-
cluded commercial traders, business executives, gov-
ernment officials, students, missionaries, and medical
tourists. Marketing, sales, and customer service ac-
tivities were operating in the dark. For example, each
May the airline would send every customer in its
scattered data repositories a Mother’s Day greeting,
although many of the recipients were not mothers.
In 2014 Kenya Airways initiated a multiyear pro-
gram to automate and integrate all of its customer
data so that it could engage in effective customer
relationship management using Oracle’s Marketing,
Sales, Data, and Service Clouds. Oracle Marketing
Cloud provides a cloud-based platform to connect
firms’ marketing data, centrally orchestrate cross-
channel customer interactions, engage the right audi-
ence, and analyze performance. It includes tools for
managing marketing automation campaigns, provid-
ing cross-channel customer experiences, creating and
managing engaging content, “listening” to customer
conversations about a product, brand or service, and
engaging with messaging (social marketing).
A few weeks after implementing Oracle Marketing
Cloud, the airline ran its first automated marketing
campaign, which directed emails, SMS texts, and so-
cial media posts about special holiday season fares to
Kenyan emigrants in Dubai. Kenya Airways then cre-
ated campaigns to promote new and expanded routes
to Hanoi and Zanzibar. As time went on, the airline’s
marketing team became more skillful at tracking
revenue flows generated by those campaigns and
identifying new sources of data to target the cam-
paigns more effectively. Kenya Airways Marketing
Automation Lead, Harriet Luyai, reported in early
2015 that “reachable contacts” rose from 40 percent
to 89 percent, open rates on marketing emails rose
from 40 percent to 65 percent, and the airline’s “ac-
quisition rate”—the percentage of respondents who
opt in to its campaigns—was up to 20 percent. The
airline can measure the impact of marketing cam-
paigns on ticket sales. Campaigns that previously
took three days to execute using an agency now take
30 minutes and are much less expensive.
After implementing Oracle Marketing Cloud,
Kenya Airways started using Oracle Sales Cloud to au-
tomate its sales activities and Oracle RightNow Cloud
Service for its customer service activities, linking all
three clouds in one central data repository. Marketing,
sales, and service could now integrate their customer
data and coordinate business processes. The airline
pulled together information on age, income, educa-
tion level, job function, job level, revenue generated
for the airline, geography, status, preferences, interest
areas, service calls, email activity, form submissions,
and purchase history to help it create very detailed
customer profiles for personalizing offerings.
To help the Kenya Airways marketing team drive
additional revenue by converting leads to ticket sales,
increasing website traffic, and increasing social fol-
lowers, the airline implemented Oracle Social Cloud.
INTERACTIVE SESSION ORGANIZATIONS
Kenya Airways Flies High with Customer Relationship Management
1. What was the problem at Kenya Airways described
in this case? What management, organization, and
technology factors contributed to this problem?
2. What was the relationship of customer relation-
ship management to Kenya Airways’ business per-
formance and business strategy?
3. Describe Kenya Airway’s solution to its problem.
What management, organization, and technology
issues had to be addressed by the solution?
4. How effective was this solution? How did it affect
the way Kenya Airways ran its business and its
business performance?
This tool helps the Kenya Airways customer service
team follow social media posts and discussions about
the airline’s services and respond to questions and
problems within 30 minutes. It also helps agents pri-
oritize their follow-up posts and manage workflows
for the appropriate approvals and for troubleshooting.
Although Kenya Airways had a customer loyalty
program, it had previously been unable to identify
high-value customers. Now Kenya Airways can
track all its high-value customers and show how
much revenue each customer generates. It can
also segment customers across the customer life
cycle, making it possible to distinguish a new cus-
tomer from a longtime high-value customer. Kenya
Airways now has a 360-degree view of each of its
customers.
It took much more time to implement the
Oracle Cloud suite than Kenya Airways had
originally estimated—more than a year instead of
six months. The required data, which resided in
many different applications, needed to be cleansed
to make sure they were all in the right format
before they could be transferred to the new data
repository. Much of this work was manual. Airline
staff had to be trained in new ways of working
with digital CRM tools because so much of its work
had previously been manual. Kenya Airways man-
agement feels the airline has been richly rewarded
for this effort.
Sources: “Company View of Kenya Airways PLC,” www. bloomberg.
com, accessed January 31, 2018; Rob Preston, “First-Class Flight,”
Profit Magazine, August 2016; www.kenya-airways.com, accessed
January 31, 2018; “Kenya Airways Turns to McKinsey for Turn-
around Strategy,” Consultancy.uk, February 8, 2016; and Tilde
Herrera, “Kenya Airways Fuels with Data to Lift Marketing,”
October 29, 2015.
CASE STUDY QUESTIONS
360 Part Three Key System Applications for the Digital Age
or a system for SCM or CRM. According to a 2018 survey of 237 ERP users con-
ducted by Panorama Consulting Solutions, ERP projects took an average of 17.4
months to complete, and 44 percent of the projects delivered 50 percent or less
of the expected benefits. Approximately 64 percent of these projects experi-
enced cost overruns, and 79 percent exceeded their initial timelines (Panorama
Consulting Solutions, 2018). Changes in project scope and additional customiza-
tion work add to implementation delays and costs.
Enterprise applications require not only deep-seated technological changes
but also fundamental changes in the way the business operates. Companies
must make sweeping changes to their business processes to work with the
software. Employees must accept new job functions and responsibilities. They
must learn how to perform a new set of work activities and understand how the
information they enter into the system can affect other parts of the company.
This requires new organizational learning and should also be factored into ERP
implementation costs.
SCM systems require multiple organizations to share information and busi-
ness processes. Each participant in the system may have to change some of its
processes and the way it uses information to create a system that best serves
the supply chain as a whole.
Some firms experienced enormous operating problems and losses when
they first implemented enterprise applications because they didn’t understand
how much organizational change was required. For example, Kmart had trouble
http://www.bloomberg.com
http://www.bloomberg.com
http://www.kenya-airways.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 361
getting products to store shelves when it first implemented i2 Technologies
(now JDA Software) SCM software. The i2 software did not work well with Kmart’s
promotion-driven business model, which created sharp spikes in demand for prod-
ucts. Supermarket giant Woolworth’s Australia encountered data-related problems
when it transitioned from an antiquated home-grown ERP system to SAP. Weekly
profit-and-loss reports tailored for individual stores couldn’t be generated for nearly
18 months. The company had to change its data collection procedures, but failed
to understand its own processes or properly document these business processes.
Enterprise applications also introduce switching costs. When you adopt an
enterprise application from a single vendor, such as SAP, Oracle, or others, it is
very costly to switch vendors, and your firm becomes dependent on the vendor
to upgrade its product and maintain your installation.
Enterprise applications are based on organization-wide definitions of data.
You’ll need to understand exactly how your business uses its data and how the
data would be organized in a CRM, SCM, or ERP system. CRM systems typically
require some data cleansing work.
Enterprise software vendors are addressing these problems by offering pared-
down versions of their software and fast-start programs for small and medium-
sized businesses and best-practice guidelines for larger companies. Companies
are also achieving more flexibility by using cloud applications for functions not
addressed by the basic enterprise software so that they are not constrained by a
single do-it-all type of system.
Companies adopting enterprise applications can also save time and money
by keeping customizations to a minimum. For example, Kennametal, a
$2 billion metal-cutting tools company in Pennsylvania, had spent $10 million
over 13 years maintaining an ERP system with more than 6,400 customiza-
tions. The company replaced it with a plain-vanilla, uncustomized version of
SAP enterprise software and changed its business processes to conform to the
software. Office Depot avoided customization when it moved from in-house
systems to the Oracle ERP Cloud. The retailer is using best practices embedded
in Oracle’s Supply Chain Management Cloud and in its cloud-based Human
Capital Management (HCM) and Enterprise Performance Management (EPM)
systems. By not customizing its Oracle ERP applications, Office Depot simpli-
fied its information systems and reduced the cost of maintaining and managing
them (Thibodeau, 2018).
Next-Generation Enterprise Applications
Today, enterprise application vendors are delivering more value by becoming
more flexible, user-friendly, web-enabled, mobile, and capable of integration with
other systems. Stand-alone enterprise systems, customer relationship manage-
ment systems, and SCM systems are becoming a thing of the past. The major
enterprise software vendors have created what they call enterprise solutions, enter-
prise suites, or e-business suites to make their CRM, SCM, and ERP systems work
closely with each other and link to systems of customers and suppliers.
Next-generation enterprise applications also include cloud solutions as well
as more functionality available on mobile platforms. Large enterprise software
vendors such as SAP, Oracle, Microsoft, and Epicor now feature cloud ver-
sions of their flagship ERP systems and also cloud-based products for small
and medium-sized businesses (as described earlier in the Interactive Session on
Management). SAP, for example, offers SAP S/4HANA Cloud for large compa-
nies, and SAP Business ByDesign and SAP Business One enterprise software for
medium-sized and small businesses. Microsoft offers the Dynamics 365 cloud
362 Part Three Key System Applications for the Digital Age
version of its ERP and CRM software. Cloud-based enterprise systems are also
offered by smaller vendors such as NetSuite.
The undisputed global market leader in cloud-based CRM systems is
Salesforce.com, which we described in Chapter 5. Salesforce.com delivers its ser-
vice through Internet-connected computers or mobile devices, and it is widely
used by small, medium-sized, and large enterprises. As cloud-based products
mature, more companies, including very large Fortune 500 firms, are choosing to
run all or part of their enterprise applications in the cloud.
Social CRM
CRM software vendors are enhancing their products to take advantage of social
networking technologies. These social enhancements help firms identify new
ideas more rapidly, improve team productivity, and deepen interactions with
customers (see Chapter 10). Using social CRM tools, businesses can better en-
gage with their customers by, for example, analyzing their sentiments about
their products and services.
Social CRM tools enable a business to connect customer conversations and re-
lationships from social networking sites to CRM processes. The leading CRM ven-
dors now offer such tools to link data from social networks to their CRM software.
SAP, Salesforce.com, and Oracle CRM products now feature technology to monitor,
track, and analyze social media activity on Facebook, LinkedIn, Twitter, YouTube,
and other sites. Business intelligence and analytics software vendors such as SAS
also have capabilities for social media analytics (with several measures of customer
engagement across a variety of social networks) along with campaign management
tools for testing and optimizing both social and traditional web-based campaigns.
Salesforce.com connected its system for tracking leads in the sales process
with social-listening and social-media marketing tools, enabling users to tailor
their social-marketing dollars to core customers and observe the resulting com-
ments. If an ad agency wants to run a targeted Facebook or Twitter ad, these
capabilities make it possible to aim the ad specifically at people in the client’s
lead pipeline who are already being tracked in the CRM system. Users will be
able to view tweets as they take place in real time and perhaps uncover new
leads. They can also manage multiple campaigns and compare them all to fig-
ure out which ones generate the highest click-through rates and cost per click.
Business Intelligence in Enterprise Applications
Enterprise application vendors have added business intelligence features to
help managers obtain more meaningful information from the massive amounts
of data these systems generate, including data from the Internet of Things
(IoT). SAP now makes it possible for its enterprise applications to use HANA
in-memory computing technology so that they are capable of much more rapid
and complex data analysis. Included are tools for flexible reporting; ad hoc
analysis; interactive dashboards; what-if scenario analysis; data visualization;
and machine learning to analyze very large bodies of data, make connections,
make predictions, and provide recommendations for operations optimization.
For example, SAP created a machine learning and neural network application
(see Chapter 11) that recognizes patterns associated with machine performance
in the oil and gas industry. The software automatically generates notifications
of potential machine failures and sends them to SAP Plant Maintenance, which
planners use to schedule machine repair and replacement (Franken, 2018).
The major enterprise application vendors offer portions of their prod-
ucts that work on mobile handhelds. You can find out more about this topic
in our Learning Track on Wireless Applications for Customer Relationship
Management, Supply Chain Management, and Healthcare.
http://Salesforce.com
http://Salesforce.com
http://Salesforce.com
http://Salesforce.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 363
9-5 How will MIS help my career?
Here is how Chapter 9 and this book can help you find a job as a manufacturing
management trainee.
The Company
XYZ Global Industrial Components is a large Michigan-headquartered company
with 40 global manufacturing facilities and more than 4,000 employees world-
wide, and it has an open position for a new college graduate in its Manufacturing
Management Program. The company produces fastener, engineered, and link-
age and suspension components for automotive, heavy-duty trucks, aerospace,
electric utility, telecommunications, and other industries worldwide.
Position Description
The Manufacturing Management Program is a rotational, two-year program de-
signed to nurture and train future managers by enabling recent college gradu-
ates to acquire critical skills and industry experience in plant, technical, and
corporate environments. Job responsibilities include:
• Working with business units and project teams on systems implementation,
including implementation of ERP and JDA manufacturing systems.
• Understanding business processes and data requirements for each business
unit.
• Proficiency in supporting and conducting business requirement analysis
sessions.
• Tracking and documenting changes to functional and business specifications.
• Writing user documentation, instructions, and procedures.
• Monitoring and documenting post-implementation problems and revision
requests.
Job Requirements
• Bachelor’s degree in IT, MIS, engineering, or related field or equivalent, with
a GPA higher than 3.0
• Demonstrated skills in Microsoft Office Suite
• Strong written and verbal communication skills
• Proven track record of accomplishments both inside and outside the
educational setting
• Experience in a leadership role in a team
Interview Questions
• Describe the projects you have worked on in a team. Did you play a leader-
ship role? Exactly what did you do to help your team achieve its goal? Were
any of these projects IT projects?
• What do you know about ERP or JDA manufacturing systems? Have you ever
worked with them? What exactly did you do with these systems?
• Tell us what you can do with Microsoft Office software. Which tools have you
used? Do you have any Access and Excel skills? What kinds of problems have
you used these tools to solve? Did you take courses in Access or Excel?
364 Part Three Key System Applications for the Digital Age
Author Tips
1. Do some research on the company, its industry, and the kinds of challenges
it faces. Look through the company’s LinkedIn page and read their posts over
the past twelve months. Are there any key trends in the LinkedIn posts for
this company?
2. Review this text’s Chapter 9 on enterprise applications, Chapter 13 on develop-
ing systems, and Chapter 14 on IT project management and implementation.
3. View YouTube videos created by major IT consulting firms that discuss the
latest trends in manufacturing technology and enterprise systems.
4. Inquire how you would be using Microsoft Office tools for the job and what
Excel and Access skills you would be expected to demonstrate. Bring ex-
amples of the work you have done with this software. Show that you would
be eager to learn what you don’t know about these tools to fulfill your job
assignments.
5. Bring examples of your writing (including some from your Digital Portfolio
described in MyLab MIS) demonstrating your analytical skills and project
experience.
9-1 How do enterprise systems help businesses achieve operational excellence?
Enterprise software is based on a suite of integrated software modules and a common central data-
base. The database collects data from and feeds the data into numerous applications that can support
nearly all of an organization’s internal business activities. When one process enters new information,
the information is made available immediately to other business processes.
Enterprise systems support organizational centralization by enforcing uniform data standards and
business processes throughout the company and a single unified technology platform. The firmwide
data that enterprise systems generate help managers evaluate organizational performance.
9-2 How do supply chain management systems coordinate planning, production, and logistics with
suppliers?
Supply chain management (SCM) systems automate the flow of information among members of the
supply chain so they can use it to make better decisions about when and how much to purchase, pro-
duce, or ship. More accurate information from supply chain management systems reduces uncertainty
and the impact of the bullwhip effect.
Supply chain management software includes software for supply chain planning and for supply
chain execution. Internet technology facilitates the management of global supply chains by providing
the connectivity for organizations in different countries to share supply chain information. Improved
communication among supply chain members also facilitates efficient customer response and move-
ment toward a demand-driven model.
9-3 How do customer relationship management systems help firms achieve customer intimacy?
Customer relationship management (CRM) systems integrate and automate customer-facing pro-
cesses in sales, marketing, and customer service, providing an enterprise-wide view of customers.
Companies can use this customer knowledge when they interact with customers to provide them with
better service or sell new products and services. These systems also identify profitable or unprofitable
customers or opportunities to reduce the churn rate.
The major customer relationship management software packages provide capabilities for both oper-
ational CRM and analytical CRM. They often include modules for managing relationships with selling
partners (partner relationship management) and for employee relationship management.
REVIEW SUMMARY
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 365
9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking
advantage of new technologies?
Enterprise applications are difficult to implement. They require extensive organizational change, large
new software investments, and careful assessment of how these systems will enhance organizational per-
formance. Enterprise applications cannot provide value if they are implemented atop flawed processes or
if firms do not know how to use these systems to measure performance improvements. Employees require
training to prepare for new procedures and roles. Attention to data management is essential.
Enterprise applications are now more flexible, web-enabled, and capable of integration with other systems,
using web services and service-oriented architecture (SOA). They also can run in cloud infrastructures or on
mobile platforms. CRM software has added social networking capabilities to enhance internal collaboration,
deepen interactions with customers, and use data from social networking sites. Enterprise applications are
incorporating business intelligence capabilities for analyzing the large quantities of data they generate.
Key Terms
Analytical CRM, 357
Bullwhip effect, 348
Churn rate, 358
Cross-selling, 355
Customer lifetime value (CLTV), 357
Demand planning, 350
Employee relationship management (ERM), 353
Enterprise software, 342
Just-in-time strategy, 348
Operational CRM, 357
Partner relationship management (PRM), 353
Pull-based model, 351
Push-based model, 351
Sales force automation (SFA), 354
Social CRM, 362
Supply chain, 346
Supply chain execution systems, 350
Supply chain planning systems, 349
Touch point, 353
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
9-1 How do enterprise systems help businesses
achieve operational excellence?
• Define an enterprise system and explain
how enterprise software works.
• Describe how enterprise systems provide
value for a business.
9-2 How do supply chain management systems
coordinate planning, production, and logistics
with suppliers?
• Define a supply chain and identify each of
its components.
• Explain how supply chain management sys-
tems help reduce the bullwhip effect and
how they provide value for a business.
• Define and compare supply chain plan-
ning systems and supply chain execution
systems.
• Describe the challenges of global supply
chains and how Internet technology can
help companies manage them better.
• Distinguish between a push-based and a
pull-based model of supply chain manage-
ment and explain how contemporary sup-
ply chain management systems facilitate a
pull-based model.
9-3 How do customer relationship management
systems help firms achieve customer intimacy?
• Define customer relationship management
and explain why customer relationships are
so important today.
• Describe how partner relationship manage-
ment (PRM) and employee relationship
management (ERM) are related to customer
relationship management (CRM).
• Describe the tools and capabilities of cus-
tomer relationship management software
for sales, marketing, and customer service.
• Distinguish between operational and ana-
lytical CRM.
366 Part Three Key System Applications for the Digital Age
9-4 What are the challenges that enterprise
applications pose, and how are enterprise
applications taking advantage of new
technologies?
• List and describe the challenges enterprise
applications pose.
• Explain how these challenges can be
addressed.
• Describe how enterprise applications are
taking advantage of cloud computing and
business intelligence.
• Define social CRM and explain how cus-
tomer relationship management systems
are using social networking.
Discussion Questions
9-5 Supply chain management is less about
managing the physical movement of goods
and more about managing information.
Discuss the implications of this statement.
9-6 If a company wants to implement an
enterprise application, it had better do
MyLab MIS
MyLab MIS
its homework. Discuss the implications of
this statement.
9-7 Which enterprise application should a
business install first: ERP, SCM, or CRM?
Explain your answer.
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience analyzing business process integration, suggesting sup-
ply chain management and customer relationship management applications, using database software to manage
customer service requests, and evaluating supply chain management business services. Visit MyLab MIS to ac-
cess this chapter’s Hands-On MIS Projects,
Management Decision Problems
9-8 Toronto-based Mercedes-Benz Canada, with a network of 55 dealers, did not know enough about its
customers. Dealers provided customer data to the company on an ad hoc basis. Mercedes did not force
dealers to report this information. There was no real incentive for dealers to share information with the
company. How could CRM and PRM systems help solve this problem?
9-9 Office Depot sells a wide range of office supply products and services in the United States and
internationally. The company tries to offer a wider range of office supplies at lower cost than other retailers
by using just-in-time replenishment and tight inventory control systems. It uses information from a demand
forecasting system and point-of-sale data to replenish its inventory in its 1,600 retail stores. Explain how
these systems help Office Depot minimize costs and any other benefits they provide. Identify and describe
other supply chain management applications that would be especially helpful to Office Depot.
Improving Decision Making: Using Database Software to Manage Customer Service
Requests
Software skills: Database design; querying and reporting
Business skills: Customer service analysis
9-10 In this exercise, you’ll use database software to develop an application that tracks customer service
requests and analyzes customer data to identify customers meriting priority treatment.
Prime Service is a large service company that provides maintenance and repair services for close to 1,200
commercial businesses in New York, New Jersey, and Connecticut. Its customers include businesses of all sizes.
Customers with service needs call into its customer service department with requests for repairing heating ducts,
broken windows, leaky roofs, broken water pipes, and other problems. The company assigns each request a num-
ber and writes down the service request number, the identification number of the customer account, the date of
the request, the type of equipment requiring repair, and a brief description of the problem. The service requests
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 367
are handled on a first-come-first-served basis. After the service work has been completed, Prime calculates the
cost of the work, enters the price on the service request form, and bills the client. This arrangement treats the
most important and profitable clients—those with accounts of more than $70,000—no differently from its clients
with small accounts. Management would like to find a way to provide its best customers with better service. It
would also like to know which types of service problems occur most frequently so that it can make sure it has
adequate resources to address them.
Prime Service has a small database with client account information, which can be found in MyLab MIS.
Use database software to design a solution that would enable Prime’s customer service representatives to identify
the most important customers so that they could receive priority service. Your solution will require more than
one table. Populate your database with at least 10 service requests. Create several reports that would be of inter-
est to management, such as a list of the highest—and lowest—priority accounts and a report showing the most
frequently occurring service problems. Create a report listing service calls that customer service representatives
should respond to first on a specific date.
Achieving Operational Excellence: Evaluating Supply Chain Management Services
Software skills: Web browser and presentation software
Business skills: Evaluating supply chain management services
9-11 In addition to carrying goods from one place to another, some trucking companies provide supply chain
management services and help their customers manage their information. In this project, you’ll use the
web to research and evaluate two of these business services. Investigate the websites of two companies,
UPS and Schneider National, to see how these companies’ services can be used for supply chain
management. Then respond to the following questions:
• What supply chain processes can each of these companies support for its clients?
• How can customers use the websites of each company to help them with supply chain management?
• Compare the supply chain management services these companies provide. Which company would
you select to help your firm manage its supply chain? Why?
Collaboration and Teamwork Project
Analyzing Enterprise Application Vendors
9-12 With a group of three or four other students, use the web to research and evaluate the products of two vendors
of enterprise application software. You could compare, for example, the SAP and Oracle enterprise systems,
the supply chain management systems from JDA Software and SAP, or the customer relationship management
systems of Oracle and Salesforce.com. Use what you have learned from these companies’ websites to compare
the software products you have selected in terms of business functions supported, technology platforms, cost,
and ease of use. Which vendor would you select? Why? Would you select the same vendor for a small business
(50–300 employees) as well as for a large one? If possible, use Google Docs and Google Drive or Google Sites to
brainstorm, organize, and develop a presentation of your findings for the class.
http://Salesforce.com
368 Part Three Key System Applications for the Digital Age
Clemens Food Group Delivers with
New Enterprise Applications
CASE STUDY
Clemens Food Group is known for helping its customers bring home the bacon, and other products as well. Based in Hatfield,
Pennsylvania, Clemons Food is a vertically coor-
dinated company that includes antibiotic-free hog
farming, food production, logistical services, and
transportation. Using a responsive pork produc-
tion system, the company focuses on supplying the
highest-quality products to its partners as well as ad-
vanced solutions that simplify partners’ operations.
The Clemens Food Group family of services and
brands include pork product producers Hatfield
Quality Meats and Nick’s Sausage Company, as well
as logistics and transportation firms (PV Transport),
and CFC Logistics Country View Family Farms, a hog
procurement and production company managing
over 100 family farms raising hogs under contract.
Clemons Food Group products are sold by grocers
and food service operators in the northeastern
and mid-Atlantic regions of the United States. The
Clemens Food Group raises and processes about five
million hogs per year, managing procurement, pro-
duction, and logistics services from birth to finished
food products. Clemens has 3,350 employees.
For a company in the perishable goods industry
such as Clemens Food to be profitable, it must have a
firm grasp on the timeliness and accuracy of orders
and very precise information about the status of its
products and warehouse activities throughout its
network of farms and production facilities. Accuracy
in determining yields, costs, and prices in a wildly
fluctuating market can make a difference of millions
of dollars. Unfortunately, Clemens Food’s legacy sys-
tems were no longer able to keep up with production
and support future growth. Management realized the
company needed a new platform to provide better
visibility into production, more efficient planning,
and tighter control of available-to-promise processes.
(Available-to-promise [ATP] provides a response
to customer order inquiries, generating available
quantities of the requested product and delivery due
dates.) Clemens Food also wanted real-time informa-
tion about plant profitability, including daily profit-
ability margins on an order-by-order basis.
In 2010, Clemens Food created a five-year plan to
modernize its IT infrastructure with an integrated
platform for systems to optimize its supply network
and improve scheduling, optimization, and margin vis-
ibility in its multi-business operations. The plan gained
steam in 2014 when Clemens Food announced it would
develop a third pork processing plant comprising
550,000 square feet in Coldwater Township, Michigan.
The addition of this facility could significantly increase
volume and double revenue if it was backed by a more
modern IT platform. Clemens Food’s existing ERP sys-
tem needed to be replaced by one that could handle
increased volume and multi-plant complexities.
Joshua Rennells, Senior Vice President at Clemens
Food Group, and his team extensively researched new
technologies. A key requirement was to use proven
best technology for what works in the perishable food
industry. Where there is market volatility and inher-
ent risks in selling a perishable product, precise in-
formation on yields and costs is especially important.
Clemens Food believed SAP software was the best so-
lution for helping the company achieve growth targets
and share data across organizational boundaries with
a fully integrated state-of-the-art system, and Rennells
believed that the SAP S/4HANA platform would not
require another significant upgrade for 15 years.
SAP S/4HANA is a business suite that is based
on the SAP HANA in-memory computing platform.
It features enterprise resource planning software
meant to cover all day-to-day processes of an enter-
prise and also integrates portions of SAP Business
Suite products for customer relationship manage-
ment, supplier relationship management, and supply
chain management. SAP S/4HANA is available in on-
premises, cloud, and hybrid computing platforms.
Rather than implement the new system incre-
mentally, Clemens Food chose to implement SAP
S/4HANA Finance, along with functionality for ma-
terials management and production planning in a
sweeping “big-bang” approach across the enterprise.
The new system needed to be operational in time
for the opening of the Coldwater plant. According to
Rennells, Clemens Food had used a phased approach
for its previous ERP implementation 15 years ear-
lier. That prior rollout ended up taking several years
and resulted in heavy customization. By the time
Clemens Food migrated to SAP S/4HANA, its legacy
ERP system was linked to more than 70 applications.
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 369
Taking a big-bang approach was the only way to be
up and running before the Coldwater plant went live.
Being in the perishables industry made it impera-
tive for Clemens Food to have master data in place
when the new system went live to avoid disruptions
to production or shipping capabilities. (Master data
play a key role in the core operation of a business,
such as data about customers, employees, inventory,
or suppliers, and are typically shared by multiple
users and groups across an organization.) The master
data in Clemens Food’s legacy system had quite a
few flaws that showed up in testing. Clemens Food
needed a rigorous master data cleansing effort.
Clemens Food selected itelligence Group imple-
mentation consultants to help with its master data and
other migration issues. itelligence Group is a global
SAP Platinum Partner with over 25 years of experience.
It offers a full range of services from implementation
consulting to managed services for its clients. Clemens
Food Group identified itelligence as a partner with deep
SAP food-specific knowledge and experience, includ-
ing fresh and processed meat. itelligence Group had
a proprietary Hog Procurement solution available for
Clemens that helped deliver an on-time and on- budget
project with minimal disruption to the business.
itelligence Group had experience guiding other
meat-processing companies through similar large-
scale implementations. Rennells wanted itelligence
to act as business process experts to help Clemens
Food re-examine the way it did things. Clemens Food
followed itelligence’s suggestions about modifica-
tions, budget management, the overall testing cycle,
and the philosophy of implementation.
One especially valuable piece of project guidance
from itelligence was to encourage project members
to see the implementation as being led by the busi-
ness rather than just an IT project. Clemens Foods
started out with the project being IT-led, but after
five months assigned internal leaders of the business
to be the project leads. That switch forced the proj-
ect team to be more objective through all the differ-
ent testing phases. After each testing cycle, they had
objective scoring from the dedicated team leads who
viewed the project as a business process improve-
ment. That helped the project team move closer to a
finished product, rather than waiting until going live
to find out it missed the mark. Including the busi-
ness as equal partners when updates were instituted
helped ensure that customizations were avoided.
Two Clemens Food production plants went live on
SAP S/4HANA in May 2017, three months before the
Coldwater facility began operations. There were no
business disruptions. To avoid disruption of produc-
tion or shipping capabilities, the company had built in
some planned downtime for production to address any
issues with shipping or procurement, which are tied
to the Coldwater plant’s main distribution system. The
planned downtime also ensured that any master data
flaws potentially discovered through testing would be
cleaned up and master data would be in place before
the system actually went live. Management had antici-
pated it would take about six months to stabilize the
new system, and that turned out to be accurate.
Sales forecasting in the meat-processing industry
has unique challenges because of the many variables
from dealing with perishable products, raw material
by- products, and seasonality considerations. Every
Thursday, Clemens Food had run a sales report on its
old legacy system that showed the previous week’s
sales. Information about actual profitability was delayed.
Now, the company can measure profitability on an
invoice-by-invoice basis, and it knows the profitability
of each order right away. Prices change daily in the per-
ishable food business, so the importance of having real-
time information about profitability can’t be overstated.
Deeper insights and visibility from the new sys-
tem have improved customer service. With available-
to-promise processes running on SAP S/4HANA and
with SAP S/4HANA integrated with the company’s
warehouse management system, Clemens Food can
assure customers placing a phone order whether
there is inventory available. In the pork industry,
this can be an extremely complicated task, since
a single hog can be broken down into hundreds of
by-products. Before implementing SAP S/4HANA,
Clemens Food was able to provide the same assur-
ance only when an order was ready for shipment.
Once the new system is fully stabilized, Clemens
Food plans a reporting upgrade, using SAP HANA Live
views with its existing SAP BusinessObjects Business
Intelligence suite. The company now has a single
“source of truth,” and data are integrated, whereas in
the past it had to deal with similar data spread over
multiple systems. With a single source of truth and
the ability to put information at people’s fingertips,
Clemens Foods can create dashboards and focus on
making reporting far simpler than it’s ever been.
Sources: Ken Murphy, “Clemens Food Group Corrals the Power
of the Digital Core,” SAP Insider, January 24, 2018; www.
itelligencegroup.com, accessed March 27, 2018; “Clemens Food
Group LLC,” www.vault.com, accessed March 27, 2018; and www.
clemensfoodgroup.com, accessed March 27, 2018.
http://www.itelligencegroup.com
http://www.itelligencegroup.com
http://www.vault.com
http://www.clemensfoodgroup.com
http://www.clemensfoodgroup.com
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
9-17 What are three reasons a company would want to implement an enterprise resource planning (ERP)
system and two reasons it might not want to do so?
9-18 What are the sources of data for analytical CRM systems? Provide three examples of outputs from ana-
lytical CRM systems.
Chapter 9 References
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Sloan Management Review (Fall 2017).
Bozarth, Cecil, and Robert B. Handfield. Introduction to Operations
and Supply Chain Management, 5th ed. (Upper Saddle River,
NJ: Prentice-Hall, 2019).
D’Avanzo, Robert, Hans von Lewinski, and Luk N. van Wassen-
hove. “The Link Between Supply Chain and Financial Perfor-
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2003).
Davenport, Thomas H. Mission Critical: Realizing the Promise of
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Franken, Govert. “SAP AI: Machine Learning in Oil and Gas.”
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Fruhlinger, Josh, and Thomas Wailgum. “15 Famous ERP Disas-
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Klein, Richard, and Arun Rai. “Interfirm Strategic Information
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Laudon, Kenneth C. “The Promise and Potential of Enterprise Sys-
tems and Industrial Networks.” Working paper, The Concours
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Lee, Hau L., V. Padmanabhan, and Seugin Whang. “The Bullwhip
Effect in Supply Chains.” Sloan Management Review (Spring
1997).
Liang, Huigang, Zeyu Peng, Yajiong Xue, Xitong Guo, and Neng-
min Wang. “Employees’ Exploration of Complex Systems: An
Integrative View.” Journal of Management Information Systems
32, No. 1 (2015).
Maklan, Stan, Simon Knox, and Joe Peppard. “When CRM Fails.”
MIT Sloan Management Review 52, No. 4 (Summer 2011).
Malik, Yogesh, Alex Niemeyer, and Brian Ruwadi. “Building the Sup-
ply Chain of the Future.” McKinsey Quarterly (January 2011).
Nadeau, Michael. “ERP Heads for the Cloud.” CIO (September 20
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___________. “Hybrid ERP Matures as Companies Develop Better
Strategies.” CIO (February 22, 2017).
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oracle.com, accessed August 21, 2005.
Panorama Consulting Solutions. “2018 ERP Report” (2018).
Rai, Arun, Paul A. Pavlou, Ghiyoung Im, and Steve Du. “Interfirm
IT Capability Profiles and Communications for Cocreating
Relational Value: Evidence from the Logistics Industry.” MIS
Quarterly 36, No. 1 (March 2012).
Ranganathan, C., and Carol V. Brown. “ERP Investments and the
Market Value of Firms: Toward an Understanding of Influen-
tial ERP Project Variables.” Information Systems Research 17,
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Sarker, Supreteek, Saonee Sarker, Arvin Sahaym, and
Bjørn-Andersen. “Exploring Value Cocreation in Relationships
Between an ERP Vendor and Its Partners: A Revelatory Case
Study.” MIS Quarterly 36, No. 1 (March 2012).
Seldon, Peter B., Cheryl Calvert, and Song Yang. “A Multi-Project
Model of Key Factors Affecting Organizational Benefits from
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Built for Speed and Customization.” MIT Sloan Management
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Sykes, Tracy Ann, Viswanath Venkatesh, and Jonathan L. John-
son. “Enterprise System Implementation and Employee Job
CASE STUDY QUESTIONS
9-13 Why would supply chain management be so
important for Clemens Food Group?
9-14 What problem was the company facing? What
management, organization, and technology
factors contributed to the problem?
9-15 Was SAP S/4HANA a good solution for
Clemens Food Group? Explain your answer.
9-16 What management, organization, and technol-
ogy issues had to be addressed to implement
SAP S/4HANA at Clemens Food Group?
370 Part Three Key System Applications for the Digital Age
http://blogs.sap.com
http://www.oracle.com
http://www.oracle.com
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 371
Performance: Understanding the Role of Advice Networks.”
MIS Quarterly 38, No. 1 (March 2014).
Tate, Wendy L., Diane Mollenkopf, Theodore Stank, and Andrea
Lago da Silva. “Integrating Supply and Demand.” MIT Sloan
Management Review (Summer 2015).
Thibodeau, Patrick. “Office Depot Says ‘No’ to Oracle ERP Cloud
Customizations.” TechTarget (February 1, 2018).
Tian, Feng, and Sean Xin Xu. “How Do Enterprise Resource
Planning Systems Affect Firm Risk? Post-Implementation
Impact.” MIS Quarterly 39, No. 1 (March 2015).
“Top 5 Reasons ERP Implementations Fail and What You Can Do
About It.” Ziff Davis (2013).
Van Caeneghem, Alexander, and Jean-Marie Becquevort. “Turn-
ing on ERP Systems Can Turn Off People.” CFO (February 5,
2016).
Wailgum, Thomas. “What Is ERP? A Guide to Enterprise Resource
Planning Systems.” CIO (July 27, 2017).
Wong, Christina W. Y., Kee-Hung Lai, and T. C. E. Cheng. “Value of
Information Integration to Supply Chain Management: Roles
of Internal and External Contingencies.” Journal of Manage-
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Zhang, Jonathan Z., George F. Watson IV, and Robert W. Palma-
tier. “Customer Relationships Evolve—So Must Your CRM
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372
MyLab MIS
Discussion Questions: 10-7, 10-8, 10-9; Hands-on MIS Projects: 10-10, 10-11, 10-12, 10-13;
Writing Assignments: 10-18, 10-19; eText with Conceptual Animations
CHAPTER CASES
YouTube Transforms the Media Landscape
Uber: Digital Disruptor
“Socializing” with Customers
A Nasty Ending for Nasty Gal
VIDEO CASES
Walmart Takes On Amazon: A Battle of IT
and Management Systems
Groupon: Deals Galore
Etsy: A Marketplace and Community
Instructional Videos:
Walmart’s E-commerce Fulfillment Center
Network
Behind the Scenes of an Amazon Warehouse
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
10-1 What are the unique features of
e-commerce, digital markets, and
digital goods?
10-2 What are the principal e-commerce
business and revenue models?
10-3 How has e-commerce transformed
marketing?
10-4 How has e-commerce affected
business-to-business transactions?
10-5 What is the role of m-commerce
in business, and what are the most
important m-commerce applications?
10-6 What issues must be addressed when
building an e-commerce presence?
10-7 How will MIS help my career?
E-commerce: Digital Markets,
Digital Goods10CHAPTER
373
The first video posted on YouTube was a 19-second clip from 2005 of one of the company’s founders standing in front of the San Diego Zoo ele-phant cage. Who would have thought that the online video-sharing ser-
vice would mushroom into the world’s second most popular website, with more
than 1.8 billion monthly users? YouTube viewers worldwide now watch more
than 5 billion YouTube videos per day. Three hundred hours of video are up-
loaded to YouTube every minute.
YouTube allows users to view, rate, share, add to favorites, report, and com-
ment on videos and subscribe to other users’ video channels. Although hundreds
of millions of people love to post YouTube videos of their growing children,
dogs, and cats, YouTube offers much more: clips from major motion pictures
and TV shows, music videos, sports videos, videos from companies promot-
ing their brands, and numerous “how-to”
videos about home repair, gardening, and
computer troubleshooting. Most YouTube
content has been uploaded by individuals,
but media corporations such as CBS, the
BBC, Vevo, and Hulu offer some of their
material via YouTube as part of a partner-
ship program.
YouTube maintains very large databases
for video content and tracking the behav-
ior of its users. It carefully mines data to
give each user personalized video recom-
mendations that will entice that person
to watch longer. There are so many eye-
balls affixed to YouTube—it’s a gold mine
for marketers, and YouTube content gets
richer by the minute. More than half of
YouTube views come from mobile devices.
YouTube was purchased by Google in
2006 and benefits from Google’s enormous reach, since Google handles about
80 percent of global Internet searches. YouTube revenue comes from ads ac-
companying videos that are targeted to site content and audiences. YouTube
also offers subscription-based premium channels, film rentals, and a subscrip-
tion service called YouTube Red that provides ad-free access to the website and
some exclusive content. It is unclear if YouTube is actually profitable at this
point. Experts believe that annual costs for running and maintaining YouTube
exceed $6 billion.
Once known as a magnet for pirated video, YouTube has been embraced by
Hollywood and the entertainment world. Almost every movie trailer or music
Youtube Transforms the Media Landscape
© Bloomicon/Shutterstock
374 Part Three Key System Applications for the Digital Age
video is released onto YouTube; all major sports leagues upload highlights
there; and networks supplement traditional programming with videos that can
be shared, like the talk show host James Corden’s “Carpool Karaoke” series.
YouTube has become a major destination entertainment site, and it is about to
alter the media landscape even further.
YouTube has joined services targeting consumers who want to give up cable
or satellite TV without losing access to live television. In early 2017, YouTube
announced a subscription service called YouTube TV. For $40 per month, the
service offers more than 60 channels, including the major networks, FX, ESPN,
and the Disney Channel, as well as the ability to store an unlimited number of
programs on a cloud-based digital video recorder for up to six accounts. YouTube
TV subscribers will be able to watch content on any platform, including PCs,
tablets, smartphones, and big-screen TVs.
After the cost of acquiring all this television content is considered, Google
may not make much on YouTube TV subscription revenue. That’s fine right
now, because Google is using YouTube TV to break into the television advertis-
ing market, selling targeted advertising in ad slots that typically went to cable
operators. In the long term, that could be significant: Roughly $70 billion is
spent annually in the United States on TV ads.
Sources: David Pierce, “Why You Should Cut Cable—and What You’ll Miss,” Wall Street
Journal, February 14, 2018; Douglas MacMillan, “Investors Want More Transparency about
YouTube’s Sales, Profit,” Wall Street Journal, April 10, 2018; “37 Mind Blowing YouTube Facts,
Figures and Statistics—2018,” MerchDope, August 4, 2018; www.tv.youtube.com, accessed
July 30, 2018; Jack Nicas, “YouTube Tops 1 Billion Hours of Video a Day, on Pace to Eclipse
TV,” Wall Street Journal, February 27, 2017; Jack Nicas and Shalini Ramachandran, “Google’s
YouTube to Launch $35-a-Month Web-TV Service,” Wall Street Journal, February 28, 2017; and
Peter Kafka and Rani Molla, “2017 Was the Year Digital Ad Spending Finally Beat TV,” Recode,
December 4, 2017.
YouTube exemplifies some of the major trends in e-commerce today. It does not sell a product, it sells an innovative service, as e-commerce busi-
nesses are increasingly trying to do. YouTube’s service delivers streaming video
content either for free (supported by advertising) or by subscription, and also
enables users to upload and store their own videos. YouTube makes use of
advanced data mining and search technology to generate revenue from adver-
tising. YouTube is “social,” linking people to each other through their shared
interests and fascination with video. And it is mobile: YouTube can be viewed
on smartphones and tablets as well as conventional computers and TV screens,
and more than half of YouTube views are on mobile devices.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. YouTube’s primary business challenge is how to take
advantage of opportunities presented by the Internet and new developments in
search and data mining technology to wring profits from the billions of videos it
streams to viewers. Obviously YouTube had to make major investments in tech-
nology to support video uploads and downloads, gigantic databases of videos
and users, tagging images, and social networking tools. YouTube generates rev-
enue from ads targeted to video viewers and from subscriptions to its streaming
content services, including its new lineup of major TV channels. It is unclear
http://www.tv.youtube.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 375
whether YouTube has achieved long-term profitability, but it is very valuable to
Google as another outlet for its advertising.
Here are some questions to think about: How does YouTube provide value?
Why is YouTube an expensive business to operate? Is it a viable business model?
Why or why not?
10-1 What are the unique features of e-commerce,
digital markets, and digital goods?
In 2019, purchasing goods and services online by using smartphones, tablets, and
desktop computers is ubiquitous. In 2019, an estimated 224 million Americans
(about 92 percent of the Internet population) will shop online, and 195 million
will purchase something online, as did millions of others worldwide. Although
most purchases still take place through traditional channels, e-commerce con-
tinues to grow rapidly and to transform the way many companies do business
(eMarketer, 2018h). E-commerce is composed of three major segments: retail
goods, travel and services, and online content. In 2019, e-commerce consumer
sales of goods ($598 billion), travel and services ($213 billion), and online con-
tent ($23 billion) will total about $830 billion. Sales of retail goods alone will
be about 11 percent of total U.S. retail sales of $5.9 trillion, and are growing at
12 percent annually (compared with 3.3 percent for traditional retailers) (eMar-
keter, 2018e; 2018c). E-commerce is still a small part of the much larger retail
goods market that takes place in physical stores. E-commerce has expanded
from the desktop and home computer to mobile devices, from an isolated ac-
tivity to a new social commerce, and from a Fortune 1000 commerce with a na-
tional audience to local merchants and consumers whose location is known to
mobile devices. At the top 100 e-commerce retail sites, more than half of online
shoppers arrive from their smartphones, and 48 percent of e-commerce sales
are now mobile, while 52 percent of purchases occur on the desktop. The key
words for understanding this new e-commerce in 2019 are “social, mobile, local”
(eMarketer, 2018d).
• Opportunities presented
by new technology
• Maintain social
networks
• Partner with
content providers
• Personalize streaming video
• Piggyback advertising
• Provide content subscription
service
• Increase revenue
• Databases
• Social networking
tools
• Data mining
• Video streaming
• Design business
and revenue model
Business
Solutions
Management
Organization
Video Content Serving
Platform
Technology
Information
System
Business
Challenges
376 Part Three Key System Applications for the Digital Age
E-commerce Today
E-commerce refers to the use of the Internet and the web to transact business.
More formally, e-commerce is about digitally enabled commercial transactions
between and among organizations and individuals. For the most part, this re-
fers to transactions that occur over the Internet and the web. Commercial trans-
actions involve the exchange of value (e.g., money) across organizational or
individual boundaries in return for products and services.
E-commerce began in 1995 when one of the first Internet portals,
Netscape.com, accepted the first ads from major corporations and popular-
ized the idea that the web could be used as a new medium for advertising
and sales. No one envisioned at the time what would turn out to be an expo-
nential growth curve for e-commerce retail sales, which doubled and tripled
in the early years. E-commerce grew at double-digit rates until the recession
of 2008–2009, when growth slowed to a crawl and revenues flattened (see
Figure 10.1), which is not bad considering that traditional retail sales were
shrinking by 5 percent annually. Since then, offline retail sales have in-
creased only a few percentage points a year, whereas online e-commerce has
been a stellar success.
The very rapid growth in e-commerce in the early years created a market
bubble in e-commerce stocks, which burst in March 2001. A large number of
e-commerce companies failed during this process. Yet for many others, such
as Amazon, eBay, Expedia, and Google, the results have been more positive:
soaring revenues, fine-tuned business models that produce profits, and rising
stock prices. By 2006, e-commerce revenues returned to solid growth and have
continued to be the fastest-growing form of retail trade in the United States,
Europe, and Asia.
• Online consumer sales (including travel and digital content) will grow to
an estimated $830 billion in 2019, an increase of more than 12 percent over
2018 with 195 million people purchasing online and an additional 224 million
shopping and gathering information but not purchasing (eMarketer, 2017b).
FIGURE 10.1 THE GROWTH OF E-COMMERCE
Retail e-commerce revenues grew 15–25 percent per year until the recession of 2008–2009,
when they slowed measurably. In 2018, e-commerce revenues grew at an estimated 12 percent
annually.
Sources: Based on data from eMarketer, “US Retail Ecommerce Sales, 2018–2022,” 2018c; eMarketer, “US Digital Travel Sales, 2018–2022,” 2018a; and
eMarketer chart, “US Mobile Downloads and In-App Revenues, 2013–2017,” 2017a.
0.0
200.0
400.0
600.0
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1000.0
1200.0
19
95
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Growth in E-Commerce B2C Revenue (billions)
Year
B
2C
R
ev
en
ue
s
(B
ill
io
ns
U
S
D
)
http://Netscape.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 377
The Internet influences more than $2 trillion in retail commerce that takes
place in physical stores, about 40 percent of all retail sales.
• The number of individuals of all ages online in the United States is expected
to grow to 279 million in 2018, up from 147 million in 2004. In the world,
more than 3.7 billion people are now connected to the Internet. Growth in
the overall Internet population has spurred growth in e-commerce (Internet
World Stats, 2018).
• Approximately 106 million U.S. households will have broadband access to the
Internet in 2018, representing about 82 percent of all households.
• About 232 million Americans will access the Internet by using a smart-
phone in 2019. Mobile e-commerce has begun a rapid growth based on apps,
ringtones, downloaded entertainment, and location-based services. Mobile
e-commerce will account for about $267 billion in 2019, 44 percent of all
e-commerce. Mobile phones and tablets are becoming the most common
Internet access device. Currently, more than 80 percent of all mobile phone
users access the Internet using their phones, although they also use their
desktops (eMarketer, 2018b).
• B2B e-commerce (use of the Internet for business-to-business commerce and
collaboration among business partners) expanded to more than $7.7 trillion.
Table 10.1 highlights these new e-commerce developments.
The New E-commerce: Social, Mobile, Local
One of the biggest changes is the extent to which e-commerce has become more
social, mobile, and local. Online marketing once consisted largely of creating
a corporate website, buying display ads on Yahoo, purchasing search-related
ads on Google, and sending email messages. The workhorse of online market-
ing was the display ad. It still is, but it’s increasingly being replaced by video
ads, which are far more effective. Display ads from the very beginning of the
Internet were based on television ads, where brand messages were flashed be-
fore millions of users who were not expected to respond immediately, ask ques-
tions, or make observations. If the ads did not work, the solution was often to
repeat the ad. The primary measure of success was how many eyeballs (unique
visitors) a website produced and how many impressions a marketing campaign
generated. (An impression was one ad shown to one person.) Both of these
measures were carryovers from the world of television, which measures mar-
keting in terms of audience size and ad views.
From Eyeballs to Conversations: Conversational Commerce
After 2007, all this changed with the rapid growth of Facebook and other social
sites, the explosive growth of smartphones beginning with the Apple iPhone,
and the growing interest in local marketing. What’s different about the new
world of social-mobile-local e-commerce is the dual and related concepts of
conversations and engagement. In the popular literature, this is often referred
to as conversational commerce. Marketing in this new period is based on firms
engaging in multiple online conversations with their customers, potential cus-
tomers, and even critics. Your brand is being talked about on the web and social
media (that’s the conversation part), and marketing your firm, building, and
restoring your brands require you to locate, identify, and participate in these
conversations. Social marketing means all things social: listening, discussing,
interacting, empathizing, and engaging. The emphasis in online marketing has
shifted from a focus on eyeballs to a focus on participating in customer-oriented
conversations. In this sense, social marketing is not simply a new ad channel
378 Part Three Key System Applications for the Digital Age
but a collection of technology-based tools for communicating with shoppers.
The leading social commerce platforms are Facebook, Instagram, Twitter, and
Pinterest.
In the past, firms could tightly control their brand messaging and lead con-
sumers down a funnel of cues that ended in a purchase. That is not true of
social marketing. Consumer purchase decisions are increasingly driven by the
TABLE 10.1 THE GROWTH OF E-COMMERCE
BUSINESS TRANSFORMATION
E-commerce remains the fastest-growing form of commerce when compared to physical retail stores, services, and
entertainment. Social, mobile, and local commerce have become the fastest-growing forms of e-commerce.
The breadth of e-commerce offerings grows, especially in the services economy of social networking, travel, entertainment,
retail apparel, jewelry, appliances, and home furnishings.
The online demographics of shoppers broaden to match that of ordinary shoppers.
Pure e-commerce business models are refined further to achieve higher levels of profitability, and traditional retail firms, such as
Walmart, JCPenney, L.L.Bean, and Macy’s, are developing omnichannel business models to strengthen their dominant physical
retail assets. Walmart, the world’s largest retailer, has decided to take on Amazon with a more than $1 billion investment in its
e-commerce efforts.
Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often riding on the infrastructures
created by industry giants, such as Amazon, Apple, and Google, and increasingly taking advantage of cloud-based computing
resources.
Mobile e-commerce has taken off in the United States with location-based services and entertainment downloads, including
e-books, movies, music, and television shows. Mobile e-commerce will generate more than $267 billion in 2019.
TECHNOLOGY FOUNDATIONS
Wireless Internet connections (Wi-Fi, WiMax, and 4G smartphones) continue to expand.
Powerful smartphones and tablet computers provide access to music, web surfing, and entertainment as well as voice
communication. Podcasting and streaming take off as platforms for distribution of video, radio, and user-generated content.
Mobile devices expand to include wearable computers such as Apple Watch and Fitbit trackers.
The Internet broadband foundation becomes stronger in households and businesses as communication prices fall.
Social networking apps and sites such as Facebook, Twitter, LinkedIn, Instagram, and others seek to become a major new
platform for e-commerce, marketing, and advertising. Facebook has 2.2 billion users worldwide and 214 million in the United
States (Facebook, 2018).
Internet-based models of computing, such as smartphone apps, cloud computing, software as a service (SaaS), and database
software greatly reduce the cost of e-commerce websites.
NEW BUSINESS MODELS EMERGE
More than 70 percent of the Internet population has joined an online social network, created blogs, and shared photos and
music. Together, these sites create an online audience as large as that of television that is attractive to marketers. In 2018,
social networking will account for an estimated 15 percent of online time. Social sites have become the primary gateway to the
Internet in news, music, and, increasingly, products and services. (eMarketer, 2018f)
The traditional advertising industry is disrupted as online advertising grows twice as fast as TV and print advertising; Google,
Yahoo, and Facebook display more than 1 trillion ads a year.
On-demand service e-commerce sites such as Uber, Lyft, and Airbnb extend the market creator business model (on-demand
model) to new areas of the economy.
Newspapers and other traditional media adopt online, interactive models but are losing advertising revenues to the online
players despite gaining online readers. The New York Times succeeds in capturing more than 2.8 million subscribers, growing at
25 percent annually and adding 400,000 new digital subscribers in 2018. Book publishing continues to grow slowly at 5 percent
because of the growth in e-books and the continuing appeal of traditional books.
Online entertainment business models offering television, movies, music, and games grow with cooperation among the major
copyright owners in Hollywood and New York and with Internet distributors such as Apple, Amazon, Google, YouTube, and
Facebook. Increasingly, the online distributors are moving into movie and TV production. Cable television is in modest decline,
as some viewers cut or reduce their cable subscriptions and rely on Internet-based alternatives such as Roku or YouTube TV.
Chapter 10 E-commerce: Digital Markets, Digital Goods 379
conversations, choices, tastes, and opinions of their social network. Social mar-
keting is all about firms participating in and shaping this social process.
From the Desktop to the Smartphone
Traditional online marketing (browser-based, search, display ads, video ads,
email, and games) still constitutes the majority (58 percent) of all online mar-
keting ($107 billion), but it’s growing much more slowly than social-mobile- local
marketing. Mobile marketing now constitutes 70 percent of all online market-
ing. The marketing dollars are following customers and shoppers from the PC
to mobile devices (eMarketer, 2018g)
Social, mobile, and local e-commerce are connected. As mobile devices be-
come more powerful, they are more useful for accessing Facebook and other
social sites. As mobile devices become more widely adopted, customers can use
them to find local merchants, and merchants can use them to alert customers
in their neighborhood of special offers.
Why E-commerce Is Different
Why has e-commerce grown so rapidly? The answer lies in the unique nature
of the Internet and the web. Simply put, the Internet and e-commerce technol-
ogies are much richer and more powerful than previous technology revolutions
such as radio, television, and the telephone. Table 10.2 describes the unique
features of the Internet and web as a commercial medium. Let’s explore each of
these unique features in more detail.
Ubiquity
In traditional commerce, a marketplace is a physical place, such as a retail
store, that you visit to transact business. E-commerce is ubiquitous, meaning
TABLE 10.2 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
E-COMMERCE TECHNOLOGY DIMENSION BUSINESS SIGNIFICANCE
Ubiquity. Internet/web technology is available
everywhere: at work, at home, and elsewhere by
desktop and mobile devices. Mobile devices extend
service to local areas and merchants.
The marketplace is extended beyond traditional boundaries and is
removed from a temporal and geographic location. Marketspace
is created; shopping can take place anytime, anywhere. Customer
convenience is enhanced, and shopping costs are reduced.
Global Reach. The technology reaches across national
boundaries, around the earth.
Commerce is enabled across cultural and national boundaries
seamlessly and without modification. The marketspace includes,
potentially, billions of consumers and millions of businesses worldwide.
Universal Standards. There is one set of technology
standards, namely Internet standards.
With one set of technical standards across the globe, disparate
computer systems can easily communicate with each other.
Richness. Video, audio, and text messages are
possible.
Video, audio, and text marketing messages are integrated into a single
marketing message and consumer experience.
Interactivity. The technology works through interaction
with the user.
Consumers are engaged in a dialogue that dynamically adjusts the
experience to the individual and makes the consumer a participant in
the process of delivering goods to the market.
Information Density. The technology reduces
information costs and raises quality.
Information processing, storage, and communication costs drop
dramatically, whereas currency, accuracy, and timeliness improve
greatly. Information becomes plentiful, cheap, and more accurate.
Personalization/Customization. The technology
allows personalized messages to be delivered to
individuals as well as to groups.
Personalization of marketing messages and customization of products
and services are based on individual characteristics.
Social Technology. The technology supports
content generation and social networking.
New Internet social and business models enable user content creation
and distribution and support social networks.
380 Part Three Key System Applications for the Digital Age
that it is available just about everywhere all the time. It makes it possible to
shop from your desktop, at home, at work, or even from your car, using smart-
phones. The result is called a marketspace—a marketplace extended beyond
traditional boundaries and removed from a temporal and geographic location.
From a consumer point of view, ubiquity reduces transaction costs—the
costs of participating in a market. To transact business, it is no longer necessary
to spend time or money traveling to a market, and much less mental effort is
required to make a purchase.
Global Reach
E-commerce technology permits commercial transactions to cross cultural and
national boundaries far more conveniently and cost effectively than is true in
traditional commerce. As a result, the potential market size for e-commerce
merchants is roughly equal to the size of the world’s online population (esti-
mated to be more than 3 billion).
In contrast, most traditional commerce is local or regional—it involves local
merchants or national merchants with local outlets. Television, radio stations,
and newspapers, for instance, are primarily local and regional institutions with
limited, but powerful, national networks that can attract a national audience
but not easily cross national boundaries to a global audience.
Universal Standards
One strikingly unusual feature of e-commerce technologies is that the technical
standards of the Internet and, therefore, the technical standards for conducting
e-commerce are universal standards. All nations around the world share them
and enable any computer to link with any other computer regardless of the
technology platform each is using. In contrast, most traditional commerce tech-
nologies differ from one nation to the next. For instance, television and radio
standards differ around the world, as does cellular telephone technology.
The universal technical standards of the Internet and e-commerce greatly
lower market entry costs—the cost merchants must pay simply to bring their
goods to market. At the same time, for consumers, universal standards reduce
search costs—the effort required to find suitable products.
Richness
Information richness refers to the complexity and content of a message.
Traditional markets, national sales forces, and small retail stores have great
richness; they can provide personal, face-to-face service, using aural and vi-
sual cues when making a sale. The richness of traditional markets makes them
powerful selling or commercial environments. Prior to the development of
the web, there was a trade-off between richness and reach; the larger the audi-
ence reached, the less rich the message. The web makes it possible to deliver
rich messages with text, audio, and video simultaneously to large numbers of
people.
Interactivity
Unlike any of the commercial technologies of the twentieth century, with the
possible exception of the telephone, e-commerce technologies are interactive,
meaning they allow for two-way communication between merchant and con-
sumer and peer-to-peer communication among friends. Television, for instance,
cannot ask viewers any questions or enter conversations with them, and it can-
not request customer information to be entered on a form. In contrast, all these
activities are possible on an e-commerce website or mobile app. Interactivity
Chapter 10 E-commerce: Digital Markets, Digital Goods 381
allows an online merchant to engage a consumer in ways similar to a face-
to-face experience but on a massive, global scale.
Information Density
The Internet and the web vastly increase information density—the total
amount and quality of information available to all market participants, consum-
ers, and merchants alike. E-commerce technologies reduce information collec-
tion, storage, processing, and communication costs while greatly increasing the
currency, accuracy, and timeliness of information.
Information density in e-commerce markets make prices and costs more
transparent. Price transparency refers to the ease with which consumers can
find out the variety of prices in a market; cost transparency refers to the abil-
ity of consumers to discover the actual costs merchants pay for products.
There are advantages for merchants as well. Online merchants can discover
much more about consumers than in the past. This allows merchants to seg-
ment the market into groups that are willing to pay different prices and permits
the merchants to engage in price discrimination—selling the same goods,
or nearly the same goods, to different targeted groups at different prices. For
instance, an online merchant can discover a consumer’s avid interest in expen-
sive, exotic vacations and then pitch high-end vacation plans to that consumer
at a premium price, knowing this person is willing to pay extra for such a va-
cation. At the same time, the online merchant can pitch the same vacation
plan at a lower price to a more price-sensitive consumer. Information density
also helps merchants differentiate their products in terms of cost, brand, and
quality.
Personalization/Customization
E-commerce technologies permit personalization. Merchants can target their
marketing messages to specific individuals by adjusting the message to a per-
son’s clickstream behavior, name, interests, and past purchases. The technol-
ogy also permits customization—changing the delivered product or service
based on a user’s preferences or prior behavior. Given the interactive nature of
e- commerce technology, much information about the consumer can be gath-
ered in the marketplace at the moment of purchase. With the increase in in-
formation density, a great deal of information about the consumer’s past pur-
chases and behavior can be stored and used by online merchants.
The result is a level of personalization and customization unthinkable with
traditional commerce technologies. For instance, you may be able to shape
what you see on television by selecting a channel, but you cannot change the
content of the channel you have chosen. In contrast, online news outlets such
as the Wall Street Journal Online allow you to select the type of news stories you
want to see first and give you the opportunity to be alerted when certain events
happen.
Social Technology: User Content Generation and
Social Networking
In contrast to previous technologies, the Internet and e-commerce technologies
have evolved to be much more social by allowing users to create and share with
their friends (and a larger worldwide community) content in the form of text,
videos, music, or photos. By using these forms of communication, users can
create new social networks and strengthen existing ones.
All previous mass media, including the printing press, use a broadcast model
(one-to-many) in which content is created in a central location by experts
382 Part Three Key System Applications for the Digital Age
(professional writers, editors, directors, and producers), with audiences concen-
trated in huge numbers to consume a standardized product. The new Internet
and e-commerce empower users to create and distribute content on a large scale
and permit users to program their own content consumption. The Internet pro-
vides a unique many-to-many model of mass communications.
Key Concepts in E-commerce: Digital Markets
and Digital Goods in a Global Marketplace
The location, timing, and revenue models of business are based in some part
on the cost and distribution of information. The Internet has created a digital
marketplace where millions of people all over the world can exchange massive
amounts of information directly, instantly, and free. As a result, the Internet
has changed the way companies conduct business and increased their global
reach.
The Internet reduces information asymmetry. An information asymmetry
exists when one party in a transaction has more information that is impor-
tant for the transaction than the other party. That information helps determine
their relative bargaining power. In digital markets, consumers and suppliers
can see the prices being charged for goods, and in that sense, digital markets
are said to be more transparent than traditional markets.
For example, before automobile retailing sites appeared on the web, there
was significant information asymmetry between auto dealers and customers.
Only the auto dealers knew the manufacturers’ prices, and it was difficult for
consumers to shop around for the best price. Auto dealers’ profit margins de-
pended on this asymmetry of information. Today’s consumers have access to a
legion of websites providing competitive pricing information, and three-fourths
of U.S. auto buyers use the Internet to shop around for the best deal. Thus, the
web has reduced the information asymmetry surrounding an auto purchase.
The Internet has also helped businesses seeking to purchase from other busi-
nesses reduce information asymmetries and locate better prices and terms.
Digital markets are very flexible and efficient because they operate with
reduced search and transaction costs, lower menu costs (merchants’ costs
of changing prices), greater price discrimination, and the ability to change
prices dynamically based on market conditions. In dynamic pricing, the
price of a product varies depending on the demand characteristics of the cus-
tomer or the supply situation of the seller. For instance, online retailers from
Amazon to Walmart change prices on thousands of products based on time
of day, demand for the product, and users’ prior visits to their sites. Using
big data analytics, some online firms can adjust prices at the individual level
based on behavioral targeting parameters such as whether the consumer is
a price haggler (who will receive a lower price offer) versus a person who
accepts offered prices and does not search for lower prices. Prices can also
vary by zip code. Uber, along with other ride services, uses surge pricing to
adjust prices of a ride based on demand (which always rises during storms
and major conventions).
These new digital markets can either reduce or increase switching costs, de-
pending on the nature of the product or service being sold, and they might
cause some extra delay in gratification due to shipping times. Unlike a physical
market, you can’t immediately consume a product such as clothing purchased
over the web (although immediate consumption is possible with digital music
downloads and other digital products).
Chapter 10 E-commerce: Digital Markets, Digital Goods 383
Digital markets provide many opportunities to sell directly to the consumer,
bypassing intermediaries such as distributors or retail outlets. Eliminating inter-
mediaries in the distribution channel can significantly lower purchase transac-
tion costs. To pay for all the steps in a traditional distribution channel, a product
may have to be priced as high as 135 percent of its original cost to manufacture.
Figure 10.2 illustrates how much savings result from eliminating each of these
layers in the distribution process. By selling directly to consumers or reducing
the number of intermediaries, companies can raise profits while charging lower
prices. The removal of organizations or business process layers responsible for
intermediary steps in a value chain is called disintermediation. E-commerce
has also given rise to a completely new set of new intermediaries such as
Amazon, eBay, PayPal, and Blue Nile. Therefore, disintermediation differs from
one industry to another.
Disintermediation is affecting the market for services. Airlines and hotels
operating their own reservation sites online earn more per ticket because they
have eliminated travel agents as intermediaries. Table 10.3 summarizes the dif-
ferences between digital markets and traditional markets.
Digital Goods
The Internet digital marketplace has greatly expanded sales of digital goods—
goods that can be delivered over a digital network. Music tracks, video, Hollywood
movies, software, newspapers, magazines, and books can all be expressed, stored,
delivered, and sold as purely digital products. For the most part, digital goods are
intellectual property, which is defined as “works of the mind.” Intellectual prop-
erty is protected from misappropriation by copyright, patent, trademark, and
trade secret laws (see Chapter 4). Today, all these products are delivered as digital
streams or downloads while their physical counterparts decline in sales.
In general, for digital goods, the marginal cost of producing another unit is
about zero (it costs nothing to make a copy of a music file). However, the cost of
producing the original first unit is relatively high—in fact, it is nearly the total
cost of the product because there are few other costs of inventory and distribu-
tion. Costs of delivery over the Internet are very low, marketing costs often
FIGURE 10.2 THE BENEFITS OF DISINTERMEDIATION TO THE CONSUMER
The typical distribution channel has several intermediary layers, each of which adds to
the final cost of a product, such as a sweater. Removing layers lowers the final cost to the
customer.
Manufacturer
Manufacturer
Manufacturer Distributor Retailer Customer $48.50
Price per
Sweater
$40.34
$20.45
Customer
Customer
Retailer
384 Part Three Key System Applications for the Digital Age
remain the same, and pricing can be highly variable. On the Internet, the mer-
chant can change prices as often as desired because of low menu costs.
The impact of the Internet on the market for these kinds of digital goods is
nothing short of revolutionary, and we see the results around us every day.
Businesses dependent on physical products for sales—such as bookstores,
music stores, book publishers, music labels, and film studios—face the possibil-
ity of declining sales and even destruction of their businesses. Newspaper and
magazine subscriptions to hard copies are declining, while online readership
and subscriptions are expanding.
Total record label industry revenues fell nearly 50 percent from $14 billion
in 1999 to about $7.7 billion in 2016, due almost entirely to the rapid decline in
CD album sales and the growth of digital music services (both legal and illegal
music piracy). But revenues increased in 2017 by 16 percent to $8.7 billion pri-
marily through the growth of paid subscriptions (RIAA.com, 2018). The Apple
iTunes Store has sold more than 50 billion songs for 99 cents each since opening
in 2003, providing a digital distribution model that has restored some of the rev-
enues lost to digital music channels. Yet the download business is rapidly fading
at Apple, down more than 25 percent in recent years, as streaming becomes the
dominant consumer path to music. Since iTunes, illegal downloading has been
cut in half, and legitimate online music sales (both downloads and streaming)
amounted to $5.7 billion in 2017. As cloud streaming services expand, illegal
downloading will decline further. Digital music sales, both digital download and
streaming, account for more than 80 percent of all music revenues. The music
labels make only about 32 cents from a single track download and only 0.5 cents
for a streamed track. Although the record labels make revenue from ownership
of the song (both words and music), the artists who perform the music make
virtually nothing from streamed music. Artists’ earnings on a streamed song on
an ad-supported platform like Spotify are pennies per million streams.
Hollywood has been less severely disrupted than the music industry by il-
legal digital distribution platforms, because it is more difficult to download
high-quality, pirated copies of full-length movies and because of the avail-
ability of low-cost, high-quality legal movies. Hollywood has struck lucrative
distribution deals with Netflix, Google, Hulu, Amazon, and Apple, making it
convenient to download and pay for high-quality movies and television series.
TABLE 10.3 DIGITAL MARKETS COMPARED WITH TRADITIONAL MARKETS
DIGITAL MARKETS TRADITIONAL MARKETS
Information asymmetry Asymmetry reduced Asymmetry high
Search costs Low High
Transaction costs Low (sometimes virtually nothing) High (time, travel)
Delayed gratification High (or lower in the case
of a digital good)
Lower: purchase now
Menu costs Low High
Dynamic pricing Low cost, instant High cost, delayed
Price discrimination Low cost, instant High cost, delayed
Market segmentation Low cost, moderate precision High cost, less precision
Switching costs Higher/lower (depending on
product characteristics)
High
Network effects Strong Weaker
Disintermediation More possible/likely Less possible/unlikely
http://RIAA.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 385
These arrangements are not enough to compensate entirely for the loss in DVD
sales, which fell 60 percent from 2006 to 2017. Digital format streaming and
downloads grew by 20 percent in 2017 and, for the first time, consumers viewed
more downloaded movies than DVDs or related physical products. As with tele-
vision series, the demand for feature-length Hollywood movies appears to be
expanding, in part because of the growth of smartphones, tablets, and smart
TVs, making it easier to watch movies in more locations.
In 2019, about 258 million Internet users are expected to view movies,
about 82 percent of the adult Internet population. There is little doubt that the
Internet is becoming a major movie distribution and television channel that
rivals cable television, and someday may replace cable television entirely (see
the chapter-opening case).
Table 10.4 describes digital goods and how they differ from traditional physi-
cal goods (eMarketer, 2018i)
10-2 What are the principal e-commerce
business and revenue models?
E-commerce is a fascinating combination of business models and new infor-
mation technologies. Let’s start with a basic understanding of the types of
e- commerce and then describe e-commerce business and revenue models.
Types of E-commerce
There are many ways to classify electronic commerce transactions—one is by
looking at the nature of the participants. The three major electronic commerce
categories are business-to-consumer (B2C) e-commerce, business-to-business
(B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.
• Business-to-consumer (B2C) electronic commerce involves retailing prod-
ucts and services to individual shoppers. Amazon, Walmart, and iTunes are
examples of B2C commerce. BarnesandNoble.com, which sells books, soft-
ware, and music to individual consumers, is an example of B2C e-commerce.
• Business-to-business (B2B) electronic commerce involves sales of goods
and services among businesses. Elemica’s website for buying and selling
chemicals and energy is an example of B2B e-commerce.
• Consumer-to-consumer (C2C) electronic commerce involves consumers
selling directly to consumers. For example, eBay, the giant web auction site,
TABLE 10.4 HOW THE INTERNET CHANGES THE MARKETS FOR DIGITAL
GOODS
DIGITAL GOODS TRADITIONAL GOODS
Marginal cost/unit Zero Greater than zero, high
Cost of production High (most of the cost) Variable
Copying cost Approximately zero Greater than zero, high
Distributed delivery cost Low High
Inventory cost Low High
Marketing cost Variable Variable
Pricing More variable (bundling,
random pricing games)
Fixed, based on unit costs
http://BarnesandNoble.com
386 Part Three Key System Applications for the Digital Age
enables people to sell their goods to other consumers by auctioning their mer-
chandise off to the highest bidder or for a fixed price. eBay acts as a middleman
by creating a digital platform for peer-to-peer commerce. Craigslist is the plat-
form most consumers use to buy from and sell directly to others.
Another way of classifying electronic commerce transactions is in terms of
the platforms participants use in a transaction. Until recently, most e- commerce
transactions took place using a desktop PC connected to the Internet over a
wired network. Several wireless mobile alternatives have emerged, such as
smartphones and tablet computers. The use of handheld wireless devices for
purchasing goods and services from any location is termed mobile commerce
or m-commerce. All three types of e-commerce transactions can take place
using m-commerce technology, which we discuss in detail in Section 10.3.
E-commerce Business Models
Changes in the economics of information described earlier have created the
conditions for entirely new business models to appear while destroying older
business models. Table 10.5 describes some of the most important Internet busi-
ness models that have emerged. All, in one way or another, use the Internet
(including apps on mobile devices) to add extra value to existing products and
services or to provide the foundation for new products and services.
Portal
Portals are gateways to the web and are often defined as those sites that users set
as their home page. Some definitions of a portal include search engines such as
TABLE 10.5 INTERNET BUSINESS MODELS
CATEGORY DESCRIPTION EXAMPLES
E-tailer Sells physical products directly to consumers or to individual businesses. Amazon
Blue Nile
Transaction broker Saves users money and time by processing online sales transactions and
generating a fee each time a transaction occurs.
ETrade.com
Expedia
Market creator Provides a digital environment where buyers and sellers can meet, search
for products, display products, and establish prices for those products;
can serve consumers or B2B e-commerce, generating revenue from
transaction fees.
eBay
Priceline.com
Exostar
Elemica
Content provider Creates revenue by providing digital content, such as news, music, photos,
or video, over the web. The customer may pay to access the content, or
revenue may be generated by selling advertising space.
WSJ.com
GettyImages.com
iTunes.com
MSN Games
Community provider Provides an online meeting place where people with similar interests can
communicate and find useful information.
Facebook
Twitter
Portal Provides initial point of entry to the web along with specialized content
and other services.
Yahoo
MSN
AOL
Service provider Provides applications such as photo sharing, video sharing, and
user-generated content as services; provides other services such as online
data storage and backup.
Google Docs
Photobucket.com
Dropbox
http://ETrade.com
http://Priceline.com
http://WSJ.com
http://GettyImages.com
http://iTunes.com
http://Photobucket.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 387
Google and Bing even if few make these sites their home page. Portals such as
Yahoo, Facebook, MSN, and AOL offer web search tools as well as an integrated
package of content and services such as news, email, instant messaging, maps, cal-
endars, shopping, music downloads, video streaming, and more all in one place.
The portal business model now provides a destination site where users start their
web searching and linger to read news, find entertainment, meet other people,
and, of course, be exposed to advertising. Facebook is a very different kind of por-
tal based on social networking, and in 2018 Americans will spend more than half
their online time at Facebook, about two hours per day! Portals generate revenue
primarily by attracting very large audiences, charging advertisers for display ad
placement (similar to traditional newspapers), collecting referral fees for steering
customers to other sites, and charging for premium services. In 2019, portals (not
including Google, Facebook, or Bing) will generate an estimated $10 billion in dis-
play ad revenues. Although there are hundreds of portal/search engine sites, the
top portals (Yahoo, MSN, and AOL) gather more than 80 percent of the Internet
portal traffic because of their superior brand recognition.
E-tailer
Online retail stores, often called e-tailers, come in all sizes, from giant Amazon
with 2017 retail sales revenues of more than $178 billion to tiny local stores that
have websites. An e-tailer is similar to the typical brick-and-mortar storefront, ex-
cept that customers only need to connect to the Internet to check their inventory
and place an order. Altogether, online retail (the sale of physical goods online) will
generate about $598 billion in revenues in 2019. The value proposition of e-tailers
is to provide convenient, low-cost shopping 24/7; large selections; and con-
sumer choice. Some e-tailers, such as Walmart.com or Staples.com, referred to as
bricks-and-clicks, are subsidiaries or divisions of existing physical stores and carry
the same products. Others, however, operate only in the virtual world, without
any ties to physical locations. Ashford.com and eVitamins.com are examples of
this type of e-tailer. Several other variations of e-tailers—such as online versions of
direct-mail catalogs, online malls, and manufacturer-direct online sales—also exist.
Content Provider
E-commerce has increasingly become a global content channel. Content is de-
fined broadly to include all forms of intellectual property. Intellectual property
refers to tangible and intangible products of the mind for which the creator
claims a property right. Content providers distribute information content—
such as digital video, music, photos, text, and artwork—over the web. The value
proposition of online content providers is that consumers can conveniently find
a wide range of content online and purchase this content inexpensively to be
played or viewed on multiple computer devices or smartphones.
Providers do not have to be the creators of the content (although sometimes
they are, like Disney.com) and are more likely to be Internet-based distribu-
tors of content produced and created by others. For example, Apple sells music
tracks at its iTunes Store, but it does not create or commission new music.
The phenomenal popularity of Internet-connected mobile devices such as
the iPhone, iPod, and iPad has enabled new forms of digital content delivery
from podcasting to mobile streaming. Podcasting is a method of publishing
audio or video broadcasts through the Internet, allowing subscribing users to
download audio or video files onto their personal computers, smartphones, tab-
lets, or portable music players. Streaming is a publishing method for music
and video files that flows a continuous stream of content to a user’s device with-
out being stored locally on the device.
http://Walmart.com
http://Staples.com
http://Ashford.com
http://eVitamins.com
http://Disney.com
388 Part Three Key System Applications for the Digital Age
Estimates vary, but total online content will generate about $23 billion in
2019, one of the fastest-growing e-commerce segments, growing at an estimated
18 percent annual rate.
Transaction Broker
Sites that process transactions for consumers normally handled in person, by
phone, or by mail are transaction brokers. The largest industries using this
model are financial services and travel services. The online transaction bro-
ker’s primary value propositions are savings of money and time and providing
an extraordinary inventory of financial products or travel packages in a single
location. Online stockbrokers and travel booking services charge fees that are
considerably less than traditional versions of these services. Fidelity Financial
Services and Expedia are the largest online financial and travel service firms
based on a transaction broker model.
Market Creator
Market creators build a digital environment in which buyers and sellers can
meet, display products, search for products, and establish prices. The value
proposition of online market creators is that they provide a platform where
sellers can easily display their wares and purchasers can buy directly from sell-
ers. Online auction markets such as eBay and Priceline are good examples of
the market creator business model. Another example is Amazon’s Merchants
platform (and similar programs at eBay), where merchants are allowed to
set up stores on Amazon’s website and sell goods at fixed prices to consum-
ers. The so-called on-demand economy (mistakenly often referred to as the
sharing economy), exemplified by Uber (described in the Interactive Session
on Organizations) and Airbnb, is based on the idea of a market creator build-
ing a digital platform where supply meets demand; for instance, spare auto
or room rental capacity finds individuals who want transportation or lodging.
Crowdsource funding markets such as Kickstarter.com bring together private
equity investors and entrepreneurs in a funding marketplace.
Service Provider
Whereas e-tailers sell products online, service providers offer services online.
Photo sharing and online sites for data backup and storage all use a service
provider business model. Software is no longer a physical product with a CD
in a box but, increasingly, software as a service (SaaS) that you subscribe
to online rather than purchase from a retailer, such as Office 365. Google
has led the way in developing online software service applications such as
G Suite, Google Sites, Gmail, and online data storage services. Salesforce.com
is a major provider of cloud-based software for customer management (see
Chapter 5).
Community Provider (Social Networks)
Community providers are sites that create a digital online environment
where people with similar interests can transact (buy and sell goods); share
interests, photos, and videos; communicate with like-minded people; receive
interest-related information; and even play out fantasies by adopting online per-
sonalities called avatars. Social networking sites Facebook, Tumblr, Instagram,
LinkedIn, and Twitter and hundreds of other smaller, niche sites all offer users
community-building tools and services. Social networking sites have been the
fastest-growing websites in recent years, often doubling their audience size in
a year.
http://Kickstarter.com
http://Salesforce.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 389
You’re in New York, Paris, Chicago, or another major
city and need a ride. Instead of trying to hail a cab,
you pull out your smartphone and tap the Uber app.
A Google map pops up displaying your nearby sur-
roundings. You select a spot on the screen designat-
ing an available driver, and the app secures the ride,
showing how long it will take for the ride to arrive
and how much it will cost. Once you reach your
destination, the fare is automatically charged to your
credit card. No fumbling for money.
Rates take into account the typical factors of time
and distance but also demand. Uber’s software pre-
dicts areas where rides are likely to be in high de-
mand at different times of the day. This information
appears on a driver’s smartphone so that the driver
knows where to linger and, ideally, pick up custom-
ers within minutes of a request for a ride. Uber also
offers a higher-priced town car service for business
executives and a ride-sharing service. Under certain
conditions, if demand is high, Uber can be more
expensive than taxis, but it still appeals to riders by
offering a reliable, fast, convenient alternative to tra-
ditional taxi services.
Uber runs much leaner than a traditional taxi
company does. Uber does not own taxis and has no
maintenance and financing costs. It does not have
employees, so it claims, but instead calls the drivers
independent contractors, who receive a cut of each
fare. Uber is not encumbered with employee costs
such as workers’ compensation, minimum wage re-
quirements, background checks on drivers, driver
training, health insurance, or commercial licensing
costs. Uber has shifted the costs of running a taxi
service entirely to the drivers and to the customers
using their cell phones. Drivers pay for their own
cars, fuel, and insurance. What Uber does is provide
a smartphone-based platform that enables people
who want a service—like a taxi—to find a provider
who can meet that need.
Uber relies on user reviews of drivers and the ride
experience to identify problematic drivers and driver
reviews of customers to identify problematic passen-
gers. It also sets standards for cleanliness. It uses the
reviews to discipline drivers. Uber does not publicly
report how many poorly rated drivers or passengers
there are in its system. Uber also uses software that
monitors sensors in drivers’ smartphones to monitor
their driving behavior.
Uber is headquartered in San Francisco and was
founded in 2009 by Travis Kalanick and Garrett
Camp. In 2018, it had more than 3 million drivers
working in 600 cities worldwide, generating revenue
of 2.6 billion in the first quarter of 2018. After paying
for drivers, marketing, and other operating expenses,
Uber still operated at a loss. More than 75 million
people use Uber. However, Uber’s over-the-top suc-
cess has created its own set of challenges.
By digitally disrupting a traditional and highly
regulated industry, Uber has ignited a firestorm of
opposition from existing taxi services in the United
States and around the world. Who can compete with
an upstart firm offering a 40 percent price reduction
when demand for taxis is low? (When demand is
high, Uber prices surge.) What city or state wants to
give up regulatory control over passenger safety, pro-
tection from criminals, driver training, and a healthy
revenue stream generated by charging taxi firms for
a taxi license?
If Uber is the poster child for the new
on- demand economy, it’s also an iconic example
of the social costs and conflict associated with
this new kind of business model. Uber has been
accused of denying its drivers the benefits of em-
ployee status by classifying them as contractors,
violating public transportation laws and regulations
throughout the United States and the world, abus-
ing the personal information it has collected on
ordinary people, increasing traffic congestion,
undermining public transportation, and failing to
protect public safety by refusing to perform suffi-
cient criminal, medical, and financial background
checks on its drivers. Uber’s brand image has been
further tarnished by negative publicity about its ag-
gressive, unrestrained workplace culture and the
behavior of CEO Kalanick.
Uber has taken some remediating steps. It en-
hanced its app to make it easier for drivers to take
breaks while they are on the job. Drivers can now
also be paid instantly for each ride they complete
rather than weekly and see on the app’s dashboard
how much they have earned. Uber added an option
to its app for passengers to tip its U.S. drivers, and
INTERACTIVE SESSION ORGANIZATIONS
Uber: Digital Disruptor
390 Part Three Key System Applications for the Digital Age
1. Analyze Uber using the competitive forces and
value chain models. What is its competitive
advantage?
2. What is the relationship between information
technology and Uber’s business model? Explain
your answer.
3. How disruptive is Uber?
4. Is Uber a viable business? Explain your answer.
Kalanick resigned as head of Uber in June 2017. (He
was replaced by Dara Khosrowshahi.)
Critics fear that Uber and other on-demand firms
have the potential for creating a society of part-time,
low-paid, temp work, displacing traditionally full-
time, secure jobs—the so-called Uberization of work.
According to one study, half of Uber drivers earn
less than the minimum wage in their state. Uber re-
sponds by saying it is lowering the cost of transpor-
tation, expanding the demand for ride services, and
expanding opportunities for car drivers, whose pay
is about the same as other taxi drivers.
Does Uber have a sustainable business model?
The company is still not profitable, and continues
to subsidize the cost of many of its rides. Uber has
competitors, including Lyft in the United States and
local firms in Asia and Europe. New, smaller, com-
peting firms offering app-based cab-hailing services
are cropping up, such as Sidecar and Via. Established
taxi firms in New York and other cities are launch-
ing their own hailing apps and trumpeting their
fixed-rate prices.
Uber is pressing on, with new services for
same-day deliveries, business travel accounts,
and heavy investments in self-driving cars, which
management believes will be key to lowering labor
costs and ensuring long-term profitability. After a
self-driving Uber car struck and killed a woman in
Tempe, Arizona in March 2018, Arizona suspended
autonomous vehicle testing in the state, and Uber
stopped testing autonomous cars in California,
Pittsburgh, and Toronto. Even before the accident,
Uber’s self-driving cars were having trouble driving
through construction zones and next to tall vehicles
like big truck rigs. Test drivers had to take over the
car almost every mile. It is still too early to tell
whether Uber and other on-demand businesses will
succeed.
Sources: Steven Hill, “New Leadership Has Not Changed Uber,” New
York Times, March 26, 2018; Bloomberg, “Uber Revenue Spiked
70% Last Quarter, But It Still Lost Tons of Money,” May 24,2018;
Daisuke Wakabashai, “Uber’s Self-Driving Cars Were Struggling Be-
fore Arizona Crash,” New York Times, March 23, 2018; Craig Smith,
“100 Amazing Uber Statistics, Demographics and Facts (July 2018),”
DMR, July 29, 2018; “Rob Berger, “Uber Settlement Takes Custom-
ers for a Ride,” Forbes, April 22, 2016; and Mike Isaac and Noam
Scheiber, “Uber Settles Cases with Concessions, But Drivers Stay
Freelancers,” New York Times, April 21, 2016.
CASE STUDY QUESTIONS
E-commerce Revenue Models
A firm’s revenue model describes how the firm will earn revenue, gener-
ate profits, and produce a superior return on investment. Although many
e- commerce revenue models have been developed, most companies rely on
one, or some combination, of the following six revenue models: advertising,
sales, subscription, free/freemium, transaction fee, and affiliate.
Advertising Revenue Model
In the advertising revenue model, a website generates revenue by attract-
ing a large audience of visitors who can then be exposed to advertisements.
The advertising model is the most widely used revenue model in e-commerce,
and arguably, without advertising revenues, the web would be a vastly differ-
ent experience from what it is now because people would be asked to pay for
Chapter 10 E-commerce: Digital Markets, Digital Goods 391
access to content. Content on the web—everything from news to videos and
opinions—is free to visitors because advertisers pay the production and dis-
tribution costs in return for the right to expose visitors to ads. Companies will
spend an estimated $125 billion on online advertising in 2019 (in the form of a
paid message on a website, paid search listing, video, app, game, or other on-
line medium, such as instant messaging). About $90 billion of this will be for
mobile ads. Mobile ads will account for 72 percent of all digital advertising. In
the past five years, advertisers have increased online spending and cut outlays
on traditional channels such as radio and newspapers. In 2019, online advertis-
ing will grow at 18 percent and constitute about 53 percent of all advertising in
the United States (eMarketer, 2018g).
Websites with the largest viewership or that attract a highly specialized, dif-
ferentiated viewership and are able to retain user attention (stickiness) can
charge higher advertising rates. Yahoo, for instance, derives nearly all its rev-
enue from display ads (banner ads), video ads, and, to a lesser extent, search
engine text ads. Google and Facebook derive well over 90 percent of their rev-
enue from advertising, including selling keywords (AdWords), selling ad spaces
(AdSense), and selling display ad spaces to advertisers. Facebook alone displays
one-third of the trillion display ads shown on all sites in 2019.
Sales Revenue Model
In the sales revenue model, companies derive revenue by selling goods, in-
formation, or services to customers. Companies such as Amazon (which sells
books, music, and other products), LLBean.com, and Gap.com all have sales
revenue models. Content providers make money by charging for downloads
of entire files such as music tracks (iTunes Store) or books or for download-
ing music and/or video streams (Hulu.com TV shows). Apple has pioneered
and strengthened the acceptance of micropayments. Micropayment systems
provide content providers with a cost-effective method for processing high vol-
umes of very small monetary transactions (anywhere from 25 cents to $5.00 per
transaction). The largest micropayment system on the web is Apple’s iTunes
Store, which has more than 1 billion customers worldwide who purchase indi-
vidual music tracks for 99 cents and feature-length movies for various prices.
Subscription Revenue Model
In the subscription revenue model, a website offering content or services
charges a subscription fee for access to some or all of its offerings on an on-
going basis. Content providers often use this revenue model. For instance, the
online version of Consumer Reports provides access to premium content, such
as detailed ratings, reviews, and recommendations, only to subscribers for a
$35.00 annual fee. Netflix is one of the most successful subscriber sites with
over 100 million customers worldwide in 2018. To be successful, the subscription
model requires the content to be perceived as differentiated, having high added
value, and not readily available elsewhere or easily replicated. Other companies
offering content or services online on a subscription basis include Match.com
(dating services), Ancestry.com (genealogy research), and Microsoft Xbox Live.
Free/Freemium Revenue Model
In the free/freemium revenue model, firms offer basic services or content
for free and charge a premium for advanced or special features. For example,
Google offers free applications but charges for premium services. Pandora, the
subscription radio service, offers a free service with limited play time and ad-
vertising and a premium service with unlimited play. The idea is to attract
http://LLBean.com
http://Gap.com
http://Hulu.com
http://Match.com
http://Ancestry.com
392 Part Three Key System Applications for the Digital Age
very large audiences with free services and then convert some of this audience
to pay a subscription for premium services. One problem with this model is
converting people from being freeloaders into paying customers. “Free” can be
a powerful model for losing money. None of the freemium music streaming
sites have earned a profit to date. Nevertheless, they are finding that free ser-
vice with ad revenue is more profitable than the paid subscriber part of their
business.
Transaction Fee Revenue Model
In the transaction fee revenue model, a company receives a fee for enabling
or executing a transaction. For example, eBay provides an online auction mar-
ketplace and receives a small transaction fee from a seller if the seller is suc-
cessful in selling an item. E*Trade, an online stockbroker, receives transaction
fees each time it executes a stock transaction on behalf of a customer. The
transaction revenue model enjoys wide acceptance in part because the true
cost of using the platform is not immediately apparent to the user.
Online financial services, from banking to payment systems, rely on a
transaction fee model. While online banking and services are dominated by
large banks with millions of customers, start-up financial technology firms,
also known as FinTech firms, have grown rapidly to compete with banks for
peer-to-peer (P2P), bill payment, money transfer, lending, crowdsourcing, fi-
nancial advice, and account aggregation services. The largest growth in FinTech
has involved P2P payment services, such as Venmo and Square, two among
hundreds of FinTech firms competing in this space with banks and online pay-
ment giants such as PayPal (PayPal purchased Venmo in 2013). FinTech firms
are typically not profitable and are often bought out by larger financial service
firms for their technology and customer base.
Affiliate Revenue Model
In the affiliate revenue model, websites (called affiliate websites) send visi-
tors to other websites in return for a referral fee or percentage of the revenue
from any resulting sales. Referral fees are also referred to as lead generation
fees. For example, MyPoints makes money by connecting companies to po-
tential customers by offering special deals to its members. When members
take advantage of an offer and make a purchase, they earn points they can
redeem for free products and services, and MyPoints receives a referral fee.
Community feedback sites such as Epinions and Yelp receive much of their
revenue from steering potential customers to websites where they make a pur-
chase. Amazon uses affiliates that steer business to the Amazon website by
placing the Amazon logo on their blogs. Personal blogs often contain display
ads as part of affiliate programs. Some bloggers are paid directly by manufac-
turers, or receive free products, for speaking highly of products and providing
links to sales channels.
10-3 How has e-commerce transformed marketing?
Although e-commerce and the Internet have changed entire industries and en-
abled new business models, no industry has been more affected than market-
ing and marketing communications.
The Internet provides marketers with new ways of identifying and commu-
nicating with millions of potential customers at costs far lower than traditional
Chapter 10 E-commerce: Digital Markets, Digital Goods 393
media, including search engine marketing, data mining, recommender sys-
tems, and targeted email. The Internet enables long tail marketing. Before
the Internet, reaching a large audience was very expensive, and marketers
had to focus on attracting the largest number of consumers with popular hit
products, whether music, Hollywood movies, books, or cars. In contrast, the
Internet allows marketers to find potential customers inexpensively for prod-
ucts where demand is very low. For instance, the Internet makes it possible to
sell independent music profitably to very small audiences. There’s always some
demand for almost any product. Put a string of such long tail sales together and
you have a profitable business.
The Internet also provides new ways—often instantaneous and spontaneous—
to gather information from customers, adjust product offerings, and increase
customer value. Table 10.6 describes the leading marketing and advertising for-
mats used in e-commerce.
Behavioral Targeting
Many e-commerce marketing firms use behavioral targeting techniques to
increase the effectiveness of banners, rich media, and video ads. Behavioral
targeting refers to tracking the clickstreams (history of clicking behavior) of in-
dividuals on thousands of websites to understand their interests and intentions
and expose them to advertisements that are uniquely suited to their online be-
havior. Marketers and most researchers believe this more precise understand-
ing of the customer leads to more efficient marketing (the firm pays for ads
only to those shoppers who are most interested in their products) and larger
sales and revenues. Unfortunately, behavioral targeting of millions of web users
also leads to the invasion of personal privacy without user consent. When con-
sumers lose trust in their web experience, they tend not to purchase anything.
Backlash is growing against the aggressive uses of personal information as con-
sumers seek out safer havens for purchasing and messaging. Snapchat offers
TABLE 10.6 ONLINE AD SPENDING BY FORMATS (BILLIONS)
MARKETING FORMAT 2018 REVENUE DESCRIPTION
Search engine $53.3 Text ads targeted at precisely what the customer is looking for at the moment of
shopping and purchasing. Sales oriented.
Display ads $67.1 Banner ads (pop-ups and leave-behinds) with interactive features; increasingly
behaviorally targeted to individual web activity. Brand development and sales.
Includes social media and blog display ads.
Video $21.2 Fastest-growing format, engaging and entertaining; behaviorally targeted,
interactive. Branding and sales.
Classified $2.1 Job, real estate, and services ads; interactive, rich media, and personalized to
user searches. Sales and branding.
Rich media $18.3 Animations, games, and puzzles. Interactive, targeted, and entertaining. Branding
orientation.
Lead generation $2.3 Marketing firms that gather sales and marketing leads online and then sell them
to online marketers for a variety of campaign types. Sales or branding orientation.
Sponsorships $2.1 Online games, puzzles, contests, and coupon sites sponsored by firms to
promote products. Sales orientation.
Email $0.47 Effective, targeted marketing tool with interactive and rich media potential. Sales
oriented.
Source: Based on eMarketer, “Digital Ad Spending by Format,, 2018” eMarketer, March 2018.
394 Part Three Key System Applications for the Digital Age
disappearing messages, and even Facebook has retreated by making its default
for new posts “for friends only.”
Behavioral targeting takes place at two levels: at individual websites or from
within apps and on various advertising networks that track users across thou-
sands of websites. All websites collect data on visitor browser activity and store
it in a database. They have tools to record the site that users visited prior to
coming to the website, where these users go when they leave that site, the type
of operating system they use, browser information, and even some location
data. They also record the specific pages visited on the particular site, the time
spent on each page of the site, the types of pages visited, and what the visitors
purchased (see Figure 10.3). Firms analyze this information about customer
interests and behavior to develop precise profiles of existing and potential cus-
tomers. In addition, most major websites have hundreds of tracking programs
on their home pages, which track your clickstream behavior across the web
by following you from site to site and re-target ads to you by showing you the
same ads on different sites. The leading online advertising network is Google’s
DoubleClick.
This information enables firms to understand how well their website is
working, create unique personalized web pages that display content or ads for
products or services of special interest to each user, improve the customer’s
experience, and create additional value through a better understanding of the
shopper (see Figure 10.4). By using personalization technology to modify the
web pages presented to each customer, marketers achieve some of the ben-
efits of using individual salespeople at dramatically lower costs. For instance,
General Motors will show a Chevrolet banner ad to women emphasizing safety
and utility, whereas men will receive ads emphasizing power and ruggedness.
FIGURE 10.3 WEBSITE VISITOR TRACKING
E-commerce websites and advertising platforms like Google’s DoubleClick have tools to
track a shopper’s every step through an online store and then across the web as shoppers
move from site to site. Close examination of customer behavior at a website selling women’s
clothing shows what the store might learn at each step and what actions it could take to
increase sales.
Courtesy of Google Inc.
Click 1
Click 6
Click 2
Click 3
Click 4
Click 5
The shopper clicks on the home page. The store can tell that the
shopper arrived from the Yahoo portal at 2:30 PM (which might
help determine sta�ng for customer service centers) and how
long she lingered on the home page (which might indicate trouble
navigating the site). Tracking beacons load cookies on the shopper’s
browser to follow her across the Web.
The shopper clicks on blouses, then clicks to view a woman’s pink
blouse. The shopper clicks to select this item in a size 10 in pink and
clicks to place it in her shopping cart. This information can help the
store determine which sizes and colors are most popular. If the visitor
moves to a di�erent site, ads for pink blouses will appear from the
same or a di�erent vendor.
From the shopping cart page, the shopper clicks to close the
browser to leave the website without purchasing the blouse.
This action could indicate the shopper changed her mind or that
she had a problem with the website’s checkout and payment
process. Such behavior might signal that the website was not
well designed.
Chapter 10 E-commerce: Digital Markets, Digital Goods 395
It’s a short step from ad networks to programmatic ad buying. Ad net-
works create real-time bidding platforms (RTB) where marketers bid in an
automated environment for highly targeted slots available from web pub-
lishers. Here, ad platforms can predict how many targeted individuals will
view the ads, and ad buyers can estimate how much this exposure is worth
to them.
What if you are a large national advertising company or global manufac-
turer trying to reach millions of consumers? With millions of websites, work-
ing with each one would be impractical. Advertising networks solve this
problem by creating a network of several thousand of the most popular web-
sites millions of people visit, tracking the behavior of these users across the
entire network, building profiles of each user, and then selling these profiles
to advertisers in a real-time bidding environment. Popular websites download
dozens of web-tracking cookies, bugs, and beacons, which report user online
behavior to remote servers without the users’ knowledge. Looking for young,
single consumers with college degrees, living in the Northeast, in the 18–34
age range who are interested in purchasing a European car? Advertising net-
works can identify and deliver thousands of people who fit this profile and
expose them to ads for European cars as they move from one website to an-
other. Estimates vary, but behaviorally targeted ads are generally 10 times
more likely to produce a consumer response than a randomly chosen banner
or video ad (see Figure 10.5). So-called advertising exchanges use this same
technology to auction access to people with very specific profiles to advertis-
ers in a few milliseconds. In 2016, about 50 percent of online display ads were
FIGURE 10.4 WEBSITE PERSONALIZATION
Firms can create unique personalized web pages that display content or ads for
products or services of special interest to individual users, improving the customer
experience and creating additional value.
Based on your portfolio
and recent market trends, here are
some recommendations.
Welcome back, Steve P. Munson.
Check out these recommended
titles: One Minute Manager
Leading Change
Results-Based Leadership
Sarah,
Here are the items you want
to bid on: Halogen reading lamp
Portable reading lamp
LED book reading lamp
WebsiteUser
396 Part Three Key System Applications for the Digital Age
targeted ads developed by programmatic ad buys, and the rest depended on
the context of the pages shoppers visited—the estimated demographics of visi-
tors, or so-called blast-and-scatter advertising—which is placed randomly on
any available page with minimal targeting, such as time of day or season.
It’s another short step to native advertising. Native advertising involves
placing ads in social network newsfeeds or within traditional editorial content,
such as a newspaper article. This is also referred to as organic advertising, where
content and advertising are in very close proximity or integrated together.
Two-thirds (68 percent) of Internet users disapprove of search engines
and websites tracking their online behavior to aim targeted ads at them.
Twenty-eight percent of those surveyed approve of behavioral targeting be-
cause they believe it produces more relevant ads and information. A majority
of Americans want a Do Not Track option in browsers that will stop websites
from collecting information about their online behavior. More than 50 percent
are very concerned about the wealth of personal data online; 86 percent have
taken steps to mask their online behavior; 25 percent of web users use ad-
blocking software (Rainie, 2016).
Social E-commerce and Social Network Marketing
In 2019, one of the fastest-growing media for branding and marketing is social
media. Companies will spend an estimated $30 billion in 2019 using social
networks such as Facebook, Instagram, Twitter, and LinkedIn to reach mil-
lions of consumers who spend hours a day on social sites. Expenditures for
social media marketing are much smaller than for television, magazines, and
FIGURE 10.5 HOW AN ADVERTISING NETWORK SUCH AS DOUBLECLICK
WORKS
Advertising networks and their use of tracking programs have become controversial among
privacy advocates because of their ability to track individual consumers across the Internet.
Merchant server connects
to DoubleClick ad server
DoubleClick follows consumer from
site to site through use of tracking
programs
Consumer
requests Web
page from ad
network
member site
DoubleClick.Net
User
profile
Database
Ad server selects
and serves an
appropriate
banner ad
based on
profile
Ad server reads cookie;
checks database for profile
MERCHANT SITE ADVERTISING NETWORK
CONSUMER
Network
Member
Firms
Chapter 10 E-commerce: Digital Markets, Digital Goods 397
even newspapers, but this will change in the future. Social networks in the
offline world are collections of people who voluntarily communicate with
one another over an extended period of time. Online social networks, such
as Facebook, Instagram, Pinterest, LinkedIn, Twitter, and Tumblr, along with
other sites with social components, are websites that enable users to commu-
nicate with one another, form group and individual relationships, and share
interests, values, and ideas.
Social e-commerce is commerce based on the idea of the digital social
graph, a mapping of all significant online social relationships. The social graph
is synonymous with the idea of a social network used to describe offline rela-
tionships. You can map your own social graph (network) by drawing lines from
yourself to the 10 closest people you know. If they know one another, draw
lines between these people. If you are ambitious, ask these 10 friends to list and
draw in the names of the 10 people closest to them. What emerges from this ex-
ercise is a preliminary map of your social network. Now imagine if everyone on
the Internet did the same and posted the results to a very large database with a
website. Ultimately, you would end up with Facebook or a site like it.
According to small world theory, you are only six links away from any other
person on earth. If you entered your personal address book, which has, say, 100
names in it, in a list and sent it to your friends, and they in turn entered 50 new
names of their friends, and so on, five times, the social network created would
encompass 31 billion people! The social graph is therefore a collection of mil-
lions of personal social graphs (and all the people in them).
If you understand the interconnectedness of people, you will see just how
important this concept is to e-commerce: The products and services you buy
will influence the decisions of your friends, and their decisions will in turn in-
fluence you. If you are a marketer trying to build and strengthen a brand, you
can take advantage of the fact that people are enmeshed in social networks,
share interests and values, and communicate and influence one another. As
a marketer, your target audience is not a million isolated people watching a
TV show but the social network of people who watch the show and the view-
ers’ personal networks. Moreover, online social networks are where the largest
Internet audiences are located. Table 10.7 describes the features of social com-
merce that are driving its growth.
Facebook, with 74 percent of all social marketing in the United States and
208 million U.S. monthly visitors in 2018, receives most of the public attention
given to social networking. The other top four social sites are also growing,
though at far slower rates than in the past. LinkedIn had 93 million visitors
a month in 2018. Twitter grew to reach 146 million active users in 2018, with
stronger offshore growth than in the United States. Pinterest hit the top 50
websites with 110 million users, a 25 percent increase from 2017. According
to analysts, 25 percent of the total time spent online in the United States was
spent on social network sites (about 56 minutes a day), and social networking
is the most common online activity. The fastest-growing smartphone appli-
cations are social network apps; nearly half of smartphone users visit social
sites daily. More than 70 percent of all visits to Facebook in 2018 came from
smartphones.
At social shopping sites such as Pinterest you can swap shopping ideas with
friends. Facebook offers the “like” button to let your friends know you admire
a product, service, or content and, in some cases, purchase something online.
Facebook processes around 5 billion likes a day worldwide. Online communi-
ties are also ideal venues to employ viral marketing techniques. Online viral
marketing is like traditional word-of-mouth marketing except that the word can
398 Part Three Key System Applications for the Digital Age
spread across an online community at the speed of light and go much further
geographically than a small network of friends.
The Wisdom of Crowds
Creating sites where thousands, even millions, of people can interact offers
business firms new ways to market and advertise and to discover who likes
(or hates) their products. In a phenomenon called the wisdom of crowds,
some argue that large numbers of people can make better decisions about a
wide range of topics or products than a single person or even a small commit-
tee of experts.
Obviously, this is not always the case, but it can happen in interesting ways.
In marketing, the wisdom of crowds concept suggests that firms should consult
with thousands of their customers first as a way of establishing a relationship
with them and, second, to understand better how their products and services
are used and appreciated (or rejected). Actively soliciting the comments of your
customers builds trust and sends the message to your customers that you care
what they are thinking and that you need their advice.
Beyond merely soliciting advice, firms can be actively helped in solving some
business problems by using crowdsourcing. For instance, BMW launched a
crowdsourcing project to enlist the aid of customers in designing an urban ve-
hicle for 2025. Kickstarter.com is arguably one of the most famous e-commerce
crowdfunding sites where visitors invest in start-up companies. Other examples
include Caterpillar working with customers to design better machinery, IKEA
for designing furniture, and Pepsico using Super Bowl viewers to build an on-
line video.
Marketing through social media is still in its early stages, and companies
are experimenting in hopes of finding a winning formula. Social interactions
and customer sentiment are not always easy to manage, presenting new chal-
lenges for companies eager to protect their brands. The Interactive Session on
Management provides specific examples of companies’ social marketing efforts
using Facebook and Twitter.
TABLE 10.7 FEATURES OF SOCIAL COMMERCE
SOCIAL COMMERCE FEATURE DESCRIPTION
Newsfeed A stream of notifications from friends and advertisers that social users find on their home pages.
Timelines A stream of photos and events in the past that create a personal history for users, one that
can be shared with friends.
Social sign-on Websites allow users to sign into their sites through their social network pages on
Facebook or another social site. This allows websites to receive valuable social profile
information from Facebook and use it in their own marketing efforts.
Collaborative shopping An environment where consumers can share their shopping experiences with one another
by viewing products, chatting, or texting. Friends can chat online about brands, products,
and services.
Network notification An environment where consumers can share their approval (or disapproval) of products,
services, or content or share their geolocation, perhaps a restaurant or club, with friends.
Facebook’s ubiquitous “like” button is an example, as are Twitter’s tweets and followers.
Social search (recommendations) An environment where consumers can ask their friends for advice on purchases of
products, services, and content. Although Google can help you find things, social search
can help you evaluate the quality of things by listening to the evaluations of your friends or
their friends. For instance, Amazon’s social recommender system can use your Facebook
social profile to recommend products.
http://Kickstarter.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 399
More than 3 billion people worldwide use social
media, making it an obvious platform for companies
seeking to engage consumers, amplify product mes-
sages, discover trends and influencers, build brand
awareness, and take action on customer requests
and recommendations. More than 80 million busi-
nesses have Facebook brand pages, enabling users
to interact with the brand through blogs, comment
pages, contests, and offerings on the brand page.
The “like” button gives users a chance to share with
their social network their feelings about content they
are viewing and websites they are visiting. With like
buttons on many millions of websites, Facebook can
track user behavior on other sites and then sell this
information to marketers. Facebook also sells display
ads to firms that appear on users’ home pages and
most other pages in the Facebook interface such as
photos and apps. Twitter features such as “promoted
tweets” and “promoted trends” enable advertisers to
have their tweets displayed more prominently when
Twitter users search for certain keywords.
Mack Trucks, a leading U.S. truck manufacturer,
used a social marketing campaign to attract custom-
ers, drivers, and dealers when it launched its new
Anthem model. Mack had traditionally used print
ads in trucking publications, brochures, and industry
trade shows as its primary marketing channels when
rolling out a new product. However, these channels
did not enable Mack to tailor and deliver different
messages for different customers. For example, a
manager of a large fleet might be most interested
in fuel efficiency, while an owner-operator might
be more attracted to design style. Mack’s marketing
team continued to use traditional channels for broad
awareness and relied on social marketing to focus on
segmentation and metrics.
Starting in July 2017 Mack launched a series of
biweekly YouTube videos to build excitement for
the Anthem model, followed by a live stream of
the Anthem unveiling on YouTube and Facebook in
September of that year. Mack netted 7,000 email ad-
dresses from the teaser campaign, with 3,700 people
viewing the live stream of the launch event. These
are considered significant numbers for a product
costing over U.S. $100,000. Mack’s marketing team
also launched a comprehensive social media cam-
paign directing the company’s 174,000 Facebook
followers, 24,000 Twitter followers, 15,000 LinkedIn
followers, 15,000 YouTube subscribers, and other so-
cial communities to photos, videos, text summaries,
and other content describing every aspect of the new
Anthem line. These activities were credited with at-
tracting more than 40,000 new social followers to the
Mack brand.
Mack uses Oracle Eloqua Marketing Cloud Service
and Oracle Social Cloud to link social activity to
175,000 profiles in its Oracle Eloqua database of cus-
tomers and prospects. The digital marketing team
thus knows if a person in the database clicked on a
Facebook post to view an Anthem-related video or
looked for other information on the company’s web-
site. Compelling personalized content helps engage
prospects and move them further along the sales pro-
cess until they ask to talk to a Mack dealer. At that
point, the prospect is considered a qualified lead.
Oracle Social Cloud alerts team members when the
Mack Anthem is mentioned on various social sites,
and they can respond where appropriate.
Mack also enlisted celebrity influencers for the
Anthem campaign. Country music artist Steve
Moakler recorded a road song called Born Ready for
the Anthem launch and dedicated it to drivers. More
than 55,000 people viewed Moakler’s performance
on YouTube. The marketing team also produced
a YouTube video with the Oakland Raiders’ Khalil
Mack called What Makes a Mack, and it attracted over
75,000 viewers. Mack is developing a broad-based
influence program identifying customers and driv-
ers who will be among the first to view new products
and serve as active advocates on social media.
More than 9,300 people opted into some aspect
of the Mack Anthem campaign, generating about
1,700 qualified leads. The Anthem landing page
has attracted over 146,000 visitors, who can watch
the Moakler video and obtain information on every
aspect of the new truck line. Mack’s senior manage-
ment is very pleased with the results and the detail
and precision of digital marketing information. Vice
President of Marketing John Walsh can see what hap-
pens with every dollar Mack spends.
An estimated 90 percent of customers are influ-
enced by online reviews, and nearly half of U.S.
social media users actively seek customer service
through social media. As a result, marketing is now
INTERACTIVE SESSION MANAGEMENT
“Socializing” with Customers
400 Part Three Key System Applications for the Digital Age
1. Assess the management, organization, and tech-
nology issues for using social media technology to
engage with customers.
2. What are the advantages and disadvantages
of using social media for advertising, brand
building, market research, and customer
service?
3. Give an example of a business decision in this
case study that was facilitated by using social
media to interact with customers.
4. Should all companies use social media technology
for customer service and marketing? Why or why
not? What kinds of companies are best suited to
use these platforms?
placing much more emphasis on customer satisfac-
tion and service. Social media monitoring helps mar-
keters and business owners understand more about
buyers’ likes, dislikes, and complaints concerning
products, additional products or product modifica-
tions customers want, and how people are talking
about a brand (positive or negative sentiment).
Prompted by customer social media comments
about meats other than roast beef, fast-food sandwich
restaurant chain Arby’s launched a “Meat Mountain”
campaign poster showing various meats other than
roast beef. Arby’s customers mistakenly thought the
poster displayed a new sandwich and, through social
media, indicated they were anxious to try it. Arby’s
then responded with a new $10 Meat Mountain
sandwich.
Social media campaigns can be tricky to orches-
trate, and the results are not always predictable.
When social followers of Donald Trump called for
boycotting Nordstrom for dropping Ivanka Trump’s
clothing line from its stores, Nordstrom’s stock price
rose, and the company outperformed many of its
retail industry rivals in the months that followed.
Nordstrom customers remained loyal to the brand.
Previous Trump tweets calling out other brands such
as Lockheed Martin had hurt stock share prices. In
September 2016, San Antonio–based Miracle Mattress
provoked angry social media backlash when it posted
a Facebook video advertising a “Twin Towers Sale.”
The video encouraged customers to “remember 9/11”
and “get any size mattress for a twin price.” Miracle
Mattress removed the video from its Facebook time-
line, and owner Mike Bonanno posted an apology
letter.
Sources: Rob Preston, “Open Road,” Profit Magazine, Spring 2018;
Melody Hahm, “26-Year-Old Launches Instagram-Fueled Fast
Fashion Brand,” Yahoo Finance, July 25, 2018; Craig Smith, “844
Amazing Facebook Statistics (July 2018) by the Numbers,” Dmr,
July 30, 2018; www.Macktrucks.com, accessed July 29, 2018; Janet
Morrissey, “Brands Heed Social Media. They’re Advised Not to
Forget Word of Mouth,” New York Times, November 26, 2017; Farhad
Manjoo “How Battling Brands Online Has Gained Urgency, and
Impact,” New York Times, June 21, 2017; and Lindsay Friedman,
“The 12 Worst Social-Media Fails of 2016,” www.entrepreneur.com,
September 22, 2016.
CASE STUDY QUESTIONS
10-4 How has e-commerce affected
business-to-business transactions?
Trade between business firms (business-to-business commerce, or B2B) repre-
sents a huge marketplace. The total amount of B2B trade in the United States in
2019 is estimated to be about $13.5 trillion, with B2B e-commerce (online B2B)
contributing about $6.2 trillion of that amount (U.S. Bureau of the Census, 2018;
authors’ estimates). By 2020, B2B e-commerce is expected to grow to about
$6.9 trillion in the United States.
The process of conducting trade among business firms is complex and re-
quires considerable human intervention; therefore, it consumes significant re-
sources. Some firms estimate that each corporate purchase order for support
products costs them, on average, at least $100 in administrative overhead, in-
cluding processing paper, approving purchase decisions, using the telephone
and fax machines to search for products and arrange for purchases, arranging
http://www.Macktrucks.com
http://www.entrepreneur.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 401
for shipping, and receiving the goods. Across the economy, this adds up to
trillions of dollars annually spent for procurement processes that could be
automated. If even just a portion of inter-firm trade were automated and parts
of the entire procurement process were assisted by the Internet, literally tril-
lions of dollars might be released for more productive uses, consumer prices
potentially would fall, productivity would increase, and the economic wealth
of the nation would expand. This is the promise of B2B e-commerce. The
challenge of B2B e-commerce is changing existing patterns and systems of
procurement and designing and implementing new Internet and cloud-based
B2B solutions.
Electronic Data Interchange (EDI)
B2B e-commerce refers to the commercial transactions that occur among busi-
ness firms. Increasingly, these transactions are flowing through a variety of
Internet-enabled mechanisms. About 80 percent of online B2B e-commerce is
still based on proprietary systems for Electronic Data Interchange (EDI).
EDI enables the computer-to-computer exchange between two organizations
of standard transactions such as invoices, bills of lading, shipment schedules,
or purchase orders. Transactions are automatically transmitted from one in-
formation system to another through a network, eliminating the printing and
handling of paper at one end and the inputting of data at the other. Each major
industry in the United States and much of the rest of the world has EDI stan-
dards that define the structure and information fields of electronic transactions
for that industry.
EDI originally automated the exchange of documents such as purchase or-
ders, invoices, and shipping notices. Although many companies still use EDI
for document automation, firms engaged in just-in-time inventory replenish-
ment and continuous production use EDI as a system for continuous replenish-
ment. Suppliers have online access to selected parts of the purchasing firm’s
production and delivery schedules and automatically ship materials and goods
to meet prespecified targets without intervention by firm purchasing agents
(see Figure 10.6).
Although many organizations still use private networks for EDI, they are
increasingly web-enabled because Internet technology provides a much more
flexible and low-cost platform for linking to other firms. Businesses can extend
digital technology to a wider range of activities and broaden their circle of trad-
ing partners.
FIGURE 10.6 ELECTRONIC DATA INTERCHANGE (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous
inventory replenishment. Suppliers can automatically send data about shipments to
purchasing firms. The purchasing firms can use EDI to provide production and inventory
requirements and payment data to suppliers.
Shipping data
Supplier
Systems
Firm
Systems
Payment data
Production/inventory
requirements
Continuous replenishment
402 Part Three Key System Applications for the Digital Age
Procurement, for example, involves not only purchasing goods and materi-
als but also sourcing, negotiating with suppliers, paying for goods, and mak-
ing delivery arrangements. Businesses can now use the Internet to locate the
lowest-cost supplier, search online catalogs of supplier products, negotiate with
suppliers, place orders, make payments, and arrange transportation. They are
not limited to partners linked by traditional EDI networks.
New Ways of B2B Buying and Selling
The Internet and web technology enable businesses to create electronic store-
fronts for selling to other businesses using the same techniques as used for B2C
commerce. Alternatively, businesses can use Internet technology to create ex-
tranets or electronic marketplaces for linking to other businesses for purchase
and sale transactions.
Private industrial networks typically consist of a large firm using a secure
website to link to its suppliers and other key business partners (see Figure 10.7).
The buyer owns the network, and it permits the firm and designated suppliers,
distributors, and other business partners to share product design and develop-
ment, marketing, production scheduling, inventory management, and unstruc-
tured communication, including graphics and email. Another term for a private
industrial network is a private exchange.
An example is VW Group Supply, which links the Volkswagen Group and
its suppliers. VW Group Supply handles 90 percent of all global purchasing for
Volkswagen, including all automotive and parts components.
Net marketplaces, which are sometimes called e-hubs, provide a single,
digital marketplace based on Internet technology for many buyers and sell-
ers (see Figure 10.8). They are industry-owned or operate as independent in-
termediaries between buyers and sellers. Net marketplaces generate revenue
FIGURE 10.7 A PRIVATE INDUSTRIAL NETWORK
A private industrial network, also known as a private exchange, links a firm to its suppliers,
distributors, and other key business partners for efficient supply chain management and
other collaborative commerce activities.
Suppliers Distributors
Firm
Chapter 10 E-commerce: Digital Markets, Digital Goods 403
from purchase and sale transactions and other services provided to clients.
Participants in Net marketplaces can establish prices through online negotia-
tions, auctions, or requests for quotations, or they can use fixed prices.
There are many types of Net marketplaces and ways of classifying them.
Some sell direct goods and some sell indirect goods. Direct goods are goods
used in a production process, such as sheet steel for auto body production.
Indirect goods are all other goods not directly involved in the production
process, such as office supplies or products for maintenance and repair. Some
Net marketplaces support contractual purchasing based on long-term relation-
ships with designated suppliers, and others support short-term spot purchas-
ing, where goods are purchased based on immediate needs, often from many
suppliers.
Some Net marketplaces serve vertical markets for specific industries, such
as automobiles, telecommunications, or machine tools, whereas others serve
horizontal markets for goods and services that can be found in many industries,
such as office equipment or transportation.
Exostar is an example of an industry-owned Net marketplace, focusing on
long-term contract purchasing relationships and on providing common net-
works and computing platforms for reducing supply chain inefficiencies.
This aerospace and defense industry-sponsored Net marketplace was founded
jointly by BAE Systems, Boeing, Lockheed Martin, Raytheon, and Rolls-Royce
plc to connect these companies to their suppliers and facilitate collaboration.
More than 125,000 trading partners in the commercial, military, and govern-
ment sectors use Exostar’s sourcing, e-procurement, and collaboration tools for
both direct and indirect goods.
Exchanges are independently owned third-party Net marketplaces that con-
nect thousands of suppliers and buyers for spot purchasing. Many exchanges
provide vertical markets for a single industry, such as food, electronics, or in-
dustrial equipment, and they primarily deal with direct inputs. For example,
Go2Paper enables a spot market for paper, board, and craft among buyers and
sellers in the paper industries from more than 75 countries.
FIGURE 10.8 A NET MARKETPLACE
Net marketplaces are online marketplaces where multiple buyers can purchase from
multiple sellers.
• Catalogs
• Sourcing
• Automated
purchasing
• Processing
and fulfillment
Suppliers Buyers
Net
Marketplace
404 Part Three Key System Applications for the Digital Age
Exchanges proliferated during the early years of e-commerce, but many have
failed. Suppliers were reluctant to participate because the exchanges encouraged
competitive bidding that drove prices down and did not offer any long-term re-
lationships with buyers or services to make lowering prices worthwhile. Many
essential direct purchases are not conducted on a spot basis because they re-
quire contracts and consideration of issues such as delivery timing, customiza-
tion, and quality of products.
10-5 What is the role of m-commerce in
business, and what are the most
important m-commerce applications?
Walk down the street in any major metropolitan area and count how many
people are pecking away at their iPhones, Samsungs, or BlackBerrys. Ride the
trains or fly the planes, and you’ll see fellow travelers reading an online news-
paper, watching a video on their phone, or reading a novel on their Kindle. As
the mobile audience has expanded in leaps and bounds, mobile advertising and
m-commerce have taken off.
In 2019, retail m-commerce will account for about 48 percent of all
e- commerce, with about $270 billion in annual revenues generated by retail
goods and services, apps, advertising, music, videos, ring tones, movies, televi-
sion, and location-based services such as local restaurant locators and traffic
updates. M-commerce is the fastest-growing form of e-commerce, expanding at
a rate of 30 percent or more per year, and is estimated to grow to $500 billion by
2022 (see Figure 10.9) (eMarketer, 2018d).
FIGURE 10.9 MOBILE RETAIL COMMERCE REVENUES
Mobile e-commerce is the fastest-growing type of B2C e-commerce and represented
about 34 percent of all e-commerce in 2018.
Sources: Data from eMarketer chart “Retail Mcommerce Sales, US, (billions) 2018–2022,” eMarketer, 2018d
0
100
200
300
400
500
600
2016 2017 2018 2019
Year
2020 2021 2022
R
ev
en
ue
(b
ill
io
ns
$
)
Chapter 10 E-commerce: Digital Markets, Digital Goods 405
The main areas of growth in mobile e-commerce are mass market retailing
such as Amazon; sales of digital content such as music, TV shows, movies,
and e-books; and in-app sales to mobile devices. On-demand firms such as
Uber (described earlier in this chapter) and Airbnb are location-based ser-
vices, and examples of mobile commerce as well. Larger mobile screens and
more-convenient payment procedures also play a role in the expansion of
m-commerce.
Location-Based Services and Applications
Location-based services include geosocial, geoadvertising, and geoinforma-
tion services. Seventy-four percent of smartphone owners use location-based
services. What ties these activities together and is the foundation for mobile
commerce is the global positioning system (GPS)–enabled map services avail-
able on smartphones. A geosocial service can tell you where your friends
are meeting. Geoadvertising services can tell you where to find the nearest
Italian restaurant, and geoinformation services can tell you the price of a
house you are looking at or about special exhibits at a museum you are pass-
ing. In 2019, the fastest-growing and most popular location-based services are
on-demand economy firms such as Uber, Lyft, Airbnb, and hundreds more that
provide services to users in local areas and are based on the user’s location (or,
in the case of Airbnb, the user’s intended travel location).
Waze is an example of a popular, social geoinformation service. Waze is a
GPS-based map and navigational app for smartphones, now owned by Google.
Waze locates the user’s car on a digital map using GPS and, like other navigation
programs, collects information on the user’s speed and direction continuously.
What makes Waze different is that it collects traffic information from users
who submit accident reports, speed traps, landmarks, street fairs, protests, and
even addresses. Waze uses this information to come up with suggested alterna-
tive routes, travel times, and warnings and can even make recommendations
for gas stations along the way. The Waze app is used extensively by Uber and
Lyft drivers and more than 50 million other drivers in the United States.
Foursquare and new offerings by Facebook and Google are examples of geo-
social services. Geosocial services help you find friends, or your friends to find
you, by checking in to the service, announcing your presence in a restaurant or
other place. Your friends are instantly notified. About 20 percent of smartphone
owners use geosocial services.
Foursquare provides a location-based social networking service to over
60 million registered individual users, who can connect with friends, update
their location, and provide reviews and tips for enjoying a location. Points are
awarded for checking in at designated venues. Users choose to post their check-
ins on their accounts on Twitter, Facebook, or both. Users also earn badges by
checking in at locations with certain tags, for check-in frequency, or for the
time of check-in.
Connecting people to local merchants in the form of geoadvertising is the
economic foundation for mobile commerce. Geoadvertising sends ads to users
based on their GPS locations. Smartphones report their locations back to Google
and Apple. Merchants buy access to these consumers when they come within
range of a merchant. For instance, Kiehl Stores, a cosmetics retailer, sent spe-
cial offers and announcements to customers who came within 100 yards of
their store.
406 Part Three Key System Applications for the Digital Age
Other Mobile Commerce Services
Banks and credit card companies have developed services that let customers
manage their accounts from their mobile devices. JPMorgan Chase and Bank of
America customers can use their cell phones to check account balances, trans-
fer funds, and pay bills. Apple Pay for the iPhone and Apple Watch, along with
other Android and Windows smartphone models, allow users to charge items to
their credit card accounts with a swipe of their phone. (See our Learning Track
on mobile payment systems.)
The mobile advertising market is the fastest-growing online ad platform,
racking up a forecast $90 billion in ad revenue in 2019 and growing at 20 percent
annually. Ads eventually move to where the eyeballs are, and increasingly that
means mobile phones and, to a lesser extent, tablets. Google is the largest mo-
bile advertising market, posting about $23 billion in mobile ads or 60 percent of
its total ad revenue, with Facebook number two with $19.4 billion (90 percent
of its total digital ad business). Google is displaying ads linked to cell phone
searches by users of the mobile version of its search engine; ads are embedded
in games, videos, and other mobile applications.
Shopkick is a mobile application that enables retailers such as Best Buy,
Sports Authority, and Macy’s to offer coupons to people when they walk into
their stores. The Shopkick app automatically recognizes when the user has en-
tered a partner retail store and offers a new virtual currency called kickbucks,
which can be redeemed for store gift cards.
Fifty-five percent of online retailers now have m-commerce websites—
simplified versions of their websites that enable shoppers to use cell phones to
shop and place orders. Virtually all large traditional and online retailers such as
Sephora, Home Depot, Amazon, and Walmart have apps for m-commerce sales.
In 2019, more than 66 percent of m-commerce sales will occur within apps
rather than mobile web browsers. Browser commerce has, at least for mobile
users, become app commerce.
10-6 What issues must be addressed when
building an e-commerce presence?
Building a successful e-commerce presence requires a keen understanding of
business, technology, and social issues as well as a systematic approach. Today,
an e-commerce presence is not just a corporate website but also includes a
social network site on Facebook, a Twitter feed, and smartphone apps where
customers can access your services. Developing and coordinating all these cus-
tomer venues can be difficult. A complete treatment of the topic is beyond the
scope of this text, and students should consult books devoted to just this topic
(Laudon and Traver, 2019). The two most important management challenges in
building a successful e-commerce presence are (1) developing a clear under-
standing of your business objectives and (2) knowing how to choose the right
technology to achieve those objectives.
Develop an E-commerce Presence Map
E-commerce has moved from being a PC-centric activity on the web to a mo-
bile and tablet-based activity. Currently, a majority of Internet users in the
United States use smartphones and tablets to shop for goods and services,
Chapter 10 E-commerce: Digital Markets, Digital Goods 407
look up prices, enjoy entertainment, and access social sites, less so to make
purchases. Your potential customers use these various devices at different
times during the day and involve themselves in different conversations, de-
pending what they are doing—touching base with friends, tweeting, or read-
ing a blog. Each of these is a touch point where you can meet the customer,
and you have to think about how you develop a presence in these different
virtual places. Figure 10.10 provides a roadmap to the platforms and related
activities you will need to think about when developing your e-commerce
presence.
Figure 10.10 illustrates four kinds of e-commerce presence: websites,
email, social media, and offline media. You must address different platforms
for each of these types. For instance, in the case of website presence, there
are three platforms: traditional desktop, tablets, and smartphones, each
with different capabilities. Moreover, for each type of e-commerce pres-
ence, there are related activities you will need to consider. For instance,
in the case of websites, you will want to engage in search engine market-
ing, display ads, affiliate programs, and sponsorships. Offline media, the
fourth type of e-commerce presence, is included here because many firms
use multiplatform or integrated marketing by which print ads refer custom-
ers to websites.
Develop a Timeline: Milestones
Where would you like to be a year from now? It’s very helpful for you to have a
rough idea of the time frame for developing your e-commerce presence when
you begin. You should break your project down into a small number of phases
that could be completed within a specified time. Table 10.8 illustrates a one-year
FIGURE 10.10 E-COMMERCE PRESENCE MAP
An e-commerce presence requires firms to consider the four types of presence, with
specific platforms and activities associated with each.
Traditional
Mobile
Tablet
Facebook
Twitter
Blogs
Print
Internal lists
Purchased lists
Type of Presence Platform Activity
Search
Display Apps
A�liates
Sponsorships
Conversation
Engagement
Sharing
Advice
Education
Exposure
BrandingTV & radio
Newsletters
Updates
Sales
Websites
Social media
Oƒine media
Email
408 Part Three Key System Applications for the Digital Age
timeline for the development of an e-commerce presence for a start-up com-
pany devoted to fashions for teenagers. You can also find more detail about
developing an e-commerce website in the Learning Tracks for this chapter.
10.7 How will MIS help my career?
Here is how Chapter 10 and this text can help you find a job as a junior
e- commerce data analyst.
The Company
SportsFantasy Empire, a technology company that creates digital sports compe-
titions, is looking for a recent college graduate to fill a junior e-commerce data
analyst position. SportsFantasy Empire offers players the opportunity to com-
pete through web and mobile devices in fantasy sports contests for cash prizes.
The company was founded in 2012 and is headquartered in Los Angeles, with
additional offices in San Francisco and New York.
Job Description
The junior e-commerce data analyst will work with SportsFantasy Empire’s an-
alytics team to analyze large volumes of data to derive business insights about
the company’s games and customers that will increase revenue. Job responsi-
bilities include:
• Setting up contest sizing that defines the user experience and business
efficiency.
• Optimizing acquisition spending and marketing strategies to drive growth.
• Identifying ways to improve customer gameplay through on-site changes.
• Measuring how new features or site changes are driving changes in customer
behavior.
• Developing standard reporting for key business results, including reports on
contest performance, player activity, segment performance, and key player
performance.
TABLE 10.8 E-COMMERCE PRESENCE TIMELINE
PHASE ACTIVITY MILESTONE
Phase 1: Planning Envision web presence; determine personnel. Web mission statement
Phase 2: Website development Acquire content; develop a site design; arrange for
hosting the site.
Website plan
Phase 3: Web implementation Develop keywords and metatags; focus on search
engine optimization; identify potential sponsors.
A functional website
Phase 4: Social media plan Identify appropriate social platforms and content for
your products and services.
A social media plan
Phase 5: Social media
implementation
Develop Facebook, Twitter, and Pinterest presence. Functioning social media
presence
Phase 6: Mobile plan Develop a mobile plan; consider options for porting
your website to smartphones.
A mobile media plan
Chapter 10 E-commerce: Digital Markets, Digital Goods 409
Job Requirements
• Bachelor’s degree in engineering, mathematics, business, or a related field
• E-commerce data analytics experience desirable
• Knowledge of statistics
• Demonstrated history of independently developing new insights from data
• Experience with model building, SQL, SAS, or other programming language
desirable
• Strong communication and organizational skills
• Avid fantasy sports player a plus
Interview Questions
1. Do you play fantasy sports? How often? Have you ever worked with
data about fantasy sports? Why do you think you would be a good fit for
this job?
2. What is your background in statistics? What courses did you take? Have you
any job experience where you had to use statistics?
3. Have you ever analyzed data about website performance or online customer
behavior?
4. What do you know about the cost of acquiring a customer through social me-
dia channels (i.e., measuring the average customer acquisition cost on social
networks; acquisition vs. retention costs)?
5. How would you propose working with our non-technical teams in telling a
story about customer data insights so that they are able to drive customer
engagement and loyalty and execute more effectively?
6. What is your proficiency level with SQL or SAS and site analytics
tools? Have you ever used these tools on the job? What did you do with
them?
7. Can you give an example of a problem you solved using data analytics? Did
you do any writing and analysis? Can you provide examples?
Author Tips
1. Review this chapter and also the discussion of search and search engine mar-
keting in Chapter 7. To qualify for this job, you should also have taken course
work in statistics. Course work or on-the-job training in SQL and SAS would
also be helpful.
2. Use the web to do more research on the company. Try to find out more about
its strategy, competitors, and business challenges. Additionally, review the
company’s social media channels from the past 12 months. Are there any
trends you can identify or certain themes the social media channels seem to
focus on?
3. Be prepared to talk about SportsFantasy Empire’s games as well as the games
offered by competitors to show you are familiar with the industry. Inquire
about some of the ways the company fine-tunes its online presence. Be pre-
pared to give an example of how you think a fantasy game could improve its
online presence.
4. Use the web to find examples of data analytics used by fantasy sports
companies.
410 Part Three Key System Applications for the Digital Age
10-1 What are the unique features of e-commerce, digital markets, and digital goods?
E-commerce involves digitally enabled commercial transactions between and among organiza-
tions and individuals. Unique features of e-commerce technology include ubiquity, global reach,
universal technology standards, richness, interactivity, information density, capabilities for person-
alization and customization, and social technology. E-commerce is becoming increasingly social,
mobile, and local.
Digital markets are said to be more transparent than traditional markets, with reduced informa-
tion asymmetry, search costs, transaction costs, and menu costs along with the ability to change
prices dynamically based on market conditions. Digital goods, such as music, video, software, and
books, can be delivered over a digital network. Once a digital product has been produced, the cost of
delivering that product digitally is extremely low.
10-2 What are the principal e-commerce business and revenue models?
E-commerce business models are e-tailers, transaction brokers, market creators, content provid-
ers, community providers, service providers, and portals. The principal e-commerce revenue models
are advertising, sales, subscription, free/freemium, transaction fee, and affiliate.
10-3 How has e-commerce transformed marketing?
The Internet provides marketers with new ways of identifying and communicating with millions
of potential customers at costs far lower than traditional media. Crowdsourcing using the wisdom of
crowds helps companies learn from customers to improve product offerings and increase customer
value. Behavioral targeting techniques increase the effectiveness of banner, rich media, and video
ads. Social commerce uses social networks and social network sites to improve targeting of products
and services.
10-4 How has e-commerce affected business-to-business transactions?
B2B e-commerce generates efficiencies by enabling companies to locate suppliers, solicit bids,
place orders, and track shipments in transit electronically. Net marketplaces provide a single, digital
marketplace for many buyers and sellers. Private industrial networks link a firm with its suppliers
and other strategic business partners to develop highly efficient and responsive supply chains.
10-5 What is the role of m-commerce in business, and what are the most important m-commerce
applications?
M-commerce is especially well suited for location-based applications such as finding local ho-
tels and restaurants, monitoring local traffic and weather, and providing personalized location-based
marketing. Mobile phones and handhelds are being used for mobile bill payment, banking, securities
trading, transportation schedule updates, and downloads of digital content such as music, games,
and video clips. M-commerce requires wireless portals and special digital payment systems that can
handle micropayments. The GPS capabilities of smartphones make geoadvertising, geosocial, and
geoinformation services possible.
10-6 What issues must be addressed when building an e-commerce presence?
Building a successful e-commerce presence requires a clear understanding of the business objec-
tives to be achieved and selection of the right platforms, activities, and timeline to achieve those
objectives. An e-commerce presence includes not only a corporate website but also a presence on
Facebook, Twitter, and other social networking sites and smartphone apps.
REVIEW SUMMARY
Key Terms
Advertising revenue model, 390
Affiliate revenue model, 392
Behavioral targeting, 393
Business-to-business (B2B), 385
Business-to-consumer (B2C), 385
Community providers, 388
Consumer-to-consumer (C2C), 385
Cost transparency, 381
Chapter 10 E-commerce: Digital Markets, Digital Goods 411
Crowdsourcing, 398
Customization, 381
Digital goods, 383
Direct goods, 403
Disintermediation, 383
Dynamic pricing, 382
Electronic Data Interchange (EDI), 401
E-tailer, 387
Exchanges, 403
FinTech, 392
Free/freemium revenue model, 391
Geoadvertising services, 405
Geoinformation services, 405
Geosocial services, 405
Indirect goods, 403
Information asymmetry, 382
Information density, 381
Intellectual property, 387
Location-based services, 405
Long tail marketing, 393
Market creator, 388
Market entry costs, 380
Marketspace, 380
Menu costs, 382
Micropayment systems, 391
Mobile commerce (m-commerce), 386
Native advertising, 396
Net marketplaces, 402
Personalization, 381
Podcasting, 387
Price discrimination, 381
Price transparency, 381
Private exchange, 402
Private industrial networks, 402
Revenue model, 390
Richness, 380
Sales revenue model, 391
Search costs, 380
Social graph, 397
Social shopping, 397
Streaming, 387
Subscription revenue model, 391
Transaction costs, 380
Transaction fee revenue model, 392
Wisdom of crowds, 398
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
10-1 What are the unique features of e-commerce,
digital markets, and digital goods?
• Name and describe four business trends
and three technology trends shaping
e- commerce today.
• List and describe the eight unique features
of e-commerce.
• Define a digital market and digital goods
and describe their distinguishing features.
10-2 What are the principal e-commerce business
and revenue models?
• Name and describe the principal
e- commerce business models.
• Name and describe the e-commerce rev-
enue models.
10-3 How has e-commerce transformed marketing?
• Explain how social networking and the
wisdom of crowds help companies im-
prove their marketing.
• Define behavioral targeting and explain
how it works at individual websites and on
advertising networks.
• Define the social graph and explain how it
is used in e-commerce marketing.
10-4 How has e-commerce affected business-to-
business transactions?
• Explain how Internet technology sup-
ports business-to-business electronic
commerce.
• Define and describe Net marketplaces
and explain how they differ from
private industrial networks (private
exchanges).
10-5 What is the role of m-commerce in business,
and what are the most important m-commerce
applications?
• List and describe important types of
m-commerce services and applications.
10-6 What issues must be addressed when building
an e-commerce presence?
• List and describe the four types of
e- commerce presence.
412 Part Three Key System Applications for the Digital Age
Discussion Questions
10-7 How does the Internet change consumer
and supplier relationships?
10-8 The Internet may not make corporations
obsolete, but the corporations will have
MyLab MIS
MyLab MIS
to change their business models. Do you
agree? Why or why not?
10-9 How have social technologies changed
e-commerce?MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience developing e-commerce strategies for businesses, using
spreadsheet software to research the profitability of an e-commerce company, and using web tools to research and
evaluate e-commerce hosting services. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
10-10 Columbiana is a small, independent island in the Caribbean that has many historical buildings, forts,
and other sites along with rain forests and striking mountains. A few first-class hotels and several
dozen less-expensive accommodations lie along its beautiful white-sand beaches. The major airlines
have regular flights to Columbiana, as do several small airlines. Columbiana’s government wants to
increase tourism and develop new markets for the country’s tropical agricultural products. How can
an e-commerce presence help? What Internet business model would be appropriate? What functions
should the e-commerce presence perform?
10-11 Explore the websites of the following companies: Swatch, Lowe’s, and Priceline. Determine which
of these websites would benefit most from adding a company-sponsored blog to the website. List the
business benefits of the blog. Specify the intended audience for the blog. Decide who in the company
should author the blog and select some topics for the blog.
Improving Decision Making: Using Spreadsheet Software to Analyze a Dot-com Business
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
10-12 Pick one e-commerce company on the Internet—for example, Ashford, Yahoo, or Priceline.
Study the web pages that describe the company and explain its purpose and structure. Use the
web to find articles that comment on the company. Then visit the Securities and Exchange
Commission’s website at www.sec.gov to access the company’s 10-K (annual report) form showing
income statements and balance sheets. Select only the sections of the 10-K form containing the
desired portions of financial statements that you need to examine and download them into your
spreadsheet. (MyLab MIS provides more detailed instructions on how to download this 10-K data
into a spreadsheet.) Create simplified spreadsheets of the company’s balance sheets and income
statements for the past three years.
• Is the company a dot-com success, borderline business, or failure? What information provides
the basis of your decision? Why? When answering these questions, pay special attention to the
company’s three-year trends in revenues, costs of sales, gross margins, operating expenses, and net
margins.
• Prepare an overhead presentation (with a minimum of five slides), including appropriate spreadsheets
or charts, and present your work to your professor and classmates.
Achieving Operational Excellence: Evaluating E-commerce Hosting Services
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
10-13 This project will help develop your Internet skills in evaluating commercial services for hosting an
e-commerce site for a small start-up company.
You would like to set up a website to sell towels, linens, pottery, and tableware from Portugal and are
examining services for hosting small business Internet storefronts. Your website should be able to take secure
http://www.sec.gov
Chapter 10 E-commerce: Digital Markets, Digital Goods 413
credit card payments and calculate shipping costs and taxes. Initially, you would like to display photos and de-
scriptions of 40 products. Visit Wix, GoDaddy, and iPage and compare the range of e-commerce hosting services
they offer to small businesses, their capabilities, and their costs. Examine the tools they provide for creating
an e-commerce site. Compare these services and decide which you would use if you were actually establishing
a web store. Write a brief report indicating your choice and explaining the strengths and weaknesses of each
service.
Collaboration and Teamwork Project
Performing a Competitive Analysis of E-commerce Sites
10-14 Form a group with three or four of your classmates. Select two businesses that are competitors in the
same industry and that use their websites for electronic commerce. Visit these websites. You might com-
pare, for example, the websites for Pandora and Spotify, Amazon and BarnesandNoble.com, or E*Trade
and TD Ameritrade. Prepare an evaluation of each business’s website in terms of its functions, user
friendliness, and ability to support the company’s business strategy. Which website does a better job?
Why? Can you make some recommendations to improve these websites? If possible, use Google Docs
and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for
the class.
http://BarnesandNoble.com
414 Part Three Key System Applications for the Digital Age
Amoruso has been a heavy user of social tools to
promote her business. When she first started out, she
used MySpace, where she attracted a cult following
of more than 60,000 fans. The company gained trac-
tion on social media with Nasty Gal’s aesthetic that
could be both high and low, edgy and glossy.
Amoruso took customer feedback very seriously
and believed customers were at the center of ev-
erything Nasty Gal did. When she sold on eBay, she
learned to respond to every customer comment to
help her understand precisely who was buying her
goods and what they wanted. Amoruso said that the
content Nasty Gal customers created has always
been a huge part of the Nasty Gal brand. It was very
important to see how customers wore Nasty Gal’s
pieces and the types of photographs they took. They
were inspiring.
Social media is built on sharing, and Nasty Gal
gave its followers compelling images, words, and con-
tent to share and talk about each day. They could be
a crazy vintage piece, a quote, or a behind-the-scenes
photo. At most companies the person manning the
Twitter and Facebook accounts is far removed from
senior management. Amoruso did not always au-
thor every Nasty Gal tweet, but she still read every
comment. If the customers were unhappy about
something, she wanted to hear about it right away.
At other businesses, it might take months for cus-
tomer feedback to filter up to the CEO. When Nasty
Gal first joined Snapchat, Amoruso tested the water
with a few Snaps, and Nasty Gal followers responded
in force.
In June 2008, Amoruso moved Nasty Gal Vintage
off eBay and onto its own destination website,
www.nastygal.com. In 2012, Nasty Gal began selling
clothes under its own brand label and also invested
$18 million in a 527,000-square-foot national distribu-
tion center in Shepherdsville, Kentucky, to handle its
own shipping and logistics. Venture capitalists Index
Ventures provided at least $40 million in funding.
Nasty Gal opened a brick-and-mortar store in Los
Angeles in 2014 and another in Santa Monica in 2015.
With growing direct-to-consumer demand and
higher inventory replenishment requirements driven
by new store openings, Nasty Gal invested in a new
warehouse management system. The warehouse
In 2006, Sophia Amoruso was a 22-year-old hitch-hiking, dumpster-diving community college drop-out with a lot of time on her hands. After reading
a book called Starting an eBay Business for Dummies,
she launched an eBay store called Nasty Gal Vintage,
named after a song and 1975 album by the jazz
singer Betty Davis, second wife of the legendary
Miles Davis.
Nasty Gal’s styling was edgy and fresh—a little
bit rock and roll, a little bit disco, modern, but never
hyper-trendy. Eight years after its founding, Nasty Gal
had sold more than $100 million in new and vintage
clothing and accessories, employed more than 350
people, had more than a million fans on Facebook and
Instagram, and was a global brand. It looked like a
genuine e-commerce success story. Or was it?
When Amoruso began her business, she did
everything herself out of her tiny San Francisco
apartment—merchandising, photographing, copywrit-
ing, and shipping. She got up at the crack of dawn to
make 6 a.m. estate sales, haggled with thrift stores,
spent hours photoshopping the images she styled and
shot photos herself using models she recruited her-
self, and ensured that packaging was high quality.
She would inspect items to make sure they were
in good enough shape to sell. She zipped zippers,
buttoned buttons, connected hooks, folded each gar-
ment, and slid it into a clear plastic bag that was
sealed with a sticker. Then she boxed the item and
affixed a shipping label on it. She had to assume that
her customers were as particular and as concerned
with aesthetics as she was.
Amoruso had taken photography classes at a com-
munity college, where she learned to understand
the importance of silhouette and composition. She
bought vintage pieces with dramatic silhouettes—
a coat with a big funnel collar, a ’50s dress with a
flared skirt, or a Victorian jacket with puffy sleeves.
Exaggerating everything about the silhouette through
the angle from which it was photographed helped
Amoruso produce tiny thumbnails for eBay that
attracted serious bidders. She was able to take an
object, distill what was best about it, and then exag-
gerate those qualities so they were visible even in its
tiniest representation. When the thumbnail was en-
larged, it looked amazing.
A Nasty Ending for Nasty Gal
CASE STUDY
http://www.nastygal.com
Chapter 10 E-commerce: Digital Markets, Digital Goods 415
Gal brand was quickly saturated. There was a limit to
the number of women Nasty Gal appealed to: Nasty
Gal had a California cool, young girl look, and it was
unclear how attractive it was in other parts of the
United States and around the world.
Nasty Gal also wasted money on things that didn’t
warrant large expenditures. The company quin-
tupled the size of its headquarters by moving into a
50,300-square-foot location in downtown Los Angeles
in 2013—far more space than the company needed,
according to industry experts. The company had also
opened a 500,000-square-foot fulfillment center in
Kentucky to handle its own distribution and logis-
tics as well as two bricks-and-mortar stores in Los
Angeles and Santa Monica. Even in the hyper-trendy
fashion business, companies have to closely monitor
production, distribution, and expenses for opera-
tions to move products at a scale big enough to make
a profit. Nasty Gal’s mostly young staff focused too
much on the creative side of the business.
While it was growing, Nasty Gal built its manage-
ment team, hiring sizzling junior talent from retail
outlets such as Urban Outfitters. But their traditional
retail backgrounds clashed with the start-up mental-
ity. As Nasty Gal expanded, Amoruso’s own fame
also grew, and she was sidetracked by other projects.
She wrote two books. The first, titled #Girlboss, de-
scribed the founding of Nasty Gal and Amoruso’s
business philosophy and was adapted by Netflix into
a show with Amoruso as executive producer. (The
series was cancelled in June 2017 after just one sea-
son.) Employees complained about Amoruso’s man-
agement style and lack of focus.
Amoruso resigned as chief executive in 2015 but
remained on Nasty Gal’s board of directors until
the company filed for Chapter 11 bankruptcy on
November 9, 2016. Between 2015 and 2016, Nasty Gal
had raised an additional $24 million in equity and
debt financing from venture-focused Stamos Capital
Partners LP and Hercules Technology Growth Capital
Inc. Even though the funding helped Nasty Gal stay
afloat, the company still had trouble paying for new
inventory, rent, and other operating expenses.
Within weeks of filing for Chapter 11 protection,
Nasty Gal sold its brand name and other intellec-
tual property on February 28, 2017, for $20 million
to a rival online fashion site, the United Kingdom’s
Boohoo.com. Boohoo is operating Nasty Gal as a
standalone website, but Nasty Gal’s stores are clos-
ing. Boohoo believes Nasty Gal’s arresting style and
loyal customer base will complement Boohoo and
management system investment was designed to
increase warehouse productivity and shorten order
cycle times so that Nasty Gal’s supply chain could
better service its mushrooming sales. (Order cycle
time refers to the time period between placing of
one order and the next order.) The company selected
HighJump’s Warehouse Management System (WMS)
with the goal of increasing visibility and overall pro-
ductivity while keeping fill rates above 99 percent.
(The fill rate is the percentage of orders satisfied
from stock at hand.)
Key considerations were scalability and capabili-
ties for handling retail replenishment in addition
to direct-to-consumer orders. HighJump’s imple-
mentation team customized the WMS software to
optimize the business processes that worked best for
an e-commerce retailer that ships most of its items
straight to the customer, with a small subset going to
retail stores. The WMS software was also configured
to support processes that would scale with future
growth. Picking efficiency and fill rates shot up, with
fill rates above 99 percent, even though order vol-
ume climbed.
Nasty Gal experienced tremendous growth
in its early years, being named INC Magazine’s
fastest-growing retailer in 2012 and earning a num-
ber one ranking in Internet Retailer’s Top 500 Guide in
2016. By 2011, annual sales hit $24 million and then
nearly $100 million in 2012. However, sales started
dropping to $85 million in 2014 and then $77 million
in 2015. Nasty Gal’s rapid expansion had been fueled
by heavy spending in advertising and marketing.
This is a strategy used by many start-ups, but it only
pays off in the long run if one-time buyers become
loyal shoppers. Otherwise, too much money is spent
on online marketing like banner ads and paying for
influencers. If a company pays $70 on marketing
to acquire a customer and that customer only buys
once from it, the company won’t make money. A
company that spends $200 million to make $100 mil-
lion in revenue is not a sustainable business. Nasty
Gal had a “leaky bucket” situation: Once it burned
through its fundraising capital and cut down on mar-
keting, sales continued to drop.
Nasty Gal couldn’t hold onto customers. Some
were dissatisfied with product quality, but many
were more attracted to fast-fashion retailers such as
Zara and H&M, which both deliver a wider array of
trendy clothes through online and bricks-and-mortar
stores at lower prices and are constantly changing
their merchandise. The actual market for the Nasty
http://Boohoo.com
416 Part Three Key System Applications for the Digital Age
expand global opportunities for growth. Many cus-
tomers have complained about the quality of fabric
and customer service.
Amoruso subsequently turned to developing
Girlboss—a media company that hosts a website,
a podcast, and two annual conferences, called
the Girlboss Rally. She also launched the Girlboss
Foundation, which has given out $130,000 to
women-owned small businesses.
Sources: Cady Drell, “Sophia Amoruso on the Strange and
Difficult Upside of Making Big Mistakes.” Elle, July 24, 2018;
Aundrea Cline-Thomas, “How Girlboss’s Sophia Amoruso
Continues to Chart Her Career Course,” www.nbcnews.com,
July 26, 2018; Sarah Chaney, “How Nasty Gal Went from an
$85 Million Company to Bankruptcy,” Wall Street Journal,
February 24, 2017; Shan Li, “Nasty Gal, Once a Fashion World
Darling, Went Bankrupt: What Went Wrong?,” Los Angeles Times,
February 24, 2017; “Case Study Nasty Gal,” HighJump, 2016; and
Yelena Shuster, “NastyGal Founder Sophia Amoruso on How to
Become a #GirlBoss,” Elle, May 15, 2014.
CASE STUDY QUESTIONS
10-15 How was social media related to Nasty Gal’s
business model? To what extent was Nasty
Gal a “social” business?
10-16 What management, organization, and tech-
nology problems were responsible for Nasty
Gal’s failure as a business?
10-17 Could Nasty Gal have avoided bankruptcy?
Explain your answer.
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
10-18 Describe the six features of social commerce. Provide an example for each feature, describing how a
business could use that feature for selling to consumers online.
10-19 List and describe the main activities involved in building an e-commerce presence.
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The Swaying Effects of Online Product Reviews on Attribute
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an Era of Privacy Concerns.” Pew Research Center (May 2018).
___________. “The State of Privacy in Post-Snowden America.” Pew
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418
MyLab MIS
Discussion Questions: 11-5, 11-6, 11-7; Hands-on MIS Projects: 11-8, 11-9, 11-10, 11-11;
Writing Assignments: 11-17, 11-18; eText with Conceptual Animations
CHAPTER CASES
Machine Learning Helps Akershus University
Hospital Make Better Treatment
Decisions
Sargent & Lundy Learns to Manage
Employee Knowledge
The Reality of Virtual Reality
Can Cars Drive Themselves—And Should
They?
VIDEO CASES
How IBM’s Watson Became a Jeopardy
Champion
Alfresco: Open Source Document
Management and Collaboration
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
11-1 What is the role of knowledge
management systems in business?
11-2 What are artificial intelligence (AI) and
machine learning? How do businesses
use AI?
11-3 What types of systems are used
for enterprise-wide knowledge
management, and how do they
provide value for businesses?
11-4 What are the major types of
knowledge work systems, and how
do they provide value for firms?
11-5 How will MIS help my career?
Managing Knowledge and
Artificial Intelligence11CHAPTER
419
The healthcare industry is deluged with big data, including patient histo-ries, clinical records, charts, and test results. Medical information is now doubling every 3 years and will be doubling every 73 days by 2020. How
can healthcare professionals keep up with the knowledge in their field, and
how can they use this knowledge to make more informed decisions about treat-
ment options and managing healthcare costs when there is way too much data
for humans to easily analyze and absorb?
One of the many health care organizations struggling with this problem is
Akershus University Hospital (Ahus), a Norwegian public university hospital
serving approximately 500,000 inhabitants around Oslo, Norway, and employ-
ing 9,500 people. Ahus had amassed huge volumes of data on patients and treat-
ments, but much of this information was in unstructured, textual reports that
made it extremely difficult and time-consuming
to extract meaningful information. Combing
through thousands of complex clinical docu-
ments was impossible to complete manually.
Working with Capgemini consultants, Ahus
is trying to solve this problem by using arti-
ficial intelligence technology in IBM Watson
Explorer. IBM Watson Explorer is a cognitive
computing platform that can analyze struc-
tured and unstructured data to uncover trends
and patterns that would be difficult, if not im-
possible, for humans to discern. It uses natural
language processing to search data expressed
in everyday language like ordinary speech
and machine learning algorithms to improve
search results. Natural language processing
technology makes it possible for a machine
to understand, analyze, and derive meaning from human language. Machine
learning software can identify patterns in very large databases without ex-
plicit programming, although with significant human training. IBM Watson
Explorer is able to rapidly mine large volumes of data, interpret speech and
text, pick up on nuances of meaning and context, answer questions, draw
conclusions, and learn from its experience. It can make inferences and cor-
relations about the content it ingests and rank potential responses for a user
to select.
The hospital’s image diagnostic department wanted to improve the use of CT
examinations in emergencies. Ahus used IBM Watson Explorer to analyze when
its CT scans performed on pediatric patients in emergency situations fell within
recommended guidelines. CT scans can be life-saving in critical circumstances,
Machine Learning Helps Akershus University
Hospital Make Better Treatment Decisions
© Panchenko Vladimir/Shutterstock
420 Part Three Key System Applications for the Digital Age
but the radiation can also be potentially harmful, so CT scans should not be
overused. A large amount of Ahus’s CT scan data was in text format. Ahus used
Watson Explorer to gather unstructured data from more than 5,000 anonymous
CT examination reports and apply machine learning and natural language pro-
cessing techniques to learn how often CT scans were undertaken and the find-
ings of those scans.
Ahus and Capgemini implemented the project over a period of seven weeks
during the summer of 2016. Watson had to learn the language used in medi-
cine and understand the context of how that language is used. Capgemini
adapted the technology to the Norwegian language, and Ahus trained Watson
to understand medical words and phrases. The project also created a clas-
sification schema, teaching Watson to distinguish files that reported positive
scan results and those that reported negative results, and categorize the data
accordingly.
After several tests, Watson Explorer attained an accuracy level of 99 percent
for content classification. The final analysis confirmed that frequency of CT
scanning at Ahus was at an acceptable level, and that the hospital was striking
the right balance between the probability of positive gains in relation to the
potential harmful effects. It would have taken a team of people months and
perhaps years to analyze the same amount of data that Watson could process in
minutes.
Sources: IBM Corporation. “Akershus University Hospital,” and “IBM Watson Explorer,”
www.ibm.com, accessed May 17, 2018; and “Akershus University Hospital Optimizes the Use
of CT Examinations,” www.capgemini.com, accessed May 18, 2018.
Akershus University Hospital’s use of artificial intelligence techniques such as machine learning and natural language processing to determine
whether its CT scans fell within recommended guidelines shows how organiza-
tional performance can benefit by using technology to facilitate the acquisition
and application of knowledge. Facilitating access to knowledge, using knowl-
edge tools to create and utilize new knowledge, and using that knowledge to
improve business processes are vital to success and survival for both private
business firms and public organizations.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Like other medical facilities, Akershus University
Hospital was what is termed “data rich but knowledge poor.” It had vast quan-
tities of patient and treatment data, but they were largely unstructured and
very difficult to analyze for information and insights. AI techniques such
as machine learning and natural language processing helped Ahus obtain
new insights and knowledge from thousands of CT scan records so that it
could optimize treatments and ensure doctors and staff were following best
practices.
Here are some questions to think about: How did using IBM Watson Explorer
help Akershus University Hospital improve its knowledge? What was the im-
pact on the hospital’s business processes?
http://www.ibm.com
Capgemini – home page – Get the future you want
Chapter 11 Managing Knowledge and Artificial Intelligence 421
11-1 What is the role of knowledge
management systems in business?
Knowledge management and collaboration systems are among the fastest-
growing areas of corporate and government software investment. The past
decade has shown an explosive growth in research on knowledge and knowl-
edge management in the economics, management, and information systems
fields.
Knowledge management and collaboration are closely related. Knowledge
that cannot be communicated and shared with others is nearly useless.
Knowledge becomes useful and actionable when shared throughout the firm.
We have already described the major tools for collaboration and social business
in Chapter 2. In this chapter, we will focus on knowledge management systems
and be mindful that communicating and sharing knowledge are becoming in-
creasingly important.
We live in an information economy in which the major source of wealth
and prosperity is the production and distribution of information and
knowledge. At least 20 percent of the total economic output of the United
States, $4 trillion, derives from the output of the information and knowledge
sectors of the economy, which employs an estimated minimum of 30 mil-
lion people (U.S. Department of Labor, 2017; Bureau of Economic Analysis,
2018).
Knowledge management has become an important theme at many large
business firms as managers realize that much of their firm’s value depends on
the firm’s ability to create and manage knowledge. Studies have found that a
substantial part of a firm’s stock market value is related to its intangible assets,
of which knowledge is one important component, along with brands, reputa-
tions, and unique business processes. Well-executed knowledge-based projects
have been known to produce extraordinary returns on investment, although
the impacts of knowledge-based investments are difficult to measure (Gu and
Lev, 2001).
CT Scan Analysis System
• Unstructured data
• Very large volume of data
• Opportunities from new technology
• IBM Watson Explorer
• Machine learning
• Natural language
processing
• Collect patient data
• Collect procedure
and test data
• Implement CT scan
process
• Train Watson
Explorer
• Mine large databases
• Categorize scan results
• Classify content
• Evaluate conformity with best
practices
• Optimize treatments
• Improve safety
• Monitor safety and
costs
Technology
Management
Organization
Business
Challenges
Information
System
Business
Solutions
422 Part Three Key System Applications for the Digital Age
Important Dimensions of Knowledge
There is an important distinction between data, information, knowledge, and
wisdom. Chapter 1 defines data as flows of events or transactions captured by
an organization’s systems that are useful for transacting but little else. To turn
data into useful information, a firm must expend resources to organize data into
categories of understanding, such as monthly, daily, regional, or store-based
reports of total sales. To transform information into knowledge, a firm must
expend additional resources to discover patterns, rules, and contexts where the
knowledge works. Finally, wisdom is thought to be the collective and indi-
vidual experience of applying knowledge to the solution of problems. Wisdom
involves where, when, and how to apply knowledge.
Knowledge is both an individual attribute and a collective attribute of the
firm. Knowledge is a cognitive, even a physiological, event that takes place in-
side people’s heads. It is also stored in libraries and records, shared in lectures,
and stored by firms in the form of business processes and employee know-how.
Knowledge residing in the minds of employees that has not been documented
is called tacit knowledge, whereas knowledge that has been documented is
called explicit knowledge. Knowledge can reside in email, voice mail, graph-
ics, and unstructured documents as well as structured documents. Knowledge
is generally believed to have a location, either in the minds of humans or in
specific business processes. Knowledge is “sticky” and not universally appli-
cable or easily moved. Finally, knowledge is thought to be situational and con-
textual. For example, you must know when to perform a procedure as well as
how to perform it. Table 11.1 reviews these dimensions of knowledge.
We can see that knowledge is a different kind of firm asset from, say, build-
ings and financial assets; that knowledge is a complex phenomenon; and that
there are many aspects to the process of managing knowledge. We can also
TABLE 11.1 IMPORTANT DIMENSIONS OF KNOWLEDGE
KNOWLEDGE IS A FIRM ASSET
Knowledge is an intangible asset.
The transformation of data into useful information and knowledge requires organizational
resources.
Knowledge is not subject to the law of diminishing returns as are physical assets but instead
experiences network effects because its value increases as more people share it.
KNOWLEDGE HAS DIFFERENT FORMS
Knowledge can be either tacit or explicit (codified).
Knowledge involves know-how, craft, and skill.
Knowledge involves knowing how to follow procedures.
Knowledge involves knowing why, not simply when, things happen (causality).
KNOWLEDGE HAS A LOCATION
Knowledge is a cognitive event involving mental models and maps of individuals.
There is both a social and an individual basis of knowledge.
Knowledge is “sticky” (hard to move), situated (enmeshed in a firm’s culture), and contextual
(works only in certain situations).
KNOWLEDGE IS SITUATIONAL
Knowledge is conditional; knowing when to apply a procedure is just as important as knowing
the procedure (conditional).
Knowledge is related to context; you must know how to use a certain tool and under what
circumstances.
Chapter 11 Managing Knowledge and Artificial Intelligence 423
recognize that knowledge-based core competencies of firms—the two or three
things that an organization does best—are key organizational assets. Knowing
how to do things effectively and efficiently in ways that other organizations
cannot duplicate is a primary source of profit and competitive advantage that
cannot be purchased easily by competitors in the marketplace.
For instance, having a unique build-to-order production system constitutes
a form of knowledge and perhaps a unique asset that other firms cannot copy
easily. With knowledge, firms become more efficient and effective in their use
of scarce resources. Without knowledge, firms become less efficient and less ef-
fective in their use of resources and ultimately fail.
Organizational Learning and Knowledge Management
Like humans, organizations create and gather knowledge using a variety of
organizational learning mechanisms. Through collection of data, careful mea-
surement of planned activities, trial and error (experimentation), and feedback
from customers and the environment in general, organizations gain experience.
Organizations that learn adjust their behavior to reflect that learning by creat-
ing new business processes and by changing patterns of management decision
making. This process of change is called organizational learning. Arguably,
organizations that can sense and respond to their environments rapidly will
survive longer than organizations that have poor learning mechanisms.
The Knowledge Management Value Chain
Knowledge management refers to the set of business processes developed
in an organization to create, store, transfer, and apply knowledge. Knowledge
management increases the ability of the organization to learn from its envi-
ronment and to incorporate knowledge into its business processes. Figure 11.1
illustrates the value-adding steps in the knowledge management value chain.
Each stage in the value chain adds value to raw data and information as they
are transformed into usable knowledge.
In Figure 11.1, information systems activities are separated from related
management and organizational activities, with information systems activi-
ties on the top of the graphic and organizational and management activities
below. One apt slogan of the knowledge management field is “Effective knowl-
edge management is 80 percent managerial and organizational and 20 percent
technological.”
In Chapter 1, we define organizational and management capital as the set of
business processes, culture, and behavior required to obtain value from invest-
ments in information systems. In the case of knowledge management, as with
other information systems investments, supportive values, structures, and be-
havior patterns must be built to maximize the return on investment in knowl-
edge management projects. In Figure 11.1, the management and organizational
activities in the lower half of the diagram represent the investment in organiza-
tional capital required to obtain substantial returns on the information technol-
ogy (IT) investments and systems shown in the top half of the diagram.
Knowledge Acquisition
Organizations acquire knowledge in a number of ways, depending on the type
of knowledge they seek. The first knowledge management systems sought
to build corporate repositories of documents, reports, presentations, and best
practices. These efforts have been extended to include unstructured documents
(such as email). In other cases, organizations acquire knowledge by developing
424 Part Three Key System Applications for the Digital Age
online expert networks so that employees can “find the expert” in the company
who is personally knowledgeable.
In still other cases, firms must acquire new knowledge by discovering pat-
terns in corporate data via machine learning (including neural networks, gene-
netic algorithms, natural language processing, and other AI techniques), or by
using knowledge workstations where engineers can discover new knowledge.
These various efforts are described throughout this chapter. A coherent and or-
ganized knowledge system also requires business analytics using data from the
firm’s transaction processing systems that track sales, payments, inventory,
customers, and other vital areas as well as data from external sources such as
news feeds, industry reports, legal opinions, scientific research, and govern-
ment statistics.
Knowledge Storage
Once they are discovered, documents, patterns, and expert rules must be stored
so they can be retrieved and used by employees. Knowledge storage gener-
ally involves the creation of a database. Document management systems that
digitize, index, and tag documents according to a coherent framework are large
databases adept at storing collections of documents. Expert systems also help
corporations preserve the knowledge that is acquired by incorporating that
knowledge into organizational processes and culture. Each of these is discussed
later in this chapter and in the following chapter.
Management must support the development of planned knowledge storage
systems, encourage the development of corporate-wide schemas for indexing
documents, and reward employees for taking the time to update and store doc-
uments properly. For instance, it would reward the sales force for submitting
FIGURE 11.1 THE KNOWLEDGE MANAGEMENT VALUE CHAIN
Knowledge management today involves both information systems activities and a host of enabling
management and organizational activities.
Knowledge Business Value Chain
Knowledge Management Systems
Information System Activities
Data and
Information
Acquisition
Collecting
Storing
Disseminating
Feedback
Acquire
Business analytics
Data mining
Neural networks
Machine learning
Knowledge workstations
Expert knowledge
networks
Store
Content management
systems
Knowledge databases
Expert systems
Disseminate
Portals
Search engines
Collaboration and
social business tools
Apply
Decision support
systems
Enterprise
applications
Robotics
Management and Organizational Activities
Knowledge culture
Communities of
practice
Social networks
Organizational routines
Organizational culture
Training
Collaboration
New IT-based business
processes
New products and
services
New markets
Chapter 11 Managing Knowledge and Artificial Intelligence 425
names of prospects to a shared corporate database of prospects where all sales
personnel can identify each prospect and review the stored knowledge.
Knowledge Dissemination
Portals, email, instant messaging, wikis, social business tools, and search en-
gine technology have added to an existing array of collaboration tools for shar-
ing calendars, documents, data, and graphics (see Chapter 2). Contemporary
technology has created a deluge of information and knowledge. How can man-
agers and employees discover, in a sea of information and knowledge, that
which is really important for their decisions and their work? Here, training
programs, informal networks, and shared management experience commu-
nicated through a supportive culture help managers focus their attention on
what is important.
Knowledge Application
Regardless of what type of knowledge management system is involved, knowl-
edge that is not shared and applied to the practical problems facing firms and
managers does not add business value. To provide a return on investment, or-
ganizational knowledge must become a systematic part of management deci-
sion making and become situated in systems for decision support (described
in Chapter 12). Ultimately, new knowledge must be built into a firm’s business
processes and key application systems, including enterprise applications for
managing crucial internal business processes and relationships with customers
and suppliers. Management supports this process by creating—based on new
knowledge—new business practices, new products and services, and new mar-
kets for the firm.
Building Organizational and Management Capital:
Collaboration, Communities of Practice, and Office
Environments
In addition to the activities we have just described, managers can help by
developing new organizational roles and responsibilities for the acquisition of
knowledge, including the creation of chief knowledge officer executive posi-
tions, dedicated staff positions (knowledge managers), and communities of
practice. Communities of practice (COPs) are informal social networks
of professionals and employees within and outside the firm who have simi-
lar work-related activities and interests. The activities of these communities
include self-education and group education, conferences, online newslet-
ters, and day-to-day sharing of experiences and techniques to solve specific
work problems. Many organizations, such as IBM, the U.S. Federal Highway
Administration, and the World Bank, have encouraged the development of
thousands of online communities of practice. These communities of prac-
tice depend greatly on software environments that enable collaboration and
communication.
COPs can make it easier for people to reuse knowledge by pointing com-
munity members to useful documents, creating document repositories, and
filtering information for newcomers. COPs’ members act as facilitators, en-
couraging contributions and discussion. COPs can also reduce the learning
curve for new employees by providing contacts with subject matter experts
and access to a community’s established methods and tools. Finally, COPs
can act as a spawning ground for new ideas, techniques, and decision-making
behavior.
426 Part Three Key System Applications for the Digital Age
Types of Knowledge Management Systems
There are essentially three major types of knowledge management systems:
enterprise-wide knowledge management systems, knowledge work systems,
and “intelligent” techniques. Figure 11.2 shows the knowledge management
systems applications for each of these major categories.
Enterprise-wide knowledge management systems are general-purpose
firmwide efforts to collect, store, distribute, and apply digital content and
knowledge. These systems include capabilities for searching for information,
storing both structured and unstructured data, and locating employee exper-
tise within the firm. They also include supporting technologies such as portals,
search engines, collaboration and social business tools, and learning manage-
ment systems.
The development of powerful networked workstations and software for as-
sisting engineers and scientists in the discovery of new knowledge has led to the
creation of knowledge work systems such as computer-aided design (CAD), vi-
sualization, simulation, and virtual reality systems. Knowledge work systems
(KWS) are specialized systems built for engineers, scientists, and other knowl-
edge workers charged with discovering and creating new knowledge for a com-
pany. We discuss knowledge work applications in detail in Section 11-4.
Knowledge management also includes a diverse group of “intelligent”
techniques, such as data mining, expert systems, machine learning, neural net-
works, natural language processing, computer vision systems, robotics, genetic
algorithms, and intelligent agents. These techniques have different objectives,
from a focus on discovering knowledge (data mining and neural networks) to dis-
tilling knowledge in the form of rules for a computer program (expert systems)
to discovering optimal solutions for problems (genetic algorithms). Section 11-2
provides more detail about these “intelligent” techniques.
FIGURE 11.2 MAJOR TYPES OF KNOWLEDGE MANAGEMENT SYSTEMS
There are three major categories of knowledge management systems, and each can be broken down further into
more specialized types of knowledge management systems.
General-purpose, integrated,
firmwide e�orts to collect, store,
disseminate, and use digital
content and knowledge
Enterprise content management systems
Collaboration and social tools
Learning management systems
Specialized workstations and
systems that enable scientists,
engineers, and other knowledge
workers to create and discover
new knowledge
Computer-aided design (CAD)
Virtual reality
Tools for discovering patterns
and applying knowledge to
discrete decisions and knowledge
domains
Data mining
Neural networks
Expert systems
Machine learning
Natural language processing
Computer vision systems
Robotics
Genetic algorithms
Intelligent agents
Enterprise-Wide
Knowledge Management
Systems
Knowledge Work Systems “Intelligent” Techniques
Chapter 11 Managing Knowledge and Artificial Intelligence 427
11-2 What are artificial intelligence (AI) and machine
learning? How do businesses use AI?
“Intelligent” techniques are often described as artificial intelligence (AI).
There are many definitions of artificial intelligence. In the most ambitious vi-
sion, AI involves the attempt to build computer systems that think and act like
humans. Humans see, hear, and communicate with natural languages, make
decisions, plan for the future, achieve goals, perceive patterns in their environ-
ments, and learn, among many other capabilities. Humans also love, hate, and
choose what objectives they want to pursue. These are the foundations of what
is called “human intelligence” and what is called “common sense” or general-
ized intelligence.
So far the “Grand Vision” of AI remains a distant dream: there are no com-
puter programs that have demonstrated generalized human intelligence or
common sense. Human intelligence is vastly more complex than the most so-
phisticated computer programs and covers a broader range of activities than is
currently possible with “intelligent” computer systems and devices.
A narrow definition of artificial intelligence is far more realistic and useful.
Stripped of all the hyperbole, artificial intelligence programs are like all com-
puter programs: They take data input from the environment, process that data,
and produce outputs. AI programs differ from traditional software programs in
the techniques and technologies they use to input and process data. AI systems
today can perform many tasks that would be impossible for humans to accom-
plish, and can equal or come close to humans in tasks such as interpreting CT
scans, recognizing faces and voices, playing games like chess or Go, or besting
human experts in certain well-defined tasks. In many industries they are trans-
forming how business is done, where people are employed, and how they do
their jobs.
Evolution of AI
In the last decade, significant progress has been made within this limited vision
of AI. The major forces driving the rapid evolution of AI are the development
of Big Data databases generated by the Internet, e-commerce, the Internet of
Things, and social media. Secondary drivers include the drastic reduction in
the cost of computer processing and the growth in the power of processors. And
finally, the growth of AI has relied on the refinement of algorithms by tens of
thousands of AI software engineers and university AI research centers, along
with significant investment from business and governments. There have been
few fundamental conceptual breakthroughs in AI in this period, or in under-
standing how humans think. Many of the algorithms and statistical techniques
were developed decades earlier but could not be implemented and refined on
such a large scale as is currently possible.
Progress has been significant: Image recognition programs have gone from
25 percent error rates down to less than 3 percent in 2018; natural language
speech recognition errors have dropped from 15 percent to 6 percent; and in
translation among common languages, Google’s Translate program achieves
about 85 percent accuracy compared to humans (Technology Quarterly, 2017;
Hirschberg and Manning, 2016). These advances have made possible personal
assistants like Siri (Apple), Alexa (Amazon), Cortana (Microsoft), and Now
(Google), as well as speech-activated systems in automobiles.
428 Part Three Key System Applications for the Digital Age
In a famous 1950 paper, computer scientist Alan Turing defined an artifi-
cially intelligent computer program as one that a human could have a conver-
sation with and not be able to tell it was a computer (Turing, 1950). We still
cannot have a genuine conversation with a computer AI system because it has
no genuine understanding of the world, no common sense, and does not truly
understand humans. Nevertheless, AI systems can be enormously helpful to
humans and business firms.
Major Types of AI
Artificial intelligence is a family of programming techniques and technologies,
each of which has advantages in select applications. Table 11.2 describes the
major types of AI: expert systems, machine learning, neural networks, deep
learning, genetic algorithms, natural language processing, computer vision sys-
tems, robotics, and intelligent agents. Let’s take a look at each type of AI and
understand how it is used by businesses and other organizations.
Expert Systems
Expert systems were developed in the 1970s and were the first large-scale
applications of AI in business and other organizations. They account for an es-
timated 20 percent of all AI systems today. Expert systems capture the knowl-
edge of individual experts in an organization through in-depth interviews, and
represent that knowledge as sets of rules. These rules are then converted into
computer code in the form of IF-THEN rules. Such programs are often used to
develop apps that walk users through a process of decision making.
Expert systems provide benefits such as improved decisions, reduced er-
rors, reduced costs, reduced training time, and better quality and service. They
have been used in applications for making decisions about granting credit and
for diagnosing equipment problems, as well as in medical diagnostics, legal
research, civil engineering, building maintenance, drawing up building plans,
and educational technology (personalized learning and responsive testing)
TABLE 11.2 MAJOR TYPES OF AI TECHNIQUES
Expert systems Represent the knowledge of experts as a set of rules that can be
programmed so that a computer can assist human decision makers.
Machine learning Software that can identify patterns in very large databases without explicit
programming although with significant human training.
Neural networks and deep learning Loosely based on human neurons, algorithms that can be trained to classify
objects into known categories based on data inputs. Deep learning uses
multiple layers of neural networks to reveal the underlying patterns in data,
and in some limited cases identify patterns without human training.
Genetic algorithms Algorithms based loosely on evolutionary natural selection and mutation,
commonly used to generate high-quality solutions to optimization and
search problems.
Natural language processing Algorithms that make it possible for a computer to understand and analyze
natural human language.
Computer vision systems Systems that can view and extract information from real-world images.
Robotics Use of machines that can substitute for human movements as well as
computer systems for their control and information processing.
Intelligent agents Software agents that use built-in or learned knowledge to perform specific
tasks or services for an individual.
Chapter 11 Managing Knowledge and Artificial Intelligence 429
(Maor, 2003; Mishra, 2016). For instance, if you were the project manager of a
14-story office building and were given the task of configuring the building’s air
conditioning system, which has hundreds of parts and subassemblies, an expert
system could walk you through the process by asking a series of questions,
producing an order to suppliers, and providing an overall cost estimate for the
project, all in a matter of hours rather than weeks. See Figure 11.3 for an expert
system for credit granting.
How Expert Systems Work
Expert systems model human knowledge as a set of rules that collectively are
called the knowledge base. Expert systems can have from a handful to many
thousands of rules, depending on the complexity of the decision-making prob-
lem. The strategy used to search through the collection of rules and formulate
conclusions is called the inference engine. The inference engine works by
searching through the rules and firing those rules that are triggered by facts the
user gathers and enters.
Expert systems have a number of limitations, the most important of which
is that even experts can’t explain how they make decisions: they know more
than they can say. People drive cars, for instance, but are challenged to say
how they do it. The knowledge base can become chaotic as the number of
FIGURE 11.3 RULES IN AN EXPERT SYSTEM
An expert system contains a number of rules to be followed. The rules are
interconnected, the number of outcomes is known in advance and is limited, there
are multiple paths to the same outcome, and the system can consider multiple rules
at a single time. The rules illustrated are for simple credit-granting expert systems.
F
Limit 10,000
I
Limit 3,000
B –> C
If car payment < 10% of income
Ask about mortgage payment
Else EXIT
C --> D
If mortgage payment < 20% of
income
Grant credit
Else EXIT
E --> F
If years > = 4
Grant 10,000 line
Else do G
H –> F
If other debt < 5% of income
Do F
Else do I
A --> B
If INC > 50,000
Ask about car
payments
Else EXIT
D –> E
If D, ask about
years employed
G –> H
If years < 4
Ask about
other debt
D
Grant credit line
430 Part Three Key System Applications for the Digital Age
rules can reach into the thousands. In rapidly changing environments, say
medical diagnosis, the rules change and need to be continually updated.
Expert systems are not useful for dealing with unstructured problems that
managers and employees typically encounter, and do not use real-time data
to guide their decisions. Expert systems do not scale well to the kinds of very
large data sets produced by the Internet and the Internet of Things (IoT), and
they are expensive to build. For these reasons, expert system development
has slowed in the last decade to small domains of expert knowledge such as
automobile diagnosis.
Machine Learning
More than 75 percent of AI development today involves some kind of machine
learning (ML) accomplished by neural networks, genetic algorithms, and
deep learning networks, with the main focus on finding patterns in data, and
classifying data inputs into known (and unknown) outputs. Machine learning
is based on an entirely different AI paradigm than expert systems. In machine
learning there are no experts, and there is no effort to write computer code for
rules reflecting an expert’s understanding. Instead, ML begins with very large
data sets with tens to hundreds of millions of data points and automatically
finds patterns and relationships by analyzing a large set of examples and mak-
ing a statistical inference. Table 11.3 provides some examples of how leading
business firms are using various types of machine learning.
Facebook has over 200 million monthly users in the United States who spend
an average of 35 minutes on site daily. The firm displays an estimated 1 bil-
lion ads monthly to this audience, and it decides which ads to show each per-
son in less than one second. For each person, Facebook bases this decision on
the prior behavior of its users, including information shared (posts, comments,
Likes), the activity of their social network friends, background information
supplied to Facebook (age, gender, location, devices used), information sup-
plied by advertisers (email address, prior purchases), and user activity on apps
and other websites that Facebook can track. Facebook uses ML to identify pat-
terns in the dataset, and to estimate the probability that any specific user will
click on a particular ad based on the patterns of behavior they have identified.
TABLE 11.3 EXAMPLES OF MACHINE LEARNING
WellsFargo Aiera system reads and analyzes a half-million documents daily for 1,600
stocks, and produces buy and sell calls for 550 stocks followed by their
wealth management unit.
Allstate Insurance Amelia system uses deep learning and natural language processing to
assist call center employees in handling customer queries. Trained on 40
insurance topics, it understands context, and learns from experience.
Netflix Recommender system based on video similarity algorithm uses statistical
and machine learning to develop a personalized selection of videos for
each of its 125 million subscribers worldwide.
Amazon Alexa uses machine learning and speech recognition for its intelligent
voice-controlled personal assistant.
Schindler Group Monitors over one million elevators and walkways using GE’s Predix
operating system and machine learning to make predictions about
needed maintenance.
PayPal Uses machine learning algorithms to identify patterns of fraud for
170 million customers who generate four billion transactions annually.
Chapter 11 Managing Knowledge and Artificial Intelligence 431
Analysts estimate that Facebook uses at least 100,000 servers located in several
very large-scale “hyper datacenters” to perform this task. At the end of this pro-
cess is a simple show ad/no show ad result.
The current response rate (click rate) to Facebook ads is about 0.1 percent,
roughly four times that of an untargeted display ad although not as good as
targeted email campaigns (about 3 percent), or Google Search ads (about 2
percent). All of the very large Internet consumer firms, including Amazon,
Alphabet’s Google, Microsoft, Alibaba, Tencent, Netflix, and Baidu, use similar
ML algorithms. Obviously, no human or group of humans could achieve these
results given the enormous database size, the speed of transactions, or the com-
plexity of working in real time. The benefits of ML illustrated by this brief ex-
ample come down to an extraordinary ability to recognize patterns at the scale
of millions of people in a matter of seconds, and classify objects into discrete
categories.
Supervised and Unsupervised Learning
Nearly all machine learning today involves supervised learning, in which the
system is “trained” by providing specific examples of desired inputs and outputs
identified by humans in advance. A very large database is developed, say ten
million photos posted on the Internet, and then split into two sections, one a
development database and the other a test database. Humans select a target,
let’s say to identify all photos that contain a car image. Humans feed a large
collection of verified pictures that contain a car image into a neural network
(described below) that proceeds iteratively through the development database
in millions of cycles, until eventually the system can identify photos with a car.
The machine learning system is then tested using the test database to ensure
the algorithms can achieve the same results with different photos. In many
cases, but not all, machine learning can come close to or equal human efforts,
but on a very much larger scale. Over time, with tweaking by programmers, and
by making the database even bigger, using ever larger computing systems, the
system will improve its performance, and in that sense, can learn. Supervised
learning is one technique used to develop autonomous vehicles that need to
be able to recognize objects around them, such as people, other cars, buildings,
and lines on the pavement to guide them (see the chapter-ending case study).
In unsupervised learning, the same procedures are followed, but humans
do not feed the system examples. Instead, the system is asked to process the
development database and report whatever patterns it finds. For instance, in a
seminal research effort often referred to “The Cat Paper,” researchers collected
10 million YouTube photos from videos and built an ML system that could
detect human faces without labeling or “teaching” the machine with verified
human face photos (Le et al., 2011). Researchers developed a brute force neu-
ral network computer system composed of 1,000 machines with 16,000 core
processors loaned by Google. The systems processors had a total of 1 billion
connections to one another, creating a very large network that imitated on a
small scale the neurons and synapses (connections) of a human brain. The
result was a system that could detect human faces in photos, as well as cat
faces and human bodies. The system was then tested on 22,000 object images
on ImageNet (a large online visual database), and achieved a 16 percent accu-
racy rate. In principle then, it is possible to create machine learning systems
that can “teach themselves” about the world without human intervention. But
there’s a long way to go: we wouldn’t want to use autonomous cars that were
guided by systems with a 16 percent accuracy rate! Nevertheless, this research
was a 75 percent improvement over previous efforts.
432 Part Three Key System Applications for the Digital Age
To put this in perspective, a one-year-old human baby can recognize faces,
cats, tables, doors, windows, and hundreds of other objects it has been exposed
to, and continuously catalogs new experiences that it seeks out by itself for rec-
ognition in the future. But babies have a huge computational advantage over our
biggest ML research systems. The human adult brain has an estimated 84 billion
neurons, each with over 10,000 connections to other neurons (synapses), and
over one trillion total connections in its network (brain). Modern homo sapiens
have been programed (by nature) for an estimated 300,000 years, and their pre-
decessors for 2.5 million years. For these reasons, machine learning is applicable
today in a very limited number of situations where there are very large data-
bases and computing facilities, most desired outcomes are already defined by
humans, the output is binary (0,1), and where there is a very talented and large
group of software and system engineers working the problem.
Neural Networks
A neural network is composed of interconnected units called neurons. Each
neuron can take data from other neurons, and transfer data to other neurons
in the system. The artificial neurons are not biological physical entities as in
the human brain, but instead are software programs and mathematical models
that perform the input and output function of neurons. The strength of the con-
nections (weight) can be controlled by researchers using a Learning Rule, an
algorithm that systematically alters the strength of the connections among the
neurons to produce the final desired output that could be identifying a picture
of a cancer tumor, fraudulent credit card transactions, or suspicious telephone
calling patterns.
Neural networks find patterns and relationships in very large amounts of
data that would be too complicated and difficult for a human being to ana-
lyze by using machine learning algorithms and computational models that are
loosely based on how the biological human brain is thought to operate. Neural
networks are pattern detection programs. Neural networks learn patterns
from large quantities of data by sifting through the data, and ultimately finding
pathways through the network of thousands of neurons. Some pathways are
more successful than others in their ability to identify objects like cars, animals,
faces, and voices. There may be millions of pathways through the data. An al-
gorithm (the Learning Rule mentioned above) identifies these successful paths,
and strengthens the connection among neurons in these pathways. This pro-
cess is repeated thousands or millions of times until only the most successful
pathways are identified. The Learning Rule identifies the best or optimal path-
ways through the data. At some point, after millions of pathways are analyzed,
the process stops when an acceptable level of pattern recognition is reached,
for instance, successfully identifying cancer tumors about as well as humans,
or even better than humans.
Figure 11.4 represents one type of neural network comprising an input layer,
a processing layer, and an output layer. Humans train the network by feed-
ing it a set of outcomes they want the machine to learn. For instance, if the
objective is to build a system that can identify patterns in fraudulent credit
card purchases, the system is trained using actual examples of fraudulent trans-
actions. The data set may be composed of a million examples of fraudulent
transactions. The data set is divided into two segments: a training data set, and
a test data set. The training data set is used to train the system. After millions of
test runs, the program hopefully will identify the best path through the data. To
verify the accuracy of the system, it is then used on the test data set, which the
Chapter 11 Managing Knowledge and Artificial Intelligence 433
system has not analyzed before. If successful, the system will be tested on new
data sets. The neural network in Figure 11.4 has learned how to identify a likely
fraudulent credit card purchase.
Neural network applications in medicine, science, and business address
problems in pattern classification, prediction, and control and optimization. In
medicine, neural network applications are used for screening patients for coro-
nary artery disease, for diagnosing epilepsy and Alzheimer’s disease, and for
performing pattern recognition of pathology images, including certain cancers.
The financial industry uses neural networks to discern patterns in vast pools of
data that might help investment firms predict the performance of equities, cor-
porate bond ratings, or corporate bankruptcies. Visa International uses a neural
network to help detect credit card fraud by monitoring all Visa transactions for
sudden changes in the buying patterns of cardholders. Table 11.4 provides ex-
amples of neural networks.
FIGURE 11.4 HOW A NEURAL NETWORK WORKS
A neural network uses rules it “learns” from patterns in data to construct a hidden
layer of logic. The hidden layer then processes inputs, classifying them based on the
experience of the model. In this example, the neural network has been trained to
distinguish between valid and fraudulent credit card purchases.
Input Layer Hidden Layer Output Layer
Data
• Age
• Income
• Purchase
history
• Frequency of
purchases
• Average
purchase
size
Results
Valid
purchase
Fraudulent
purchase
TABLE 11.4 EXAMPLES OF NEURAL NETWORKS
FUNCTIONALITY INPUTS PROCESS OUTPUTS/APPLICATION
Computer vision Millions of digital images,
videos, or sensors
Recognize patterns in images,
and objects
Photo tagging; facial
recognition; autonomous
vehicles
Speech recognition Digital soundtracks, voices Recognize patterns and
meaning in soundtracks and
speech
Digital assistants, chatbots,
help centers
Machine controls, diagnostics Internet of Things: thousands
of sensors
Identify operational status,
patterns of failure
Preventive maintenance;
quality control
Language translation Millions of sentences in various
languages
Identify patterns in multiple
languages
Translate sentences from one
language to another
Transaction analysis Millions of loan applications,
stock trades, phone calls
Identify patterns in financial
and other transactions
Fraud control; theft of services;
stock market predictions
Targeted online ads Millions of browser histories Identify clusters of consumers;
preferences
Programmatic advertising
434 Part Three Key System Applications for the Digital Age
“Deep Learning” Neural Networks
“Deep learning” neural networks are more complex, with many layers of
transformation of the input data to produce a target output. Collections of neu-
rons are called nodes or layers. Deep learning networks are in their infancy,
and are used almost exclusively for pattern detection on unlabeled data where
the system is not told what to look for specifically but to simply discover pat-
terns in the data. The system is expected to be self-taught. See Figure 11.5.
For instance, in our earlier example of unsupervised learning involving a
machine learning system that could identify cats (The Cat Paper) and other
objects without training, the system used was a deep learning network. It
consisted of three layers of neural networks (layers 1, 2, and 3). Each of these
layers has two levels of pattern detection (levels 1 and 2). Each level was de-
veloped to identify a low-level feature of the photos: layer 1 identified lines
in the photos, and layer 2 identified circles. The result of the first layer may
be blobs and fuzzy edges. Second and third layers refine the images emerging
from the first layer, until at the end of the process the system can distinguish
cats, dogs, and humans, although in this case not very well, with a 16 percent
accuracy rate.
Many pundits believe deep learning networks come closer to the “Grand Vision”
of AI where ML systems would be capable of learning like a human being. Others
who work in ML and deep learning are more critical (Marcus, 2018; Pearl 2016).
Limitations of Neural Networks and Machine Learning
Neural networks have a number of limitations currently. They require very
large data sets to identify patterns. There are often many patterns in large data
sets that are nonsensical, and it takes humans to choose which patterns “make
sense.” Many patterns in large data sets are ephemeral: there may be a pattern
in the stock market, or the performance of professional sports teams, but they
do not last long. In many important decision situations there are no large data
FIGURE 11.5 A DEEP LEARNING NETWORK
Deep learning networks consist of many layers of neural networks working in a
hierarchical fashion to detect patterns. Shown here is an expanded look at layer 1. Other
layers have the same structure.
Outputs Medium level feature pattern:
Facial shape
Feature 2: CirclesLevel 2
Layer 1
Layer 2
Layer 3
Level 1
Inputs
Feature 1: Lines
Chapter 11 Managing Knowledge and Artificial Intelligence 435
sets. Should you apply to College A or College B? Should we merge with an-
other company?
Neural networks, machine learning systems, and the people who work with
them cannot explain how the system arrived at a particular solution. For in-
stance, in the case of the IBM Watson computer playing Jeopardy, researchers
could not say exactly why Watson chose the answers it did, only that they were
either right or wrong. Most real-world ML applications in business involve clas-
sifying digital objects into simple binary categories (yes or no; 0 or 1). But many
of the significant problems facing managers, firms, and organizations do not
have binary solutions. Neural networks may not perform well if their training
covers too little or too much data. AI systems have no sense of ethics: they may
recommend actions that are illegal or immoral. In most current applications, AI
systems are best used as tools for relatively low-level decisions, aiding, but not
substituting for managers.
Genetic Algorithms
Genetic algorithms are another form of machine learning. Genetic algorithms
are useful for finding the optimal solution for a specific problem by examining
a very large number of alternative solutions for that problem. Their method
of solving problems is based on ideas inspired by evolutionary biology such as
inheritance, mutation, selection, and crossover (recombination).
A genetic algorithm works by searching a population of randomly generated
strings of binary digits to identify the right string representing the best possible
solution for the problem. As solutions alter and combine, the worst ones are
discarded and the better ones survive to go on to produce even better solutions.
In Figure 11.6, each string corresponds to one of the variables in the prob-
lem. One applies a test for fitness, ranking the strings in the population accord-
ing to their level of desirability as possible solutions. After the initial population
is evaluated for fitness, the algorithm then produces the next generation of
FIGURE 11.6 THE COMPONENTS OF A GENETIC ALGORITHM
This example illustrates an initial population of “chromosomes,” each representing a
different solution. The genetic algorithm uses an iterative process to refine the initial
solutions so that the better ones, those with the higher fitness, are more likely to emerge
as the best solution.
Length Width
Decoding of
chromosomes
A population of
chromosomes
Evaluation of
chromosomes
Weight Fitness
1 Long Wide Light 55
2 Short Narrow Heavy 49
3 Long Narrow Heavy 36
4 Short Medium Light 61
5 Long Medium Very light 74
436 Part Three Key System Applications for the Digital Age
strings, consisting of strings that survived the fitness test plus offspring strings
produced from mating pairs of strings, and tests their fitness. The process con-
tinues until a solution is reached.
Genetic algorithms are used to solve problems that are very dynamic and
complex, involving hundreds or thousands of variables or formulas. The prob-
lem must be one whose range of possible solutions can be represented geneti-
cally and for which criteria can be established for evaluating fitness. Genetic
algorithms expedite the solution because they can evaluate many solution al-
ternatives quickly to find the best one. For example, General Electric engineers
used genetic algorithms to help optimize the design for jet turbine aircraft en-
gines, in which each design change required changes in up to 100 variables.
The supply chain management software from JDA software uses genetic algo-
rithms to optimize production-scheduling models, incorporating hundreds of
thousands of details about customer orders, material and resource availability,
manufacturing and distribution capability, and delivery dates.
Natural Language Processing, Computer Vision
Systems, and Robotics
Other important AI techniques include natural language processing, computer
vision systems, and robotics.
Natural Language Processing
Human language is not always precise. It is often ambiguous, and meanings of
words can depend on complex variables such as slang, regional dialects, and so-
cial context. Natural language processing (NLP) makes it possible for a com-
puter to understand and analyze natural language—language that human beings
instinctively use, not language specially formatted to be understood by computers.
NLP algorithms are typically based on machine learning, including deep learning,
which can learn how to identify a speaker’s intent from many examples. Akershus
University Hospital, described in the chapter-opening case, used NLP and IBM
Watson Explorer to sift through thousands of medical records with unstructured
textual data expressed in everyday language like natural speech. The algorithms
could read text on a medical record and interpret its meaning. You can also see nat-
ural language processing at work in leading search engines such as Google, spam
filtering systems, and text mining sentiment analysis (discussed in Chapter 6).
Tokyo-based Mizuho Bank employs advanced speech recognition technology,
IBM® Watson™ content analytics software, and a cloud services infrastructure to
improve contact center agents’ interactions with customers. After converting the
customer’s speech to textual data, the solution applies natural language process-
ing algorithms based on machine learning analysis of interactions with thousands
of customers. The system learns more and more from each customer interaction
so that it can eventually infer the customer’s specific needs or goals at each point
of the conversation. It then formulates the optimal response, which is delivered
in real time as a prompt on the agent’s screen. By helping contact center agents
more efficiently sense and respond to customer needs, this solution reduced the
average duration of customer interactions by more than 6 percent (IBM, 2018).
Computer Vision Systems
Computer vision systems deal with how computers can emulate the human
visual system to view and extract information from real-world images. Such sys-
tems incorporate image processing, pattern recognition, and image understanding.
Chapter 11 Managing Knowledge and Artificial Intelligence 437
An example is Facebook’s facial recognition tool called DeepFace, which is nearly
as accurate as the human brain in recognizing a face. DeepFace will help Facebook
improve the accuracy of Facebook’s existing facial recognition capabilities to
ensure that every photo of a Facebook user is connected to that person’s Facebook
account. Computer vision systems are also used in autonomous vehicles such as
drones and self-driving cars (see the chapter-ending case), industrial machine
vision systems (e.g., inspecting bottles), military applications, and robotic tools.
In 2017, the National Basketball Association (NBA) decided to allow spon-
sors to place small logo patches representing their brands on player uniforms.
This advertising investment turned out to be worth its multi-million-dollar
cost. According to GumGum, an AI company focusing on computer vision
technology, the image placed by The Goodyear Tire & Rubber Co. on the uni-
forms of the Cleveland Cavaliers generated $3.4 million in value from social
media exposure alone during the first half of the baseball season. GumGum
develops algorithms that enable computers to identify what’s happening in
imagery. GumGum used computer vision technology to thoroughly analyze
broadcast and social media content for placement, exposure, and duration in-
volving Goodyear images that appeared in online or in TV-generated NBA
content. Instead of humans trying to monitor the number of times a logo ap-
peared on a screen, GumGum’s vision technology tracks and reports the data
(Albertson, 2018).
Robotics
Robotics deals with the design, construction, operation, and use of mov-
able machines that can substitute for humans along with computer systems
for their control, sensory feedback, and information processing. Robots can-
not substitute entirely for people but are programmed to perform a spe-
cific series of actions automatically. They are often are used in dangerous
environments (such as bomb detection and deactivation), manufacturing
processes, military operations (drones), and medical procedures (surgical
robots). Many employees now worry whether robots will replace people en-
tirely and take away their jobs (see the Chapter 4 Interactive Session on
Organizations).
The most widespread use of robotic technology has been in manufactur-
ing. For example, automobile assembly lines employ robots to do heavy lifting,
welding, applying glue, and painting. People still do most of the final assembly
of cars, especially when installing small parts or wiring that needs to be guided
into place. A Renault SA plant in Cleon, France, now uses robots from Universal
Robots AS of Denmark to drive screws into engines, especially those that go
into places people find hard to access. The robots verify that parts are properly
fastened and check to make sure the correct part is being used. The Renault
robots are also capable of working in proximity to people and slowing down or
stopping to avoid hurting them.
Intelligent Agents
Intelligent agents are software programs that work in the background without
direct human intervention to carry out specific tasks for an individual user,
business process, or software application. The agent uses a limited built-in or
learned knowledge base to accomplish tasks or make decisions on the user’s
behalf, such as deleting junk email, scheduling appointments, or finding the
cheapest airfare to California.
438 Part Three Key System Applications for the Digital Age
There are many intelligent agent applications today in operating systems, ap-
plication software, email systems, mobile computing software, and network tools.
Of special interest to business are intelligent agent bots that search for informa-
tion on the Internet. Chapter 7 describes how shopping bots help consumers find
products they want and assist them in comparing prices and other features.
Although some software agents are programmed to follow a simple set of
rules, others are capable of learning from experience and adjusting their behav-
ior using machine learning and natural language processing. Siri, a virtual as-
sistant application on Apple’s iPhone and iPad, is an example. Siri uses natural
language processing to answer questions, make recommendations, and perform
actions. The software adapts to the user’s individual preferences over time and
personalizes results, performing tasks such as getting directions, scheduling
appointments, and sending messages. Similar products include Google Now,
Microsoft’s Cortana, and Amazon’s Alexa.
Chatbots (chatterbots) are software agents designed to simulate a conversa-
tion with one or more human users via textual or auditory methods. They try to
understand what you type or say and respond by answering questions or execut-
ing tasks. They provide automated conversations that allow users to do things like
check the weather, manage personal finances, shop online, and receive help when
they have questions for customer service. Vodafone, a multinational telecommu-
nications company, uses a chatbot to answer 80,000 questions per month, reduc-
ing contact center calls for 75 percent of the customers it chats with. Vodafone
staff use the chatbot to access accurate, up-to-date information on Vodafone prod-
ucts and services. Facebook has integrated chatbots into its Messenger messaging
app so that an outside company with a Facebook brand page can interact with
Facebook users through the chat program. Today’s chatbots perform very basic
functions but will become more technologically advanced in the future.
Procter & Gamble (P&G) used intelligent agent technology to make its sup-
ply chain more efficient (see Figure 11.7). It modeled a complex supply chain
as a group of semiautonomous agents representing individual supply chain
components such as trucks, production facilities, distributors, and retail stores.
The behavior of each agent is programmed to follow rules that mimic actual
behavior, such as “order an item when it is out of stock.” Simulations using the
agents enable the company to perform what-if analyses on inventory levels, in-
store stockouts, and transportation costs.
Using intelligent agent models, P&G discovered that trucks should often be
dispatched before being fully loaded. Although transportation costs would be
higher using partially loaded trucks, the simulation showed that retail store
stockouts would occur less often, thus reducing the number of lost sales, which
would more than make up for the higher distribution costs. Agent-based model-
ing has saved P&G $300 million annually on an investment of less than 1 per-
cent of that amount.
11-3 What types of systems are used for
enterprise-wide knowledge management,
and how do they provide value for businesses?
Firms must deal with at least three kinds of knowledge. Some knowledge
exists within the firm in the form of structured text documents (reports and
presentations). Decision makers also need knowledge that is semistructured,
such as email, voice mail, chat room exchanges, videos, digital pictures,
Chapter 11 Managing Knowledge and Artificial Intelligence 439
brochures, or bulletin board postings. In still other cases, there is no formal
or digital information of any kind, and the knowledge resides in the heads of
employees. Much of this knowledge is tacit knowledge that is rarely written
down. Enterprise-wide knowledge management systems deal with all three
types of knowledge.
Enterprise Content Management Systems
Businesses today need to organize and manage both structured and semistruc-
tured knowledge assets. Structured knowledge is explicit knowledge that ex-
ists in formal documents as well as in formal rules that organizations derive
by observing experts and their decision-making behaviors. But according to ex-
perts, at least 80 percent of an organization’s business content is semistructured
or unstructured—information in folders, messages, memos, proposals, emails,
graphics, electronic slide presentations, and even videos created in different
formats and stored in many locations.
Enterprise content management (ECM) systems help organizations
manage both types of information. They have capabilities for knowledge cap-
ture, storage, retrieval, distribution, and preservation to help firms improve
their business processes and decisions. Such systems include corporate re-
positories of documents, reports, presentations, and best practices, as well
as capabilities for collecting and organizing semistructured knowledge such
as email (see Figure 11.8). Major enterprise content management systems
also enable users to access external sources of information, such as news
feeds and research, and to communicate via email, chat/instant messaging,
FIGURE 11.7 INTELLIGENT AGENTS IN P&G’S SUPPLY CHAIN NETWORK
Intelligent agents are helping Procter & Gamble shorten the replenishment cycles for products such
as a box of Tide.
Production
facility
Supplier
Supplier
1
2
3
3. Software agents schedule
shipments from distributors
to retailers, giving priority to
retailers whose inventories are
low. If a shipment to a retailer
is delayed, agents find an
alternative trucker.
1. Software agents
schedule deliveries
from suppliers. If a
supplier can’t deliver
on time, agents
negotiate with other
suppliers to create an
alternative delivery
schedule.
Distributor
Distributor
Retail
store
Retail
store
2. Software agents collect real-time
sales data on each P&G product from
multiple retail stores. They relay the data
to P&G production for replenishing
orders and to sales and marketing for
trend analysis.
440 Part Three Key System Applications for the Digital Age
discussion groups, and videoconferencing. They are starting to incorpo-
rate blogs, wikis, and other enterprise social networking tools. Open Text
Corporation, IBM, and Oracle are leading vendors of enterprise content man-
agement software.
A key problem in managing knowledge is the creation of an appropriate clas-
sification scheme, or taxonomy, to organize information into meaningful cat-
egories so that it can be easily accessed. Once the categories for classifying
knowledge have been created, each knowledge object needs to be “tagged,” or
classified, so that it can be easily retrieved. Enterprise content management
systems have capabilities for tagging, interfacing with corporate databases and
content repositories, and creating enterprise knowledge portals that provide a
single point of access to information resources.
Firms in publishing, advertising, broadcasting, and entertainment have
special needs for storing and managing unstructured digital data such as pho-
tographs, graphic images, video, and audio content. For example, Coca-Cola
must keep track of all the images of the Coca-Cola brand that have been cre-
ated in the past at all of the company’s worldwide offices to prevent both
redundant work and variation from a standard brand image. Digital asset
management systems help companies classify, store, and distribute these
digital objects.
Locating and Sharing Expertise
Some of the knowledge businesses need is not in the form of a digital docu-
ment but instead resides in the memory of individual experts in the firm.
Contemporary enterprise content management systems, along with the sys-
tems for collaboration and social business introduced in Chapter 2, have
capabilities for locating experts and tapping their knowledge. These include
online directories of corporate experts and their profiles with details about
their job experience, projects, publications, and educational degrees, and
FIGURE 11.8 AN ENTERPRISE CONTENT MANAGEMENT SYSTEM
An enterprise content management system has capabilities for classifying, organizing,
and managing structured and semistructured knowledge and making it available
throughout the enterprise.
• Reports/presentations
• Best practices
• Memos
• Digital slides
• Email
• Graphics
• Video
• News feeds
• Wikis, blogs
• Employee profiles
Create/Capture
Tag
Store/Retrieve
Manage/Review
Distribute/Publish
Users Unified repository
Chapter 11 Managing Knowledge and Artificial Intelligence 441
repositories of expert-generated content. Specialized search tools make
it easier for employees to find the appropriate expert in a company. For
knowledge resources outside the firm, social networking and social busi-
ness tools enable users to bookmark web pages of interest, tag these book-
marks with keywords, and share the tags and web page links with other
people.
Learning Management Systems
Companies need ways to keep track of and manage employee learning and
to integrate it more fully into their knowledge management and other corpo-
rate systems. A learning management system (LMS) provides tools for the
management, delivery, tracking, and assessment of various types of employee
learning and training.
Contemporary LMS support multiple modes of learning, including CD-ROM,
downloadable videos, web-based classes, live instruction in classes or online,
and group learning in online forums and chat sessions. The LMS consolidates
mixed-media training, automates the selection and administration of courses,
assembles and delivers learning content, and measures learning effectiveness.
The Interactive Session on Management shows how Sargent & Lundy used
learning management and enterprise collaboration systems to increase sharing
of employee expertise and employee learning.
Businesses run their own learning management systems, but they are also
turning to publicly available massive open online courses (MOOCs) to edu-
cate their employees. A MOOC is an online course made available via the web
to very large numbers of participants. Companies view MOOCs as a new way
to design and deliver online learning where learners can collaborate with each
other, watch short videos, and participate in threaded discussion groups. Firms
such as Microsoft, AT&T, and Tenaris have developed their own MOOCs, while
others such as Bank of America and Qualcomm are adapting publicly available
MOOCs aligned with their core competencies.
11-4 What are the major types of knowledge
work systems, and how do they provide
value for firms?
The enterprise-wide knowledge systems we have just described provide a wide
range of capabilities that can be used by many if not all the workers and groups
in an organization. Firms also have specialized systems for knowledge workers
to help them create new knowledge and to ensure that this knowledge is prop-
erly integrated into the business.
Knowledge Workers and Knowledge Work
Knowledge workers, which we introduced in Chapter 1, include researchers,
designers, architects, scientists, and engineers who primarily create knowl-
edge and information for the organization. Knowledge workers usually have
high levels of education and memberships in professional organizations and
are often asked to exercise independent judgment as a routine aspect of their
work. For example, knowledge workers create new products or find ways of
improving existing ones. Knowledge workers perform three key roles that
442 Part Three Key System Applications for the Digital Age
Sargent & Lundy is a 125-year-old firm providing
comprehensive engineering, project management,
and consulting services for complex power genera-
tion and power transmission projects. During its
125-year history, the company has designed 958
power plants all over the world. The headquarters
are in Chicago, with global offices in Canada and the
United Arab Emirates. Sargent & Lundy is noted for
its industry knowledge, engineering expertise, and
high-quality work. Approximately 87 percent of its
2,500 employees are engineers and designers.
The company takes pride in the depth of knowl-
edge of its employee experts and their loyalty to the
firm. On average, employees stay with the company
for 15 years—often much longer. Sargent & Lundy
tries to cross-utilize its staff in various types of work
because it believes they are the best people for
the job. Deanna Myers, Sargent & Lundy’s Senior
Manager of Learning and Development, works to
ensure that employees have the skills, tools, and re-
sources they need to achieve excellence throughout
their careers.
In December 2010, Sargent & Lundy’s manage-
ment learned that around half of the company’s most
experienced employees, including engineers, design-
ers, and power experts, would be eligible to retire by
2015. When they left the company, they would be tak-
ing critical business knowledge with them. Although
engineers had access to a knowledge database of the
firm’s documented processes and procedures, experts’
tacit knowledge was more difficult to capture.
The company hired a large group of new recruits
very quickly to replace the retirees. However, with a
worldwide footprint and ambitious expansion plans,
the company needed to find better ways of transfer-
ring seasoned employees’ expertise—including their
tacit knowledge—to the new recruits wherever they
were located. Corporate training hand learning facili-
ties needed to be centralized and overhauled to make
it easier for experts to share industry experience and
skills as well as tacit knowledge.
In the past, Sargent & Lundy had used an un-
tracked schedule of instructor-led courses, which
often overlapped with existing training. The moment
an instructor-led course had finished, the company
might have just hired another two or three people
who needed that course. This meant that a portion
of the employees who really needed the instruction
were not getting it. There was no in-house computer-
based training available for new employees.
The company decided to transform its learning
model and implemented a new talent management
platform based on SAP SuccessFactors Learning
Management System. SAP SuccessFactors is a cloud-
based human capital management (HCM) software
suite. It integrates software for orienting and train-
ing a new employee, social business and collabora-
tion tools, a learning management system (LMS),
performance management, recruiting software, ap-
plicant tracking software, succession planning, talent
management, and HR analytics to enable companies
to manage their employees more strategically and
maximize their performance. SAP SuccessFactors
provides detailed capabilities for reporting and track-
ing individual employee development.
Working with company experts, Sargent & Lundy’s
technical training team used SuccessFactors to de-
velop a wide range of training programs and learning
plans for specific technologies. Videos and online
courses were added to the company’s training arse-
nal, along with personalized learning plans for people
working with specific disciplines and technologies.
For example, an electrical engineer working on a
transmission project would follow a learning plan with
courses and objectives that differed from those of an-
other electrical engineer working on a nuclear plant.
Sargent & Lundy’s new recruits wanted more
discussion and feedback on how well they were
performing on a day-to-day basis, so the company
also implemented SAP Jam, SAP’s cloud-based social
collaboration program. Using SAP Jam made it even
easier for employees to share knowledge, often in
real time.
Face-to-face meetings are still the primary way
for staff to share knowledge about industry trends,
best practices, and innovative solutions. But Sargent
& Lundy’s employees were too geographically scat-
tered to always meet in person. The company’s
knowledge-sharing model had to change to provide
more knowledge sharing and employee conversa-
tions online.
Sargent & Lundy’s new social platform features
online discussion forums covering everything
from seismic analysis to specific types of valves.
INTERACTIVE SESSION MANAGEMENT
Sargent & Lundy Learns to Manage Employee Knowledge
Chapter 11 Managing Knowledge and Artificial Intelligence 443
1. How is knowledge management related to Sargent
& Lundy’s business model?
2. Identify the knowledge management problem
faced by Sargent & Lundy. What management, or-
ganization, and technology factors contributed to
this problem?
3. Describe the solution selected for this problem.
Was it effective? Why or why not? How much
did it change the firm’s operations and decision
making?
4. What management, organization, and technology
issues had to be addressed in selecting and imple-
menting the solution?
New employees with questions are able to connect
to experts via SAP Jam with just a few mouse clicks.
The in-house experts respond to the questions and
share their experiences. Before implementing SAP
Jam, only a small percentage of regional staff par-
ticipated in discussions for communities of practice.
Sargent & Lundy’s Communities of Practice (CoP)
program makes it possible for employee experts to
collaborate with novice staff around specific topics
(see the discussion of CoPs earlier in this chapter).
The main focus of SAP Jam is on discussion
groups. When users log in, they are presented with a
home feed showing events in the discussion groups
to which they subscribe. They can drill down to a
specific feed or browse all the CoP groups for topics
of interest. There are no restrictions on who can post
a question, discussion topic, or article. A designer in
the transmission group might look at how designers
in other groups solved similar problems by review-
ing what these groups discussed in their last CoP
meeting, references and visuals, and which experts
or solutions might be helpful.
SAP Jam was launched in late 2015, and in the
year that followed there was a 125 percent increase
in participation. Many CoP groups are now using SAP
Jam, including groups for specific technical topics
such as thermo hydraulics and non-technical groups
such as one for women in leadership. Employees of
all levels can use Jam to discuss topics of interest,
find answers to questions, and check facts. Besides
improving employee learning, the tool has increased
employee engagement. Conversations in SAP Jam
have identified areas for process improvement
and problems that need immediate technical staff
attention.
Sources: www.sargentlundy.com, accessed May 28, 2018; Lauren
Bonneau, “Creating a Culture of Collaboration at Sargent & Lundy,”
SAP Insider Profiles, March 24, 2017; and SAP SE, “Sargent & Lundy:
Powering the Next Generation on Blended Learning with SAP
SuccessFactors Solutions,” 2016.
CASE STUDY QUESTIONS
are critical to the organization and to the managers who work within the
organization:
• Keeping the organization current in knowledge as it develops in the external
world—in technology, science, social thought, and the arts
• Serving as internal consultants regarding the areas of their knowledge, the
changes taking place, and opportunities
• Acting as change agents, evaluating, initiating, and promoting change
projects
Requirements of Knowledge Work Systems
Most knowledge workers rely on systems such as word processors, email, vid-
eoconferencing, collaboration, and scheduling systems, which are designed
to increase worker productivity in the office. However, knowledge work-
ers also require highly specialized knowledge work systems with powerful
http://www.sargentlundy.com
444 Part Three Key System Applications for the Digital Age
graphics, analytical tools, and communications and document management
capabilities.
These systems require sufficient computing power to handle the sophisti-
cated graphics or complex calculations necessary for such knowledge workers
as scientific researchers, engineers, and product designers. Because knowledge
workers need knowledge from the external world, these systems also must give
the worker quick and easy access to external databases. They typically feature
user-friendly interfaces that enable users to perform needed tasks without hav-
ing to spend a great deal of time learning how to use the system. Knowledge
workers are highly paid—wasting a knowledge worker’s time is simply too ex-
pensive. Figure 11.9 summarizes the requirements of knowledge work systems.
Examples of Knowledge Work Systems
Major knowledge work applications include CAD systems and virtual reality
systems for simulation and modeling. Computer-aided design (CAD) auto-
mates the creation and revision of designs, using computers and sophisticated
graphics software. Using a more traditional physical design methodology, each
design modification requires a mold to be made and a prototype to be tested
physically. That process must be repeated many times, which is very expensive
and time-consuming. Using a CAD workstation, the designer need only make a
physical prototype toward the end of the design process because the design can
be easily tested and changed on the computer. The ability of CAD software to
provide design specifications for the tooling and manufacturing processes also
saves a great deal of time and money while producing a manufacturing process
with far fewer problems.
For example, Ford Motor Company used a computer simulation to cre-
ate an engine cylinder to come up with the most efficient design possible.
FIGURE 11.9 REQUIREMENTS OF KNOWLEDGE WORK SYSTEMS
Knowledge work systems require strong links to external knowledge bases in addition to
specialized hardware and software.
User
interface
SOFTWARE
Graphics -> Visualization
Modeling -> Simulation
Document management
Communications
External
knowledge
base
Hardware platform: knowledge workstation
Chapter 11 Managing Knowledge and Artificial Intelligence 445
Engineers altered that design to account for manufacturing constraints and
tested the revised design virtually in models that used decades of data on
material properties and engine performance. Ford then created the mold to
make a real part that could be bolted onto an engine for further testing. The
entire process took days instead of months and cost thousands of dollars in-
stead of millions.
CAD systems can supply data for 3-D printing, also known as additive man-
ufacturing, which uses machines to make solid objects, layer by layer, from
specifications in a digital file. Unlike traditional techniques, by which objects
are cut or drilled from molds, resulting in wasted materials, 3-D printing lets
workers model an object on a computer and print it out with plastic, metal,
or composite materials. 3-D printing is currently used for prototyping, custom
manufacturing, and fashioning items with small production runs. Today’s 3-D
printers can handle materials including plastic, titanium, and human carti-
lage and produce fully functional components including batteries, transistors,
prosthetic devices, LEDs, and other complex mechanisms, and there are now
3-D printing services that run over the cloud, such as that offered by Staples.
Virtual reality (VR) systems have visualization, rendering, and simula-
tion capabilities that go far beyond those of conventional CAD systems. They
use interactive graphics software to create computer-generated simulations that
are so close to reality that users almost believe they are participating in a real-
world situation. In many virtual reality systems, the user dons special clothing,
headgear, and equipment, depending on the application. The clothing contains
sensors that record the user’s movements and immediately transmit that in-
formation back to the computer. For instance, to walk through a virtual real-
ity simulation of a house, you would need garb that monitors the movement
of your feet, hands, and head. You also would need goggles containing video
screens and sometimes audio attachments and feeling gloves so that you can be
immersed in the computer feedback.
At NYU Langone Medical Center in New York City, students wearing 3-D
glasses are able to “dissect” a virtual cadaver projected on a screen. With the
help of a computer, they can move through the virtual body, scrutinizing lay-
ers of muscles or watching a close-up of a pumping heart along with bright red
arteries and deep blue veins. The 3-D virtual cadaver is a valuable complemen-
tary teaching tool. The Interactive Session on Technology describes some of the
issues raised by applications of VR technology.
Augmented reality (AR) is a related technology for enhancing visual-
ization by overlaying digital data and images onto a physical real-world envi-
ronment. The digital technology provides additional information to enhance
the perception of reality, making the surrounding real world of the user
more interactive and meaningful. The yellow first-down markers shown on
televised football games are examples of augmented reality as are medical
procedures like image-guided surgery, where data acquired from comput-
erized tomography (CT) and magnetic resonance imaging (MRI) scans or
from ultrasound imaging are superimposed on the patient in the operating
room. Other industries where AR has caught on include military training,
engineering design, robotics, and consumer design. For example, Newport
News Shipbuilding, which designs and builds U.S. Navy aircraft carriers,
uses AR to inspect a ship near the end of the manufacturing process. By
seeing the final design superimposed on the ship, engineers have reduced
inspection time by 96 percent—from 36 hours to only 90 minutes (Porter
and Heppelmann, 2017).
446 Part Three Key System Applications for the Digital Age
In the past, your best chance of experiencing vir-
tual reality (VR) was to view Hollywood films.
Today, this technology has become more sophisti-
cated and immersive, and it is finding more busi-
ness uses.
Besides entertainment, the most popular vir-
tual reality applications are currently in retail and
manufacturing, where an immersive experience
can help customers visualize products or teach
factory workers how to use complex equipment.
Audi has used virtual reality technology in its
“dealership in a briefcase” program. By donning
an Oculus Rift virtual reality headset, prospec-
tive buyers can feel as if they are sitting behind
the wheel of a car or opening up the trunk. The
VR headset displays in 3-D exactly what you’d see
if you were looking over a real-life Audi. Bang &
Olufsen headphones simulate the sounds of doors
slamming shut and music from the stereo system
of the cars being browsed. This VR experience is
available for the entire Audi model range and cus-
tomization options.
Volkswagen Group is experimenting with virtual
reality to speed up vehicle design and development
and to identify potentially costly design problems
earlier in the development cycle. Volkswagen has
been able to cut out costly physical prototypes and
replace them with immersive, 360-degree views of
digitally constructed interior and exterior compo-
nents of a vehicle using virtual reality HTC Vive
headsets. Virtual components of a car, including
interior and exterior parts such as buttons, lights, or
consoles, can be switched out and replaced easily
with a few lines of software code during the design
process.
A major drawback of virtual reality is how it
isolates people from others and from real-world
surroundings because they are immersed in a vir-
tual world encased in a headset. Facebook wants to
change that by using virtual reality to create a new
type of shared social experience. Facebook envi-
sions a virtual world with an imaginary social space
where avatars that look like real people “hang out”
with other avatars representing friends and fam-
ily. CEO Mark Zuckerberg believes virtual reality
provides a new and powerful way for his company
to grow, and expects one billion people to use this
medium.
In March 2014 Facebook purchased Oculus VR
for $2 billion to start working with virtual reality.
Oculus produces the Rift high-end VR headset and
also Oculus Go, a standalone headset costing only
$199 that is supposed to be easier to use than the
Rift. A beta version of Spaces, Facebook’s virtual
reality app for the Oculus Rift, was launched in
April 2018. Spaces is intended as a virtual hangout
where you can interact with up to four friends,
each represented by self-created digital avatars.
Inside Spaces you can also video chat with friends
via Facebook Messenger, do a Facebook Live broad-
cast, or take “selfies” in VR to share with Facebook
friends.
In Oculus Rooms for the Oculus Go, people can
spend time together in a virtual world, chatting,
watching a movie, or playing cards. Oculus Go has
a virtual reality TV viewing app called Oculus TV
where users can “sit” in a 3-D environment with
a massive screen and watch video with a friend.
Content from Netflix, Hulu Showtime, Redbull,
Pluto TV, Facebook video, and ESPN is available.
Oculus Venues makes it possible to watch sports or
live concerts with friends or other people in virtual
reality.
Facebook is trying to create photorealistic ava-
tars, with technology to help users personalize
their avatars with more lifelike features and ges-
tures so that they more closely resemble the people
they represent. Facebook’s avatars are still very
cartoon-like. Creating the virtual reality experi-
ence Facebook wants carries a hefty price tag—an
investment of around $3 billion during the next
decade. It is too early to tell whether Facebook can
make a virtual reality breakthrough for widespread
use.
Not all organizations will benefit from VR. Greg
Meyers, CIO at Motorola Solutions, a data com-
munications and telecommunications equipment
provider, doesn’t see any obvious applications
where virtual reality can help drive growth for his
company. Virtual reality may be useful for stag-
ing more effective meetings, but Meyers feels the
company would derive more benefit from using
INTERACTIVE SESSION TECHNOLOGY
The Reality of Virtual Reality
Chapter 11 Managing Knowledge and Artificial Intelligence 447
11-5 How will MIS help my career?
Here is how Chapter 11 and this book will help you find an entry-level job as a
sales assistant for an AI company.
The Company
RazzleDazzle Technology, an artificial intelligence company based in San Jose,
California, is looking for an entry-level sales assistant. RazzleDazzle specializes
in computer vision technology, seeking to unlock the value of visual content
produced daily across diverse data sets to solve problems for a variety of indus-
tries, including advertising and professional sports.
1. If your company wanted to implement a virtual
reality application, what management, organiza-
tion, and technology factors should it consider?
2. Should all businesses use virtual reality? Why or
why not? What kinds of organizations will benefit
most from this technology?
3. Do you think Facebook’s virtual reality strategy
will be successful? Explain your answer.
AI technology to help it make better and faster
decisions.
There is a gap between the hype and the re-
ality of what VR can actually do for business.
Management needs to ensure that the company
will receive concrete returns on investment. Virtual
reality shouldn’t be viewed as the next platform
everyone’s going to use, because it’s unclear that
will be the case, according to Forrester Research
analyst J. P. Gownder. A business needs to be able to
demonstrate that VR will solve a very specific busi-
ness problem, and must determine exactly how VR
technology can improve its operations, engage cus-
tomers for highly configurable goods, or deliver new
consumer experiences.
Many enterprise applications of immersive tech-
nology are still in the piloting and troubleshoot-
ing phases. Today’s virtual reality technology also
lacks strong security and management features
appropriate for deployment in the enterprise,
where VR applications might need to be linked to
the organization’s databases and major corporate
systems.
According to research analyst Ian Hughes, for
most workplace applications, shutting people off
from other people and the real world to engage in
a virtual experience does not fit well with the way
people behave. Rather than a fully simulated work
environment, for most tasks, Hughes recommends
blending real and virtual worlds. It’s better for tech-
nology to be extending the real world rather than
replacing it.
Sources: Kurt Wagner, “Oculus Go, the Virtual Reality Headset
Facebook Hopes Will Bring VR to the Mainstream, Is Finally
Here,” Recode, May 1, 2018; Sara Castellanos, “Volkswagen Brings
Sense of Touch to Virtual Reality,” Wall Street Journal, April 25,
2018; Chuong Nguyen, “Facebook Wants to Make Your Virtual
Self Appear as Real as Possible in VR,” Digital Trends, May 3, 2018;
“Virtual and Augmented Reality—Reshaping Business Futures,”
ETCIO.com, March 12, 2018; Matt Kapko, “Making Waves with
Immersive Technologies,” CIO, May–June 2017; and Lisa Eadiccio,
“Inside Facebook’s Plan to Take Virtual Reality Mainstream,” Time,
August 2, 2017.
CASE STUDY QUESTIONS
http://ETCIO.com
448 Part Three Key System Applications for the Digital Age
Position Description
The sales assistant will work closely with the sales team on planning and
staging events, database management, administrative tasks, and account
research to support sales and marketing objectives. Job responsibilities
include:
• Using Salesforce.com for lead generation collection, data entry, and
maintenance
• Using Excel to update sales team resources
• Scheduling meetings and taking meeting notes
• Assisting with research on sales accounts and new event ideas and
locations
• Assisting sales with client meeting preparation
• Assembling promotional materials
Job Requirements
• Recent college graduate.
• Bachelor’s degree in marketing, MIS, finance, or liberal arts.
• Strong interest in learning the business and industry.
• Knowledge of Microsoft Office essential.
• Attention to detail, effective communication skills, enthusiastic attitude, and
the ability to thrive in a fast-paced environment.
Interview Questions
1. What do you know about our company and about computer vision systems?
Have you ever done any work with AI technology?
2. Have you ever worked with Salesforce.com? How have you used the soft-
ware?
3. What is your proficiency level with Microsoft Office tools? What work have
you done with Excel spreadsheets?
4. Can you provide samples of your writing to demonstrate your communica-
tion skills and sense of detail?
Author Tips
1. Review the section of this chapter on AI and use the web to find out more
about computer vision systems.
2. Use the web and LinkedIn to find out more about this company, its
products, services, and competitors and the way it operates. Think about
what it needs to support its sales team and how you could specifically
contribute.
3. Learn what you can about Salesforce.com, with attention to how it handles
lead generation, data entry, and maintenance.
4. Inquire exactly how you would be using Excel in this job. Describe some of
the Excel work you have done and perhaps bring samples with you to the
interview.
http://Salesforce.com
http://Salesforce.com
http://Salesforce.com
Chapter 11 Managing Knowledge and Artificial Intelligence 449
11-1 What is the role of knowledge management systems in business?
Knowledge management is a set of processes to create, store, transfer, and apply knowledge in the
organization. Much of a firm’s value depends on its ability to create and manage knowledge. Knowl-
edge management promotes organizational learning by increasing the ability of the organization to
learn from its environment and to incorporate knowledge into its business processes. There are three
major types of knowledge management systems: enterprise-wide knowledge management systems,
knowledge work systems, and “intelligent” techniques.
11-2 What are artificial intelligence (AI) and machine learning? How do businesses use AI?
AI involves the attempt to build computer systems that try to think and act like humans. At pres-
ent, artificial intelligence lacks the flexibility, breadth, and generality of human intelligence, but it
can be used to capture, codify, and extend organizational knowledge.
Expert systems capture tacit knowledge from a limited domain of human expertise and express
that knowledge in the form of rules. Machine learning software can learn from previous data and ex-
amples. It can identify patterns in very large databases without explicit programming, although with
significant human training
Neural networks consist of hardware and software that attempt to mimic the thought processes
of the human brain. Neural networks are notable for their ability to learn on their own with some
training, and to recognize patterns that cannot be easily identified by humans. Deep learning neural
networks use multiple layers of neural networks to reveal the underlying patterns in data, and in
some limited cases identify patterns without human training
Genetic algorithms develop solutions to particular problems using genetically based processes
such as fitness, crossover, and mutation. Genetic algorithms are useful for solving problems involving
optimization where many alternatives or variables must be evaluated to generate an optimal solution.
Intelligent agents are software programs with built-in or learned knowledge bases that carry out
specific tasks for an individual user, business process, or software application. Intelligent agents can
be programmed to navigate through large amounts of data to locate useful information and in some
cases act on that information on behalf of the user. Chatbots are software agents designed to simulate
a conversation with one or more human users via textual or auditory methods.
Natural language processing technology makes it possible for a machine to understand human lan-
guage and to process that information. Computer vision systems deal with how computers can emulate
the human visual system to view and extract information from real-world images. Robotics deals with the
design, construction, operation, and use of movable machines that can substitute for some human actions.
11-3 What types of systems are used for enterprise-wide knowledge management, and how do they
provide value for businesses?
Enterprise-wide knowledge management systems are firmwide efforts to collect, store, distribute,
and apply digital content and knowledge. Enterprise content management systems provide databases
and tools for organizing and storing structured documents and tools for organizing and storing semi-
structured knowledge, such as email or rich media. Often these systems include group collaboration
tools, portals to simplify information access, search tools, tools for locating experts, and tools for clas-
sifying information based on a taxonomy that is appropriate for the organization. Learning manage-
ment systems provide tools for the management, delivery, tracking, and assessment of various types
of employee learning and training.
11-4 What are the major types of knowledge work systems, and how do they provide value for firms?
Knowledge work systems (KWS) support the creation of new knowledge and its integration into
the organization. KWS require easy access to an external knowledge base; powerful computer hard-
ware that can support software with intensive graphics, analysis, document management, and com-
munications capabilities; and a user-friendly interface. KWS include computer-aided design (CAD)
systems, augmented reality applications, and virtual reality systems, which create interactive simu-
lations that behave like the real world, with intensive graphics and powerful modeling capabilities.
REVIEW SUMMARY
450 Part Three Key System Applications for the Digital Age
Key Terms
3-D printing, 445
Artificial intelligence (AI), 427
Augmented reality (AR), 445
Chatbot, 438
Communities of practice (COPs), 425
Computer-aided design (CAD), 444
Computer vision systems, 436
Data, 422
“Deep learning,” 434
Digital asset management systems, 440
Enterprise content management (ECM), 439
Enterprise-wide knowledge management
systems, 426
Expert systems, 428
Explicit knowledge, 422
Genetic algorithms, 435
Inference engine, 429
Intelligent agents, 437
“Intelligent” techniques, 426
Knowledge, 422
Knowledge base, 429
Knowledge management, 423
Knowledge work systems (KWS), 426
Learning management system (LMS), 441
Machine learning, 430
Massive open online course (MOOC), 441
Natural language processing (NLP), 436
Neural networks, 432
Organizational learning, 423
Pattern detection program, 432
Robotics, 437
Structured knowledge, 439
Supervised learning, 431
Tacit knowledge, 422
Taxonomy, 440
Unsupervised learning, 431
Virtual reality (VR) systems, 445
Wisdom, 422
MyLab MIS
To complete the problems with the MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
11-1 What is the role of knowledge management
systems in business?
• Define knowledge management and ex-
plain its value to businesses.
• Describe the important dimensions of
knowledge.
• Distinguish between data, knowledge, and
wisdom and between tacit knowledge and
explicit knowledge.
• Describe the stages in the knowledge
management value chain.
11-2 What are artificial intelligence (AI) and machine
learning? How do businesses use AI?
• Define artificial intelligence (AI) and the
major AI techniques.
• Define an expert system, describe how it
works, and explain its value to business.
• Define machine learning, explain how
it works, and give some examples of the
kinds of problems it can solve.
• Define neural networks and deep learning
neural networks, describing how they
work and how they benefit organizations.
• Define and describe genetic algorithms,
and intelligent agents. Explain how each
works and the kinds of problems for
which each is suited.
• Define and describe computer vision
systems, natural language processing
systems, and robotics and give
examples of their applications in
organizations.
11-3 What types of systems are used for enterprise-
wide knowledge management, and how do
they provide value for businesses?
• Define and describe the various types of
enterprise-wide knowledge management
systems and explain how they provide
value for businesses.
• Describe the role of the following in facili-
tating knowledge management: taxono-
mies, MOOCs, and learning management
systems.
11-4 What are the major types of knowledge work
systems, and how do they provide value for
firms?
• Define knowledge work systems and de-
scribe the generic requirements of knowl-
edge work systems.
• Describe how the following systems sup-
port knowledge work: CAD, virtual reality,
and augmented reality.
Chapter 11 Managing Knowledge and Artificial Intelligence 451
Discussion Questions
11-5 Knowledge management is a business
process, not a technology. Discuss.
11-6 Describe various ways that knowledge
management systems could help firms with
sales and marketing or with manufacturing
and production.
MyLab MIS
MyLab MIS
11-7 Compare artificial intelligence to human
intelligence. How “intelligent” is artificial
intelligence today?
MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience designing a knowledge portal, identifying opportunities
for knowledge management, creating a simple expert system, and using intelligent agents to research products
for sale on the web. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
11-8 U.S. Pharma Corporation is headquartered in New Jersey but has research sites in Germany, France,
the United Kingdom, Switzerland, and Australia. Research and development of new pharmaceuticals
is key to ongoing profits, and U.S. Pharma researches and tests thousands of possible drugs. The
company’s researchers need to share information with others within and outside the company,
including the U.S. Food and Drug Administration, the World Health Organization, and the International
Federation of Pharmaceutical Manufacturers & Associations. Also critical is access to health information
sites, such as the U.S. National Library of Medicine, and to industry conferences and professional
journals. Design a knowledge portal for U.S. Pharma’s researchers. Include in your design specifications
relevant internal systems and databases, external sources of information, and internal and external
communication and collaboration tools. Design a home page for your portal.
11-9 Canadian Tire is one of Canada’s largest companies, with 50,000 employees and 1,100 stores and gas
bars (gas stations) across Canada selling sports, leisure, home products, apparel, and financial services as
well as automotive and petroleum products. The retail outlets are independently owned and operated.
Canadian Tire has been using daily mailings and thick product catalogs to inform its dealers about new
products, merchandise setups, best practices, product ordering, and problem resolution, and it is looking
for a better way to provide employees with human resources and administrative documents. Describe the
problems created by this way of doing business and how knowledge management systems might help.
Improving Decision Making: Building a Simple Expert System for Retirement Planning
Software skills: Spreadsheet formulas and IF function or expert system tool
Business skills: Benefits eligibility determination
11-10 Expert systems typically use a large number of rules. This project has been simplified to reduce
the number of rules, but it will give you experience working with a series of rules to develop an
application.
When employees at your company retire, they are given cash bonuses. These cash bonuses are based
on the length of employment and the retiree’s age. To receive a bonus, an employee must be at least 50 years of
age and have worked for the company for more than five years. The following table summarizes the criteria for
determining bonuses.
LENGTH OF EMPLOYMENT BONUS
<5 years No bonus
5–10 years 20 percent of current annual salary
11–15 years 30 percent of current annual salary
16–20 years 40 percent of current annual salary
21–25 years 50 percent of current annual salary
26 or more years 100 percent of current annual salary
452 Part Three Key System Applications for the Digital Age
Using the information provided, build a simple expert system. Find a demonstration copy of an expert
system software tool on the web that you can download. Alternatively, use your spreadsheet software to build
the expert system. (If you are using spreadsheet software, we suggest using the IF function so you can see how
rules are created.)
Improving Decision Making: Using Intelligent Agents for Comparison Shopping
Software skills: Web browser and shopping bot software
Business skills: Product evaluation and selection
11-11 This project will give you experience using shopping bots to search online for products, find product infor-
mation, and find the best prices and vendors. Select a digital camera you might want to purchase, such as
the Canon PowerShot SX540 or the Olympus Tough TG-5. Visit MySimon (www. mysimon.com), BizRate.
com (www.bizrate.com), and Google Shopping to do price comparisons for you. Evaluate these shopping
sites in terms of their ease of use, number of offerings, speed in obtaining information, thoroughness of in-
formation offered about the product and seller, and price selection. Which site or sites would you use, and
why? Which camera would you select, and why? How helpful were these sites for making your decision?
Collaboration and Teamwork Project
Rating Enterprise Content Management Systems
11-12 With a group of classmates, select two enterprise content management (ECM) products, such as those from
Oracle, OpenText, and IBM. Compare their features and capabilities. To prepare your analysis, use articles
from computer magazines and the websites of the ECM software vendors. If possible, use Google Docs and
Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the
class.
http://www.mysimon.com
http://BizRate.com
http://BizRate.com
http://www.bizrate.com
Chapter 11 Managing Knowledge and Artificial Intelligence 453
Will cars really be able to drive themselves without human operators? Should they? And are they good business investments?
Everyone is searching for answers.
Autonomous vehicle technology has reached a
point where no automaker can ignore it. Every major
auto maker is racing to develop and perfect autono-
mous vehicles, believing that the market for them
could one day reach trillions of dollars. Companies
such as Ford, General Motors, Nissan, Mercedes,
Tesla, and others have invested billions in autono-
mous technology research and development. Ford in-
vested $1 billion in AI firm Argo AI, and GM bought
a self-driving car startup called Cruise. Ford has set
a goal of producing a self-driving car with no pedals
by 2021. Ride-hailing companies like Uber and Lyft
believe driverless cars that eliminate labor costs are
key to their long-term profitability. Cars that drive
themselves have been on the road in select loca-
tions in California, Arizona, Michigan, Paris, London,
Singapore, and Beijing. Waymo, the company that
emerged from Google’s self-driving car project, pre-
dicts that by 2020 its fleet of self-driving Jaguars will
make as many as one million trips per day.
A car that is supposed to take over driving from a
human requires a very powerful computer system
that must process and analyze large amounts of data
generated by myriad sensors, cameras, and other
devices to control and adjust steering, accelerating,
and braking in response to real-time conditions. Key
technologies include:
Sensors: Self-driving cars are loaded with sensors of
many different types. Sensors on car wheels measure
car velocity as it drives and moves through traffic.
Ultrasonic sensors measure and track positions of line
curbs, sidewalks, and objects very close to the car.
Cameras: Cameras are needed for spotting things
like lane lines on the highway, speed signs, and
traffic lights. Windshield-mounted cameras create
a 3-D image of the road ahead. Cameras behind the
rear-view mirror focus on lane markings. Infrared
cameras pick up infrared beams emitted from head-
lamps to extend vision for night driving.
Lidars: Lidars are light detection and ranging de-
vices which sit on top of most self-driving cars.
A lidar fires out millions of laser beams every sec-
ond, measuring how long they take to bounce back.
The lidar takes in a 360-degree view of a car’s sur-
roundings, identifying nearby objects with an accu-
racy up to 2 centimeters. Lidars are very expensive
and not yet robust enough for a life of potholes, ex-
treme temperatures, rain, or snow.
GPS: A global positioning system (GPS) pinpoints
the car’s macro location, and is accurate to within
1.9 meters. Combined with reading from tachom-
eters, gyroscopes, and altimeters, it provides initial
positioning.
Radar: Radar bounces radio waves off of objects to
help see a car’s surroundings, including blind spots,
and is especially helpful for spotting big metallic ob-
jects, such as other vehicles.
Computer: All the data generated by these tech-
nologies needs to be combined, analyzed, and turned
into a robot-friendly picture of the world, with in-
structions on how to move through it, requiring
almost supercomputer-like processing power. Its soft-
ware features obstacle avoidance algorithms, predic-
tive modeling, and “smart” object discrimination (for
example, knowing the difference between a bicycle
and a motorcycle) to help the vehicle follow traffic
rules and navigate obstacles.
Machine Learning, Deep Learning, and
Computer Vision Technology: The car’s
computer system has to be “trained” using machine
intelligence and deep learning to do things like
detect lane lines and identify cyclists, by show-
ing it millions of examples of the subject at hand.
Because the world is too complex to write a rule
for every possible scenario, cars must be able to
“learn” from experience and figure out how to
navigate on their own.
Maps: Before an autonomous car takes to the
streets, its developers use cameras and lidars to map
its territory in extreme detail. That information helps
the car verify its sensor readings, and it is key for
any vehicle to know its own location.
Self-driving car companies are notorious for over-
hyping their progress. Should we believe them? At
this point, the outlook for them is clouded.
Can Cars Drive Themselves—And Should They?
CASE STUDY
454 Part Three Key System Applications for the Digital Age
In March 2018, a self-driving Uber Volvo XC90
operating in autonomous mode struck and killed a
woman in Tempe, Arizona. Since the crash, Arizona
has suspended autonomous vehicle testing in the
state, and Uber is not renewing its permit to test
self-driving cars in California. The company has also
stopped testing autonomous cars in Pittsburgh and
Toronto and it’s unclear when it will be revived. Even
before the accident, Uber’s self-driving cars were
having trouble driving through construction zones
and next to tall vehicles like big truck rigs. Uber’s
drivers had to intervene far more frequently than
drivers in other autonomous car projects.
The Uber accident raised questions about whether
autonomous vehicles were even ready to be tested
on public roads and how regulators should deal with
this. Autonomous vehicle technology’s defenders
pointed out that nearly 40,000 people die on U.S.
roads every year, and human error causes more than
90 percent of crashes. But no matter how quickly
self-driving proliferates, it will be a very long time
before the robots can put a serious dent in those
numbers and convince everyday folks that they’re
better off letting the cars do the driving.
While proponents of self-driving cars like Tesla’s
Elon Musk envision a self-driving world where al-
most all traffic accidents would be eliminated, and
the elderly and disabled could travel freely, most
Americans think otherwise. A Pew Research Center
survey found that most people did not want to ride in
self-driving cars and were unsure if they would make
roads more dangerous or safer. Eighty-seven percent
wanted a person always behind the wheel, ready to
take over if something went wrong.
There’s still plenty that needs to be improved
before self-driving vehicles could safely take to the
road. Autonomous vehicles are not yet able to op-
erate safely in all weather conditions. Heavy rain
or snow can confuse current car radar and lidar
systems—autonomous vehicles can’t operate on their
own in such weather conditions. These vehicles also
have trouble when tree branches hang too low or
bridges and roads have faint lane markings. On some
roads, self-driving vehicles will have to make guid-
ance decisions without the benefit of white lines or
clear demarcations at the edge of the road, including
Botts’ Dots (small plastic markers that define lanes).
Botts’ Dots are not believed to be effective lane-
marking for autonomous vehicles.
Computer vision systems are able to reliably rec-
ognize objects. What remains challenging is “scene
understanding”—for example, the ability to determine
whether a bag on the road is empty or is hiding bricks
or heavy objects inside. Although autonomous vehicle
vision systems are now capable of picking out traffic
lights reliably, they are not always able to make correct
decisions if traffic lights are not working. This requires
experience, intuition, and knowing how to cooperate
among multiple vehicles. Autonomous vehicles must
also be able to recognize a person moving alongside a
road, determine whether that person is riding a bicycle,
and how that person is likely to respond and behave.
All of that is still difficult for an autonomous vehicle to
do right now. Chaotic environments such as congested
streets teeming with cars, pedestrians, and cyclists are
especially difficult for self-driving cars to navigate.
Driving a car to merge into rapidly flowing lanes
of traffic is an intricate task that often requires eye
contact with oncoming drivers. How can autono-
mous vehicles communicate with humans and other
machines to let them know what they want to do?
Researchers are investigating whether electronic
signs and car-to-car communication systems would
solve this problem. There’s also what’s called the
“trolley problem”: In a situation where a crash is
unavoidable, how does a robot car decide whom or
what to hit? Should it hit the car coming up on its left
or a tree on the side of the road?
A less advanced version of autonomous vehicle
technology is already on the market. Cadillac Super
Cruise, Nissan ProPilot Assist, and Tesla Autopilot
are capable of keeping a car in its lane and a safe dis-
tance from other cars, allowing the “driver” behind
the wheel to take hands off the wheel, provided that
person keeps paying attention and is ready to take
control if needed. These less-advanced systems can’t
see things like stopped fire trucks or traffic lights.
But humans haven’t made good driving backups be-
cause their attention tends to wander. At least two
Tesla drivers in the U.S. have died using the system.
(One hit a truck in 2016, another hit a highway
barrier in 2018.) There is what is called a “handoff
problem.” A semi-autonomous car needs to be able to
determine what its human “driver” is doing and how
to get that person to take the wheel when needed.
And let’s not forget security. A self-driving car is es-
sentially a collection of networked computers and sen-
sors linked wirelessly to the outside world, and it is no
more secure than other networked systems. Keeping
systems safe from intruders who want to crash or wea-
ponize cars may prove to be the greatest challenge con-
fronting autonomous vehicles in the future.
Self-driving cars require new ecosystems to sup-
port them, much as today’s cars are dependent on
Chapter 11 Managing Knowledge and Artificial Intelligence 455
while commuting. Some people will prosper. Most
will probably benefit, but many will be left behind.
Driverless technology is estimated to change one in
every nine U.S. jobs, although it will also create new
jobs. Another consideration is that the tremendous
investment in autonomous vehicles, estimated to be
around $32 billion annually, might be better spent
on improving public transportation systems like
trains and subways. Does America need more cars in
sprawling urban areas where highways are already
jammed?
The accidents self-driving cars have experienced
so far point to the need to create a dependable stan-
dard for measuring reliability and safety. In 2018,
twenty-nine states have enacted legislation regulat-
ing autonomous vehicles, with a few states requiring
a safety driver always be in the car ready to take con-
trol. U.S. federal regulators have delayed formulat-
ing an overarching set of self-driving car standards,
leaving a gap for the states to fill. The federal gov-
ernment is only now poised to create its first law for
autonomous vehicles. This law is similar to Arizona’s
and would allow hundreds of thousands of driverless
cars to be deployed within a few years and would re-
strict states from putting up hurdles for the industry.
Sources: Christopher Mims, “Driverless Hype Collides with
Merciless Reality,” Wall Street Journal, September 13, 2018; National
Conference of State Legislatures, “Autonomous Vehicles—Self
Driving Vehicles Enacted Legislation,” June 25, 2018; Jack Karsten
and Darrell West, “The State of Self-Driving Car Laws Across the
U.S.,” Brookings Institute, May 1, 2018; Alex Davies, “The WIRED
Guide to Self-Driving Cars,” WIRED, May 17, 2018; Daisuke
Wakabashai, “Uber’s Self-Driving Cars Were Struggling Before
Arizona Crash,” New York Times, March 23, 2018; Kevin Roose,
“The Self-Driving Car Industry’s Biggest Turning Point Yet,” New
York Times, March 29, 2018; Tim Higgins, “VW, Hyundai Turn
to Driverless-Car Startup in Silicon Valley,” Wall Street Journal,
January 4, 2018; John Markoff, “A Guide to Challenges Facing Self-
Driving Car Technologists,” New York Times, June 7, 2017; and The
Editorial Board, “Would You Buy a Self-Driving Future from These
Guys?” New York Times, October 14, 2017.
CASE STUDY QUESTIONS
11-13 What are the management, organizational,
and technology challenges posed by self-
driving car technology?
11-14 Are self-driving cars good business invest-
ments? Explain your answer.
11-15 What ethical and social issues are raised by
self-driving car technology?
11-16 Will cars really be able to drive themselves
without human operators? Should they?
garages, gasoline stations, and highway systems.
New roads, highways, and automotive supply chains
will have to be rebuilt for self-driving cars. The big
auto makers that build millions of cars a year rely
on complex, precise interaction among hundreds of
companies, including automotive component suppli-
ers and the services to keep cars running. They need
dealers to sell the cars, gas pumps or charging sta-
tions to fuel them, body shops to fix them, and park-
ing lots to store them. Manufacturers of autonomous
vehicles need to rethink interactions and processes
built up over a century. The highway infrastructure
will need to change over time to support autonomous
vehicles. Waymo has partnered with Avis to take care
of its fleet of driverless minivans in Arizona, and it’s
working with a startup called Trov to insure their pas-
sengers. GM is retooling one of its plants to produce
Chevrolet Bolts without steering wheels or pedals.
A computer-driven car that can handle any situ-
ation as well as a human under all conditions is
decades away at best. Many analysts expect the first
deployment of self-driving technology will be robot
taxi services operating in limited conditions and
areas, so their operators can avoid particularly tricky
intersections and make sure everything is mapped
in fine detail. The Boston Consulting Group predicts
that 25 percent of all miles driven in the U.S. by 2030
may be by shared self-driving vehicles. To take a ride,
you’d probably have to use predetermined pickup
and drop-off points, so your car can always pull over
safely and legally. The makers of self-driving cars
will be figuring out how much to charge so they can
recoup their research and development costs, but not
so much as to dissuade potential riders. They’ll strug-
gle with regulators and insurance companies over
what to do in the inevitable event of a crash.
Some pundits predict that in the next few decades,
driverless technology will add $7 trillion to the global
economy and save hundreds of thousands of lives.
At the same time, it could devastate the auto indus-
try along with gas stations, taxi drivers, and truck-
ers. People might stop buying cars because services
like Uber using self-driving cars would be cheaper.
This could cause mass unemployment of taxi drivers
and large reductions in auto sales. It would also cut
down the need for many parking garages and parking
spaces, freeing up valuable real estate for other pur-
poses. More people might decide to live further from
their workplaces because autonomous vehicles linked
to traffic systems would make traffic flow more
smoothly and free riders to work, nap, or watch video
456 Part Three Key System Applications for the Digital Age
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458
MyLab MIS
Discussion Questions: 12-5, 12-6, 12-7; Hands-on MIS Projects: 12-8, 12-9, 12-10, 12-11;
Writing Assignments: 12-17, 12-18; eText with Conceptual Animations
CHAPTER CASES
Big Data and the Internet of Things Drive
Precision Agriculture
Siemens Makes Business Processes More
Visible
Anthem Benefits from More Business
Intelligence
Is Predix GE’s Future?
VIDEO CASES
PSEG Leverages Big Data and Business
Analytics Using GE’s Predix Platform
FreshDirect Uses Business Intelligence to
Manage Its Online Grocery
Business Intelligence Helps the Cincinnati
Zoo Work Smarter
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
12-1 What are the different types of
decisions, and how does the decision-
making process work?
12-2 How do information systems support
the activities of managers and
management decision making?
12-3 How do business intelligence and
business analytics support decision
making?
12-4 How do different decision-making
constituencies in an organization use
business intelligence, and what is the
role of information systems in helping
people working in a group make
decisions more efficiently?
12-5 How will MIS help my career?
Enhancing Decision Making12CHAPTER
459
By 2050, the world will be populated with an estimated 9 million people, and in order to feed all of them, agricultural output will need to double. Information technology, in the form of the Internet of Things (IoT), wire-
less and mobile technologies, and automated data collection and analysis is
likely to provide part of the solution to this problem.
Purdue University’s College of Agriculture is one of the organizations lead-
ing the way toward more data-driven farming. The College has developed an
agriculture-oriented network with advanced IoT sensors and devices that will
allow researchers to study and improve plant growth and food production pro-
cesses. According to Pat Smoker, di-
rector of Purdue Agriculture IT, in
West Lafayette, Indiana, every pro-
cess from farm to table has poten-
tial for improvement through bet-
ter use of information technology.
Purdue College of Agriculture
partnered with Hewlett Packard
Enterprise (HPE) on a digital ag-
riculture initiative. In fall 2016,
the university began installing
an Internet of Things (IoT) net-
work on its 1,408-acre research
farm, the Agronomy Center for
Research and Education (ACRE).
The system captures terabytes of
data daily from sensors, cameras,
and human inputs. To collect, ag-
gregate, process, and transmit
such large volumes of data back to Purdue’s HPE supercomputer, the university
is deploying a combination of wireless and edge computing technologies (see
Chapters 5 and 7). They include solar-powered mobile Wi-Fi hotspots, an adap-
tive weather tower providing high-speed connectivity across the entire ACRE
facility, and the PhenoRover, a semi-automated mobile vehicle that roams
throughout ACRE research plots capturing real-time data from plant-based
sensors. Purdue is also experimenting with drones for plant-growth data collec-
tion. ACRE researchers can enter data into a mobile device on-site and transmit
them via the wireless network to an HPE data center for analysis.
Previously, Purdue’s faculty had to figure out how to transmit data from the
sensors back to the lab, and assign someone to write the software for analyzing
the data. The new system is faster and responsive. For example, researchers
Big Data and the Internet of Things Drive
Precision Agriculture
© Ekkasit keatsirikul/123RF
460 Part Three Key System Applications for the Digital Age
using mobile devices in the field can transmit data about seed growth back to
ACRE labs to analyze the impact of water levels, fertilizer quantities, and soil
types. The labs can then communicate the results of their analysis back to the
field to allow quick adjustments. Computerized instructions control how plant-
ing and spraying machines apply seed and nutrients to a field.
The Purdue project is an example of “precision agriculture,” in which data
collected and analyzed with digital tools drive decisions about fertilizer levels,
planting depth, and irrigation requirements for small sections of fields or in-
dividual plants, and automated equipment can apply the ideal treatment for
specific weeds.
Large agricultural companies like Monsanto and DuPont are big precision
agriculture players, providing computerized data analysis and planting recom-
mendations to farmers who use their seeds, fertilizers, and herbicides. The
farmer provides data on his or her farm’s field boundaries, historic crop yields,
and soil conditions to these companies or another agricultural data analysis
company, which analyzes the data along with other data it has collected about
seed performance weather conditions, and soil types in different areas. The
company doing the data analysis then sends a computer file with recommen-
dations back to the farmer, who uploads the data into computerized planting
equipment and follows the recommendations as it plants fields. For example,
the recommendations might tell an Iowa corn farmer to lower the number of
seeds planted per acre or to plant more seeds per acre in specified portions of
the field capable of growing more corn. The farmer might also receive advice
on the exact type of seed to plant in different areas and how much fertilizer
to apply. In addition to producing higher crop yields, farmers using fertilizer,
water, and energy to run equipment more precisely are less wasteful, and this
also promotes the health of the planet.
Sources: “Envision: The Big Idea,” https://ag.purdue.edu, accessed April 26, 2018; “Precision
Agriculture,” www.farms.com, accessed April 26, 2018; www.monsanto.com, accessed May 1,
2018; and Eileen McCooey, “Purdue Uses IoT to Reinvent Farming, Boost Output,” Baseline,
December 6, 2017.
Precision agriculture is a powerful illustration of how information systems can dramatically improve decision making. In the past, deciding what to
plant, how, where, and when was based on farmers’ historical experience with
their land and best guesses. Wireless networks, myriad sensors in the field, mo-
bile devices, powerful computers, and big data analytics tools have created sys-
tems that can make many of these decisions much more rapidly and accurately.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. There is a worldwide need to increase food produc-
tion, both to feed a rapidly growing global population and to make farms more
profitable. Wireless technology and big data analytics create new opportunities
for managing crops almost on a plant-by-plant basis. Managing fields with this
level of computerized precision means farmers need to use less fertilizer and
less seed per unit of land, potentially saving an individual farmer tens of thou-
sands of dollars while increasing crop yields. Precision agriculture may also
help solve the world food crisis.
https://ag.purdue.edu
http://www.farms.com
http://www.monsanto.com
Chapter 12 Enhancing Decision Making 461
Here are some questions to think about: How is information technology
changing the way farmers run their business? How is precision agriculture
changing decision making? Give examples of two decisions that can be im-
proved by using precision agriculture.
12-1 What are the different types of decisions, and
how does the decision-making process work?
Decision making in businesses used to be limited to management. Today, lower-
level employees are responsible for some of these decisions, as information sys-
tems make information available to lower levels of the business. But what do
we mean by better decision making? How does decision making take place in
businesses and other organizations? Let’s take a closer look.
Business Value of Improved Decision Making
What does it mean to the business to make better decisions? What is the mon-
etary value of improved decision making? Table 12.1 attempts to measure the
monetary value of improved decision making for a small U.S. manufacturing
firm with $280 million in annual revenue and 140 employees. The firm has
identified a number of key decisions where new system investments might im-
prove the quality of decision making. The table provides selected estimates of
annual value (in the form of cost savings or increased revenue) from improved
decision making in selected areas of the business.
We can see from Table 12.1 that decisions are made at all levels of the
firm and that some of these decisions are common, routine, and numerous.
Although the value of improving any single decision may be small, improving
hundreds of thousands of “small” decisions adds up to a large annual value for
the business.
• Identify technologies
• Identify decisions for
improvement
• Collect agri-
cultural data
• Revise farm
production process
• Wireless sensors
• Determine optimal
water/fertilizer/seed amounts
• Adjust planting patterns
Technology
Organization
Management
Business
Challenges
Information
System
Business
Solutions
• Increase crop yield
• Reduce costs
• Explosive population growth
• Opportunities from new technology
Precision Agriculture
Systems
• Wireless network
• Supercomputer
• Computerized
planting/spraying
machines
• PhenoRover
• Mobile devices
• BI analytic
software
462 Part Three Key System Applications for the Digital Age
Types of Decisions
Chapters 1 and 2 showed that there are different levels in an organization. Each
of these levels has different information requirements for decision support and
responsibility for different types of decisions (see Figure 12.1). Decisions are
classified as structured, semi-structured, and unstructured.
Unstructured decisions are those in which the decision maker must pro-
vide judgment, evaluation, and insight to solve the problem. Each of these deci-
sions is novel, important, and nonroutine, and there is no well-understood or
agreed-on procedure for making them.
Structured decisions, by contrast, are repetitive and routine, and they in-
volve a definite procedure for handling them so that they do not have to be
treated each time as if they were new. Many decisions have elements of both
TABLE 12.1 BUSINESS VALUE OF ENHANCED DECISION MAKING
EXAMPLE DECISION DECISION MAKER
NUMBER
OF ANNUAL
DECISIONS
ESTIMATED VALUE
TO FIRM OF A SINGLE
IMPROVED DECISION ANNUAL VALUE
Allocate support to most valuable customers Accounts manager 12 $100,000 $1,200,000
Predict call center daily demand Call center
management
4 $150,000 $600,000
Decide parts inventory levels daily Inventory manager 365 $5,000 $1,825,000
Identify competitive bids from major
suppliers
Senior management 1 $2,000,000 $2,000,000
Schedule production to fill orders Manufacturing
manager
150 $10,000 $1,500,000
Allocate labor to complete a job Production floor
manager
100 $4,000 $400,000
FIGURE 12.1 INFORMATION REQUIREMENTS OF KEY DECISION-MAKING
GROUPS IN A FIRM
Senior managers, middle managers, operational managers, and employees have
different types of decisions and information requirements.
Senior
Management
Middle Management
Operational Management
Individual Employees and Teams
Unstructured
Decide entrance or exit
from markets
Approve capital budget
Decide long-term goals
Design a marketing plan
Develop a departmental
budget
Design a new corporate
Web site
Determine overtime
eligibility
Restock inventory
Oer credit to customers
Determine special oers
to customers
Semistructured
Structured
Decision Characteristics Examples of Decisions
Chapter 12 Enhancing Decision Making 463
types of decisions and are semi-structured, where only part of the problem
has a clear-cut answer provided by an accepted procedure. In general, struc-
tured decisions are more prevalent at lower organizational levels, whereas un-
structured problems are more common at higher levels of the firm.
Senior executives face many unstructured decision situations, such as estab-
lishing the firm’s 5- or 10-year goals or deciding new markets to enter. Answering
the question “Should we enter a new market?” would require access to news,
government reports, and industry views as well as high-level summaries of firm
performance. However, the answer would also require senior managers to use
their own best judgment and poll other managers for their opinions.
Middle managers face more structured decision scenarios, but their deci-
sions may include unstructured components. A typical middle-level manage-
ment decision might be “Why is the reported order fulfillment report showing a
decline over the past six months at a distribution center in Minneapolis?” This
middle manager will obtain a report from the firm’s enterprise system or distri-
bution management system on order activity and operational efficiency at the
Minneapolis distribution center. This is the structured part of the decision. But
before arriving at an answer, this middle manager will have to interview em-
ployees and gather more unstructured information from external sources about
local economic conditions or sales trends.
Operational management and rank-and-file employees tend to make more
structured decisions. For example, a supervisor on an assembly line has to de-
cide whether an hourly paid worker is entitled to overtime pay. If the employee
worked more than eight hours on a particular day, the supervisor would rou-
tinely grant overtime pay for any time beyond eight hours that was clocked on
that day.
A sales account representative often has to make decisions about extending
credit to customers by consulting the firm’s customer database that contains
credit information. If the customer met the firm’s pre-specified criteria for grant-
ing credit, the account representative would grant that customer credit to make
a purchase. In both instances, the decisions are highly structured and are rou-
tinely made thousands of times each day in most large firms. The answer has
been preprogrammed into the firm’s payroll and accounts receivable systems.
The Decision-Making Process
Making a decision is a multistep process. Simon (1960) described four differ-
ent stages in decision making: intelligence, design, choice, and implementation
(see Figure 12.2).
Intelligence consists of discovering, identifying, and understanding the prob-
lems occurring in the organization—why a problem exists, where, and what
effects it is having on the firm.
Design involves identifying and exploring various solutions to the problem.
Choice consists of choosing among solution alternatives.
Implementation involves making the chosen alternative work and continuing
to monitor how well the solution is working.
What happens if the solution you have chosen doesn’t work? Figure 12.2
shows that you can return to an earlier stage in the decision-making process
and repeat it if necessary. For instance, in the face of declining sales, a sales
management team may decide to pay the sales force a higher commission for
making more sales to spur on the sales effort. If this does not produce sales in-
creases, managers would need to investigate whether the problem stems from
464 Part Three Key System Applications for the Digital Age
poor product design, inadequate customer support, or a host of other causes
that call for a different solution.
12-2 How do information systems support
the activities of managers and
management decision making?
The premise of this book and this chapter is that systems to support decision
making produce better decision making by managers and employees, above-
average returns on investment for the firm, and ultimately higher profitability.
However, information systems cannot improve every decision taking place in
an organization. Let’s examine the role of managers and decision making in
organizations to see why this is so.
Managerial Roles
Managers play key roles in organizations. Their responsibilities range from
making decisions, to writing reports, to attending meetings, to arranging birth-
day parties. We are able to better understand managerial functions and roles by
examining classical and contemporary models of managerial behavior.
FIGURE 12.2 STAGES IN DECISION MAKING
The decision-making process is broken down into four stages.
Problem discovery:
What is the problem?
Design
Choice
Implementation
Solution discovery:
What are the possible solutions?
Choosing solutions:
What is the best solution?
Solution testing:
Is the solution working?
Can we make it work better?
Intelligence
Chapter 12 Enhancing Decision Making 465
The classical model of management, which describes what managers do,
was largely unquestioned for more than 70 years after the 1920s. Henri Fayol
and other early writers first described the five classical functions of managers
as planning, organizing, coordinating, deciding, and controlling. This descrip-
tion of management activities dominated management thought for a long time,
and it is still popular today.
The classical model describes formal managerial functions but does not ad-
dress exactly what managers do when they plan, decide things, and control
the work of others. For this, we must turn to the work of contemporary behav-
ioral scientists who have studied managers in daily action. Behavioral models
argue that the actual behavior of managers appears to be less systematic, more
informal, less reflective, more reactive, and less well organized than the classi-
cal model would have us believe.
Observers find that managerial behavior actually has five attributes that dif-
fer greatly from the classical description. First, managers perform a great deal
of work at an unrelenting pace — studies have found that managers engage in
more than 600 different activities each day, with no break in their pace. There
is never enough time to do everything for which a CEO is responsible (Porter
and Nohria, 2018). Second, managerial activities are fragmented; most activi-
ties last for less than nine minutes, and only 10 percent of the activities exceed
one hour in duration. Third, managers prefer current, specific, and ad hoc in-
formation (printed information often will be too old). Fourth, they prefer oral
forms of communication to written forms because oral media provide greater
flexibility, require less effort, and bring a faster response. Fifth, managers give
high priority to maintaining a diverse and complex web of contacts that acts as
an informal information system and helps them execute their personal agendas
and short- and long-term goals.
Analyzing managers’ day-to-day behavior, Henry Mintzberg found that it
could be classified into 10 managerial roles (Mintzberg, 1971). Managerial
roles are expectations of the activities that managers should perform in an or-
ganization. Mintzberg found that these managerial roles fell into three catego-
ries: interpersonal, informational, and decisional.
Interpersonal Roles
Managers act as figureheads for the organization when they represent their
companies to the outside world and perform symbolic duties, such as giving
out employee awards, in their interpersonal role. Managers act as leaders,
attempting to motivate, counsel, and support subordinates. Managers also act
as liaisons between various organizational levels; within each of these levels,
they serve as liaisons among the members of the management team. Managers
provide time and favors, which they expect to be returned.
Informational Roles
In their informational role, managers act as the nerve centers of their organi-
zations, receiving the most concrete, up-to-date information and redistributing
it to those who need to be aware of it. Managers are therefore information dis-
seminators and spokespersons for their organizations.
Decisional Roles
Managers make decisions. In their decisional role, they act as entrepreneurs
by initiating new kinds of activities, they handle disturbances arising in the or-
ganization, they allocate resources to staff members who need them, and they
negotiate conflicts and mediate between conflicting groups.
466 Part Three Key System Applications for the Digital Age
Table 12.2, based on Mintzberg’s role classifications, is one look at where sys-
tems can and cannot help managers. The table shows that information systems
are now capable of supporting most, but not all, areas of managerial life.
Real-World Decision Making
We now see that information systems are not helpful for all managerial roles.
And in those managerial roles where information systems might improve deci-
sions, investments in information technology do not always produce positive
results. There are three main reasons: information quality, management filters,
and organizational culture (see Chapter 3).
Information Quality
High-quality decisions require high-quality information. Table 12.3 describes
information quality dimensions that affect the quality of decisions.
If the output of information systems does not meet these quality criteria,
decision making will suffer. Chapter 6 describes how corporate databases and
files have varying levels of inaccuracy and incompleteness, which in turn will
degrade the quality of decision making.
TABLE 12.3 INFORMATION QUALITY DIMENSIONS
QUALITY DIMENSION DESCRIPTION
Accuracy Do the data represent reality?
Integrity Are the structure of data and relationships among the entities and attributes consistent?
Consistency Are data elements consistently defined?
Completeness Are all the necessary data present?
Validity Do data values fall within defined ranges?
Timeliness Are data available when needed?
Accessibility Are the data accessible, comprehensible, and usable?
TABLE 12.2 MANAGERIAL ROLES AND SUPPORTING INFORMATION SYSTEMS
ROLE BEHAVIOR SUPPORT SYSTEMS
INTERPERSONAL ROLES
Figurehead Telepresence systems
Leader Interpersonal Telepresence, social networks, Twitter
Liaison Smartphones, social networks
INFORMATIONAL ROLES
Nerve center Management information systems, executive support system
Disseminator Information Texting, email, social networks
Spokesperson processing Webinars, telepresence
DECISIONAL ROLES
Entrepreneur Decision None exist
Disturbance handler making None exist
Resource allocator Business intelligence, decision-support system
Negotiator None exist
Sources: Authors and Mintzberg, Henry. “Managerial Work: Analysis from Observation.” Management Science 18 (October 1971).
Chapter 12 Enhancing Decision Making 467
Management Filters
Even with timely, accurate information, managers often make bad decisions.
Managers (like all human beings) absorb information through a series of filters
to make sense of the world around them. Cognitive scientists, behavioral econ-
omists, and recently neuro-economists have found that managers, like other
humans, are poor at assessing risk, and are risk averse; perceive patterns where
none exist; and make decisions based on intuition, feelings, and the framing
of the problem as opposed to empirical data (Kahneman, 2011; Tversky and
Kahneman, 1986).
For instance, Wall Street firms such as Bear Stearns and Lehman Brothers
imploded in 2008 because they underestimated the risk of their investments
in complex mortgage securities, many of which were based on subprime loans
that were more likely to default. The computer models they and other financial
institutions used to manage risk were based on overly optimistic assumptions
and overly simplistic data about what might go wrong. Management wanted
to make sure that their firms’ capital was not all tied up as a cushion against
defaults from risky investments, preventing them from investing it to generate
profits. So the designers of these risk management systems were encouraged to
measure risks in a way that minimized their risk.
Organizational Inertia and Politics
Organizations are bureaucracies with limited capabilities and competencies for
acting decisively. When environments change and businesses need to adopt
new business models to survive, strong forces within organizations resist
making decisions calling for major change. Decisions taken by a firm often rep-
resent a balancing of the firm’s various interest groups rather than the best
solution to the problem.
Studies of business restructuring find that firms tend to ignore poor perfor-
mance until threatened by outside takeovers, and they systematically blame
poor performance on external forces beyond their control—such as economic
conditions (the economy), foreign competition, and rising prices—rather than
blaming senior or middle management for poor business judgment. When the
external business environment is positive and firm performance improves,
managers typically credit themselves for the improved performance rather
than the positive environment.
High-Velocity Automated Decision Making
Today, many decisions made by organizations are not made by managers—or
any humans. For instance, when you enter a query into Google’s search engine,
Google has to decide which URLs to display in about half a second on aver-
age (500 milliseconds). High-frequency traders at electronic stock exchanges
execute their trades in under 30 milliseconds.
In high-velocity decision environments, the intelligence, design, choice, and
implementation parts of the decision-making process are captured by the soft-
ware’s algorithms. The humans who wrote the software have already identi-
fied the problem, designed a method for finding a solution, defined a range of
acceptable solutions, and implemented a solution. Obviously, with humans out
of the loop, great care needs to be taken to ensure the proper operation of these
systems to prevent significant harm.
Organizations in these areas are making decisions faster than what manag-
ers can monitor or control. The past few years have seen a series of break-
downs in computerized trading systems, including one on August 1, 2012, when
468 Part Three Key System Applications for the Digital Age
a software error caused Knight Capital to enter millions of faulty trades in less
than an hour. The trading glitch created wild surges and plunges in nearly 150
stocks and left Knight with $440 million in losses.
12-3 How do business intelligence and business
analytics support decision making?
Chapter 2 introduced you to the different types of systems used for supporting
management decision making. At the foundation of all of these decision support
systems are a business intelligence and business analytics infrastructure that
supplies the data and the analytic tools for supporting decision making.
What Is Business Intelligence?
Business intelligence (BI) is a term used by hardware and software vendors and
information technology consultants to describe the infrastructure for ware-
housing, integrating, reporting, and analyzing data that come from the busi-
ness environment, including big data. The foundation infrastructure collects,
stores, cleans, and makes relevant information available to managers. Think
databases, data warehouses, data marts, Hadoop, and analytic platforms, which
we described in Chapter 6. Business analytics (BA) is also a vendor-defined term
that focuses more on tools and techniques for analyzing and understanding
data. Think online analytical processing (OLAP), statistics, models, and data
mining, which we also introduced in Chapter 6.
Business intelligence and analytics are essentially about integrating
all the information streams produced by a firm into a single, coherent,
enterprise-wide set of data and then using modeling, statistical analysis
tools, and data mining tools to make sense out of all these data so man-
agers can make better decisions and plans. Purdue College of Agriculture,
described in the chapter-opening case, is using business intelligence and
analytics to help farmers make some very fine-grained decisions about fer-
tilizer levels, planting depth, and irrigation requirements for small sections
of fields or individual plants.
It is important to remember that business intelligence and analytics are prod-
ucts defined by technology vendors and consulting firms. Leading providers of
these products include Oracle, SAP, IBM, Microsoft, and SAS. A number of BI
and BA products now have cloud and mobile versions.
The Business Intelligence Environment
Figure 12.3 gives an overview of a business intelligence environment, high-
lighting the kinds of hardware, software, and management capabilities that the
major vendors offer and that firms develop over time. There are six elements in
this business intelligence environment:
• Data from the business environment: Businesses must deal with both
structured and unstructured data from many different sources, including big
data. The data need to be integrated and organized so that they can be ana-
lyzed and used by human decision makers.
• Business intelligence infrastructure: The underlying foundation of
business intelligence is a powerful database system that captures all the
relevant data to operate the business. The data may be stored in transactional
Chapter 12 Enhancing Decision Making 469
databases or combined and integrated into an enterprise data warehouse or
series of interrelated data marts.
• Business analytics toolset: A set of software tools are used to analyze data
and produce reports, respond to questions posed by managers, and track the
progress of the business using key indicators of performance.
• Managerial users and methods: Business intelligence hardware and software
are only as intelligent as the human beings who use them. Managers impose
order on the analysis of data using a variety of managerial methods that define
strategic business goals and specify how progress will be measured. These in-
clude business performance management and balanced scorecard approaches
focusing on key performance indicators and industry strategic analyses focus-
ing on changes in the general business environment, with special attention to
competitors. Without strong senior management oversight, business analytics
can produce a great deal of information, reports, and online screens that focus
on the wrong matters and divert attention from the real issues.
• Delivery platform—MIS, DSS, ESS: The results from business intelligence
and analytics are delivered to managers and employees in a variety of ways,
depending on what they need to know to perform their jobs. MIS, DSS, and
ESS, which we introduced in Chapter 2, deliver information and knowledge
to different people and levels in the firm—operational employees, middle
managers, and senior executives. In the past, these systems could not share
data and operated as independent systems. Today, one suite of hardware and
software tools in the form of a business intelligence and analytics package
is able to integrate all this information and bring it to managers’ desktops or
mobile platforms.
• User interface: Business people often learn quicker from a visual represen-
tation of data than from a dry report with columns and rows of information.
Today’s business analytics software suites feature data visualization tools,
such as rich graphs, charts, dashboards, and maps. They also are able to
FIGURE 12.3 BUSINESS INTELLIGENCE AND ANALYTICS FOR DECISION
SUPPORT
Business intelligence and analytics require a strong database foundation, a set of
analytic tools, and an involved management team that can ask intelligent questions
and analyze data.
Business strategy
Performance management
Call centers
Reports
Databases
Data Warehouses
Data Marts
Analytic platforms
Models
Balanced score card
Forecasts
Data mining
OLAP
Reporting and query tools
Big Data analytics
Dashboards
Scorecards
Desktop
Mobile
Web portal
Social media
MIS
DSS
ESS
Data from
Business
Environment
Business Intelligence
Infrastructure
Business Analytics
Toolset
Platform
User Interface
Managerial Users and
Methods
Web data
Mobile devices
Social media data
Stores
Suppliers
Governmental and
economic data
470 Part Three Key System Applications for the Digital Age
Data visualization tools
facilitate creation of graphs,
charts, dashboards, and
maps to make it easier for
users to obtain insights from
data.
© NicoElNino/Shutterstock
deliver reports on mobile phones and tablets as well as on the firm’s web por-
tal. For example, Tableau Software enables non-technical users to easily cre-
ate and share customized interactive dashboards to provide business insights
from a broad spectrum of data, including data from spreadsheets, corporate
databases, and the web. Another example is the process mining software
used by Siemens AG to visualize and analyze its business processes (see the
Interactive Session on Technology). BA software is adding capabilities to post
information on Twitter, Facebook, or internal social media to support deci-
sion making in an online group setting rather than in a face-to-face meeting.
Business Intelligence and Analytics Capabilities
Business intelligence and analytics promise to deliver correct, nearly real-time
information to decision makers, and the analytic tools help them quickly un-
derstand the information and take action. There are six analytic functionalities
that BI systems deliver to achieve these ends:
• Production reports: These are predefined reports based on industry-
specific requirements (see Table 12.4).
• Parameterized reports: Users enter several parameters as in a pivot table to
filter data and isolate impacts of parameters. For instance, you might want to
TABLE 12.4 EXAMPLES OF BUSINESS INTELLIGENCE PREDEFINED PRODUCTION REPORTS
BUSINESS FUNCTIONAL AREA PRODUCTION REPORTS
Sales Forecast sales; sales team performance; cross-selling; sales cycle times
Service/call center Customer satisfaction; service cost; resolution rates; churn rates
Marketing Campaign effectiveness; loyalty and attrition; market basket analysis
Procurement and support Direct and indirect spending; off-contract purchases; supplier performance
Supply chain Backlog; fulfillment status; order cycle time; bill of materials analysis
Financials General ledger; accounts receivable and payable; cash flow; profitability
Human resources Employee productivity; compensation; workforce demographics; retention
Chapter 12 Enhancing Decision Making 471
Siemens AG is a German manufacturing conglomer-
ate that produces systems and components for indus-
trial automation, healthcare, energy, building, and
transportation markets. The company is headquar-
tered in Munich and Berlin, with 372,000 employees
worldwide, and global revenue of €83 billion (ap-
proximately U.S. $99 billion) in fiscal 2017. Siemens
is the largest industrial manufacturing company in
Europe, with branch offices abroad. This is clearly
a company that prizes innovation and continuous
improvement of the efficiency and quality of its busi-
ness processes.
Siemens has thousands of business processes,
some of which are very complex. Management
was seeking better ways of making the business
more efficient and turned to business process min-
ing technology. In 2014 the company established
a unit called Process DAsh (which stands for Data
Analytics, smart handling) to actively support global
process optimization in all Siemens divisions. It
started collecting and analyzing ERP data to identify
bottlenecks in its production, delivery, and payment
processes using Celonis Process Mining analysis
and visualization software for this purpose. Celonis
partners with SAP, and its software runs on the SAP
HANA in-memory database platform.
Process mining software analyzes data in en-
terprise application event logs to determine how
business processes are actually working in order to
identify bottlenecks and other areas of inefficiency
so that they can be improved. The technology can
analyze millions of transaction records and spot de-
viations from normal workflows. A push of a button
produces a snapshot of an entire business process.
Process DAsh used the Celonis software to take all
the individual data in a large number of information
systems and use them to construct logical models of
existing business processes and automatically visual-
ize them. The software documents actual processes
in real time, as the sequence of events is taking
place.
When process mining software is used to analyze
the transaction logs of an ERP or CRM system, data
visualization capabilities in the software can show
users what processes are running at any given time.
An organization might use process mining software
to find the cause of unexpected delays in invoice
processing by examining the logs of the accounts
payable module in its ERP system. Users can see at
a glance where inefficiencies occur through bottle-
necks, unnecessary detours, and manual interven-
tions, or where compliance issues might arise. Some
process mining software, including Celonis, enables
users to drill down to view the individual documents
associated with a process.
Celonis has capabilities for comparing users’ tar-
get operating models to the as-is process, providing
an automated fit-gap analysis. Celonis analyzes root
causes for deviations and performance loss, high-
lighting the issues which have the greatest impact on
process performance. At the touch of a button, the
user can see a comparison between the target and
actual process and also visualize the main cause of
delays and additional expenditure.
If a process model doesn’t already exist, the soft-
ware will try to create one automatically, sometimes
using artificial intelligence techniques such as ma-
chine learning (see Chapter 11). If a process model is
available, the process mining software will compare
it to the event log to identify discrepancies and their
possible causes. For process modeling, Siemens uses
a Celonis tool called Pi Conformance and Machine
Learning. The software predicts which customer
orders are likely to arrive late using algorithms that
continuously learn from Siemens’ performance.
Siemens started using Celonis analysis and
visualization tools to learn how quickly it pays its
suppliers. Some suppliers offer discounts for early
payment. Siemens was often unable to take advan-
tage of these discounts because it was unable to pay
quickly enough. The company used process min-
ing to analyze data from its ERP, accounting, and
payment approval systems to understand why this
was happening. Siemens also used process mining to
study inefficiencies in the way it takes orders from
and is paid by its customers (order-to-cash processes).
Before implementing the Celonis software,
Siemens had to manage its business processes
manually. Individual supervisors were responsible
for specific processes. When things did not go as
planned, such as when a machine broke down or a
parts shipment arrived late, there was no easy way to
INTERACTIVE SESSION TECHNOLOGY
Siemens Makes Business Processes More Visible
472 Part Three Key System Applications for the Digital Age
1. Identify the problem in this case study. What
management, organization, and technology factors
contributed to the problem?
2. Describe the capabilities of process mining soft-
ware. Was this an effective solution? Explain your
answer.
3. How did process mining change decision making
at Siemens?
4. What management, organization, and technology
issues need to be addressed when implementing
process mining systems?
determine exactly how these occurrences impacted
overall operations.
There was some resistance to process mining
among some long-term Siemens managers who
thought they already knew how to handle processes
efficiently. Lars Reinkemeyer, head of Siemens
global process mining services, was able to promote
analytics adoption by identifying individuals who
were receptive to process mining and enlisting them
to promote the new technology. Since Siemens
AG implemented process mining, it has been able
to identify slowdowns in parts procurement, late
product deliveries, and billing inefficiencies that
were costing the company millions of dollars.
Siemens AG now has over 2,500 users of Process
DAsh worldwide.
Sources: Lindsay Clark, “Siemens Success Sets the Scene for Growth in
Process Mining,” Computer Weekly, April 12, 2018; Julian Baumann,
“Siemens Is the World’s Biggest User of Process Mining,” www.celo-
nis.com, accessed April 22, 2018; “Success Story Siemens,” www.ce-
lonis.com, accessed April 22, 2018; Margaret Rouse, “Process Mining
Software,” searchERP.com, Jun 30, 2017; and Ed Burns, “Siemens
Uses Process Mining Software to Improve Manufacturing Visibility,”
SearchBusinessAnalytics.com, December 15, 2016.
CASE STUDY QUESTIONS
enter region and time of day to understand how sales of a product vary by region
and time. If you were Starbucks, you might find that customers in the East buy
most of their coffee in the morning, whereas in the Northwest customers buy
coffee throughout the day. This finding might lead to different marketing and ad
campaigns in each region. (See the discussion of pivot tables in Section 12.4.)
• Dashboards/scorecards: These are visual tools for presenting performance
data defined by users.
• Ad hoc query/search/report creation: These allow users to create their
own reports based on queries and searches.
• Drill down: This is the ability to move from a high-level summary to a more
detailed view.
• Forecasts, scenarios, models: These include the ability to perform linear
forecasting and what-if scenario analysis and analyze data using standard
statistical tools.
Predictive Analytics
An important capability of business intelligence analytics is the ability to model
future events and behaviors, such as the probability that a customer will re-
spond to an offer to purchase a product. Predictive analytics use statistical
analysis, data mining techniques, historical data, and assumptions about future
conditions to predict future trends and behavior patterns. Variables that can be
measured to predict future behavior are identified. For example, an insurance
company might use variables such as age, gender, and driving record as predic-
tors of driving safety when issuing auto insurance policies. A collection of such
predictors is combined into a predictive model for forecasting future probabili-
ties with an acceptable level of reliability.
FedEx has been using predictive analytics to develop models that predict how
customers will respond to price changes and new services, which customers
http://www.celonis.com
http://www.celonis.com
http://www.celonis.com
http://www.celonis.com
http://searchERP.com
http://SearchBusinessAnalytics.com
Chapter 12 Enhancing Decision Making 473
are most at risk of switching to competitors, and how much revenue will be
generated by new storefront or drop-box locations. The accuracy rate of FedEx’s
predictive analytics system ranges from 65 to 90 percent.
Predictive analytics are being incorporated into numerous business intelli-
gence applications for sales, marketing, finance, fraud detection, and health-
care. One of the most well-known applications is credit scoring, which is used
throughout the financial services industry. When you apply for a new credit
card, scoring models process your credit history, loan application, and pur-
chase data to determine your likelihood of making future credit payments on
time. Healthcare insurers have been analyzing data for years to identify which
patients are most likely to generate high costs.
Many companies employ predictive analytics to predict response to direct
marketing campaigns. They are able to lower their marketing and sales costs
by focusing their resources on customers who have been identified as more
promising. For instance, Slack Technologies, which provides cloud-based team
collaboration tools and services for 6.8 million active users, uses predictive
analytics to identify customers who are most likely to use its products very
frequently and upgrade to its paid services (McDonough, 2017).
Big Data Analytics
Predictive analytics are starting to use big data from both private and public
sectors, including data from social media, customer transactions, and output
from sensors and machines. In e-commerce, many online retailers have capa-
bilities for making personalized online product recommendations to their web-
site visitors to help stimulate purchases and guide their decisions about what
merchandise to stock. However, most of these product recommendations have
been based on the behaviors of similar groups of customers, such as those with
incomes under $50,000 or whose ages are between 18 and 25 years. Now some
retailers are starting to analyze the tremendous quantities of online and in-store
customer data they collect along with social media data to make these recom-
mendations more individualized. These efforts are translating into higher cus-
tomer spending and customer retention rates. Table 12.5 provides examples of
companies using big data analytics.
TABLE 12.5 WHAT BIG DATA ANALYTICS CAN DO
Bank of America Able to analyze all of its 50 million customers at once to understand each customer across all channels and
interactions and present consistent, finely customized offers. Can determine which of its customers has a
credit card or a mortgage loan that could benefit from refinancing at a competitor. When the customer
visits BofA online, calls a call center, or visits a branch, that information is available for the online app or
sales associate to present BofA’s competing offer.
Vestas Wind
Systems
Improves wind turbine placement for optimal energy output using IBM BigInsights software and an IBM
supercomputer to analyze 2.8 petabytes of structured and unstructured data such as weather reports, tidal
phases, geospatial and sensor data, satellite images, deforestation maps, and weather modeling research.
The analysis, which used to take weeks, can now be completed in less than one hour.
Hunch.com Analyzes massive database with data from customer purchases, social networks, and signals from around
the web to produce a “taste graph” that maps users with their predicted affinity to products, services,
and websites. The taste graph includes predictions about 500 million people, 200 million objects (videos,
gadgets, books), and 30 billion connections between people and objects. Helps eBay develop more finely
customized recommendations on items to offer.
German World Cup
Soccer Team
Analyzed very large amounts of video and numeric data about individual player and team performance on
itself and competing teams and then used what it had learned to improve how it played and to capitalize
on competitors’ strengths and weaknesses. Superior use of big data analytics helped the team win the 2014
World Cup.
474 Part Three Key System Applications for the Digital Age
In the public sector, big data analytics have been driving the movement to-
ward “smart cities,” which make intensive use of digital technology to make
better decisions about running cities and serving their residents. Public record-
keeping has produced warehouses full of property transfers, tax records, corpo-
rate filings, environmental compliance audits, restaurant inspections, building
maintenance reports, mass transit appraisals, crime data, health department
stats, public education records, utility reviews, and more. Municipalities are
adding more data captured through sensors, location data from mobile phones,
and targeted smartphone apps. Predictive modeling programs now inform pub-
lic policy decisions on utility management, transportation operation, healthcare
delivery, and public safety. What’s more, the ability to evaluate how changes in
one service affect the operation and delivery of other services enables holistic
problem solving that could only be dreamed of a generation ago.
Operational Intelligence and Analytics
Many decisions deal with how to run the business of these cities on a day-to-day
basis. These are largely operational decisions, and this type of business activity
monitoring is called operational intelligence. The Internet of Things is creat-
ing huge streams of data from web activities, smartphones, sensors, gauges, and
monitoring devices that can be used for operational intelligence about activi-
ties inside and outside the organization. Software for operational intelligence
and analytics enables organizations to analyze these streams of big data as they
are generated in real time. The data-driven farming systems described in the
chapter-opening case are one example of operational intelligence. Another is
the use of data generated by sensors on trucks, trailers, and intermodal contain-
ers owned by Schneider National, one of North America’s largest truckload,
logistics, and intermodal services providers. The sensors monitor location, driv-
ing behaviors, fuel levels, and whether a trailer or container is loaded or empty.
Data from fuel tank sensors help Schneider identify the optimal location at
which a driver should stop for fuel based on how much is left in the tank, the
truck’s destination, and fuel prices en route. The chapter-ending case describes
how General Electric (GE) is using operational intelligence to monitor and ana-
lyze the performance of generators, jet engines, locomotives, and oil-refining
gear and to connect these devices to the cloud.
Location Analytics and Geographic Information Systems
Decisions are also based on location data. BI analytics include location
analytics, the ability to gain business insight from the location (geographic)
component of data, including location data from mobile phones, output from
sensors or scanning devices, and data from maps. For example, location ana-
lytics might help a marketer determine which people to target with mobile
ads about nearby restaurants and stores or quantify the impact of mobile ads
on in-store visits. Location analytics would help a utility company view and
measure outages and their associated costs as related to customer location
to help prioritize marketing, system upgrades, and customer service efforts.
UPS’s package tracking and delivery-routing systems described in Chapter 1
use location analytics, as does an application used by Starbucks to determine
where to open new stores. The Starbucks system analyzes very large amounts
of location-based data and demographic data to determine the best places to
open more stores without harming sales at other Starbucks locations. A user
can see on a map local trade areas, retail clusters, demographics, traffic and
transportation nodes, and locations with new offices that might be important
sources of customers.
Chapter 12 Enhancing Decision Making 475
The Starbucks application is an example of a geographic information system
(GIS). GIS provide tools to help decision makers visualize problems that benefit
from mapping. GIS software ties location data about the distribution of people or
other resources to points, lines, and areas on a map. Some GIS have modeling
capabilities for changing the data and automatically revising business scenarios.
GIS might be used to help state and local governments calculate response
times to natural disasters and other emergencies, to help banks identify the
best location for new branches or ATM terminals, or to help police forces pin-
point locations with the highest incidence of crime.
12-4 How do different decision-making
constituencies in an organization use
business intelligence, and what is the role of
information systems in helping people working
in a group make decisions more efficiently?
Earlier in this text and in this chapter, we described the different information
constituencies in business firms—from senior managers to middle managers,
analysts, and operational employees. This also holds true for BI and BA systems
(see Figure 12.4). More than 80 percent of the audience for BI consists of casual
users who rely largely on production reports. Senior executives tend to use BI to
monitor firm activities using visual interfaces like dashboards and scorecards.
Middle managers and analysts are much more likely to be immersed in the data
and software, entering queries and slicing and dicing the data along different
dimensions. Operational employees will, along with customers and suppliers,
be looking mostly at prepackaged reports.
Decision Support for Operational and Middle
Management
Operational and middle management are generally charged with monitoring
the performance of key aspects of the business, ranging from the downtime of
machines on a factory floor to the daily or even hourly sales at franchise food
The U.S. National
Oceanic and Atmospheric
Administration (NOAA)
Office for Coastal
Management provides a
web mapping tool to vi-
sualize community-level
impacts from coastal flood-
ing or sea level rise up to
6 feet above average high
tides. Photo simulations of
how future flooding might
impact local landmarks
are also provided, as well
as data related to water
depth, connectivity, flood
frequency, socio-economic
vulnerability, and wetland
loss and migration.
Courtesy of U.S. National Oceanic and Atmospheric Administration (NOAA) Office for Coastal Management
476 Part Three Key System Applications for the Digital Age
stores to the daily traffic at a company’s website. Most of the decisions these
managers make are fairly structured. Management information systems (MIS),
which we introduced in Chapter 2, are typically used by middle managers to
support this type of decision making. Increasingly, middle managers receive
these reports online and are able to interactively query the data to find out why
events are happening. Managers at this level often turn to exception reports,
which highlight only exceptional conditions, such as when the sales quotas for
a specific territory fall below an anticipated level or employees have exceeded
their spending limits in a dental care plan. Table 12.6 provides some examples
of MIS for business intelligence.
Support for Semi-structured Decisions
Some managers are “super users” and keen business analysts who want to
create their own reports and use more sophisticated analytics and models
to find patterns in data, to model alternative business scenarios, or to test
specific hypotheses. Decision-support systems (DSS) are the BI delivery plat-
form for this category of users, with the ability to support semi-structured
decision making.
DSS rely more heavily on modeling than MIS, using mathematical or ana-
lytical models to perform what-if or other kinds of analysis. “What-if” analy-
sis, working forward from known or assumed conditions, allows the user to
vary certain values in test results to predict outcomes if changes occur in those
TABLE 12.6 EXAMPLES OF MIS APPLICATIONS
COMPANY MIS APPLICATION
California Pizza Kitchen Inventory Express application “remembers” each restaurant’s ordering patterns and compares the
amount of ingredients used per menu item to predefined portion measurements established by
management. The system identifies restaurants with out-of-line portions and notifies their managers
so that corrective actions will be taken.
Black & Veatch Intranet MIS tracks construction costs for various projects across the United States.
Taco Bell Total Automation of Company Operations (TACO) system provides information on food, labor, and
period-to-date costs for each restaurant.
FIGURE 12.4 BUSINESS INTELLIGENCE USERS
Casual users are consumers of BI output, while intense power users are the producers of
reports, new analyses, models, and forecasts.
Customers/suppliers
Operational employees
Senior managers
IT developers
Super users
Business analysts
Analytical modelers
Managers/Sta�
Business analysis
Capabilities
Casual Users:
Consumers
(80% of employees)
Power Users:
Producers
(20% of employees)
Production Reports
Parameterized Reports
Dashboards/Scorecards
Ad hoc queries; Drill down
Search/OLAP
Forecasts; What if
Analysis; statistical models
Chapter 12 Enhancing Decision Making 477
values. What happens if we raise product prices by 5 percent or increase the
advertising budget by $1 million? Sensitivity analysis models ask what-if ques-
tions repeatedly to predict a range of outcomes when one or more variables are
changed multiple times (see Figure 12.5). Backward sensitivity analysis helps
decision makers with goal seeking: If I want to sell 1 million product units next
year, how much must I reduce the price of the product?
Chapter 6 described multidimensional data analysis and OLAP as key busi-
ness intelligence technologies. Spreadsheets have a similar feature for multi-
dimensional analysis called a pivot table, which manager “super users” and
analysts employ to identify and understand patterns in business information
that may be useful for semi-structured decision making.
Figure 12.6 illustrates a Microsoft Excel pivot table that examines a large list
of order transactions for a company selling online management training videos
FIGURE 12.5 SENSITIVITY ANALYSIS
This figure displays the results of a sensitivity analysis of the effect of changing the sales price of a necktie and the cost
per unit on the product’s break-even point. It answers the question: What happens to the break-even point if the sales
price and the cost to make each unit increase or decrease?
Total fixed costs
Variable cost per unit
Average sales price
Contribution margin
Break-even point
Sales
Price
19000
3
17
14
1357
1357
14
15
16
17
18
4
1900
1727
1583
1462
1357
2
1583
1462
1357
1267
1188
3
1727
1583
1462
1357
1267
5
2111
1900
1727
1583
1462
6
2375
2111
1900
1727
1583
Variable Cost per Unit
FIGURE 12.6 A PIVOT TABLE THAT EXAMINES CUSTOMER REGIONAL
DISTRIBUTION AND ADVERTISING SOURCE
In this pivot table, we are able to examine where an online training company’s customers
come from in terms of region and advertising source.
Courtesy of Microsoft Corporation
478 Part Three Key System Applications for the Digital Age
and books. It shows the relationship between two dimensions: the sales region and
the source of contact (web banner ad or e-mail) for each customer order. It answers
the question: Does the source of the customer make a difference in addition to re-
gion? The pivot table in this figure shows that most customers come from the West
and that banner advertising produces most of the customers in all the regions.
One of the Hands-On MIS projects for this chapter asks you to use a pivot
table to find answers to a number of other questions using the same list of
transactions for the online training company as we used in this discussion. The
complete Excel file for these transactions is available in MyLab MIS. We also
provide a Learning Track on creating pivot tables using Excel.
In the past, much of this modeling was done with spreadsheets and small stand-
alone databases. Today these capabilities are incorporated into large enterprise BI
systems where they are able to analyze data from large corporate databases. BI
analytics include tools for intensive modeling, some of which we described ear-
lier. Such capabilities help Progressive Insurance identify the best customers for
its products. Using widely available insurance industry data, Progressive defines
small groups of customers, or “cells,” such as motorcycle riders age 30 or above
with college educations, credit scores over a certain level, and no accidents. For
each “cell,” Progressive performs a regression analysis to identify factors most
closely correlated with the insurance losses that are typical for this group. It then
sets prices for each cell and uses simulation software to test whether this pricing
arrangement will enable the company to make a profit. These analytic techniques
make it possible for Progressive to profitably insure customers in traditionally
high-risk categories that other insurers would have rejected.
Decision Support for Senior Management: Balanced
Scorecard and Enterprise Performance Management
Methods
The purpose of executive support systems (ESS), introduced in Chapter 2, is
to help C-level executive managers focus on the really important performance
information that affects the overall profitability and success of the firm. There
are two parts to developing ESS. First, you will need a methodology for un-
derstanding exactly what is “the really important performance information”
for a specific firm that executives need, and second, you will need to develop
systems capable of delivering this information to the right people in a timely
fashion.
Currently, the leading methodology for understanding the really important
information needed by a firm’s executives is called the balanced scorecard
method (Kaplan and Norton, 1992, 2004). The balanced scorecard is a frame-
work for operationalizing a firm’s strategic plan by focusing on measurable out-
comes on four dimensions of firm performance: financial, business process,
customer, and learning and growth (Figure 12.7).
Performance on each dimension is measured using key performance
indicators (KPIs), which are the measures proposed by senior management
for understanding how well the firm is performing along any given dimension.
For instance, one key indicator of how well an online retail firm is meeting
its customer performance objectives is the average length of time required to
deliver a package to a consumer. If your firm is a bank, one KPI of business pro-
cess performance is the length of time required to perform a basic function like
creating a new customer account.
Chapter 12 Enhancing Decision Making 479
The balanced scorecard framework is thought to be “balanced” because it
causes managers to focus on more than just financial performance. In this
view, financial performance is past history—the result of past actions—and
managers should focus on the things they are able to influence today, such
as business process efficiency, customer satisfaction, and employee training.
Once a scorecard is developed by consultants and senior executives, the next
step is automating a flow of information to executives and other managers
for each of the key performance indicators (see the Interactive Session on
Management). Once these systems are implemented, they are often referred
to as ESS.
Another closely related popular management methodology is business
performance management (BPM). Originally defined by an industry group
in 2004 (led by the same companies that sell enterprise and database systems
like Oracle, SAP, and IBM), BPM attempts to systematically translate a firm’s
strategies (e.g., differentiation, low-cost producer, market share growth, and
scope of operation) into operational targets. Once the strategies and targets are
identified, a set of KPIs are developed that measure progress toward the targets.
The firm’s performance is then measured with information drawn from the
firm’s enterprise database systems. BPM uses the same ideas as the balanced
scorecard but with a stronger strategy flavor.
Corporate data for contemporary ESS are supplied by the firm’s existing en-
terprise applications (enterprise resource planning, supply chain management,
and customer relationship management). ESS also provide access to news ser-
vices, financial market databases, economic information, and whatever other
external data senior executives require. ESS also have significant drill-down
capabilities if managers need more detailed views of data.
FIGURE 12.7 THE BALANCED SCORECARD FRAMEWORK
In the balanced scorecard framework, the firm’s strategic objectives are operationalized
along four dimensions: financial, business process, customer, and learning and growth.
Each dimension is measured using several KPIs.
• Delivery performance
• Quality performance
• Customer satisfaction
• Customer loyalty
• Customer retention
Customers
• Cash flow
• Return on investment
• Financial result
• Return on capital employed
• Return on equity
Financial
• Number of activities
• Process execution time
• Accident ratios
• Resource eciency
• Equipment downtime
Business Processes
• Investment rate
• Illness rate
• Internal promotions %
• Employee turnover
• Gender ratios
Learning and Growth
Firm Strategy
and
Objectives
480 Part Three Key System Applications for the Digital Age
INTERACTIVE SESSION MANAGEMENT
Anthem Benefits from More Business Intelligence
Anthem Inc. is one of the largest health benefit
companies in the United States. One in eight
Americans receives coverage for their medical
care through Anthem’s affiliated plans. Anthem
also offers a broad range of medical and specialty
products, such as life and disability insurance
benefits; dental, vision, and behavioral health
services; and long-term care insurance and flexible
spending accounts. Anthem is headquartered in
Indianapolis, Indiana and earned over $90 billion
in revenue in 2017.
Anthem has been an industry leader in analyzing
data to reduce fraud and waste, cultivate custom-
ers, fine-tune its products, and keep healthcare costs
low. For example, the company analyzes the data it
collects on benefit claims, clinical data, electronic
health records, lab results, and call centers to de-
termine each person’s risk for an emergency room
visit or a stroke. This information helps the company
identify opportunities for improvement and individu-
als who might benefit from additional services or
wellness coaching.
Now Anthem is applying its analytical skills in-
ternally to sharpen decisions about how to deploy
and develop its employees as a strategic resource.
Anthem has 56,000 employees and would like better
answers to these questions: What is our employee
turnover rate for call center staff in Colorado Springs
or across the United States? What is the cost of that
turnover? Are we differentiating rewards for our top
performers? How many of our nurses might retire
within the next couple of years? What is the relation-
ship between our time-to-hire metrics and national
unemployment rates?
Anthem created a cloud-based People Data Central
(PDC) portal, whose interactive “workforce intel-
ligence” dashboard lets HR and other Anthem users
access and ask questions such as these using inter-
nal and third-party data. The portal serves 56,000
employees and presents data in dashboards, graphs,
reports, and other highly visual formats that are easy
to comprehend and manipulate.
A high-level “executive scorecard” feature explores
the relationship between Human Resources metrics
and business outcomes to use in short- and long-term
planning. One scorecard report showed the relation-
ship between customer growth, Anthem’s net hire
ratio, and total costs associated with internal and
external labor. PDC provides a total of seven dash-
boards on “hire-to-retire” HR operations, 50 summary
views from which users can drill down into detailed
reports, and links to other relevant data and training
sources.
The company also formed a Talent Insights team,
whose members include MBAs, PhDs, and CPAs, to
develop more sophisticated data analysis and help
users work with the data. For example, the Talent
Insights team worked with Anthem’s Wellness team
to examine data on employees who utilize company
wellness credits to determine whether this could
be correlated with reduced absenteeism and em-
ployee turnover. Every month, the team looks at a
different slice of data using various indicators such
as company performance, employee participation
in wellness programs, or reductions in absentee-
ism. For example, one month the team broke down
Anthem’s workforce by generational age bands and
examined the potential ramifications for company
performance, highlighting its analysis in the portal’s
“insight spotlight” section.
The PDC uses Oracle Human Capital
Management (HCM) Cloud and Oracle Business
Intelligence Cloud Service. Oracle HCM Cloud is
the cloud-based version of Oracle tools for Human
Capital Management (human resources manage-
ment), including tools for talent management
and workforce management. Oracle Business
Intelligence Cloud Service provides powerful data
analytics tools as a cloud service that is available to
anyone in the enterprise. The service includes tools
for ad hoc query and analysis, interactive dash-
boards, and reports. Anthem’s Oracle-based cloud
platform took less than six months to deploy.
Anthem’s human resources and talent data used
to be scattered among many different systems and
spreadsheets, so they were difficult to aggregate and
compare. Basic questions such as “What is our turn-
over rate?” or “How many open positions do we have
right now?” produced different answers, depending
on who was asked, even within the same location or
work group. To improve the HR department’s recruit-
ing, hiring, promotion, and employee development
programs, Anthem needed better analytic tools and
a single standardized enterprise-wide view of its data.
Chapter 12 Enhancing Decision Making 481
1. Why did Anthem need better data and analytics
tools for Human Resources? What management,
organization, and technology factors contributed to
Anthem’s need for better HR data and analytics?
2. Describe the business intelligence capabilities of
the PDC portal.
3. What groups in the company benefited from
Anthem’s new analytics tools? Explain your
answer.
4. How did Anthem’s new data analytics capabili-
ties change the Human Resources function at the
company?
The PDC is able to perform sentiment analysis
(see Chapter 6). The portal includes a channel
where employees can voice their opinions about
their work experiences confidentially, using emojis
and limited text entries. The system analyzes these
ongoing sentiments to create “team vitals” reports
to help management identify and address poten-
tial productivity risks. The company often finds
information on which it can immediately take
action, such as ideas for improving processes or
re-prioritizing resources.
The Anthem Talent Insights team is also helping
other business groups outside of Human Resources
make better use of data. These employees from
other functional business areas typically have ac-
cess only to the data for their business units. Talent
Insights helps them combine these data with HR
data so they can answer questions such as how
their high-potential employees whose careers are
advancing compare with those in other parts of
the company. The team developed a model that
accurately predicts first-year attrition and identifies
the causes of employee turnover. Anthem manage-
ment is using this information to increase employee
retention and create better profiles for future hires.
Sources: Rob Preston, “People Data Central,” Profit Magazine, Winter
2018; Michael Singer, “Anthem Prescribes Oracle Analytics for Talent
Lifecycle,” blogs.oracle.com, February 26, 2018; www.antheminc.
com, accessed April 24, 2018; and Jennifer Bresnick, “Borrowed from
Retail, Anthem’s Big Data Analytics Boost Member Engagement,”
HealthIT Analytics, August 4, 2017.
CASE STUDY QUESTIONS
Well-designed ESS help senior executives monitor organizational perfor-
mance, track activities of competitors, recognize changing market conditions,
and identify problems and opportunities. Employees lower down in the corpo-
rate hierarchy also use these systems to monitor and measure business perfor-
mance in their areas of responsibility. For these and other business intelligence
systems to be truly useful, the information must be “actionable”—it must be
readily available and also easy to use when making decisions. If users have dif-
ficulty identifying critical metrics within the reports they receive, employee
productivity and business performance will suffer.
Group Decision-Support Systems (GDSS)
The systems we have just described focus primarily on helping you make a de-
cision acting alone. However, what if you are part of a team and need to make
a decision as a group? Group decision-support systems (GDSS) are avail-
able for this purpose. The collaboration environments described in Chapter
2 can be used to help a set of decision makers working together as a group,
in the same location or different locations, to solve unstructured problems.
Originally, GDSS required dedicated conference rooms with special hardware
and software tools to facilitate group decision making. But today GDSS capa-
bilities have evolved along with the power of desktop PCs, the explosion of
mobile computing, and the rapid expansion of bandwidth on Wi-Fi and cellular
networks. Dedicated rooms for collaboration can be replaced with much less
http://blogs.oracle.com
http://www.antheminc.com
http://www.antheminc.com
482 Part Three Key System Applications for the Digital Age
expensive and flexible virtual collaboration rooms that can connect mobile
employees with colleagues in the office sitting at desktops in a high-quality
video and audio environment.
For example, Cisco’s Collaboration Meeting Rooms Hybrid (CMR) allows
groups of employees to meet using any device via WebEx video software, which
does not require any special network connections, special displays, or complex
software. The software to run CMR can be hosted on company servers or in the
cloud. The meetings can be scheduled by employees whenever needed. CMR
can handle up to 500 participants in a meeting, but that is quite rare. Skype
began deploying a similar cloud-based collaboration environment integrated
with Microsoft Office called Skype for Business to support online meetings and
sharing of documents, audio, and video.
12-5 How will MIS help my career?
Here is how Chapter 12 and this text can help you find a job as an entry-level
data analyst.
The Company
Western Well Health, a major provider of healthcare services for the Denver,
Colorado metropolitan area, is looking for an entry-level data analyst to per-
form data analysis and reporting for operational/clinical departments. The
company’s healthcare network includes 18 hospitals, six senior living commu-
nities, urgent care clinics, partner hospitals, and home care and hospice ser-
vices in Colorado and Western Kansas.
Position Description
The data analyst will be responsible for coordinating a variety of quality and
performance measurement initiatives, including satisfaction survey programs,
benchmarking and tracking quality of care, clinical outcome performance, and
asset utilization. Job responsibilities include:
• Performing data analysis based on SAS data sets, MS Access databases, exter-
nal websites, and business intelligence platforms to produce reports for key
stakeholder groups and decision makers.
• Eliciting data and reporting requirements using interviews, document
analysis, requirements workshops, site visits, use cases, data analysis, and
workflow analysis.
• Working with staff on the design, maintenance, and distribution of reports
and incorporation of reports into the balanced scorecard.
• Analyzing, testing, and modifying databases and reports as needed to meet
end user specifications and quality assurance procedures.
• Assisting in enhancing business intelligence reporting tools, dashboards, and
mobile BI to improve usability, increase user adoption, and streamline support.
Job Requirements
• Bachelor’s degree in Information Systems or Statistics
• Knowledge of Microsoft Access, SQL, and business intelligence tools such as
Business Objects, SAS BI, or Tableau
Chapter 12 Enhancing Decision Making 483
• Data management, analytics, and information system experience preferred
• Some knowledge of the healthcare business and medical record systems
desirable
• Project management skills and/or experience desirable
Interview Questions
1. Have you worked with any business intelligence software? Which tools?
What is your level of proficiency? Can you give examples of the kinds of data
analysis work and reports you used these tools for?
2. In your experience with data analysis and business intelligence, did you ever
work with tools that were not as user-friendly as they could have been? What
would you have recommended to improve the tool(s) for users?
3. Have you ever developed an analytics report for users from scratch? What BI
tools, or tools and data sets, did you use? Can you talk more about how you
worked with users to elicit the information requirements for the report?
4. What do you know about the healthcare industry and electronic medical
records? Have you ever worked with medical record systems and software?
What work did you do with them?
5. Have you ever worked on a project team? What were your responsibilities?
Did you play a leadership role?
Author Tips
1. Review the first two sections of this chapter on decision making and also
Chapter 6 on data management and Chapter 13 on building systems and
information requirements.
2. Use the web to do more research on the company. Try to find out more about
its strategy, competitors, and business challenges. Additionally, look at the
company’s social media channels over the past 12 months. Are there any
trends you can identify or certain themes the social media channels seem to
focus on?
3. If you don’t have experience with the BI software tools required for the job,
use the web to learn more about these tools and how other healthcare com-
panies are using them. Go to websites of major consulting companies such
as McKinsey & Co., Boston Consulting Group, Bain & Co., and Accenture to
read their research articles on how technology is changing the healthcare
service industry.
4. Be prepared to bring samples of the querying/reporting work you have done
in your course work and your Microsoft Access proficiency.
REVIEW SUMMARY
12-1 What are the different types of decisions, and how does the decision-making process work?
The different levels in an organization (strategic, management, operational) have different
decision-making requirements. Decisions can be structured, semi-structured, or unstructured, with
structured decisions clustering at the operational level of the organization and unstructured deci-
sions at the strategic level. Decision making can be performed by individuals or groups and includes
employees as well as operational, middle, and senior managers. There are four stages in decision
making: intelligence, design, choice, and implementation.
484 Part Three Key System Applications for the Digital Age
12-2 How do information systems support the activities of managers and management decision
making?
Early classical models of managerial activities stress the functions of planning, organizing, coordi-
nating, deciding, and controlling. Contemporary research looking at the actual behavior of managers
has found that managers’ real activities are highly fragmented, variegated, and brief in duration and
that managers shy away from making grand, sweeping policy decisions.
Information technology provides new tools for managers to carry out both their traditional and
newer roles, enabling them to monitor, plan, and forecast with more precision and speed than ever
before and to respond more rapidly to the changing business environment. Information systems
have been most helpful to managers by providing support for their roles in disseminating informa-
tion, providing liaisons between organizational levels, and allocating resources. However, informa-
tion systems are less successful at supporting unstructured decisions. Where information systems
are useful, information quality, management filters, and organizational culture can degrade decision
making.
12-3 How do business intelligence and business analytics support decision making?
Business intelligence and analytics promise to deliver correct, nearly real-time information to
decision makers, and analytic tools help them quickly understand the information and take action.
A business intelligence environment consists of data from the business environment, the BI infra-
structure, a BA toolset, managerial users and methods, a BI delivery platform (MIS, DSS, or ESS), and
the user interface. There are six analytic functionalities that BI systems deliver to achieve these ends:
predefined production reports, parameterized reports, dashboards and scorecards, ad hoc queries and
searches, the ability to drill down to detailed views of data, and the ability to model scenarios and cre-
ate forecasts. BI analytics are starting to handle big data. Predictive analytics, location analytics, and
operational intelligence are important analytic capabilities.
12-4 How do different decision-making constituencies in an organization use business intelligence,
and what is the role of information systems in helping people working in a group make decisions
more efficiently?
Operational and middle management are generally charged with monitoring the performance of
their firm. Most of the decisions they make are fairly structured. Management information systems
(MIS) producing routine production reports are typically used to support this type of decision mak-
ing. For making unstructured decisions, middle managers and analysts will use decision-support
systems (DSS) with powerful analytics and modeling tools, including spreadsheets and pivot tables.
Senior executives making unstructured decisions use dashboards and visual interfaces displaying key
performance information affecting the overall profitability, success, and strategy of the firm. The
balanced scorecard and business performance management are two methodologies used in design-
ing executive support systems (ESS). Group decision-support systems (GDSS) help people working
together in a group arrive at decisions more efficiently.
Key Terms
Balanced scorecard method, 478
Behavioral models, 465
Business performance management (BPM), 479
Choice, 463
Classical model of management, 465
Data visualization, 469
Decisional role, 465
Design, 463
Drill down, 479
Geographic information systems (GIS), 475
Group decision-support systems (GDSS), 481
Implementation, 463
Informational role, 465
Intelligence, 463
Interpersonal role, 465
Key performance indicators (KPIs), 478
Location analytics, 474
Managerial roles, 465
Operational intelligence, 474
Pivot table, 477
Predictive analytics, 472
Semi-structured decisions,463
Sensitivity analysis, 477
Structured decisions, 462
Unstructured decisions, 462
Chapter 12 Enhancing Decision Making 485
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Hands-On MIS Projects
The projects in this section give you hands-on experience identifying opportunities for DSS, using a spread-
sheet pivot table to analyze sales data, and using online retirement planning tools for financial planning. Visit
MyMIS Lab’s Multimedia Library to access this chapter’s Hands-On MIS Projects.
Management Decision Problems
12-8 Dealerships for Subaru and other automobile manufacturers keep records of the mileage of cars they
sell and service. Mileage data are used to remind customers of when they need to schedule service
appointments, but they are used for other purposes as well. What kinds of decisions does this piece of
Review Questions
12-1 What are the different types of decisions, and
how does the decision-making process work?
• List and describe the different levels of
decision making and decision-making
constituencies in organizations. Explain
how their decision-making requirements
differ.
• Distinguish between unstructured, semi-
structured, and structured decisions.
• List and describe the stages in decision
making.
12-2 How do information systems support the
activities of managers and management
decision making?
• Compare the descriptions of managerial
behavior in the classical and behavioral
models.
• Identify the specific managerial roles that
can be supported by information systems.
12-3 How do business intelligence and business
analytics support decision making?
• Define and describe business intelligence
and business analytics.
• List and describe the elements of a busi-
ness intelligence environment.
• List and describe the analytic functional-
ities provided by BI systems.
• Define predictive analytics, location
analytics, and operational intelligence and
give an example of each.
12-4 How do different decision-making
constituencies in an organization use business
intelligence, and what is the role of information
systems in helping people working in a group
make decisions more efficiently?
• List each of the major decision-making
constituencies in an organization and de-
scribe the types of decisions each makes.
• Describe how MIS, DSS, or ESS provide
decision support for each of these groups.
• Define and describe the balanced score-
card method and business performance
management.
• Define a group decision-support system
(GDSS) and explain how it differs from
a DSS.
Discussion Questions
12-5 As a manager or user of information
systems, what would you need to know to
participate in the design and use of a DSS or
an ESS? Why?
12-6 If businesses used DSS, GDSS, and ESS more
widely, would managers and employees
make better decisions? Why or why not?
MyLab MIS
MyLab MIS
12-7 How much can business intelligence and
business analytics help companies refine
their business strategy? Explain your
answer.
MyLab MIS
486 Part Three Key System Applications for the Digital Age
data support at the local level and at the corporate level? What would happen if this piece of data
were erroneous, for example, showing mileage of 130,000 instead of 30,000? How would it affect
decision making? Assess its business impact.
12-9 Applebee’s is the largest casual dining chain in the world, with more than 1,900 locations
throughout the United States and in 20 other countries. The menu features beef, chicken, and
pork items as well as burgers, pasta, and seafood. Applebee’s CEO wants to make the restaurant
more profitable by developing menus that are tastier and contain more items that customers
want and are willing to pay for despite rising costs for gasoline and agricultural products. How
might business intelligence help management implement this strategy? What pieces of data
would Applebee’s need to collect? What kinds of reports would be useful to help management
make decisions on how to improve menus and profitability?
Improving Decision Making: Using Pivot Tables to Analyze Sales Data
Software skills: Pivot tables
Business skills: Analyzing sales data
12-10 This project gives you an opportunity to learn how to use Excel’s PivotTable feature to analyze
a database or data list. Use the data file for Online Management Training Inc. described earlier
in the chapter. This is a list of the sales transactions at OMT for one day. You can find this
spreadsheet file at MyLab MIS. Use Excel’s PivotTable to help you answer the following questions:
• Where are the average purchases higher? The answer might tell managers where to focus mar-
keting and sales resources, or pitch different messages to different regions.
• What form of payment is the most common? The answer could be used to emphasize in adver-
tising the most preferred means of payment.
• Are there any times of day when purchases are most common? Do people buy more products
while at work (likely during the day) or at home (likely in the evening)?
• What’s the relationship between region, type of product purchased, and average sales price?
We provide instructions on how to use Excel PivotTables in our Learning Tracks.
Improving Decision Making: Using a Web-Based DSS for Retirement Planning
Software skills: Internet-based software
Business skills: Financial planning
12-11 This project will help develop your skills in using web-based DSS for financial planning.
The websites for CNN Money and Kiplinger feature web-based DSS for financial planning and
decision making. Select either site to plan for retirement. Use your chosen site to determine how much
you need to save to have enough income for your retirement. Assume that you are 50 years old and sin-
gle and plan to retire in 17 years. You have $100,000 in savings. Your current annual income is $85,000.
Your goal is to be able to generate an annual retirement income of $60,000, including Social Security
payments.
Use the website you have selected to determine how much money you need to save to help you
achieve your retirement goal. If you need to calculate your estimated Social Security payments, use the
Quick Calculator at the Social Security Administration website.
Critique the site—its ease of use, its clarity, the value of any conclusions reached, and the extent
to which the site helps investors understand their financial needs and the financial markets.
Collaboration and Teamwork Project
Investigating Data-Driven Analytics in Sports
12-12 With three or four of your classmates, select a sport, such as football, baseball, basketball, or soccer.
Use the web to research how the sport uses data and analytics to improve team performance or
increase ticket sales to events. If possible, use Google Docs and Google Drive or Google Sites to brain-
storm, organize, and develop a presentation of your findings for the class.
Chapter 12 Enhancing Decision Making 487
General Electric (GE), one of the world’s larg-est industrial companies with products rang-ing from turbines to jet engines to medical
equipment, has been transitioning to a much more
technology-centric business strategy and business
model. Jeffrey Immelt, GE’s CEO from 2000 to 2017,
wanted to turn GE into a top 10 software company
by 2020. In 2015 GE set up GE Digital as its own
business within the industrial conglomerate for this
purpose.
GE has been focusing on electric power genera-
tors, jet engines, locomotives, and oil-refining gear,
and the software to connect these devices to the
cloud. The company is using sensor-generated data
from industrial machines to help customers monitor
equipment performance, prevent breakdowns, and
assess the machines’ overall health. This emerging
technology opened new opportunities for GE cus-
tomers to analyze their IoT data while also helping
to transform GE from a traditional manufacturer to a
modern digital business.
In a number of industries, improving the produc-
tivity of existing assets by even a single percentage
point can generate significant benefits. This is true of
the oil and gas sector, where average recovery rate of
an oil well is 35 percent. That means 65 percent of a
well’s potential is left in the earth because available
technology makes it too expensive to extract. If tech-
nology can help oil extraction companies raise the
recovery rate from 35 to 36 percent, the world’s out-
put will increase by 80 billion barrels—the equivalent
of three years of global supply.
The oil and gas industry is also deeply affected
by unplanned downtime, when equipment cannot
operate because of a malfunction. A single unproduc-
tive day on a platform can cost a liquefied natural
gas (LNG) facility as much as $25 million, and an
average midsized LNG facility experiences about five
down days a year. That’s $125 to $150 million lost.
Minimizing downtime is critical, especially consider-
ing declining revenues from lower energy prices. GE
sees a $1 billion opportunity for its IoT software.
The foundation for all of GE’s Industrial Internet
(IoT) applications is Predix, a software platform
launched in 2015 to collect data from industrial sen-
sors and analyze the information in the cloud. Predix
can run on any cloud infrastructure. The platform
has open standards and protocols that allow custom-
ers to more easily and quickly connect their ma-
chines to the Industrial Internet. The platform can
accommodate the size and scale of industrial data
for every customer at current levels of use, but it
also has been designed to scale up as demand grows.
Predix can offer apps developed by other compa-
nies as well as GE, is available for on-premises or
cloud-based deployment, and can be extended by
customers with their own data sources, algorithms,
and code. Customers may develop their own cus-
tom applications for the Predix platform. GE is also
building a developer community to create apps that
can be hosted on Predix. Predix is not limited to in-
dustrial applications. It could be used for analyzing
data in healthcare systems, for example. GE now has
a Health Cloud running on Predix. Data security is
embedded at all platform application layers, and this
is essential for companies linking their operations to
the Internet.
GE currently uses Predix to monitor and maintain
its own industrial products, such as wind turbines,
jet engines, and hydroelectric turbine systems.
Predix is able to provide GE corporate customers’
machine operators and maintenance engineers with
real-time information to schedule maintenance
checks, improve machine efficiency, and reduce
downtime. Helping customers collect and use this
operational data proactively would lower costs in
GE service agreements. When GE agrees to provide
service for a customer’s machine, it often comes with
a performance guarantee. Proactive identification of
potential issues that also takes the cost out of shop
visits helps the customer and helps GE.
In early 2013, GE began to use Predix to
analyze data across its fleet of machines. By iden-
tifying what made one machine more efficient or
downtime-prone than another, GE could more tightly
manage its operations. For example, by using high-
performance analytics, GE learned that some of its
jet aircraft engines were beginning to require more
frequent unscheduled maintenance. By collecting
massive amounts of data and analyzing the data
across its entire fleet of machines, GE was able to
cluster engine data by operating environment. The
Is Predix GE’s Future?
CASE STUDY
488 Part Three Key System Applications for the Digital Age
company found that the hot and harsh environments
in the Middle East and China caused engines to clog,
heat up, and lose efficiency, so they required more
maintenance. GE found that engines had far fewer
of these problems if they were washed more fre-
quently. Fleet analytics helped GE increase engine
lifetime and reduce engine maintenance. The com-
pany thinks it can save its customers an average of
$7 million of jet airplane fuel annually because their
engines will be more efficient.
Predix is starting to provide solutions for GE cus-
tomers. The New York Power Authority, the nation’s
largest state-owned utility, has been working with
GE Digital to build apps that improve the efficiency
of its power generation and distribution network.
Pilot projects with GE have saved the utility $3 mil-
lion in costs. The goal is $500 million in savings over
the next decade. British oil and gas company BP plc
switched from its own software to Predix to monitor
conditions in its oil wells. By the end of 2015, BP had
equipped 650 of its thousands of oil wells with GE
sensors linked to Predix. Each well was outfitted with
20 to 30 sensors to measure pressure and tempera-
ture, transmitting 500,000 data points to the Predix
cloud every 15 seconds. BP hopes to use the data to
predict well flows and the useful life of each well,
and ultimately to obtain an enterprise-wide view of
its oil fields’ performance.
GE identified pipeline risk management as a
major challenge for the oil and gas industry. There
are 2 million miles of transmission pipe throughout
the globe, moving liquid oil or gas from its point of
extraction to refining, processing, or market. Pipeline
spills are not frequent, but when they occur, they
cause serious economic and environmental damage
as well as bad publicity for pipeline operators and en-
ergy companies. Pipeline operators are always anx-
ious to know where their next rupture will be, but
they formerly lacked the data to measure pipeline
fitness. Operators had no way of integrating multiple
sources of data into one place so they could see and
understand the risk in their pipelines.
GE developed a pipeline-management software
suite for accessing, managing, and integrating critical
data for the safe management of pipelines, including
a risk assessment tool to monitor aging infrastruc-
ture. GE’s risk-assessment solution combines internal
and external factors (such as flooding) to provide an
accurate, up-to-the minute visual representation of
where risk exists in a pipeline. This risk assessment
tool enables pipeline operators to see how recent
events affect their risk and make real-time decisions
about where field service crews should be deployed
along the pipeline. The risk assessment tool visual-
ization and analytics capabilities run on Predix.
GE is also pulling data from weather systems and
dig-reporting services to provide a more compre-
hensive view of a pipeline network. Weather has a
sizable impact on risk for pipelines in areas prone to
seismic activity, waterways, and washouts. Checking
weather patterns along thousands of miles of pipe for
rain or flood zones, and integrating those data with
other complex pipeline data sets is very difficult to
perform manually. But by bringing all relevant data
together in one place, GE gives pipeline operators
easier access to information to help them address
areas with the greatest potential impact.
Besides being able to examine all current risk,
pipeline operators would benefit from a “what-if” cal-
culation tool to model hypothetical scenarios, such
as assessing the impact of adjusting operating pres-
sures or addressing particular areas of corrosive pipe.
GE would give them the tools for a color-coded view
of how those actions affect pipeline risk.
Although few businesses have the capital or in-
frastructure to operate a platform for integrating
and analyzing IoT data, GE faces competition from
many sources, including giant cloud services sup-
pliers like Amazon, Microsoft, and Google; major
business software companies like Oracle, SAP, IBM,
and SAS Institute; industrial conglomerates like
Siemens, Honeywell, and ABB; and start-ups like C3
IoT, Uptake, and FogHorn Systems. GE’s advantage is
its longstanding relationships with customers. So far,
only 8 percent of GE’s industrial customers are using
Predix portfolio products.
In November 2017, Jeff Flannery, who had suc-
ceeded Immelt as GE’s CEO, announced that spend-
ing on GE Digital and Predix would be cut by more
than 25 percent, or $400 million. Digital initiatives
are still critical to the company nevertheless, and
Flannery wants Predix to generate $1 billion in an-
nual revenue. However, Flannery wants this accom-
plished via a “more focused” strategy. In July 2018
the company announced it was seeking a buyer for
key parts of its digital unit.
GE had greatly underestimated the challenges
of creating all the software needed for analyzing
Internet of Things (IoT) data to improve business
processes across a wide range of industries. GE’s
technical expertise lies in designing and manufactur-
ing machines like power jet engines, plant turbines,
Chapter 12 Enhancing Decision Making 489
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
12-17 Identify and describe three factors that prevent managers from making good decisions.
12-18 Give three examples of data used in location analytics and explain how each can help businesses.
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12-13 How is GE changing its business strategy and
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12-14 On what business functions and level of deci-
sion making is GE focusing?
12-15 Describe three kinds of decisions that can be
supported using Predix. What is the value to
the firm of each of those decisions? Explain.
12-16 To what extent is GE becoming a software
company? Explain your answer.
http://www.ge.com
490 Part Three Key System Applications for the Digital Age
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491
Building and Managing
Systems
PART FOUR shows how to use the knowledge acquired in earlier chapters to analyze and
design information system solutions to business problems. This part answers questions such
as these: How can I develop a solution to an information system problem that provides genu-
ine business benefits? How can the firm adjust to the changes introduced by the new system
solution? What alternative approaches are available for building system solutions?
PART FOUR
CHAPTER 13
Building Information Systems
CHAPTER 14
Managing Projects
CHAPTER 15
Managing Global Systems
492
MyLab MIS
Discussion Questions: 13-6, 13-7, 13-8; Hands-on MIS Projects: 13-9, 13-10, 13-11, 13-12;
Writing Assignments: 13-19, 13-20; eText with Conceptual Animations
CHAPTER CASES
Cameron International Builds a New System
for Financial Reporting
Carter’s Redesigns Its Business Processes
Systems Development Is Different for Mobile
Apps
Hitachi Consulting Moves Human Resources
to the Cloud
VIDEO CASES
IBM: Business Process Management in a
SaaS Environment
IBM Helps the City of Madrid with Real-Time
BPM Software
Instructional Videos:
BPM Business Process Management
Customer Story
Workflow Management Viisualized
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
13-1 How does building new systems
produce organizational change?
13-2 What are the core activities in the
systems development process?
13-3 What are the principal methodologies
for modeling and designing systems?
13-4 What are alternative methods for
building information systems?
13-5 What are new approaches for system
building in the digital firm era?
13-6 How will MIS help my career?
Building Information Systems13CHAPTER
493
Cameron International Corporation is a subsidiary of Schlumberger Holdings Corporation and is a global provider of pressure control, pro-cessing, flow control, and compression systems as well as project man-
agement and aftermarket services for the oil and gas and process industries.
Headquartered in Houston, Texas, Cameron has approximately 23,000 employ-
ees and maintains a sales and service network that spans five continents.
In 2010 Cameron embarked on an enterprise-wide standardization project to
simplify its information technology platform and financial reporting processes.
The company consolidated to five profit centers on five business units, with a new
reporting structure. Manufacturing plants were to roll up their financial data to
profit centers for reporting information such as profit and loss (P&L) statements.
This consolidation made it possible
for senior managers to use an aggre-
gate view of profit center data to better
evaluate the overall financial health
of the company. However, Cameron’s
systems were unable to provide views
of data at the manufacturing plant
level. Managers seeking plant-level re-
porting had to input data into one sys-
tem and then review it in another.
Cameron needed a solution that
would include financial data at the
plant level in a central, consolidation
application. The company evaluated
several planning and consolida-
tion software tools and selected SAP
Business Planning and Consolidation
(SAP BPC) version 7.5. The BPC soft-
ware delivers planning, budgeting, forecasting, and financial consolidation ca-
pabilities in a single application. SAP BPC did provide reporting at the plant
level and could be integrated with SAP’s ERP system, which Cameron was
already using. Each plant would be able to see its P&L statements and any
variances as well as data aggregated by profit center.
Cameron implemented the new SAP planning and consolidation system in
stages, starting with its U.S. locations, and it ran the system in parallel with its
legacy system for a set period. During the parallel rollout, Cameron matched
the data from the two systems to ensure the financial data was correct. After
running successfully in parallel for two months, the new system went live
throughout the company and the legacy system was retired.
Cameron International Builds a New System
for Financial Reporting
© A. Singkham/123RF
494 Part Four Building and Managing Systems
Customization of the SAP software was required. Cameron made soft-
ware modifications to customize business rules for U.S. eliminations of inter-
company transactions. It also used plug-ins to rectify timing differences during
data loading. (A plug-in is a software module that can easily be installed to add
a specific feature or service to an existing computer program.)
End users, who comprised two-thirds of the project team, actively participated
in the development and implementation of the new system. Business users from
finance provided systems developers with details about their reporting needs.
End users helped review the system’s reporting capabilities and outputs to im-
prove the reports prior to putting the system into production. This also helped
familiarize users with the new system. Management was pleased because the
new system produced financial statements rapidly, exactly the way the business
wanted. Implementation of the new system went smoothly, on time and on bud-
get. The new system is more user-friendly, with tools to help finance business
users to do more on their own without assistance from IT staff.
With SAP BPC, Cameron has moved from manually pulling data to seamless
automation. Users of the new system need only double-click on a profit center
to see the data in detail. They can see how many plants there are and the data
for each plant. With the legacy system, it took a full day of manual effort to
ensure consolidation was done correctly. Business users were spending 90 per-
cent of their time assembling the data and only 10 percent on analyzing infor-
mation. The level of automation in the new system enables Cameron’s business
users to now spend 90 percent of their time analyzing reporting results.
Sources: www.sap.com, accessed January 5, 2018; Lauren Bonneau, “Cameron Achieves
Complete Plant-Level Visibility with SAP Business Planning and Consolidation,” SAP Insider
Profiles, October 30, 2017; and www.cameron.slb.com, accessed January 5, 2018.
Cameron’s experience illustrates some of the steps required to design and build new information systems. Building a new system for financial con-
solidation entailed analyzing the organization’s problems with existing systems,
assessing information requirements, selecting appropriate technology, and rede-
signing business processes and jobs. Management had to oversee the systems-
building effort and evaluate benefits and costs. The information requirements
were incorporated into the design of the new system, which represented a pro-
cess of planned organizational change.
The chapter-opening case calls attention to important points raised by this
case and this chapter. Cameron had reorganized around five profit centers. Its
ability to analyze its financial data by both manufacturing plant and profit cen-
ter levels was hampered by an outdated legacy consolidation system and ineffi-
cient manual processes, which raised costs and slowed down work, and limited
the company’s ability to quickly and thoroughly analyze its financial data.
The solution was to implement a new business planning and consolidation
system that could provide reporting at both manufacturing plant and profit
center levels. Cameron’s information requirements were incorporated into the
system design. The system was more user-friendly. The solution encompassed
not just the application of new technology, but changes to corporate culture,
business processes, and job functions. Cameron’s finance function was able to
spend more time on planning and analysis.
http://www.sap.com
http://www.cameron.slb.com
Chapter 13 Building Information Systems 495
Here are some questions to think about: How did Cameron’s new SAP BPC
system meet its information requirements? How much did the new system
change the way Cameron ran its business?
13-1 How does building new systems produce
organizational change?
Building a new information system is one kind of planned organizational
change. The introduction of a new information system involves much more
than new hardware and software. It also includes changes in jobs, skills, man-
agement, and organization. When we design a new information system, we are
redesigning the organization. System builders must understand how a system
will affect specific business processes and the organization as a whole.
Systems Development and Organizational Change
Information technology can promote various degrees of organizational change,
ranging from incremental to far-reaching. Figure 13.1 shows four kinds of struc-
tural organizational change that are enabled by information technology: (1) au-
tomation, (2) rationalization, (3) business process redesign, and (4) paradigm
shifts. Each carries different risks and rewards.
The most common form of IT-enabled organizational change is automation.
The first applications of information technology involved assisting employ-
ees with performing their tasks more efficiently and effectively. Calculating
paychecks and payroll registers, giving bank tellers instant access to customer
deposit records, and developing a nationwide reservation network for airline
ticket agents are all examples of early automation.
A deeper form of organizational change—one that follows quickly from early
automation—is rationalization of procedures. Automation frequently re-
veals new bottlenecks in production and makes the existing arrangement of
Technology
Information
System
Business
Solution
Business
Problem
Management
Organization
Planning and
Consolidation System
• Select system
solution
• Monitor project
• Redesign
financial
reporting
process
• Change
financial
reporting
structure
• SAP BPC
• Save time
• Reduce costs
• SAP ERP
• Inecient manual processes
• New organizational reporting
units
• Antiquated legacy systems
• Provide reporting by plant and
profit center
• Plug-ins
• Custom script
496 Part Four Building and Managing Systems
procedures and structures painfully cumbersome. Rationalization of procedures
is the streamlining of standard operating procedures. For example, Cameron
International’s new system for financial reporting is effective not only because
it uses computer technology but also because the company simplified its busi-
ness processes for this function. Fewer manual steps are required.
Rationalization of procedures is often found in programs for making a series
of continuous quality improvements in products, services, and operations, such
as total quality management (TQM) and Six Sigma. Total quality management
(TQM) makes achieving quality an end in itself and the responsibility of all
people and functions within an organization. TQM derives from concepts de-
veloped by American quality experts such as W. Edwards Deming and Joseph
Juran, but it was popularized by Japanese organizations. Six Sigma is a specific
measure of quality, representing 3.4 defects per million opportunities. Most
companies cannot achieve this level of quality but use six sigma as a goal for
driving ongoing quality improvement programs.
A more powerful type of organizational change is business process redesign,
in which business processes are analyzed, simplified, and redesigned. Business
process redesign reorganizes workflows, combining steps to cut waste and elim-
inate repetitive, paper-intensive tasks. (Sometimes the new design eliminates
jobs as well.) It is much more ambitious than rationalization of procedures,
requiring a new vision of how the process is to be organized. The Interactive
Session on Organizations presents another example.
Rationalizing procedures and redesigning business processes are limited to
specific parts of a business. New information systems can ultimately affect the
design of the entire organization by transforming how the organization carries
out its business or even the nature of the business. For instance, the long-haul
trucking and transportation firm Schneider National used new information sys-
tems to change its business model. Schneider created a new business managing
FIGURE 13.1 ORGANIZATIONAL CHANGE CARRIES RISKS AND REWARDS
The most common forms of organizational change are automation and rationalization.
These relatively slow-moving and slow-changing strategies present modest returns but
little risk. Faster and more comprehensive change—such as redesign and paradigm
shifts—carries high rewards but offers substantial chances of failure.
Low
Paradigm shifts
Low
High
RISK
RETURN
High
Redesign
Automation
Rationalization
Chapter 13 Building Information Systems 497
Carter’s has built a big business dressing little ones
and you probably wore some of its products when
you were growing up. This company is the largest
U.S. branded marketer of apparel exclusively for ba-
bies and young children, and includes the OshKosh
B’gosh brand. Carter’s merchandise is sold online,
in over 1,000 company stores in the United States
and Canada, and in 18,000 department and specialty
stores. The company has annual revenue exceeding
$3 billion and is based in Atlanta, Georgia. Carter’s
financial systems handle hundreds of thousands of
transactions each day.
Until recently, the systems Carter’s used to pro-
cess these transactions were heavily manual and
paper-based and could no longer keep pace with the
company’s growth or the increasingly digital busi-
ness environment. For many years that company
had relied on more than 20 legacy financial systems,
some of which were homegrown and antiquated. If
the systems did not integrate with each other as they
should, Carter’s used manual processes to keep ev-
erything working together. This created bottlenecks
that slowed down processing and also increased
the chances of human error. For example, manag-
ing chargebacks required a great deal of manual
data entry and tracking down spreadsheets, emails,
folders, and faxes from various systems in order to
reconcile a specific chargeback to the appropriate
ledger. (A chargeback is the return of funds used to
make a purchase to the buyer if the buyer disputes
the purchase.)
Carter’s management wanted to transform the
role of the finance function from preoccupation with
transaction processing to focusing more on analyzing
financial data and guiding decision making. To ac-
complish this goal, the company needed process im-
provements in both the business’s finance processes
and technology. This meant streamlining and simpli-
fying financial processes so the finance department
had more time for analysis and reporting work. In
2015, Carter’s launched a “Vision to Value” initiative
to achieve this goal.
In addition to replacing outdated systems with
more up-to-date technology, including a centralized
enterprise resource planning (ERP) system, the proj-
ect provided an opportunity to modernize financial
processes. Carter’s selected SAP Business Suite 4 SAP
HANA (also known as SAP S/4HANA) software for
this purpose and worked with Deloitte Consultants
for assistance with systems integration and imple-
mentation. SAP S/4HANA is a business software
suite based on SAP’s proprietary HANA ultra-high-
speed data management and computing platform,
and is designed to support all day-to-day processes of
an enterprise. The new software solution had to in-
teract well with other related systems beyond finan-
cials such as order management systems and point
of sale systems. SAP S/4HANA offers integration to
multiple data sources from many different SAP and
non-SAP applications, financial and otherwise.
Business process redesign was as crucial to
the success of the project as new technology.
Implementing SAP software provided Carter’s with
the opportunity to transform older and inefficient
processes into modern processes reflecting best
practices for its line of business and its industry.
Carter’s had to benchmark its financial processes
against these best practices, many of which were
incorporated in the SAP software. Thorough bench-
marking required questioning the rationale behind
every core financial process. For each process based
on existing technology, the implementation had
to ask whether it could be redesigned on a new
technology platform to be more efficient. Carter’s
also examined whether the process would be bet-
ter served by remaining on a legacy system rather
than migrating to SAP S/4HANA. Carter’s decided
to keep a process on its existing system unless mi-
grating to SAP S/4HANA provided clear benefits.
For the systems that ran core financial processes,
SAP S/4HANA was superior.
In July 2016, Carter’s went live with
SAP S/4HANA Finance with the procure-to-pay,
invoice-to-cash, fixed assets, and record-to-report
processes supported by the new system. Moving
the procure-to-pay process to SAP S/4HANA in-
creased efficiency by eliminating manual data
entry and increasing the visibility of a transaction
as it flowed through the system. (Procure-to-pay is
the process of buying goods and includes the ini-
tial decision to make the purchase, the process of
selecting the goods, and the transaction to pay for
the goods purchased.) Instead of requiring various
phone calls, emails, and paper copies of supporting
INTERACTIVE SESSION ORGANIZATIONS
Carter’s Redesigns Its Business Processes
logistics for other companies. This more radical form of business change is
called a paradigm shift. A paradigm shift involves rethinking the nature of the
business and the nature of the organization.
Paradigm shifts and business process redesign often fail because extensive or-
ganizational change is so difficult to orchestrate (see Chapter 14). Why, then, do
so many corporations contemplate such radical change? Because the rewards
are equally high (see Figure 13.1). In many instances, firms seeking paradigm
shifts and pursuing reengineering strategies achieve stunning, order-of-magni-
tude increases in their returns on investment (or productivity). Some of these
success stories, and some failure stories, are included throughout this book.
Business Process Redesign
Like Cameron International, described in the chapter-opening case, many busi-
nesses today are trying to use information technology to improve their business
processes. Some of these systems entail incremental process change, but others
require more far-reaching redesign of business processes. To deal with these
changes, organizations are turning to business process management. Business
process management (BPM) provides a variety of tools and methodolo-
gies to analyze existing processes, design new processes, and optimize those
498 Part Four Building and Managing Systems
1. How did Carter’s previous business processes af-
fect its business performance?
2. What management, organization, and technology
factors contributed to Carter’s problems with its
business processes?
3. Diagram Carter’s old and redesigned business
process for paying an invoice.
4. Describe the role of technology in Carter’s
business process changes.
5. How did Carter’s redesigned business processes
change the way the company worked? What was
their business impact? Explain.
documentation, the software guides the process.
The SAP Invoice Management application enables a
centralized invoicing process by scanning, reading,
and filing invoices via optical character recognition
(OCR), which kicks off an invoice workflow through
a preset list of coders and approvers all the way to
invoice payment. Once invoice information has been
entered, it can be accessed automatically anywhere
along the process life cycle, and users can view all
information related to the invoice transaction on a
single screen. For example, when approving an in-
voice, the system makes it possible for Carter’s staff
to see the invoice data flowing to accounts payable to
start the payment process.
System-generated tracking of chargebacks and an
improved capability to monitor chargeback status in
the system has created significant time savings and
efficiencies in billing and collections. All the informa-
tion is in the SAP system, so whoever is approving
the chargeback can see all the history in one place. In
addition to chargeback history, once a chargeback is
approved, the system sends a specific chargeback to
a specific general ledger. The system has also made
processes for fixed assets more efficient by eliminat-
ing manual routing and spreadsheet dependence.
Sources: “Transforming a Retail Brand Leader with SAP S/4HANA
Finance,” events.sap.com, accessed February 24, 2018; Ken Mur-
phy, “A Next-Generation Finance Platform at Carter’s,” SAP Insider
Profiles, December 19, 2016; and www.corporate.carters.com, ac-
cessed February 26, 2018.
CASE STUDY QUESTIONS
http://events.sap.com
http://www.corporate.carters.com
Chapter 13 Building Information Systems 499
processes. BPM is never concluded because process improvement requires con-
tinual change. Companies practicing business process management go through
the following steps:
1. Identify processes for change: One of the most important strategic
decisions that a firm can make is not deciding how to use computers to
improve business processes but understanding what business processes
need improvement. When systems are used to strengthen the wrong busi-
ness model or business processes, the business can become more efficient
at doing what it should not do. As a result, the firm becomes vulnerable to
competitors who may have discovered the right business model. Consider-
able time and cost may also be spent improving business processes that have
little impact on overall firm performance and revenue. Managers need to
determine what business processes are the most important and how improv-
ing these processes will help business performance.
2. Analyze existing processes: Existing business processes should be modeled
and documented, noting inputs, outputs, resources, and the sequence of ac-
tivities. The process design team identifies redundant steps, paper-intensive
tasks, bottlenecks, and other inefficiencies.
3. Design the new process: Once the existing process is mapped and mea-
sured in terms of time and cost, the process design team will try to improve
the process by designing a new one. A new streamlined “to-be” process will
be documented and modeled for comparison with the old process.
4. Implement the new process: Once the new process has been thoroughly
modeled and analyzed, it must be translated into a new set of procedures
and work rules. New information systems or enhancements to existing
systems may have to be implemented to support the redesigned process.
The new process and supporting systems are rolled out into the business
organization. As the business starts using this process, problems are
uncovered and addressed. Employees working with the process may recom-
mend improvements.
5. Continuous measurement: Once a process has been implemented and
optimized, it needs to be continually measured. Why? Processes may deterio-
rate over time as employees fall back on old methods, or they may lose their
effectiveness if the business experiences other changes.
Figure 13.2 illustrates the “as-is” process for purchasing a book from a physi-
cal bookstore. Consider what happens when a customer visits a physical book-
store and searches its shelves for a book. If he or she finds the book, that person
takes it to the checkout counter and pays for it via credit card, cash, or check.
If the customer is unable to locate the book, he or she must ask a bookstore
clerk to search the shelves or check the bookstore’s inventory records to see if
it is in stock. If the clerk finds the book, the customer purchases it and leaves.
If the book is not available locally, the clerk inquires about ordering it for the
customer from the bookstore’s warehouse or from the book’s distributor or pub-
lisher. Once the ordered book arrives at the bookstore, a bookstore employee
telephones the customer with this information. The customer would have to go
to the bookstore again to pick up the book and pay for it. If the bookstore is un-
able to order the book for the customer, the customer would have to try another
bookstore. You can see that this process has many steps and might require the
customer to make multiple trips to the bookstore.
Figure 13.3 illustrates how the book-purchasing process can be redesigned
by taking advantage of the Internet. The customer accesses an online book-
store over the Internet from his or her computer. He or she searches the book-
store’s online catalog for the book he or she wants. If the book is available, the
500 Part Four Building and Managing Systems
customer orders the book online, supplying credit card and shipping address in-
formation, and the book is delivered to the customer’s home. If the online book-
store does not carry the book, the customer selects another online bookstore
and searches for the book again. This process has far fewer steps than those for
purchasing the book in a physical bookstore, requires much less effort on the
part of the customer, and requires less sales staff for customer service. The new
process is therefore much more efficient and time-saving.
The new process design needs to be justified by showing how much it re-
duces time and cost or enhances customer service and value. Management first
measures the time and cost of the existing process as a baseline. In our example,
FIGURE 13.2 AS-IS BUSINESS PROCESS FOR PURCHASING A BOOK FROM A PHYSICAL BOOKSTORE
Purchasing a book from a physical bookstore requires many steps to be performed by both the seller and the
customer.
Go to
bookstoreCustomer
Yes
Yes
Yes
No
No
No
Customer
Clerk
Clerk
Search
shelves
Book
available?
Clerk
searches
Return to
store
Place
order
Receive
book
Notify
customer
Purchase
book
Take book
home
Found Inquireabout ordering
Able to
order?
Purchase
book
Take book
home
Go to
another store
FIGURE 13.3 REDESIGNED PROCESS FOR PURCHASING A BOOK ONLINE
Using Internet technology makes it possible to redesign the process for purchasing a book so that it requires
fewer steps and consumes fewer resources.
Access online
bookstore
No
Yes
Enter order and
payment data
Receive book
in mail
Select other
online
bookstore
Search online
catalog
Book
available?
Chapter 13 Building Information Systems 501
the time required for purchasing a book from a physical bookstore might range
from 15 minutes (if the customer immediately finds what he or she wants)
to 30 minutes if the book is in stock but has to be located by sales staff. If the
book has to be ordered from another source, the process might take one or two
weeks and another trip to the bookstore for the customer. If the customer lives
far away from the bookstore, the time to travel to the bookstore would have to
be factored in. The bookstore will have to pay the costs for maintaining a physi-
cal store and keeping the book in stock, for sales staff on site, and for shipment
costs if the book has to be obtained from another location.
The new process for purchasing a book online might only take several min-
utes, although the customer might have to wait several days or a week to have
the book delivered and will have to pay a shipping charge. But the customer
saves time and money by not having to travel to the bookstore or make addi-
tional visits to pick up the book. Booksellers’ costs are lower because they do
not have to pay for a physical store location or for local inventory.
Although many business process improvements are incremental and ongo-
ing, there are occasions when more radical change must take place. Our ex-
ample of a physical bookstore redesigning the book-purchasing process so that
it can be carried out online is an example of this type of radical, far-reaching
change. When properly implemented, business process redesign produces dra-
matic gains in productivity and efficiency and may even change the way the
business is run. In some instances, it drives a “paradigm shift” that transforms
the nature of the business itself.
This actually happened in book retailing when Amazon challenged tradi-
tional physical bookstores with its online retail model and Kindle e-book reader.
By radically rethinking the way a book can be published, purchased, and sold,
Amazon and other online bookstores have achieved remarkable efficiencies,
cost reductions, and a whole new way of doing business.
BPM poses challenges. Executives report that the largest single barrier to
successful business process change is organizational culture. Employees do not
like unfamiliar routines and often try to resist change. This is especially true
of projects where organizational changes are very ambitious and far-reaching.
Managing change is neither simple nor intuitive, and companies committed to
extensive process improvement need a good change management strategy (see
Chapter 14).
Tools for Business Process Management
Many software firms provide tools for various aspects of BPM, including IBM,
Oracle, and TIBCO. These tools help businesses identify and document pro-
cesses requiring improvement, create models of improved processes, capture
and enforce business rules for performing processes, and integrate existing
systems to support new or redesigned processes. BPM software tools also pro-
vide analytics for verifying that process performance has been improved and
for measuring the impact of process changes on key business performance
indicators.
For example, American National Insurance Company, which offers life insur-
ance, medical insurance, property casualty insurance, and investment services,
used Pegasystems BPM software to streamline customer service processes across
four business groups. The software built rules to guide customer service repre-
sentatives through a single view of a customer’s information that was maintained
in multiple systems. By eliminating the need to juggle multiple applications si-
multaneously to handle customer and agent requests, the improved process in-
creased customer service representative workload capacity by 192 percent.
502 Part Four Building and Managing Systems
13-2 What are the core activities in the
systems development process?
New information systems are an outgrowth of organizational problem solving.
A new information system is built as a solution to some type of problem or set
of problems the organization perceives it is facing. The problem may be one in
which managers and employees realize that the organization is not performing
as well as expected or that the organization should take advantage of new op-
portunities to perform more successfully.
The activities that go into producing an information system solution to
an organizational problem or opportunity are called systems development.
Systems development is a structured kind of problem solved with distinct ac-
tivities. These activities consist of systems analysis, systems design, program-
ming, testing, conversion, and production and maintenance.
Figure 13.4 illustrates the systems development process. The systems de-
velopment activities depicted usually take place in sequential order. But some
of the activities may need to be repeated or some may take place simultane-
ously depending on the approach to system building that is being employed
(see Section 13-4).
Systems Analysis
Systems analysis is the analysis of a problem that a firm tries to solve with an
information system. It consists of defining the problem, identifying its causes,
specifying the solution, and identifying the information requirements that
must be met by a system solution.
The systems analyst creates a road map of the existing organization and sys-
tems, identifying the primary owners and users of data along with existing hard-
ware and software. The systems analyst then details the problems of existing
systems. By examining documents, work papers, and procedures, observing sys-
tem operations, and interviewing key users of the systems, the analyst can iden-
tify the problem areas and objectives a solution would achieve. Often, the solu-
tion requires building a new information system or improving an existing one.
FIGURE 13.4 THE SYSTEMS DEVELOPMENT PROCESS
Building a system can be broken down into six core activities.
P
ro
du
ct
io
n
an
d
M
ai
nt
en
an
ce
C
onversion
Testing
Pr
og
ra
m
m
in
g
System
design
Systems
Analysis
Chapter 13 Building Information Systems 503
The systems analysis also includes a feasibility study to determine whether
that solution is feasible, or achievable, from a financial, technical, and orga-
nizational standpoint. The feasibility study determines whether the proposed
system is expected to be a good investment, whether the technology needed for
the system is available and can be handled by the firm’s information systems
specialists, and whether the organization can handle the changes introduced by
the system.
Normally, the systems analysis process identifies several alternative solu-
tions that the organization can pursue and assess the feasibility of each. A writ-
ten systems proposal report describes the costs and benefits, and the advantages
and disadvantages, of each alternative. It is up to management to determine
which mix of costs, benefits, technical features, and organizational impacts rep-
resents the most desirable alternative.
Establishing Information Requirements
Perhaps the most challenging task of the systems analyst is to define the specific
information requirements that must be met by the chosen system solution. At
the most basic level, the information requirements of a new system involve
identifying who needs what information, where, when, and how. Requirements
analysis carefully defines the objectives of the new or modified system and de-
velops a detailed description of the functions that the new system must per-
form. Faulty requirements analysis is a leading cause of systems failure and high
systems development costs (see Chapter 14). A system designed around the
wrong set of requirements will either have to be discarded because of poor per-
formance or will need to undergo major modifications. Section 13-4 describes al-
ternative approaches to eliciting requirements that help minimize this problem.
Some problems do not require an information system solution but instead
need an adjustment in management, additional training, or refinement of existing
organizational procedures. If the problem is information-related, systems analysis
still may be required to diagnose the problem and arrive at the proper solution.
Systems Design
Systems analysis describes what a system should do to meet information re-
quirements, and systems design shows how the system will fulfill this objec-
tive. The design of an information system is the overall plan or model for that
system. Like the blueprint of a building or house, it consists of all the specifica-
tions that give the system its form and structure.
The systems designer details the system specifications that will deliver the
functions identified during systems analysis. These specifications should ad-
dress all of the managerial, organizational, and technological components of
the system solution. Table 13.1 lists the types of specifications that would be
produced during systems design.
Like houses or buildings, information systems may have many possible de-
signs. Each design represents a unique blend of technical and organizational
components. What makes one design superior to others is the ease and effi-
ciency with which it fulfills user requirements within a specific set of technical,
organizational, financial, and time constraints.
The Role of End Users
User information requirements drive the entire system-building effort. Users
must have sufficient control over the design process to ensure that the system
reflects their business priorities and information needs, not the biases of the
504 Part Four Building and Managing Systems
technical staff. Working on design increases users’ understanding and accep-
tance of the system. As we describe in Chapter 14, insufficient user involve-
ment in the design effort is a major cause of system failure. However, some
systems require more user participation in design than others, and Section 13-4
shows how alternative systems development methods address the user partici-
pation issue.
Completing the Systems Development Process
The remaining steps in the systems development process translate the solution
specifications established during systems analysis and design into a fully op-
erational information system. These concluding steps consist of programming,
testing, conversion, production, and maintenance.
Programming
During the programming stage, system specifications that were prepared
during the design stage are translated into software program code. Today,
many organizations no longer do their own programming for new systems.
Instead, they purchase the software that meets the requirements for a new
system from external sources such as software packages from a commercial
software vendor, software services from a software service provider, or out-
sourcing firms that develop custom application software for their clients (see
Section 13-4).
TABLE 13.1 SYSTEM DESIGN SPECIFICATIONS
OUTPUT
Medium
Content
Timing
INPUT
Origins
Flow
Data entry
USER INTERFACE
Simplicity
Efficiency
Logic
Feedback
Errors
DATABASE DESIGN
Logical data model
Volume and speed requirements
Record specifications
PROCESSING
Computations
Program modules
Required reports
Timing
MANUAL PROCEDURES
What activities
Who performs them
When
How
Where
CONTROLS
Input controls (characters, limit,
reasonableness)
Processing controls (consistency,
record counts)
Output controls (totals, samples
of output)
Procedural controls (passwords,
special forms)
SECURITY
Access controls
Catastrophe plans
Audit trails
DOCUMENTATION
Operations documentation
Systems documentation
User documentation
CONVERSION
Data conversion rules
Testing method
Conversion strategy
TRAINING
Training techniques
Training modules
ORGANIZATIONAL CHANGES
Task redesign
Job design
Process design
Organization structure design
Reporting relationships
Chapter 13 Building Information Systems 505
Testing
Exhaustive and thorough testing must be conducted to ascertain whether the
system produces the right results. Testing answers the question: Will the sys-
tem produce the desired results under known conditions? Some companies are
starting to use cloud computing services for this work.
The amount of time needed to answer this question has been traditionally un-
derrated in systems project planning (see Chapter 14). Testing is time- consuming:
Test data must be carefully prepared, results reviewed, and corrections made in
the system. In some instances, parts of the system may have to be redesigned.
The risks resulting from glossing over this step are enormous.
Testing an information system can be broken down into three types of activi-
ties: unit testing, system testing, and acceptance testing. Unit testing, or program
testing, consists of testing each program separately in the system. It is widely
believed that the purpose of such testing is to guarantee that programs are error-
free, but this goal is realistically impossible. Testing should be viewed instead as a
means of locating errors in programs, by focusing on finding all the ways to make
a program fail. Once they are pinpointed, problems can be corrected.
System testing tests the functioning of the information system as a whole. It
tries to determine whether discrete modules will function together as planned
and whether discrepancies exist between the way the system actually works
and the way it was conceived. Among the areas examined are performance
time, capacity for file storage and handling peak loads, recovery and restart ca-
pabilities, and manual procedures.
Acceptance testing provides the final certification that the system is ready
to be used in a production setting. Systems tests are evaluated by users and
reviewed by management. When all parties are satisfied that the new system
meets their standards, the system is formally accepted for installation.
The systems development team works with users to devise a systematic test
plan. The test plan includes all of the preparations for the series of tests we
have just described.
Figure 13.5 shows an example of a test plan. The general condition being
tested is a record change. The documentation consists of a series of test plan
FIGURE 13.5 A SAMPLE TEST PLAN TO TEST A RECORD CHANGE
When developing a test plan, it is imperative to include the various conditions to be
tested, the requirements for each condition tested, and the expected results. Test plans
require input from both end users and information systems specialists.
Address and Maintenance
“Record Change Series”
Procedure
Test
Ref.
Condition
Tested
Prepared by: Date: Version:
Change existing
record
key field Not allowed
“Invalid key”
message
“Deleted”
message
OK if valid
OK if valid
No change
Transaction
file
Transaction
file
Transaction
file
V45
V45
V45
Other fields
Deleted record must
be available
Change 2.1 above
Abort 2.5
Change records
Change nonexistent
record
Change deleted
record
Make second
record
Insert record
Abort during
change
Special Requirements
Expected
Results
Output
On
Next
Screen
Test Series 2
2.0
2.1
2.2
2.3
2.4
2.5
2.6
506 Part Four Building and Managing Systems
screens maintained on a database (perhaps a PC database) that is ideally suited
to this kind of application.
Conversion
Conversion is the process of changing from the old system to the new sys-
tem. Four main conversion strategies can be employed: the parallel strategy,
the direct cutover strategy, the pilot study strategy, and the phased approach
strategy.
In a parallel strategy, both the old system and its potential replacement
are run together for a time until everyone is assured that the new one func-
tions correctly. This is the safest conversion approach because, in the event of
errors or processing disruptions, the old system can still be used as a backup.
However, this approach is very expensive, and additional staff or resources may
be required to run the extra system.
The direct cutover strategy replaces the old system entirely with the new
system on an appointed day. It is a very risky approach that can potentially be
more costly than running two systems in parallel if serious problems with the
new system are found. There is no other system to fall back on. Dislocations,
disruptions, and the cost of corrections may be enormous.
The pilot study strategy introduces the new system to only a limited area
of the organization, such as a single department or operating unit. When this
pilot version is complete and working smoothly, it is installed throughout the
rest of the organization, either simultaneously or in stages.
The phased approach strategy introduces the new system in stages, either
by functions or by organizational units. If, for example, the system is intro-
duced by function, a new payroll system might begin with hourly workers who
are paid weekly, followed six months later by adding salaried employees (who
are paid monthly) to the system. If the system is introduced by organizational
unit, corporate headquarters might be converted first, followed by outlying op-
erating units four months later.
Moving from an old system to a new one requires that end users be trained to
use the new system. Detailed documentation showing how the system works
from both a technical and end-user standpoint is finalized during conversion
time for use in training and everyday operations. Lack of proper training and
documentation contributes to system failure, so this portion of the systems de-
velopment process is very important.
Production and Maintenance
After the new system is installed and conversion is complete, the system is
said to be in production. During this stage, the system will be reviewed by
both users and technical specialists to determine how well it has met its orig-
inal objectives and to decide whether any revisions or modifications are in
order. In some instances, a formal post-implementation audit document
is prepared. After the system has been fine-tuned, it must be maintained
while it is in production to correct errors, meet requirements, or improve
processing efficiency. Changes in hardware, software, documentation, or
procedures to a production system to correct errors, meet new require-
ments, or improve processing efficiency are termed maintenance. Routine
maintenance consumes a large percentage of many firms’ IT budgets, but
could be reduced significantly through more up-to-date systems-building
practices and technology. Table 13.2 summarizes the systems development
activities.
Chapter 13 Building Information Systems 507
13-3 What are the principal methodologies
for modeling and designing systems?
There are alternative methodologies for modeling and designing systems.
Structured methodologies and object-oriented development are the most
prominent.
Structured Methodologies
Structured methodologies have been used to document, analyze, and design
information systems since the 1970s. Structured refers to the fact that the tech-
niques are step by step, with each step building on the previous one. Structured
methodologies are top-down, progressing from the highest, most abstract level
to the lowest level of detail—from the general to the specific.
Structured development methods are process-oriented, focusing primarily
on modeling the processes, or actions that capture, store, manipulate, and dis-
tribute data as the data flow through a system. These methods separate data
from processes. A separate programming procedure must be written every time
someone wants to take an action on a particular piece of data. The procedures
act on data that the program passes to them.
The primary tool for representing a system’s component processes and the
flow of data between them is the data flow diagram (DFD). The data flow dia-
gram offers a logical graphic model of information flow, partitioning a system
into modules that show manageable levels of detail. It rigorously specifies the
processes or transformations that occur within each module and the interfaces
that exist between them.
Figure 13.6 shows a simple data flow diagram for a mail-in university course
registration system. The rounded boxes represent processes, which portray the
transformation of data. The square box represents an external entity, which
is an originator or receiver of information located outside the boundaries of
TABLE 13.2 SYSTEMS DEVELOPMENT
CORE ACTIVITY DESCRIPTION
Systems analysis Identify problem(s)
Specify solutions
Establish information requirements
Systems design Create design specifications
Programming Translate design specifications into program code
Testing Perform unit testing
Perform systems testing
Perform acceptance testing
Conversion Plan conversion
Prepare documentation
Train users and technical staff
Production and maintenance Operate the system
Evaluate the system
Modify the system
508 Part Four Building and Managing Systems
the system being modeled. The open rectangles represent data stores, which
are either manual or automated inventories of data. The arrows represent data
flows, which show the movement between processes, external entities, and
data stores. They contain packets of data with the name or content of each data
flow listed beside the arrow.
This data flow diagram shows that students submit registration forms with
their name, their identification number, and the numbers of the courses they
wish to take. In process 1.0, the system verifies that each course selected is still
open by referencing the university’s course file. The file distinguishes courses
that are open from those that have been canceled or filled. Process 1.0 then de-
termines which of the student’s selections can be accepted or rejected. Process
2.0 enrolls the student in the courses for which he or she has been accepted.
It updates the university’s course file with the student’s name and identifica-
tion number and recalculates the class size. If maximum enrollment has been
reached, the course number is flagged as closed. Process 2.0 also updates the
university’s student master file with information about new students or changes
in address. Process 3.0 then sends each student applicant a confirmation of reg-
istration letter listing the courses for which he or she is registered and noting
the course selections that could not be fulfilled.
The diagrams can be used to depict higher-level processes as well as lower-
level details. Through leveled data flow diagrams, a complex process can be
broken down into successive levels of detail. An entire system can be divided
into subsystems with a high-level data flow diagram. Each subsystem, in turn,
can be divided into additional subsystems with second-level data flow diagrams,
and the lower-level subsystems can be broken down again until the lowest level
of detail has been reached.
Another tool for structured analysis is a data dictionary, which contains in-
formation about individual pieces of data and data groupings within a system
FIGURE 13.6 DATA FLOW DIAGRAM FOR MAIL-IN UNIVERSITY
REGISTRATION SYSTEM
The system has three processes: Verify availability (1.0), Enroll student (2.0), and Confirm
registration (3.0). The name and content of each of the data flows appear adjacent to
each arrow. There is one external entity in this system: the student. There are two data
stores: the student master file and the course file.
Student
Course file
Open courses
Course
details
Course enrollment
Student details
Registration
Verify
availability
1.0
Accepted/
rejected-
selections
Confirmation
letter
Requested courses
Student master file
3.0
Confirm
registration
2.0
Enroll
student
Chapter 13 Building Information Systems 509
(see Chapter 6). The data dictionary defines the contents of data flows and data
stores so that systems builders understand exactly what pieces of data they con-
tain. Process specifications describe the transformation occurring within the
lowest level of the data flow diagrams. They express the logic for each process.
In structured methodology, software design is modeled using hierarchical
structure charts. The structure chart is a top-down chart, showing each level
of design, its relationship to other levels, and its place in the overall design
structure. The design first considers the main function of a program or system,
then breaks this function into subfunctions, and decomposes each subfunction
until the lowest level of detail has been reached. Figure 13.7 shows a high-level
structure chart for a payroll system. If a design has too many levels to fit onto
one structure chart, it can be broken down further on more detailed structure
charts. A structure chart may document one program, one system (a set of pro-
grams), or part of one program.
Object-Oriented Development
Structured methods are useful for modeling processes but do not handle the
modeling of data well. They also treat data and processes as logically separate
entities, whereas in the real world such separation seems unnatural. Different
modeling conventions are used for analysis (the data flow diagram) and for de-
sign (the structure chart).
Object-oriented development addresses these issues. Object-oriented de-
velopment uses the object as the basic unit of systems analysis and design.
An object combines data and the specific processes that operate on those data.
Data encapsulated in an object can be accessed and modified only by the opera-
tions, or methods, associated with that object. Instead of passing data to proce-
dures, programs send a message for an object to perform an operation that is
already embedded in it. The system is modeled as a collection of objects and
the relationships among them. Because processing logic resides within objects
rather than in separate software programs, objects must collaborate with each
other to make the system work.
Object-oriented modeling is based on the concepts of class and inheritance.
Objects belonging to a certain class, or general category of similar objects, have
the features of that class. Classes of objects in turn can inherit all the struc-
ture and behaviors of a more general class and then add variables and behav-
iors unique to each object. New classes of objects are created by choosing an
FIGURE 13.7 HIGH-LEVEL STRUCTURE CHART FOR A PAYROLL SYSTEM
This structure chart shows the highest or most abstract level of design for a payroll system, providing an
overview of the entire system.
Get valid
inputs
Calculate
pay
Write
outputs
Get
inputs
Validate
inputs
Calculate
gross pay
Calculate
net pay
Update
master file
Write checks,
reports, and
output files
Process
payroll
510 Part Four Building and Managing Systems
existing class and specifying how the new class differs from the existing class
instead of starting from scratch each time.
We can see how class and inheritance work in Figure 13.8, which illustrates
the relationships among classes concerning employees and how they are paid.
Employee is the common ancestor, or superclass, for the other three classes.
Salaried, Hourly, and Temporary are subclasses of Employee. The class name is
in the top compartment, the attributes for each class are in the middle portion
of each box, and the list of operations is in the bottom portion of each box. The
features that are shared by all employees (ID, name, address, date hired, posi-
tion, and pay) are stored in the Employee superclass, whereas each subclass
stores features that are specific to that particular type of employee. Specific
to hourly employees, for example, are their hourly rates and overtime rates.
A solid line from the subclass to the superclass is a generalization path show-
ing that the subclasses Salaried, Hourly, and Temporary have common features
that can be generalized into the superclass Employee.
Object-oriented development is more iterative and incremental than tradi-
tional structured development. During analysis, systems builders document
the functional requirements of the system, specifying its most important prop-
erties and what the proposed system must do. Interactions between the sys-
tem and its users are analyzed to identify objects, which include both data and
processes. The object-oriented design phase describes how the objects will be-
have and how they will interact with one another. Similar objects are grouped
together to form a class, and classes are grouped into hierarchies in which a
subclass inherits the attributes and methods from its superclass.
The information system is implemented by translating the design into pro-
gram code, reusing classes that are already available in a library of reusable
software objects, and adding new ones created during the object-oriented de-
sign phase. Implementation may also involve the creation of an object-oriented
database. The resulting system must be thoroughly tested and evaluated.
Because objects are reusable, object-oriented development could poten-
tially reduce the time and cost of writing software because organizations can
FIGURE 13.8 CLASS AND INHERITANCE
This figure illustrates how classes inherit the common features of their superclass.
Employee
id
name
address
dateHired
position
pay
Salaried
annualSalary
bonus
calcBonus
Hourly
hourlyRate
overtimeRate
calcOvertime
Temporary
dailyRate
ytdHours
determinePermEligibility
Chapter 13 Building Information Systems 511
reuse software objects that have already been created as building blocks for
other applications. New systems can be created by using some existing objects,
changing others, and adding a few new objects. Object-oriented frameworks
have been developed to provide reusable, semicomplete applications that the
organization can further customize into finished applications.
Computer-Aided Software Engineering
Computer-aided software engineering (CASE)—sometimes called computer-
aided systems engineering—provides software tools to automate the methodolo-
gies we have just described to reduce the amount of repetitive work in systems
development. CASE tools provide automated graphics facilities for producing charts
and diagrams, screen and report generators, data dictionaries, extensive reporting
facilities, analysis and checking tools, code generators, and documentation genera-
tors. CASE tools also have capabilities for validating design diagrams and specifica-
tions. Team members can share their work easily by accessing each other’s files
to review or modify what has been done. Modest productivity benefits can also be
achieved if the tools are used properly, which requires organizational discipline.
13-4 What are alternative methods for
building information systems?
Systems differ in terms of their size and technological complexity and in terms
of the organizational problems they are meant to solve. A number of systems-
building approaches have been developed to deal with these differences. This
section describes these alternative methods: the traditional systems life cycle,
prototyping, application software packages and cloud software services, end-
user development, and outsourcing.
Traditional Systems Life Cycle
The systems life cycle is the oldest method for building information systems.
The life cycle methodology is a phased approach to building a system, di-
viding systems development into formal stages, as illustrated in Figure 13.9.
Systems development specialists have different opinions on how to partition
the systems-building stages, but they roughly correspond to the stages of sys-
tems development we have just described.
The systems life cycle methodology maintains a formal division of labor
between end users and information systems specialists. Technical specialists,
such as systems analysts and programmers, are responsible for much of the
systems analysis, design, and implementation work; end users are limited to
providing information requirements and reviewing the technical staff’s work.
The life cycle also emphasizes formal specifications and paperwork, so many
documents are generated during the course of a systems project.
The systems life cycle is still used for building large, complex systems that re-
quire a rigorous and formal requirements analysis, predefined specifications, and
tight controls over the system-building process. However, the systems life cycle
approach can be costly, time-consuming, and inflexible. Although systems build-
ers can go back and forth among stages in the life cycle, the systems life cycle is
predominantly a “waterfall” approach in which tasks in one stage are completed be-
fore work for the next stage begins. Activities can be repeated, but volumes of new
512 Part Four Building and Managing Systems
documents must be generated and steps retraced if requirements and specifica-
tions need to be revised. This encourages freezing of specifications relatively early
in the development process. The life cycle approach is also not suitable for many
small desktop systems, which tend to be less structured and more individualized.
Prototyping
Prototyping consists of building an experimental system rapidly and inexpen-
sively for end users to evaluate. By interacting with the prototype, users can get
a better idea of their information requirements. The prototype endorsed by the
users can be used as a template to create the final system.
The prototype is a working version of an information system or part of the
system, but it is meant to be only a preliminary model. Once operational, the
prototype will be further refined until it conforms precisely to users’ require-
ments. Once the design has been finalized, the prototype can be converted to a
polished production system.
The process of building a preliminary design, trying it out, refining it, and
trying again has been called an iterative process of systems development be-
cause the steps required to build a system can be repeated over and over again.
Prototyping is more explicitly iterative than the conventional life cycle, and
it actively promotes system design changes. It has been said that prototyping
replaces unplanned rework with planned iteration, with each version more ac-
curately reflecting users’ requirements.
Steps in Prototyping
Figure 13.10 shows a four-step model of the prototyping process, which consists
of the following:
Step 1: Identify the user’s basic requirements. The systems designer (usually
an information systems specialist) works with the user only long
enough to capture the user’s basic information needs.
FIGURE 13.9 THE TRADITIONAL SYSTEMS DEVELOPMENT LIFE CYCLE
The systems development life cycle partitions systems development into formal stages,
with each stage requiring completion before the next stage can begin.
System Design
Programming
Testing
Conversion
Production and
Maintenance
Systems Analysis
Chapter 13 Building Information Systems 513
Step 2: Develop an initial prototype. The systems designer creates a working
prototype quickly, using tools for rapidly generating software.
Step 3: Use the prototype. The user is encouraged to work with the system to
determine how well the prototype meets his or her needs and to make
suggestions for improving the prototype.
Step 4: Revise and enhance the prototype. The system builder notes all changes
the user requests and refines the prototype accordingly. After the pro-
totype has been revised, the cycle returns to Step 3. Steps 3 and 4 are
repeated until the user is satisfied.
When no more iterations are required, the approved prototype then becomes
an operational prototype that furnishes the final specifications for the appli-
cation. Sometimes the prototype is adopted as the production version of the
system.
Advantages and Disadvantages of Prototyping
Prototyping is most useful when there is some uncertainty about requirements
or design solutions and is often used for designing an information system’s
end-user interface (the part of the system with which end users interact,
such as online display and data entry screens, reports, or web pages). Because
prototyping encourages intense end-user involvement throughout the systems
development life cycle, it is more likely to produce systems that fulfill user
requirements.
However, rapid prototyping can gloss over essential steps in systems
development. If the completed prototype works reasonably well, management
FIGURE 13.10 THE PROTOTYPING PROCESS
The process of developing a prototype can be broken down into four steps. Because a
prototype can be developed quickly and inexpensively, systems builders can go through
several iterations, repeating steps 3 and 4, to refine and enhance the prototype before
arriving at the final operational one.
Identify
basic
requirements
Develop a
working
prototype
Step 1
Step 2
Step 3
Step 4
NO
YES
Use the
prototype
User
satisfied?
Revise and
enhance the
prototype
Operational
prototype
514 Part Four Building and Managing Systems
may not see the need for reprogramming, redesign, or full documentation and
testing to build a polished production system. Some of these hastily constructed
systems may not easily accommodate large quantities of data or a large number
of users in a production environment.
End-User Development
End-user development allows end users, with little or no formal assistance
from technical specialists, to create simple information systems, reducing
the time and steps required to produce a finished application. Using user-
friendly query languages and reporting, website development, graphics, and
PC software tools, end users can access data, create reports, and develop simple
applications on their own with little or no help from professional systems ana-
lysts or programmers. A query language is a software tool that provides im-
mediate online answers to questions that are not predefined, such as “Who are
the highest-performing sales representatives?” Query languages are often tied
to data management software (see Chapter 6). For example, CEMEX, an inter-
national supplier of products for the construction industry, used Information
Builders WebFOCUS to create a self-service reporting portal to visualize finan-
cial and operational data.
On the whole, end-user-developed systems can be completed more rapidly
than those developed through the conventional systems life cycle. Allowing
users to specify their own business needs improves requirements gathering and
often leads to a higher level of user involvement and satisfaction with the sys-
tem. However, end-user software tools still cannot replace conventional tools
for some business applications because they cannot easily handle the process-
ing of large numbers of transactions or applications with extensive procedural
logic and updating requirements.
End-user computing also poses organizational risks because it occurs outside
of traditional mechanisms for information systems management and control.
When systems are created rapidly without a formal development methodology,
testing and documentation may be inadequate. Control over data can be lost in
systems outside the traditional information systems department. To help orga-
nizations maximize the benefits of end-user applications development, man-
agement should control the development of end-user applications by requiring
cost justification of end-user information system projects and by establishing
hardware, software, and quality standards for user-developed applications.
Application Software Packages, Software Services,
and Outsourcing
Chapter 5 points out that much of today’s software is not developed in-house
but is purchased from external sources. Firms can rent the software from an on-
line software service provider, they can purchase the software from a commer-
cial vendor as a package to run in-house, or they can have a custom application
developed by an outside outsourcing firm.
Application Software Packages and Cloud Software Services
Today many systems are based on commercially available application soft-
ware packages or cloud software as a service (SaaS). For example, companies
can choose to implement Oracle enterprise resource planning, supply chain
management, or human capital management software in-house or pay to use
this software running on the Oracle Cloud platform. Microsoft Office desktop
Chapter 13 Building Information Systems 515
productivity software comes in both desktop and cloud (Office 365) versions.
Many applications are common to all business organizations—for example, pay-
roll, accounts receivable, general ledger, or inventory control. For such univer-
sal functions with standard processes that do not change a great deal over time,
a more generic system will fulfill the requirements of many organizations.
If a commercial software package or cloud software service can fulfill most
of an organization’s requirements, the company does not have to write its own
software. The company can save time and money by using the prewritten, pre-
designed, pretested software programs from the software vendor. Package and
SaaS vendors supply much of the ongoing maintenance and support for the
system, including enhancements to keep the system in line with ongoing tech-
nical and business developments. When a package or SaaS solution is pursued,
end users will be responsible for supplying the business information require-
ments for the system, and information systems specialists will provide techni-
cal requirements.
If an organization has unique requirements that the package does not meet,
these tools include capabilities for customization. Customization features
allow a commercial software package or cloud-based software to be modified to
meet an organization’s unique requirements without destroying the integrity
of the software. (See the chapter-opening case on Cameron International and
the chapter-ending case on Hitachi Consulting for examples.) If a great deal
of customization is required, additional programming and customization work
may become so expensive and time-consuming that they negate many of the
advantages of software packages and services.
When a system is developed using an application software package or a cloud
software service, systems analysis will include a formal evaluation of the soft-
ware package or service in which both end users and information systems spe-
cialists will participate. The most important evaluation criteria are the functions
provided by the software, flexibility, user-friendliness, hardware requirements,
database requirements, installation and maintenance efforts, documentation,
vendor quality, and cost. The package or software service evaluation process
often is based on a request for proposal (RFP), which is a detailed list of
questions submitted to software vendors.
When software from an external source is selected, the organization no lon-
ger has total control over the systems design process. Instead of tailoring the
systems design specifications directly to user requirements, the design effort
will consist of trying to mold user requirements to conform to the features of
the package or software service. If the organization’s requirements conflict with
the way the package or software service works and this software cannot be cus-
tomized, the organization will have to adapt to the package or software service
and change its procedures.
Outsourcing
If a firm does not want to use its internal resources to build or operate infor-
mation systems, it can outsource the work to an external organization that
specializes in providing these services. Cloud computing and software as a
service (SaaS) providers, which we described in Chapter 5, are one form of
outsourcing. Subscribing companies use the software and computer hardware
provided by the service as the technical platform for their systems. In another
form of outsourcing, a company could hire an external vendor to design and
create the software for its system, but that company would operate the sys-
tem on its own computers. The outsourcing vendor might be domestic or in
another country.
516 Part Four Building and Managing Systems
Domestic outsourcing is driven primarily by the fact that outsourcing firms
possess skills, resources, and assets that their clients do not have. Installing a
new supply chain management system in a very large company might require
hiring an additional 30 to 50 people with specific expertise in supply chain
management software licensed from a vendor. Rather than hire permanent new
employees, most of whom would need extensive training in the new software,
and then release them after the new system is built, it makes more sense, and
is often less expensive, to outsource this work for a 12-month period.
In the case of offshore outsourcing, the decision is much more cost-driven.
A skilled programmer in India or Russia earns about $10,000–$30,000 per year
compared with about $60,000 or more per year for a comparable programmer
in the United States. The Internet and low-cost communications technology
have drastically reduced the expense and difficulty of coordinating the work of
global teams in offshore locations. In addition to cost savings, many offshore
outsourcing firms offer world-class technology assets and skills. Wage inflation
outside the United States has recently eroded some of these advantages, and
some jobs have moved back to the United States. Firms generally do not out-
source the conception, systems analysis, and design of IT systems to offshore
firms, but often do outsource programming, testing, maintenance, and daily
operation of IT systems.
A firm is most likely to benefit from outsourcing if it takes the time to evalu-
ate all the risks and to make sure outsourcing is appropriate for its particular
needs. Any company that outsources its applications must thoroughly under-
stand the project, including its requirements, method of implementation, an-
ticipated benefits, cost components, and metrics for measuring performance.
Many firms underestimate costs for identifying and evaluating vendors of in-
formation technology services, for transitioning to a new vendor, for improving
internal software development methods to match those of outsourcing vendors,
and for monitoring vendors to make sure they are fulfilling their contractual ob-
ligations. Companies will need to allocate resources for documenting require-
ments, sending out RFPs, handling travel expenses, negotiating contracts, and
project management. Experts claim it takes from three months to a full year to
fully transfer work to an offshore partner and make sure the vendor thoroughly
understands your business.
Outsourcing offshore incurs additional costs for coping with cultural differ-
ences that drain productivity and dealing with human resources issues, such as
terminating or relocating domestic employees. All of these hidden costs under-
cut some of the anticipated benefits from outsourcing. Firms should be espe-
cially cautious when using an outsourcer to develop or to operate applications
that give it some type of competitive advantage.
General Motors Corporation (GM) had outsourced 90 percent of its IT ser-
vices, including its data centers and application development. The company
later decided to bring 90 percent of its IT infrastructure in-house, with only
10 percent managed by outsourcers. Lowering costs is important, but GM’s
primary reason for cutting back outsourcing was to take back control of its
information systems, which it believes were preventing the company from
responding quickly to competitive opportunities. Bringing information systems
in-house will make it easier for GM to standardize and streamline its systems
and data centers. Figure 13.11 shows best- and worst-case scenarios for the total
cost of an offshore outsourcing project. It shows how much hidden costs affect
the total project cost. The best case reflects the lowest estimates for additional
costs, and the worst case reflects the highest estimates for these costs. As you
can see, hidden costs increase the total cost of an offshore outsourcing project
Chapter 13 Building Information Systems 517
by an extra 15 to 57 percent. Even with these extra costs, many firms will ben-
efit from offshore outsourcing if they manage the work well.
13-5 What are new approaches for system
building in the digital firm era?
Technologies and business conditions are changing so rapidly that companies
are adopting shorter, more informal systems development processes, including
those for mobile applications. In addition to using software packages and online
software services, businesses are relying more heavily on fast-cycle techniques
such as rapid application development, joint application design, agile develop-
ment, and reusable standardized software components that can be assembled
into a complete software system.
Rapid Application Development (RAD), Agile
Development, and DevOps
The term rapid application development (RAD) refers to the process of
creating workable systems in a very short period of time with some flexibility
to adapt as a project evolves. RAD includes the use of visual programming and
other tools for building graphical user interfaces, iterative prototyping of key
system elements, automation of program code generation, and close teamwork
among end users and information systems specialists. Simple systems often
can be assembled from prebuilt components. The process does not have to be
sequential, and key parts of development can occur simultaneously.
Sometimes a technique called joint application design (JAD) is used to
accelerate the generation of information requirements and to develop the ini-
tial systems design. JAD brings end users and information systems specialists
FIGURE 13.11 TOTAL COST OF OFFSHORE OUTSOURCING
If a firm spends $10 million on offshore outsourcing contracts, that company will actually
spend 15.2 percent in extra costs even in the best-case scenario. In the worst-case sce-
nario, where there is a dramatic drop in productivity along with exceptionally high transi-
tion and layoff costs, a firm can expect to pay up to 57 percent in extra costs on top of
the $10 million outlay for an offshore contract.
TOTAL COST OF OFFSHORE OUTSOURCING
Cost of outsourcing contract
Hidden Costs
1. Vendor selection
2. Transition costs
3. Layo�s & retention
4. Lost productivity/cultural issues
5. Improving development processes
6. Managing the contract
Total additional costs
Total cost of outsourcing (TCO) best case
Total cost of outsourcing (TCO) worst case
10,000,000 1,520,000
5,700,000
11,520,000
15,700,000 57.0%
15.2%
10,000,000
.02%
2%
3%
3%
1%
6%
Outstanding
Contract ($)
Additional
Cost ($)
Total Cost ($) Additional
Cost
2%
3%
5%
27%
10%
10%
20,000
200,000
300,000
300,000
100,000
600,000
1,520,000
200,000
300,000
500,000
2,700,000
1,000,000
1,000,000
5,700,000
Best Case Additional
Cost ($)
Worst Case
$10,000,000
Additional
Cost ($)
518 Part Four Building and Managing Systems
together in an interactive session to discuss the system’s design. Properly pre-
pared and facilitated, JAD sessions can significantly speed up the design phase
and involve users at an intense level.
Agile development focuses on rapid delivery of working software by break-
ing a large project into a series of small subprojects that are completed in short
periods of time using iteration, continuous feedback, and continual user in-
volvement. Each mini-project is worked on by a team as if it were a complete
project and regularly released to the client. Improvement or addition of new
functionality takes place within the next iteration as developers clarify re-
quirements. Testing occurs early and often throughout the entire development
process. Agile methods emphasize face-to-face communication, encouraging
people to collaborate and make decisions quickly and effectively.
DevOps builds on agile development principles as an organizational strat-
egy to create a culture and environment that further promote rapid and agile
development practices. DevOps stands for “development and operations” and
emphasizes close collaboration between the software developers who create ap-
plications and the IT operational staff who run and maintain the applications.
Traditionally, in a large enterprise, an application development team would be
in charge of gathering business requirements for an application, designing the
application, and writing and testing the software. The operations team would
run and maintain the software once it was put into production. Problems arise
when the development team is unaware of operational issues that prevent the
software from working as expected, requiring additional time and rework to fix
the software.
DevOps tries to change this relationship by promoting better and more fre-
quent communication and collaboration between systems development and
operations groups and a fast and stable workflow throughout the entire applica-
tion development life cycle. With this type of organizational change along with
agile techniques, standardized processes, and more powerful automated soft-
ware creation and testing tools, it is possible to build, test, and release applica-
tions more rapidly and more frequently. For example, DevOps helps developers
at Netflix make hundreds of software changes each day.
Component-Based Development and Web Services
We have already described some of the benefits of object-oriented develop-
ment for building systems that can respond to rapidly changing business en-
vironments, including web applications. To further expedite software creation,
groups of objects have been assembled to provide software components for
common functions such as a graphical user interface or online ordering ca-
pability that can be combined to create large-scale business applications. This
approach to software development is called component-based development,
and it enables a system to be built by assembling and integrating existing soft-
ware components. Increasingly, these software components are coming from
cloud services. Businesses are using component-based development to create
their e-commerce applications by combining commercially available compo-
nents for shopping carts, user authentication, search engines, and catalogs with
pieces of software for their own unique business requirements.
Web Services and Service-Oriented Computing
Chapter 5 introduced web services as loosely coupled, reusable software com-
ponents using Extensible Markup Language (XML) and other open protocols
and standards that enable one application to communicate with another with
Chapter 13 Building Information Systems 519
no custom programming required to share data and services. In addition to sup-
porting internal and external integration of systems, web services can be used
as tools for building new information system applications or enhancing existing
systems. Because these software services use a universal set of standards, they
promise to be less expensive and less difficult to weave together than propri-
etary components.
Web services can perform certain functions on their own, and they can
also engage other web services to complete more complex transactions, such
as checking credit, procurement, or ordering products. By creating software
components that can communicate and share data regardless of the operating
system, programming language, or client device, web services can provide sig-
nificant cost savings in systems building while opening up new opportunities
for collaboration with other companies.
Mobile Application Development: Designing
for a Multiscreen World
Today, employees and customers expect, and even demand, to be able to use
a mobile device of their choice to obtain information or perform a transaction
anywhere and at any time. To meet these needs, companies will need to de-
velop mobile websites, mobile apps, and native apps as well as traditional infor-
mation systems.
Once an organization decides to develop mobile apps, it has to make some
important choices, including the technology it will use to implement these
apps (whether to write a native app or mobile web app) and what to do about
a mobile website. A mobile website is a version of a regular website that is
scaled down in content and navigation for easy access and search on a small
mobile screen. (Access Amazon’s website from your computer and then from
your smartphone to see the difference from a regular website.)
A mobile web app is an Internet-enabled app with specific functionality
for mobile devices. Users access mobile web apps through their mobile device’s
web browser. The web app resides primarily on a server, is accessed via the
Internet, and doesn’t need to be installed on the device. The same application
can be used by most devices that can surf the web, regardless of their brand.
A native app is a standalone application designed to run on a specific plat-
form and device. The native app is installed directly on a mobile device. Native
apps can connect to the Internet to download and upload data, and they can
also operate on these data even when not connected to the Internet. For exam-
ple, an e-book reading app such as Kindle software can download a book from
the Internet, disconnect from the Internet, and present the book for reading.
Native mobile apps provide fast performance and a high degree of reliability.
They are also able to take advantage of a mobile device’s particular capabilities,
such as its camera or touch features. However, native apps are expensive to
develop because multiple versions of an app must be programmed for different
mobile operating systems and hardware.
Developing applications for mobile platforms is quite different from develop-
ment for PCs and their much larger screens. The reduced size of mobile devices
makes using fingers and multitouch gestures much easier than typing and using
keyboards. Mobile apps need to be optimized for the specific tasks they are to
perform, they should not try to carry out too many tasks, and they should be de-
signed for usability. The user experience for mobile interaction is fundamentally
different from using a desktop or laptop PC. Saving resources—bandwidth, screen
space, memory, processing, data entry, and user gestures—is a top priority.
520 Part Four Building and Managing Systems
When a full website created for the desktop shrinks to the size of a smart-
phone screen, it is difficult for the user to navigate through the site. The
user must continually zoom in and out and scroll to find relevant material.
Therefore, companies need to design websites specifically for mobile inter-
faces and create multiple mobile sites to meet the needs of smartphones, tab-
lets, and desktop browsers. This equates to at least three sites with separate
content, maintenance, and costs. Currently, websites know what device you
are using because your browser will send this information to the server when
you log on. Based on this information, the server will deliver the appropriate
screen.
One solution to the problem of having multiple websites is to use responsive
web design. Responsive web design enables websites to change layouts auto-
matically according to the visitor’s screen resolution, whether on a desktop,
laptop, tablet, or smartphone. Responsive design uses tools such as flexible
grid-based layouts, flexible images, and media queries to optimize the design
for different viewing contexts. This eliminates the need for separate design
and development work for each new device. HTML5, which we introduced in
Chapter 5, is also used for mobile application development because it can sup-
port cross-platform mobile applications.
The Interactive Session on Technology describes how some companies have
addressed the challenges of mobile development we have just identified.
13-6 How will MIS help my career?
Here is how Chapter 13 and this book can help you find a job as an entry-level
junior business systems analyst.
The Company
Systems 100 Technology Consultants, a Chicago-based professional technology
services firm, provides staffing and information technology consulting ser-
vices to other U.S. companies and has an open position for an entry-level junior
business systems analyst. The company provides business and technology
consultants to more than 150 firms in financial services, healthcare, commu-
nications, transportation, energy, consumer goods, and technology, helping
them implement business and technology initiatives cost-effectively.
Position Description
A junior business systems analyst is expected to work in project teams through-
out all phases of the software development life cycle, including defining busi-
ness requirements, developing detailed design specifications, and working with
application developers to build or enhance systems and business processes.
Before undertaking assignments, new business systems analysts receive train-
ing in the background they will need to succeed in their assignments. The first
assignment is to work on a contract basis for a startup data analytics company
in Michigan serving mid-sized organizations. The junior business systems ana-
lyst would work with a team of data scientists to help clients integrate data
sources, cleanse and organize messy data, and improve understanding of pat-
terns and trends.
Chapter 13 Building Information Systems 521
Just about all businesses today want to deploy mo-
bile apps and they want these apps developed in a
very short time frame. That’s not so easy.
Developing successful mobile apps poses some
unique challenges. The user experience on a mo-
bile device is fundamentally different from that on
a PC. There are special features on mobile devices
such as location-based services that give firms the
potential to interact with customers in meaningful
new ways. Firms need to be able to take advantage
of those features while delivering an experience
that is appropriate to a small screen. There are mul-
tiple platforms for mobile software, including iOS,
Android, and Windows 10, and a firm may need a
different version of an application to run on each
of these as well as on devices of different sizes and
capabilities. Mobile devices might be tiny and worn
on the wrist or they might be large high-definition
tablet displays. They might include sensors and
audio output and even displays combining real and
virtual images. System builders need to understand
how, why, and where customers use mobile devices
and how these mobile experiences change busi-
ness interactions and behavior. You can’t just port a
website or desktop application to a smartphone or
tablet. It’s a different systems development process.
Many enterprises require applications that link
to corporate systems and function on the desktop
as well as on mobile devices. Take, for example,
Great-West Financial, the second largest retirement
services company in the United States with approxi-
mately $461 billion in assets under its administra-
tion. Company employees spend more time serv-
ing customers in the field rather than in the office
and needed a connection to the company’s ERP
Financials system from wherever they are work-
ing to process accounts payable invoice approvals.
Great-West decided to deploy the Dolphin Mobile
Approvals app for this purpose.
Great-West selected Dolphin because it could
handle all of its SAP workflows in a single app, so
that employees did not have to go to one place to ap-
prove invoices and another to approve everything
else. Great-West configured the app to make its look
and feel as similar as possible to the application
users accessed on their desktops. The user sees the
same data fields on the invoice header and line item
on a mobile device as on a desktop computer screen,
and the steps in the invoice approval process are
the same. However, given the difficulty of jumping
back and forth between different screens on a mobile
device, the mobile app incorporates the necessary
invoice approval codes into its line-item detail rather
than displaying these codes on a PDF attachment.
On a desktop, users must sign into the SAP system in
order to see an invoice and will receive notification
that an invoice is available for approval via email.
A pop-up notification on the mobile app eliminates
the need for users to log into the app before knowing
about an invoice.
Before deploying the mobile app, Great-West
had to set up an appropriate mobile infrastructure,
considering factors such as security, sign-on, and
back-end integration. Since this was the company’s
first mobile app interfacing to the SAP system, the
company had to make sure the mobile app could
incorporate the entire workflow from the SAP sys-
tem and that all the data was encrypted and secure.
Great-West purchased 1,000 licenses for the mobile
approvals app (which is compatible with both iOS
and Android devices) and issued company-owned
devices to senior executives and the heaviest invoice
users. Remaining users are allowed to use the app
on their own devices as long as they conform to the
firm’s BYOD policy.
For the past few years, United Parcel Service
(UPS) has provided customers with a UPS Mobile app
to track their shipments and obtain pricing informa-
tion using smartphones and tablets. UPS developers
initially wrote and maintained multiple versions of
UPS Mobile, including one for iOS in Objective-C and
another for Android in Java. This meant twice the
work for UPS mobile developers. The different ver-
sions of the app might not be updated at the same
time, so customers with different types of devices
didn’t always have access to the latest features at the
same time.
UPS was able to move the UPS Mobile app to a
single development platform, but this entailed an
enormous amount of work. The company selected
Visual Studio Tools for Xamarin for this purpose
because it allowed developers to share one C# code
base across platforms and deliver fully native apps
to customers. Xamarin also had better integration
INTERACTIVE SESSION TECHNOLOGY
Systems Development Is Different for Mobile Apps
Job Requirements
• Upcoming or recent college graduate, with BA in Management Information
Systems, Finance, Psychology, or related field
• 3 to 6-plus months of corporate work or internship experience, including
experience working with a project team
• Strong understanding of technology and systems, and business process
improvement
• Strong analytical, communication, and problem-solving skills
• Ability to work comfortably in a team environment
• Knowledge and understanding of the software development life cycle and
business process improvement
• Knowledge of MS Office applications
• Exposure to SQL desirable but not required
Interview Questions
1. What information systems courses have you taken, including MIS, database,
data analytics, and systems development? Can you write SQL queries?
2. Have you worked on any systems development projects? If so, what exactly
did you do? What systems development practices did you use?
3. Have you worked on any other kinds of projects, and what role did you play?
Do you have samples of the writing or output you produced for these projects?
4. Which Microsoft Office tools have you used? What kinds of problems have
you used these tools to solve?
5. Have you any experience with agile software development?
522 Part Four Building and Managing Systems
1. What management, organization, and technology
challenges need to be addressed when building a
mobile application?
2. How does user requirement definition for mo-
bile applications differ from traditional systems
analysis?
3. Describe how Great-West’s invoice approvals
process changed after the mobile application
was deployed.
with mobile devices’ unique hardware and capabili-
ties. Although UPS had to rebuild more than 130,000
lines of code that had been written over a four-year
period, management realized that rewriting UPS
Mobile would produce dramatic time and cost sav-
ings in the long run. The company went ahead
with developing on a single platform. Much of the
Xamarin code would need to be developed only once
and it could support multiple platforms with great
efficiency in the years to come. UPS mobile develop-
ers rewrote all versions of UPS Mobile with Visual
Studio Tools for Xamarin. UPS can now add a new
feature across all mobile devices in weeks and days
instead of months.
Sources: Rob Bamforth, “Developers at the Mobile Edge,” Computer
Weekly, January 30–February 5, 2018; Mary K. Pratt, Linda
Tucci, “Enterprise Mobile App Development: No Easy Answers,”
searchCIOtechtarget.com, accessed February 20, 2018; Microsoft,
“UPS Paves the Way for Better Service with Faster Development
and Artificial Intelligence,” September 28, 2017; www.greatwest.
com, accessed February 20, 2018; and Ken Murphy, “Great-West
Financial Establishes Its Mobile Footprint,” SAP Insider Profiles,
October 31,2016.
CASE STUDY QUESTIONS
http://searchCIOtechtarget.com
http://www.greatwest.com
http://www.greatwest.com
Chapter 13 Building Information Systems 523
Author Tips
1. Review the discussion of business processes in Chapter 2 and Chapter 13 and
the Chapter 14 discussion of IT project management and implementation. Be
prepared to talk about any systems development experience you have had,
including analyzing or redesigning business processes. Also be prepared to
discuss contemporary systems development practices.
2. Inquire about how you would be using SQL and Microsoft Office tools for the
job and what skills you would be expected to demonstrate. Bring samples of
the work you have done with this software. Express interest in learning what
you don’t know about these tools to fulfill your job assignments.
3. Bring samples of your writing (including some from your Digital Portfolio
described in MyLab MIS) demonstrating your analytical and business appli-
cation skills and project experience.
REVIEW SUMMARY
13-1 How does building new systems produce organizational change?
Building a new information system is a form of planned organizational change. Four kinds of
technology-enabled change are (1) automation, (2) rationalization of procedures, (3) business process
redesign, and (4) paradigm shift, with far-reaching changes carrying the greatest risks and rewards.
Many organizations are using business process management to redesign workflows and business
processes in the hope of achieving dramatic productivity breakthroughs. Business process manage-
ment is also useful for promoting total quality management (TQM), Six Sigma, and other initiatives
for incremental process improvement.
13-2 What are the core activities in the systems development process?
The core activities in systems development are systems analysis, systems design, programming,
testing, conversion, production, and maintenance. Systems analysis is the study and analysis of prob-
lems of existing systems and the identification of requirements for their solutions. Systems design
provides the specifications for an information system solution, showing how its technical and organi-
zational components fit together.
13-3 What are the principal methodologies for modeling and designing systems?
The two principal methodologies for modeling and designing information systems are structured
methodologies and object-oriented development. Structured methodologies focus on modeling pro-
cesses and data separately. The data flow diagram is the principal tool for structured analysis, and
the structure chart is the principal tool for representing structured software design. Object-oriented
development models a system as a collection of objects that combine processes and data. Object-
oriented modeling is based on the concepts of class and inheritance.
13-4 What are alternative methods for building information systems?
The oldest method for building systems is the systems life cycle, which requires that informa-
tion systems be developed in formal stages. The stages must proceed sequentially and have defined
outputs; each requires formal approval before the next stage can commence. The systems life cycle
is useful for large projects that need formal specifications and tight management control over each
stage of systems building, but it is very rigid and costly.
Prototyping consists of building an experimental system rapidly and inexpensively for end users
to interact with and evaluate. Prototyping encourages end-user involvement in systems development
and iteration of design until specifications are captured accurately. The rapid creation of prototypes
can result in systems that have not been completely tested or documented or that are technically
inadequate for a production environment.
524 Part Four Building and Managing Systems
Using a software package or online software services (SaaS) reduces the amount of design, pro-
gramming, testing, installation, and maintenance work required to build a system. Application soft-
ware packages or SaaS are helpful if a firm does not have the internal information systems staff or
financial resources to custom develop a system. To meet an organization’s unique requirements,
packages may require extensive modifications that can substantially raise development costs.
End-user development is the development of information systems by end users, either alone or
with minimal assistance from information systems specialists. End user–developed systems can be
created rapidly and informally using user-friendly software tools. However, end-user development
may create information systems that do not necessarily meet quality assurance standards and that
are not easily controlled by traditional means.
Outsourcing consists of using an external vendor to build (or operate) a firm’s information systems
instead of the organization’s internal information systems staff. Outsourcing can save application
development costs or enable firms to develop applications without an internal information systems
staff. However, firms risk losing control over their information systems and becoming too dependent
on external vendors. Outsourcing also entails hidden costs, especially when the work is sent offshore.
13-5 What are new approaches for system building in the digital firm era?
Companies are turning to rapid application design (RAD), joint application design (JAD), agile devel-
opment, and reusable software components to accelerate the systems development process. RAD uses
object-oriented software, visual programming, prototyping, and tools for very rapid creation of systems.
Agile development breaks a large project into a series of small subprojects that are completed in short
periods of time using iteration and continuous feedback. Component-based development expedites
application development by grouping objects into suites of software components that can be combined
to create large-scale business applications. DevOps emphasizes close collaboration between the soft-
ware developers who create applications and the IT operational staff who run and maintain the applica-
tions. Web services provide a common set of standards that enable organizations to link their systems
regardless of their technology platform through standard plug-and-play architecture. Mobile application
development must pay attention to simplicity, usability, and the need to optimize tasks for tiny screens.
Key Terms
Acceptance testing, 505
Agile development, 518
Automation, 495
Business process management (BPM), 498
Business process redesign, 496
Component-based development, 518
Computer-aided software engineering (CASE), 511
Conversion, 506
Customization, 515
Data flow diagram (DFD), 507
DevOps, 518
Direct cutover strategy, 506
Documentation, 506
End-user development, 514
End-user interface, 513
Feasibility study, 503
Information requirements, 503
Iterative, 512
Joint application design (JAD), 517
Maintenance, 506
Mobile web app, 519
Mobile website, 519
Native app, 519
Object, 509
Object-oriented development, 509
Offshore outsourcing, 516
Paradigm shift, 498
Parallel strategy, 506
Phased approach strategy, 506
Pilot study strategy, 506
Post-implementation audit, 506
Process specifications, 509
Production, 506
Programming, 504
Prototype, 512
Prototyping, 512
Query languages, 514
Rapid application development (RAD), 517
Rationalization of procedures, 495
Request for proposal (RFP), 515
Responsive web design, 520
Six Sigma, 496
Structure chart, 509
Structured, 507
System testing, 505
Systems analysis, 502
Systems design, 503
Systems development, 502
Systems life cycle, 511
Test plan, 505
Testing, 505
Total quality management (TQM), 496
Unit testing, 505
Chapter 13 Building Information Systems 525
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
13-1 How does building new systems produce
organizational change?
• Describe each of the four kinds of organi-
zational change that can be promoted with
information technology.
• Define business process management and
describe the steps required to carry it out.
13-2 What are the core activities in the systems
development process?
• Distinguish between systems analysis and
systems design. Describe the activities for
each.
• Define information requirements and ex-
plain why they are difficult to determine
correctly.
• Explain why the testing stage of systems
development is so important. Name and
describe the three stages of testing for an
information system.
• Describe the role of programming, conver-
sion, production, and maintenance in sys-
tems development.
13-3 What are the principal methodologies for
modeling and designing systems?
• Compare object-oriented and traditional
structured approaches for modeling and de-
signing systems.
13-4 What are alternative methods for building
information systems?
• Define the traditional systems life cycle.
Describe its advantages and disadvantages
for systems building.
• Define information system prototyping.
Describe its benefits and limitations. List
and describe the steps in the prototyping
process.
• Define an application software package.
Explain the advantages and disadvantages
of developing information systems based
on software packages.
• Define end-user development and describe
its advantages and disadvantages. Name
some policies and procedures for managing
end-user development.
• Describe the advantages and disadvantages
of using outsourcing for building informa-
tion systems.
13-5 What are new approaches for system building in
the digital firm era?
• Define rapid application development
(RAD), agile development, and DevOps
and explain how they can speed up system
building.
• Explain how component-based
development and web services help firms
build and enhance their information
systems.
• Explain the features of mobile applica-
tion development and responsive web
design.
Discussion Questions
13-6 Why is selecting a systems development
approach an important business decision?
Who should participate in the selection
process?
13-7 Some have said that the best way to reduce
systems development costs is to use
MyLab MIS
MyLab MIS
application software packages, SaaS, or user-
friendly tools. Do you agree? Why or why not?
13-8 Why is it so important to understand how
a business process works when trying to
develop a new information system?
MyLab MIS
526 Part Four Building and Managing Systems
Hands-On MIS Projects
The projects in this section give you hands-on experience analyzing business processes, designing and building a
customer system for auto sales, and analyzing website information requirements.
Management Decision Problems
13-9 For an additional fee, a customer purchasing a Sears Roebuck appliance, such as a washing machine, can
purchase a three-year service contract. The contract provides free repair service and parts for the specified
appliance using an authorized Sears service provider. When a person with a Sears service contract needs
to repair an appliance, such as a washing machine, he or she calls the Sears Repairs & Parts department
to schedule an appointment. The department makes the appointment and gives the caller the date and
approximate time of the appointment. The repair technician arrives during the designated time frame and
diagnoses the problem. If the problem is caused by a faulty part, the technician either replaces the part if
he or she is carrying the part or orders the replacement part from Sears. If the part is not in stock at Sears,
Sears orders the part and gives the customer an approximate time when the part will arrive. The part is
shipped directly to the customer. After the part has arrived, the customer must call Sears to schedule a
second appointment for a repair technician to replace the ordered part. This process is very lengthy. It may
take two weeks to schedule the first repair visit, another two weeks to order and receive the required part,
and another week to schedule a second repair visit after the ordered part has been received.
• Diagram the existing process.
• What is the impact of the existing process on Sears’s operational efficiency and customer relationships?
• What changes could be made to make this process more efficient? How could information systems
support these changes? Diagram the improved process.
13-10 Management at your agricultural chemicals corporation has been dissatisfied with production
planning. Production plans are created using best guesses of demand for each product, which are
based on how much of each product has been ordered in the past. If a customer places an unexpected
order or requests a change to an existing order after it has been placed, there is no way to adjust
production plans. The company may have to tell customers it can’t fill their orders, or it may run up
extra costs maintaining additional inventory to prevent stock-outs.
At the end of each month, orders are totaled and manually keyed into the company’s production
planning system. Data from the past month’s production and inventory systems are manually entered
into the firm’s order management system. Analysts from the sales department and from the produc-
tion department analyze the data from their respective systems to determine what the sales targets and
production targets should be for the next month. These estimates are usually different. The analysts
then get together at a high-level planning meeting to revise the production and sales targets to take into
account senior management’s goals for market share, revenues, and profits. The outcome of the meet-
ing is a finalized production master schedule.
The entire production planning process takes 17 business days to complete. Nine of these days
are required to enter and validate the data. The remaining days are spent developing and reconciling
the production and sales targets and finalizing the production master schedule.
• Draw a diagram of the existing production planning process.
• Analyze the problems this process creates for the company.
• How could an enterprise system solve these problems? In what ways could it lower costs? Diagram
what the production planning process might look like if the company implemented enterprise software.
Improving Decision Making: Using Database Software to Design a Customer System
for Auto Sales
Software skills: Database design, querying, reporting, and forms
Business skills: Sales lead and customer analysis
13-11 This project requires you to perform a systems analysis and then design a system solution using
database software.
Ace Auto Dealers specializes in selling new vehicles from Subaru in Portland, Oregon. The company
advertises in local newspapers and is listed as an authorized dealer on the Subaru website and other major web-
sites for auto buyers. The company benefits from a good local word-of-mouth reputation and name recognition.
Chapter 13 Building Information Systems 527
Ace does not believe it has enough information about its customers. It cannot easily determine which
prospects have made auto purchases, nor can it identify which customer touch points have produced the great-
est number of sales leads or actual sales so it can focus advertising and marketing more on the channels that
generate the most revenue. Are purchasers discovering Ace from newspaper ads, from word of mouth, or from
the web?
Prepare a systems analysis report detailing Ace’s problem and a system solution that can be implement-
ed using PC database management software. Then use database software to develop a simple system solution.
In MyLab MIS, you will find more information about Ace and its information requirements to help you develop
the solution.
Achieving Operational Excellence: Analyzing Website Design and Information Requirements
Software skills: Web browser software
Business skills: Information requirements analysis, website design
13-12 Visit the website of your choice and explore it thoroughly. Prepare a report analyzing the various functions
provided by that website and its information requirements. Your report should answer these questions:
What functions does the website perform? What data does it use? What are its inputs, outputs, and pro-
cesses? What are some of its other design specifications? Does the website link to any internal systems or
systems of other organizations? What value does this website provide the firm?
Collaboration and Teamwork Project
Preparing Website Design Specifications
13-13 With three or four of your classmates, select a system described in this text that uses the web. Review the
website for the system you select. Use what you have learned from the website and the description in this
book to prepare a report describing some of the design specifications for the system you select. If possible,
use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of
your findings for the class.
528 Part Four Building and Managing Systems
legacy HR system needed to be replaced. One top
priority was to improve business processes for tal-
ent acquisition and development so that Hitachi
Consulting could find the right people better, faster,
and cheaper. In the past, Hitachi Consulting waited
until a new position opened before actively recruit-
ing new talent. Its new HR function sought to cul-
tivate relationships with top candidates, fueled by
employee referrals and social networks. Through
ongoing dialogues, the HR staff could identify star
talent and quickly hire these people when the time
was right. Hitachi hoped that the new HR system
would reduce recruiting costs, improve candidate
experience, engagement, and retention, and expand
recognition of Hitachi as an employer of choice.
Another high priority was having a single system
of record as the authoritative source of information
for all of HCC’s regions with a central repository for
HR data. With an enterprise-wide cloud application,
HR and IT managers could centrally assign autho-
rizations for data access based on roles and respon-
sibilities, while also enforcing global security and
regulatory policies. HCC’s workforce regularly works
at client sites and requires access to enterprise data
and applications from tablets and smartphones, so
the new solution needed to provide mobile access
as well, which was not possible with HCC’s legacy
systems. Other goals included expanded analytics
and reporting capabilities, and a global platform to
streamline compensation, benefits, and absence
management.
A steering committee composed of HR, business,
and IT leadership evaluated various technology
options, selecting Oracle HCM Cloud for the solu-
tion. Oracle HCM Cloud is a cloud-based system for
Human Capital Management (HCM), providing a sin-
gle global human resources solution to maintain em-
ployee records, align common HR processes, attract,
develop and retain top talent, improve employee
productivity, control labor costs, and address simple
and complex employee compensation needs. There
are capabilities for recruiting candidates, managing
performance, developing careers, providing learning,
performing talent reviews, and planning successions.
Hitachi Consulting was growing quickly, and the
flexibility of cloud computing was helpful when
Hitachi Consulting Corporation is an interna-tional management and technology consulting firm headquartered in Dallas, Texas and a sub-
sidiary of Hitachi Ltd. based in Tokyo, Japan. Hitachi
Consulting currently employs approximately 6,500
people in 22 countries, including the United States,
Japan, Brazil, China, India, Portugal, Singapore,
Spain, the UK, Germany, and Vietnam. Because the
company provides consulting services, its employees
are its most important resource. To succeed competi-
tively, Hitachi Consulting must ensure that it has the
right number of employees with the right skills and
expertise wherever and whenever the need for its
consulting services arise. The human resources func-
tion is especially important in a company of this sort.
Four years ago, Hitachi Consulting decided to
grow its business model to include turnkey and
custom solutions combining business best practices
and leading-edge technologies such as the Internet
of Things (IoT) as well as traditional consulting
services. Hitachi is doing this across many areas—rail
and transportation, energy, water, cities, healthcare,
and public safety. A key success factor is to collabo-
rate with partners, clients and other stakeholders
across entire industries. These new offerings require
people with appropriate talents and skills to deliver
Hitachi Consulting’s new solution portfolio. The
company had to recast its Human Resources depart-
ment to operate more strategically so that it would
have the right human resources in place to do the
work.
Hitachi Consulting was saddled with multiple dis-
parate local human resources systems (and in some
cases just spreadsheets) that held its valuable em-
ployee data. These systems were not integrated with
the company’s legacy Human Resources system in
the United States. There was no way to easily obtain
an enterprise-wide view of the company’s workforce.
When a senior executive requested such company-
wide data for decision making, HR staff had to manu-
ally assemble and aggregate the necessary data. The
process would take days. Dealing with such complex
manual processes and siloed data prevented the com-
pany from operating under a “single source of truth.”
For the company to move forward, its Human
Resources function had to be transformed and its
Hitachi Consulting Moves Human Resources
to the Cloud
CASE STUDY
Chapter 13 Building Information Systems 529
the HR modernization project also had to perform
their usual duties. Project leaders devised a time-
sharing plan that pulled individuals into the mod-
ernization project when their expertise was most
needed, but quickly returned them to their regular
jobs to keep HCC’s business on track.
Implementation of the Oracle Human Capital
Management Cloud to serve Hitachi Consulting’s
entire global workforce has provided many benefits
for Hitachi Consulting. It has reduced the time and
cost to hire new employees and improved top tal-
ent identification, development, and retention. The
employee referral process used to falter because staff
members questioned whether their suggestions were
actually implemented. With the new system, the re-
ferring party is more clearly identified and tagged for
eventual rewards if the referral leads to a successful
new hire. HCC’s referral rate of new talent from cur-
rent employees has increased from 17 to 35 percent.
The company was able to save $1 million in the first
year the system was operational by reducing pay-
ments to search firms. It has become easier to absorb
and integrate employees from acquisitions.
HCC senior executives and regional managers can
now access workforce information when making de-
cisions about HCC’s new business direction. For ex-
ample, HCC’s senior executives recently asked HCC
director of service delivery Matt Revell for the com-
pany’s employee head count and turnover trends
over the last 12 months to evaluate the investments
managers were making for people in HCC’s sales and
solutions organizations. To gather that information
in the past, Revell’s staff had to request the data from
managers in each HCC region and then standardize
the information. (This was because some defini-
tions, such as those for full-time employees versus
contingent staff, weren’t consistent.) Only then could
HCC’s U.S.-based analytics group aggregate the data
and run the final report. Oracle HCM Cloud has cen-
tralized all of HCC’s HR information and uses a com-
mon enterprise-wide set of definitions. Reporting
and analytics work can be accomplished much faster
and more accurately.
The new centralized system has also made the HR
department more efficient by replacing dozens of
separate processes that had been running in various
regions with standardized practices, and enhancing
the ability to strategically analyze employee data. For
example, HCC routinely reassigns hundreds of indi-
viduals a year to posts outside their home countries
for customer engagements that require specialized
it had to quickly absorb large numbers of employ-
ees from a new acquisition. At one point, Hitachi
Consulting had less than two weeks to bring hun-
dreds of new employees into its legacy HR system.
With the old system, it was a challenge to ensure the
company had sufficient hardware and software re-
sources to accommodate the new employees without
overspending for additional infrastructure, or just as
risky, keeping a lid on infrastructure expenditures so
that the system couldn’t handle future growth. With
a cloud platform, Hitachi Consulting could simply
bring the new employees into the HR application
and adjust its contract with Oracle to accommodate
the additional head count. Switching computing to
a cloud software service provider also would relieve
Hitachi Consulting’s IT staff from routine data center
maintenance tasks, leaving more time for strategic
business initiatives, such as creating reports and
analyses for decision-makers.
Oracle HCM Cloud met all these requirements,
and it also featured a streamlined modern interface
that would make the system much easier for em-
ployees to use than the antiquated interface of HCC’s
legacy system. The Oracle cloud platform’s flexibility
also appealed to the steering committee. With many
cloud services, customers must adapt their processes
to the services’ requirements. Oracle HCM Cloud of-
fers standard processes, but it also lets organizations
customize processes when necessary.
The HCC team steering committee also found that
Oracle HCM Cloud offered tight security and regula-
tory controls required to safeguard HR data, some of
which is highly sensitive. For years, many companies
were reluctant to adopt cloud computing, concerned
that outside service providers would not be able to
safeguard sensitive data as effectively as systems
housed and managed on-site. Over time, cloud com-
puting’s reputation for reliability and security has in-
creased. More firms have decided that cloud security
is on par with what they could do on premises. The
HCC steering committee was convinced that Oracle
is addressing the latest security threats and is doing
everything as well as or better than the company to
protect employee data.
Senior management approved the HR modern-
ization plan in early 2014, with the new system
projected to go live in September 2015. The project
leaders realized they would need to carefully manage
the employee experience so staffers would become
comfortable with the changes created by the new
system. Both HR and IT staff directly involved with
530 Part Four Building and Managing Systems
skills. The new, streamlined global system greatly
improved the global transfer process, and it also
serves as the system of record that feeds employee
data for many mission-critical downstream systems.
This has improved data integrity but also greatly im-
proved the global visibility of HCC’s workforce, facili-
tating strategic analysis of global employee data.
HCC transformation experts teach clients that
fundamental change is an ongoing process, and that’s
a lesson the company’s HR and IT departments are
taking to heart. HCC leaders are now expanding their
use of the compensation capabilities available within
Oracle HCM Cloud to more closely manage sales
force compensation. According to Sona Manzo, vice
president of the Oracle HCM Cloud practice at HCC,
the company needed time to determine how it would
be transforming its sales organization, so it kept sales
compensation as a separate initiative,
HCC is continuing to use new capabilities in
Oracle HCM Cloud to help its business grow. The
new system has been able to handle complex bonus
packages tailored for salespeople in each country.
For example, “hot skill” bonuses are critical for at-
tracting talent in Asia Pacific locations, but are not
used in other regions such as the Americas. HCC will
soon be able to track multiple bonus plans in each
country and is investigating capabilities that enable
managers to request and approve bonus or salary in-
creases via mobile devices.
Sources: April Mazon, “Hitachi Consulting Realizes Significant
Value with HCM Cloud Transformation,” https://blogs.oracle.com,
accessed January 10, 2018; Alan Joch, “Disrupt Yourself,” Profit
Magazine, Summer 2017; and www.hitachiconsulting.com, accessed
January 19, 2018.
CASE STUDY QUESTIONS
13-14 Analyze Hitachi Consulting’s problems with
its legacy human resources system. What
management, organization, and technology
factors were responsible for these problems?
What was the business impact of these
problems?
13-15 List and describe the major information re-
quirements for Hitachi’s new HR system.
13-16 Was a cloud-based system appropriate for
Hitachi Consulting? Why or why not?
13-17 What steps did Hitachi take to make sure its
new HR system was successful?
13-18 What were the benefits of the new HR sys-
tem? How did it change operational activities
and decision making at Hitachi Consulting?
How successful was this system solution?
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
13-19 Describe four system conversion strategies.
13-20 Describe the role of end users in developing systems using the traditional systems life cycle, prototyp-
ing, application software packages, and end-user development.
Chapter 13 References
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Design Choices and the Balance of Ex Ante and Ex Post
Transaction Costs in Software Development Outsourcing.”
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Reorganizing IT for Faster Software Delivery.” McKinsey &
Company (2015).
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mation Technology Outsourcing: Asset Transfer and the Role
of Contract.” MIS Quarterly 41, No. 3 (September 2017).
Comella-Dorda, Santiago, Swati Lohiya, and Gerard Speksnijder.
“An Operating Model for Company-Wide Agile Development.”
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ogy Mashups: An Exploration of Processes Used to Maintain
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4 (Spring 2012).
El Sawy, Omar A. Redesigning Enterprise Processes for E-Business.
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Development.” McKinsey & Company (February 2017).
Goo, Jahyun, Rajiv Kishore, H. R. Rao, and Kichan Nam. “The Role
of Service Level Agreements in Relational Management of
Information Technology Outsourcing: An Empirical Study.”
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Hahn, Eugene D., Jonathan P. Doh, and Kraiwinee Bunyaratavej.
“The Evolution of Risk in Information Systems Offshoring:
The Impact of Home Country Risk, Firm Learning,
and Competitive Dynamics.” MIS Quarterly 33, No. 3
(September 2009).
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Corporation. New York: HarperCollins (1993).
Hoehle, Hartmut, and Viswanath Venkatesh. “Mobile Application
Usability: Conceptualization and Instrument Development.”
MIS Quarterly 39, No. 2 (June 2015).
Hua Ye, Jonathan, and Atreyi Kankanhalli. “User Service
Innovation on Mobile Phone Platforms: Investigating Impacts
of Lead Userness, Toolkit Support, and Design Autonomy.”
MIS Quarterly 42, No. 1 (March 2018).
Kelleher, Justin. “Debunking the Myths Around Agile
Development.” Information Management (August 21, 2017).
Kendall, Kenneth E., and Julie E. Kendall. Systems Analysis and
Design (9th ed.). Upper Saddle River, NJ: Prentice Hall
(2019).
Kotlarsky, Julia, Harry Scarbrough, and Ilan Oshri. “ Coordinating
Expertise Across Knowledge Boundaries in Offshore-
Outsourcing Projects: The Role of Codification.” MIS Quar-
terly 38, No. 2 (June 2014).
Levina, Natalia, and Jeanne W. Ross. “From the Vendor’s Perspective:
Exploring the Value Proposition in Information Technology
Outsourcing.” MIS Quarterly 27, No. 3 (September 2003).
Mani, Deepa, and Anitesh Barua. “The Impact of Firm Learning
on Value Creation in Strategic Outsourcing Relationships.”
Journal of Management Information Systems 32, No. 1 (2015).
McKinsey & Company. “Agile with a Capital ‘A’: A Guide to the
Principles and Pitfalls of Agile Development.” (February
2018).
Nelson, H. James, Deborah J. Armstrong, and Kay M. Nelson.
“Patterns of Transition: The Shift from Traditional to Object-
Oriented Development.” Journal of Management Information
Systems 25, No. 4 (Spring 2009).
Ozer, Muammer, and Doug Vogel. “Contextualized Relationship
Between Knowledge Sharing and Performance in Software
Development.” Journal of Management Information Systems 32,
No. 2 (2015).
Pollock, Neil, and Sampsa Hyysalo. “The Business of Being a
User: The Role of the Reference Actor in Shaping Packaged
Enterprise System Acquisition and Development.” MIS Quar-
terly 38, No. 2 (June 2014).
Saunders, Adam, and Erik Brynjolfsson. “Valuing Information
Technology Related Intangible Assets.” MIS Quarterly 40, No.
1 (March 2016).
Sircar, Sumit, Sridhar P. Nerur, and Radhakanta Mahapatra.
“ Revolution or Evolution? A Comparison of Object-Oriented
and Structured Systems Development Methods.” MIS
Quarterly 25, No. 4 (December 2001).
Su, Ning, Natalia Levina, and Jeanne W. Ross. “The Long-Tail
Strategy for IT Outsourcing.” MIT Sloan Management Review
(Winter 2016).
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Design, 8th ed. Upper Saddle River, NJ: Prentice-Hall (2017).
532
MyLab MIS
Discussion Questions: 14-5, 14-6, 14-7; Hands-on MIS Projects: 14-8, 14-9, 14-10, 14-11;
Writing Assignments: 14-17, 14-18; eText with Conceptual Animations
CHAPTER CASES
Sound Project Management Helps Stepan
Company Improve Financial Planning and
Reporting
ConocoPhillips Implements a New System
for Access Control
Arup Moves Project Management to the
Cloud
Pennsylvania’s Unemployment
Compensation Modernization System:
Unfinished Business
VIDEO CASES
Blue Cross Blue Shield: Smarter Computing
Project
NASA Project Management Challenges
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
14-1 What are the objectives of project
management, and why is it so
essential in developing information
systems?
14-2 What methods can be used for
selecting and evaluating information
systems projects and aligning them
with the firm’s business goals?
14-3 How can firms assess the business
value of information systems?
14-4 What are the principal risk factors in
information systems projects, and how
can they be managed?
14-5 How will MIS help my career?
Managing Projects14CHAPTER
533
Stepan Company, headquartered in Northfield, Illinois, is a major global manufacturer of specialty and intermediate chemicals such as surfactants, poly-mers, and specialty products that are sold to other manufacturers. The compa-
ny’s principal markets include manufacturers of cleaning and washing compounds
(including detergents, shampoos, fabric softeners, toothpastes, and household
cleaners), paints, cosmetics, food, beverages, nutritional supplements, agricultural
products, plastics, furniture, automotive equipment, insulation, and refrigeration.
Stepan has 2,000 employees and 18 manufacturing locations worldwide.
For many years, Stepan’s corporate financial planning and analysis (FP&A)
team managed budgeting and forecasting for global finance using spreadsheets
and databases that were not easily consolidated for the enterprise. FP&A was
spending a large amount of time maintaining spreadsheets and collecting, ag-
gregating, and extracting data out of its systems.
It took hundreds of hours to produce monthly
financial statements, and that left little time for
analysis and thinking strategically.
During the past decade Stepan expanded
quickly and outgrew its legacy reporting and plan-
ning processes. In 2014 Stepan embarked on
an enterprise-wide business transformation
initiative called “DRIVE.” One objective was to
improve antiquated financial reporting and plan-
ning processes globally. The company selected
a solution based on SAP Business Planning and
Consolidation (BPC), which delivers planning,
budgeting, forecasting, and financial consolida-
tion capabilities in a single application and could
integrate with Stepan’s global SAP ERP system.
Stepan’s project team for the new system un-
dertook discovery sessions, meetings with improvement and implementation
consultants, training courses on applied strategic thinking, and site visits to
several peer companies. With assistance from consultants from SAP’s analytics
group, the team surveyed and personally interviewed employees to determine
exactly how much time they spent on management reporting and planning.
The project team built a business case that called for better planning tools.
The team presented data to executive management that showed Stepan’s fi-
nance department lagged behind those of similar-sized chemical companies in
working strategically. The team also showed that the number of working days
spent on Stepan’s budget cycles was roughly double the number spent by other
similar-sized companies.
Sound Project Management Helps Stepan Company
Improve Financial Planning and Reporting
© Canbedone/Shutterstock
534 Part Four Building and Managing Systems
Stepan followed a phased implementation approach. Phase I focused on man-
agement reporting and supply chain forecasting. It went live with the function-
ality for management reporting in January 2017 and functionality for supply
chain forecasting and reporting shortly thereafter. Phase II focused on imple-
menting budgeting, forecasting, and profit projection capabilities in the fourth
quarter of 2017. Phase III, delivering functionality for full consolidations and
external reporting, was scheduled for 2018. Participation of end users with the
FP&A project team was critical for data validation. Stepan rolled out functional-
ity to select groups of users before going live for the global finance teams. This
approach enabled Stepan to allocate training resources for smaller user groups,
even though it would take longer for benefits to materialize.
Project scope and managing user expectations were top priorities. Stepan’s
FP&A project team clearly defined the scope of the project and made sure to
keep the entire company informed about new developments and changes.
To counter runaway expectations, the team distributed a list of everything in
scope and out of scope for each phase of the project. It produced reference
guides with detailed descriptions of the functionality users could expect for
every rollout, along with the capabilities of SAP BPC. The project team high-
lighted each problem the application addressed and tried to educate people
throughout the company who might not know much about finance. Stepan’s
FP&A Senior Manager Andrew Chapmen believed that clearly explaining what
was not within the scope of the project was even more important than defining
what was within the project’s scope.
Stepan is starting to realize benefits from the project, with better tools for
slicing and dicing information, less manually intensive processes, and less ef-
fort required to analyze costs and see exactly what’s driving cost and profitabil-
ity. The company is becoming a more strategic organization.
Sources: www.stepan.com, accessed January 5, 2018; Ken Murphy, “Planning Tips Scales in
Stepan Company’s Favor,” SAP Insider Profiles, August 10, 2017; and www.sap.com, accessed
January 5, 2018.
One of the principal challenges posed by information systems is ensuring they deliver genuine business benefits. There is a very high failure rate
among information systems projects because organizations have incorrectly as-
sessed their business value or because firms have failed to manage the organiza-
tional change surrounding the introduction of new technology. Projects to build
or improve information systems require special managerial and organizational
techniques to make them effective.
Stepan’s management realized this when it undertook its project to implement
a new financial planning and consolidation system. The new technology involved
changes to important business processes as well as new software. Stepan succeeded
with this project because its management clearly understood that strong project
management and attention to organizational change were essential to success.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Stepan’s rapid global growth and antiquated budget-
ing and forecasting processes called for more automated state-of-the art systems
that could quickly consolidate financial data for the entire enterprise. Outdated
legacy systems made financial operations inefficient, preventing the Financial
http://www.stepan.com
http://www.sap.com
Chapter 14 Managing Projects 535
Planning and Analysis group from focusing on improving financial analysis
and thinking more strategically. Management wisely assembled a project team,
carefully defined the project’s scope, and worked closely with SAP specialist
consultants and end users with financial business knowledge. The new system
was implemented in manageable phases where users could be carefully trained.
Here are some questions to think about: Why was this project successful?
Why was it important to pay close attention to project scope?
14-1 What are the objectives of project
management, and why is it so essential
in developing information systems?
There is a very high failure rate among information systems projects. In nearly
every organization, information systems projects take much more time and
money to implement than originally anticipated, or the completed system does
not work properly. When an information system does not meet expectations or
costs too much to develop, companies may not realize any benefit from their
information system investment, and the system may not be able to solve the
problems for which it was intended. The development of a new system must be
carefully managed and orchestrated, and the way a project is executed is likely
to be the most important factor influencing its outcome. That’s why it’s essen-
tial to have some knowledge about managing information systems projects and
the reasons why they succeed or fail.
Runaway Projects and System Failure
How badly are projects managed? On average, private sector projects are under-
estimated by half in terms of budget and time required to deliver the complete
system promised in the system plan. Many projects are delivered with missing
functionality (promised for delivery in later versions). A joint study by McKinsey
and Oxford University found that large software projects on average run 66 percent
Technology
Organization
Management
Business
Problem
Information
System
Business
Solutions
• Define project scope
• Appoint project team
• Set project budget
• Establish deliverables
and deadlines
• Project team
• Financial planning
and analysis team
• Phased
implementation
• SAP Business Planning
and Consolidation
• SAP ERP
• Provide global planning,
budgeting, forecasting, and
financial consolidation
capabilities
Global Financial
Reporting and Planning
System
• Rapid global growth
• Outdated planning and reporting
processes
• Fragmented data
• Lower costs
• Increase eƒciency
• Improve decision making
536 Part Four Building and Managing Systems
over budget and 33 percent over schedule. Over 50 percent of businesses recently
surveyed by cloud project portfolio management provider Innotas had experi-
enced IT project failure within the previous twelve months (Florentine, 2016).
As illustrated in Figure 14.1, a systems development project without proper
management will most likely suffer these consequences:
• Costs that vastly exceed budgets
• Unexpected time slippage
• Technical performance that is less than expected
• Failure to obtain anticipated benefits
The systems produced by failed information projects are often not used in the
way they were intended or are not used at all. Users often have to develop par-
allel manual systems to make these systems work.
The actual design of the system may fail to capture essential business re-
quirements or improve organizational performance. Information may not be
provided quickly enough to be helpful, it may be in a format that is impossible
to digest and use, or it may represent the wrong pieces of data.
The way in which nontechnical business users must interact with the system
may be excessively complicated and discouraging. A system may be designed with
a poor user interface. The user interface is the part of the system with which end
users interact. For example, an online input form or data entry screen may be so
poorly arranged that no one wants to submit data or request information. System
outputs may be displayed in a format that is too difficult to comprehend.
Websites may discourage visitors from exploring further if the web pages are
cluttered and poorly arranged, if users cannot easily find the information they
are seeking, or if it takes too long to access and display the web page on the
user’s computer.
Additionally, the data in the system may have a high level of inaccuracy or in-
consistency. The information in certain fields may be erroneous or ambiguous, or
it may not be organized properly for business purposes. Information required for
a specific business function may be inaccessible because the data are incomplete.
Project Management Objectives
A project is a planned series of related activities for achieving a specific busi-
ness objective. Information systems projects include the development of new
information systems, enhancement of existing systems, or upgrade or replace-
ment of the firm’s information technology (IT) infrastructure.
Project management refers to the application of knowledge, skills, tools,
and techniques to achieve specific targets within specified budget and time
constraints. Project management activities include planning the work, assess-
ing risk, estimating resources required to accomplish the work, organizing
the work, acquiring human and material resources, assigning tasks, directing
FIGURE 14.1 CONSEQUENCES OF POOR PROJECT MANAGEMENT
Without proper management, a systems development project takes longer to complete
and most often exceeds the allocated budget. The resulting information system may not
be able to demonstrate any benefits to the organization.
Cost overruns
Time slippage
Technical shortfalls impairing performance
Failure to obtain anticipated benefits
Poor Project
Management
Chapter 14 Managing Projects 537
activities, controlling project execution, reporting progress, and analyzing the
results. As in other areas of business, project management for information sys-
tems must deal with five major variables: scope, time, cost, quality, and risk.
Scope defines what work is or is not included in a project. For example, the
scope of a project for a new order processing system might be to include new
modules for inputting orders and transmitting them to production and account-
ing but not any changes to related accounts receivable, manufacturing, distribu-
tion, or inventory control systems. Project management defines all the work
required to complete a project successfully and should ensure that the scope of
a project does not expand beyond what was originally intended.
Time is the amount of time required to complete the project. Project man-
agement typically establishes the amount of time required to complete major
components of a project. Each of these components is further broken down into
activities and tasks. Project management tries to determine the time required
to complete each task and establish a schedule for completing the work.
Cost is based on the time to complete a project multiplied by the cost of human
resources required to complete the project. Information systems project costs
also include the cost of hardware, software, and work space. Project manage-
ment develops a budget for the project and monitors ongoing project expenses.
Quality is an indicator of how well the end result of a project satisfies the
objectives specified by management. The quality of information systems proj-
ects usually boils down to improved organizational performance and decision
making. Quality also considers the accuracy and timeliness of information pro-
duced by the new system and ease of use.
Risk refers to potential problems that would threaten the success of a project.
These potential problems might prevent a project from achieving its objectives
by increasing time and cost, lowering the quality of project outputs, or pre-
venting the project from being completed altogether. Section 14.4 describes the
most important risk factors for information systems.
14-2 What methods can be used for selecting and
evaluating information systems projects and
aligning them with the firm’s business goals?
Companies typically are presented with many different projects for solving prob-
lems and improving performance. There are far more ideas for systems projects
than there are resources. Firms will need to select the projects that promise the
greatest benefit to the business. Obviously, the firm’s overall business strategy
should drive project selection. How should managers choose among all the options?
Management Structure for Information
Systems Projects
Figure 14.2 shows the elements of a management structure for information
systems projects in a large corporation. It helps ensure that the most important
projects are given priority.
At the apex of this structure is the corporate strategic planning group and the in-
formation systems steering committee. The corporate strategic planning group is
responsible for developing the firm’s strategic plan, which may require the devel-
opment of new systems. Often, this group will have developed objective measures
of firm performance (called key performance indicators, introduced in Chapter 2
538 Part Four Building and Managing Systems
and Chapter 12) and choose to support IT projects that can make a substantial
improvement in one or several key performance indicators. These performance
indicators are reviewed and discussed by the firm’s board of directors.
The information systems steering committee is the senior management
group with responsibility for systems development and operation. It is com-
posed of department heads from both end-user and information systems areas.
The steering committee reviews and approves plans for systems in all divi-
sions, seeks to coordinate and integrate systems, and occasionally becomes in-
volved in selecting specific information systems projects. This group also has a
keen awareness of the key performance indicators decided on by higher-level
managers and the board of directors.
The project team is supervised by a project management group composed
of information systems managers and end-user managers responsible for
overseeing specific information systems projects. The project team is directly
responsible for an individual systems project. It consists of systems analysts,
specialists from the relevant end-user business areas, application programmers,
and perhaps database specialists. The mix of skills and the size of the project
team depend on the specific nature of the system solution.
Linking Systems Projects to the Business Plan
In order to identify the information systems projects that will deliver the most
business value, organizations need to develop an information systems plan
that supports their overall business plan and in which strategic systems are
incorporated into top-level planning. The plan serves as a road map indicating
the direction of systems development (the purpose of the plan), the rationale,
the state of current systems, new developments to consider, the management
strategy, the implementation plan, and the budget (see Table 14.1).
FIGURE 14.2 MANAGEMENT CONTROL OF SYSTEMS PROJECTS
Each level of management in the hierarchy is responsible for specific aspects of systems
projects, and this structure helps give priority to the most important systems projects for
the organization.
Corporate Strategic
Planning Group
IS Steering
Committee
Senior
Management
Middle
Management
Operational Management
Project Management
Group
Project
Team
Chapter 14 Managing Projects 539
TABLE 14.1 INFORMATION SYSTEMS PLAN
1. Purpose of the Plan
Overview of plan contents
Current business organization and future organization
Key business processes
Management strategy
2. Strategic Business Plan Rationale
Current situation
Current business organization
Changing environments
Major goals of the business plan
Firm’s strategic plan
3. Current Systems
Major systems supporting business functions and processes
Current infrastructure capabilities
Hardware
Software
Database
Networking and Internet
Cloud services
Difficulties meeting business requirements
Anticipated future demands
4. New Developments
New systems projects
Project descriptions
Business rationale
Applications’ role in strategy
New infrastructure capabilities required
Hardware
Software
Database
Networking and Internet
Cloud services
5. Management Strategy
Acquisition plans
Milestones and timing
Organizational realignment
Management controls
Major training initiatives
Human resources strategy
6. Implementation Plan
Anticipated difficulties in implementation
Progress reports
7. Budget Requirements
Requirements
Potential savings
Financing
Acquisition cycle
540 Part Four Building and Managing Systems
The plan contains a statement of corporate goals and specifies how informa-
tion technology will support the attainment of those goals. The report shows
how general goals will be achieved by specific systems projects. It identifies
specific target dates and milestones that can be used later to evaluate the plan’s
progress in terms of how many objectives were actually attained in the time
frame specified in the plan. The plan indicates the key management decisions,
technology, and required organizational change.
In order to plan effectively, firms will need to inventory and document all
of their information system applications, IT infrastructure components, and
long- and short-term information requirements. For projects in which benefits
involve improved decision making, managers should try to identify the deci-
sion improvements that would provide the greatest additional value to the firm.
They should then develop a set of metrics to quantify the value of more timely
and precise information on the outcome of the decision. (See Chapter 12 for
more detail on this topic.)
Portfolio Analysis
Once strategic analyses have determined the overall direction of systems de-
velopment, portfolio analysis can be used to evaluate alternative systems
projects. Portfolio analysis inventories all of the organization’s information sys-
tems projects and assets, including infrastructure, outsourcing contracts, and
licenses. This portfolio of information systems investments can be described as
having a certain profile of risk and benefit to the firm (see Figure 14.3) similar
to a financial portfolio.
Each information systems project carries its own set of risks and benefits.
(Section 14-4 describes the factors that increase the risks of systems projects.)
Firms would try to improve the return on their portfolios of IT assets by balanc-
ing the risk and return from their systems investments. Although there is no
ideal profile for all firms, information-intensive industries (e.g., finance) should
have a few high-risk, high-benefit projects to ensure that they stay current with
technology. Firms in non–information-intensive industries should focus on
high-benefit, low-risk projects.
Most desirable, of course, are systems with high benefit and low risk. These
promise early returns and low risks. Second, high-benefit, high-risk systems
should be examined; low-benefit, high-risk systems should be totally avoided;
and low-benefit, low-risk systems should be reexamined for the possibility of
FIGURE 14.3 A SYSTEM PORTFOLIO
Companies should examine their portfolio of projects in terms of potential benefits and
likely risks. Certain kinds of projects should be avoided altogether and others developed
rapidly. There is no ideal mix. Companies in different industries have different profiles.
High
Cautiously
examine
Avoid
P
o
te
nt
ia
l B
en
efi
ts
t
o
F
ir
m
Project Risk
Identify and
develop
Routine projects
High
Low
Low
Chapter 14 Managing Projects 541
rebuilding and replacing them with more desirable systems having higher ben-
efits. By using portfolio analysis, management can determine the optimal mix
of investment risk and reward for their firms, balancing riskier high-reward
projects with safer lower-reward ones. Firms where portfolio analysis is aligned
with business strategy have been found to have a superior return on their IT
assets, better alignment of IT investments with business objectives, and better
organization-wide coordination of IT investments (Jeffrey and Leliveld, 2004).
Scoring Models
A scoring model is useful for selecting projects where many criteria must be
considered. It assigns weights to various features of a system and then calcu-
lates the weighted totals. Using Table 14.2, the firm must decide among two
alternative enterprise resource planning (ERP) systems. The first column lists
the criteria that decision makers will use to evaluate the systems. These cri-
teria are usually the result of lengthy discussions among the decision-making
group. Often the most important outcome of a scoring model is not the score
but agreement on the criteria used to judge a system.
Table 14.2 shows that this particular company attaches the most importance
to capabilities for sales order processing, inventory management, and ware-
housing. The second column in Table 14.2 lists the weights that decision mak-
ers attached to the decision criteria. Columns 3 and 5 show the percentage
of requirements for each function that each alternative ERP system can pro-
vide. Each vendor’s score can be calculated by multiplying the percentage of
requirements met for each function by the weight attached to that function.
ERP System B has the highest total score.
TABLE 14.2 EXAMPLE OF A SCORING MODEL FOR AN ERP SYSTEM
CRITERIA WEIGHT
ERP SYSTEM
A %
ERP SYSTEM
A SCORE
ERP SYSTEM
B %
ERP SYSTEM
B SCORE
1.0 Order Processing
1.1 Online order entry 4 67 268 73 292
1.2 Online pricing 4 81 324 87 348
1.3 Inventory check 4 72 288 81 324
1.4 Customer credit check 3 66 198 59 177
1.5 Invoicing 4 73 292 82 328
Total Order Processing 1,370 1,469
2.0 Inventory Management
2.1 Production forecasting 3 72 216 76 228
2.2 Production planning 4 79 316 81 324
2.3 Inventory control 4 68 272 80 320
2.4 Reports 3 71 213 69 207
Total Inventory Management 1,017 1,079
3.0 Warehousing
3.1 Receiving 2 71 142 75 150
3.2 Picking/packing 3 77 231 82 246
3.3 Shipping 4 92 368 89 356
Total Warehousing 741 752
Grand Total 3,128 3,300
542 Part Four Building and Managing Systems
As with all “objective” techniques, there are many qualitative judgments in-
volved in using the scoring model. This model requires experts who understand
the issues and the technology. It is appropriate to cycle through the scoring
model several times, changing the criteria and weights, to see how sensitive
the outcome is to reasonable changes in criteria. Scoring models are used most
commonly to confirm, to rationalize, and to support decisions rather than as
the final arbiters of system selection.
14-3 How can firms assess the business
value of information systems?
Even if a systems project supports a firm’s strategic goals and meets user infor-
mation requirements, it needs to be a good investment for the firm. The value
of systems from a financial perspective essentially revolves around the issue
of return on invested capital. Does a particular information system investment
produce sufficient returns to justify its costs?
Information System Costs and Benefits
Table 14.3 lists some of the more common costs and benefits of systems.
Tangible benefits can be quantified and assigned a monetary value. Intangible
benefits, such as more efficient customer service or enhanced decision mak-
ing, cannot be immediately quantified but may lead to quantifiable gains in the
long run. Transaction and clerical systems that displace labor and save space
always produce more measurable, tangible benefits than management informa-
tion systems, decision-support systems, and computer-supported collaborative
work systems (see Chapter 2 and Chapter 12).
Chapter 5 introduced the concept of total cost of ownership (TCO), which is
designed to identify and measure the components of information technology
expenditures beyond the initial cost of purchasing and installing hardware and
software. However, TCO analysis provides only part of the information needed
to evaluate an information technology investment because it does not typically
deal with benefits, cost categories such as complexity costs, and “soft” and stra-
tegic factors discussed later in this section.
Capital Budgeting for Information Systems
To determine the benefits of a particular project, you’ll need to calculate all of
its costs and all of its benefits. Obviously, a project where costs exceed benefits
should be rejected. But even if the benefits outweigh the costs, additional fi-
nancial analysis is required to determine whether the project represents a good
return on the firm’s invested capital. Capital budgeting models are one of
several techniques used to measure the value of investing in long-term capital
investment projects.
Capital budgeting methods rely on measures of cash flows into and out of the
firm; capital projects generate those cash flows. The investment cost for informa-
tion systems projects is an immediate cash outflow caused by expenditures for
hardware, software, and labor. In subsequent years, the investment may cause
additional cash outflows that will be balanced by cash inflows resulting from
the investment. Cash inflows take the form of increased sales of more products
(for reasons such as new products, higher quality, or increasing market share)
Chapter 14 Managing Projects 543
or reduced costs in production and operations. The difference between cash
outflows and cash inflows is used for calculating the financial worth of an invest-
ment. Once the cash flows have been established, several alternative methods
are available for comparing different projects and deciding about the investment.
The principal capital budgeting models for evaluating IT projects are the
payback method, the accounting rate of return on investment (ROI), net pres-
ent value, and the internal rate of return (IRR). You can find out more about
how these capital budgeting models are used to justify information system in-
vestments in the Learning Tracks for this chapter.
Limitations of Financial Models
The traditional focus on the financial and technical aspects of an information
system tends to overlook the social and organizational dimensions of infor-
mation systems that may affect the true costs and benefits of the investment.
Many companies’ information systems investment decisions do not adequately
TABLE 14.3 COSTS AND BENEFITS OF INFORMATION SYSTEMS
COSTS
Hardware
Networking
Software
Services
Personnel
TANGIBLE BENEFITS (COST SAVINGS)
Increased productivity
Lower operational costs
Reduced workforce
Lower computer expenses
Lower outside vendor costs
Lower clerical and professional costs
Reduced rate of growth in expenses
Reduced facility costs
INTANGIBLE BENEFITS
Improved asset utilization
Improved resource control
Improved organizational planning
Increased organizational flexibility
More timely information
More information
Increased organizational learning
Legal requirements attained
Enhanced employee goodwill
Increased job satisfaction
Improved decision making
Improved operations
Higher client satisfaction
Better corporate image
544 Part Four Building and Managing Systems
consider costs from organizational disruptions created by a new system, such
as the cost to train end users, the impact that users’ learning curves for a new
system have on productivity, or the time managers need to spend overseeing
new system-related changes. Intangible benefits such as more timely decisions
from a new system or enhanced employee learning and expertise may also be
overlooked in a traditional financial analysis.
14-4 What are the principal risk factors in
information systems projects, and
how can they be managed?
We have already introduced the topic of information systems risks and risk as-
sessment in Chapter 8. In this chapter, we describe the specific risks to informa-
tion systems projects and show what can be done to manage them effectively.
Dimensions of Project Risk
Systems differ dramatically in their size, scope, level of complexity, and orga-
nizational and technical components. Some systems development projects are
more likely to create the problems we have described earlier or to suffer delays
because they carry a much higher level of risk than others. The level of project
risk is influenced by project size, project structure, and the level of technical
expertise of the information systems staff and project team.
• Project size. The larger the project—as indicated by the dollars spent, the size
of the implementation staff, the time allocated for implementation, and the
number of organizational units affected—the greater the risk. Very large-scale
systems projects have a failure rate that is 50 to 75 percent higher than that
for other projects because such projects are complex and difficult to control.
The organizational complexity of the system—how many units and groups
use it and how much it influences business processes—contributes to the
complexity of large-scale systems projects just as much as technical charac-
teristics, such as the number of lines of program code, length of project, and
budget. In addition, there are few reliable techniques for estimating the time
and cost to develop large-scale information systems.
• Project structure. Some projects are more highly structured than others. Their
requirements are clear and straightforward, so outputs and processes can
be easily defined. Users know exactly what they want and what the system
should do; there is almost no possibility of the users changing their minds.
Such projects run a much lower risk than those with relatively ,
fluid, and constantly changing requirements; with outputs that cannot be
fixed easily because they are subject to users’ changing ideas; or with users
who cannot agree on what they want.
• Experience with technology. The project risk rises if the project team and the
information system staff lack the required technical expertise. If the team
is unfamiliar with the hardware, system software, application software, or
database management system proposed for the project, it is highly likely that
the project will experience technical problems or take more time to complete
because of the need to master new skills.
Although the difficulty of the technology is one risk factor in information
systems projects, the other factors are primarily organizational, dealing with
Chapter 14 Managing Projects 545
the complexity of information requirements, the scope of the project, and how
many parts of the organization will be affected by a new information system.
Change Management and the Concept
of Implementation
The introduction or alteration of an information system has a powerful behav-
ioral and organizational impact. Changes in the way that information is de-
fined, accessed, and used to manage the organization’s resources often lead to
new distributions of authority and power. This internal organizational change
breeds resistance and opposition and can lead to the demise of an otherwise
good system.
A very large percentage of information systems projects stumble because
the process of organizational change surrounding system building was not
properly addressed. Successful system building requires careful change
management.
The Concept of Implementation
To manage the organizational change surrounding the introduction of a new
information system effectively, you must examine the process of implementa-
tion. Implementation refers to all organizational activities working toward the
adoption, management, and routinization of an innovation, such as a new infor-
mation system. In the implementation process, the systems analyst is a change
agent. The analyst not only develops technical solutions but also redefines the
configurations, interactions, job activities, and power relationships of various
organizational groups. The analyst is the catalyst for the entire change process
and is responsible for ensuring that all parties involved accept the changes cre-
ated by a new system. The change agent communicates with users, mediates
between competing interest groups, and ensures that the organizational adjust-
ment to such changes is complete.
The Role of End Users
System implementation generally benefits from high levels of user involve-
ment and management support. User participation in the design and opera-
tion of information systems has several positive results. First, if users are
heavily involved in systems design, they have more opportunities to mold
the system according to their priorities and business requirements and more
opportunities to control the outcome. Second, they are more likely to react
positively to the completed system because they have been active partici-
pants in the change process. Incorporating user knowledge and expertise
leads to better solutions.
The relationship between users and information systems specialists has
traditionally been a problem area for information systems implementation
efforts. Users and information systems specialists tend to have different back-
grounds, interests, and priorities. This is referred to as the user-designer
communications gap. These differences lead to divergent organizational loy-
alties, approaches to problem solving, and vocabularies.
Information systems specialists, for example, often have a highly technical,
or machine, orientation to problem solving. They look for elegant and sophis-
ticated technical solutions in which hardware and software efficiency is opti-
mized at the expense of ease of use or organizational effectiveness. Users prefer
systems that are oriented toward solving business problems or facilitating
546 Part Four Building and Managing Systems
organizational tasks. Often the orientations of both groups are so at odds that
they appear to speak in different tongues.
These differences are illustrated in Table 14.4, which depicts the typical con-
cerns of end users and technical specialists (information systems designers)
regarding the development of a new information system. Communication prob-
lems between end users and designers are a major reason why user require-
ments are not properly incorporated into information systems and why users
are driven out of the implementation process.
Systems development projects run a very high risk of failure when there
is a pronounced gap between users and technical specialists and when these
groups continue to pursue different goals. Under such conditions, users are
often driven away from the project. Because they cannot comprehend what the
technicians are saying, users conclude that the entire project is best left in the
hands of the information specialists alone.
Management Support and Commitment
If an information systems project has the backing and commitment of man-
agement at various levels, it is more likely to be perceived positively by both
users and the technical information services staff. Both groups will believe
that their participation in the development process will receive higher-
level attention and priority. They will be recognized and rewarded for the
time and effort they devote to implementation. Management backing also
ensures that a systems project receives sufficient funding and resources
to be successful. Furthermore, to be enforced effectively, all the changes
in work habits and procedures and any organizational realignments asso-
ciated with a new system depend on management backing. If a manager
considers a new system a priority, the system will more likely be treated
that way by his or her subordinates. According to the Project Management
Institute, executive sponsors who are actively engaged is the leading fac-
tor in project success (Kloppenborg and Tesch, 2015; Project Management
Institute, 2017).
Change Management Challenges for Business Process
Reengineering, Enterprise Applications, and Mergers
and Acquisitions
Given the challenges of innovation and implementation, it is not surprising to
find a very high failure rate among enterprise application and business process
reengineering (BPR) projects, which typically require extensive organizational
change and which may require replacing old technologies and legacy systems
that are deeply rooted in many interrelated business processes. A number of
studies have indicated that 70 percent of all business process reengineering
TABLE 14.4 THE USER-DESIGNER COMMUNICATIONS GAP
USER CONCERNS DESIGNER CONCERNS
Will the system deliver the information we need for our work? What demands will this system put on our servers?
Can we access the data on our smartphones, tablets, and
PCs?
What kind of programming demands will this place on our
group?
What new procedures do we need to enter data into the
system?
Where will the data be stored? What’s the most efficient way
to store them?
How will the operation of the system change employees’ daily
routines?
What technologies should we use to secure the data?
Chapter 14 Managing Projects 547
projects fail to deliver promised benefits. Likewise, a high percentage of
enterprise applications fail to be fully implemented or to meet the goals of their
users even after three years of work.
Many enterprise application and reengineering projects have been un-
dermined by poor implementation and change management practices that
failed to address employees’ concerns about change. Dealing with fear and
anxiety throughout the organization, overcoming resistance by key man-
agers, and changing job functions, career paths, and recruitment practices
have posed greater threats to reengineering than the difficulties companies
faced visualizing and designing breakthrough changes to business processes.
All of the enterprise applications require tighter coordination among dif-
ferent functional groups as well as extensive business process change (see
Chapter 9).
Projects related to mergers and acquisitions have a similar failure rate.
Mergers and acquisitions are deeply affected by the organizational characteris-
tics of the merging companies as well as by their IT infrastructures. Combining
the information systems of two different companies usually requires consider-
able organizational change and complex systems projects to manage. If the inte-
gration is not properly managed, firms can emerge with a tangled hodgepodge
of inherited legacy systems built by aggregating the systems of one firm after
another. Without a successful systems integration, the benefits anticipated from
the merger cannot be realized, or, worse, the merged entity cannot execute its
business processes effectively.
Controlling Risk Factors
Various project management, requirements gathering, and planning methodol-
ogies have been developed for specific categories of implementation problems.
Strategies have also been devised for ensuring that users play appropriate roles
throughout the implementation period and for managing the organizational
change process. Not all aspects of the implementation process can be easily
controlled or planned. However, anticipating potential implementation prob-
lems and applying appropriate corrective strategies can increase the chances
for system success.
The first step in managing project risk involves identifying the nature and
level of risk confronting the project. Implementers can then handle each proj-
ect with the tools and risk management approaches geared to its level of risk.
Not all risks are identifiable in advance, but with skillful project management,
most are. Frequent communication and a culture of collaboration will help proj-
ect teams adapt to unforeseen problems that arise (Browning and Ramasesh,
2015; Laufer et al., 2015; McFarlan, 1981).
Managing Technical Complexity
Projects with challenging and complex technology to master benefit from
internal integration tools. The success of such projects depends on how well
their technical complexity can be managed. Project leaders need both heavy
technical and administrative experience. They must be able to anticipate
problems and develop smooth working relationships among a predominantly
technical team. The team should be under the leadership of a manager with
a strong technical and project management background, and team members
should be highly experienced. Team meetings should take place frequently.
Essential technical skills or expertise not available internally should be secured
from outside the organization.
548 Part Four Building and Managing Systems
Formal Planning and Control Tools
Large projects benefit from appropriate use of formal planning tools and
formal control tools for documenting and monitoring project plans. The
two most commonly used methods for documenting project plans are Gantt
charts and PERT charts. A Gantt chart lists project activities and their
corresponding start and completion dates. The Gantt chart visually repre-
sents the timing and duration of different tasks in a development project as
well as their human resource requirements (see Figure 14.4). It shows each
task as a horizontal bar whose length is proportional to the time required to
complete it.
Although Gantt charts show when project activities begin and end, they don’t
depict task dependencies, how one task is affected if another is behind sched-
ule, or how tasks should be ordered. That is where PERT charts are useful.
PERT stands for “Program Evaluation and Review Technique,” a methodology
developed by the U.S. Navy during the 1950s to manage the Polaris submarine
missile program. A PERT chart graphically depicts project tasks and their inter-
relationships. The PERT chart lists the specific activities that make up a project
and the activities that must be completed before a specific activity can start, as
illustrated in Figure 14.5.
The PERT chart portrays a project as a network diagram consisting of num-
bered nodes (either circles or rectangles) representing project tasks. Each
node is numbered and shows the task, its duration, the starting date, and
the completion date. The direction of the arrows on the lines indicates the
sequence of tasks and shows which activities must be completed before the
commencement of another activity. In Figure 14.5, the tasks in nodes 2, 3,
and 4 are not dependent on each other and can be undertaken simultane-
ously, but each is dependent on completion of the first task. PERT charts for
complex projects can be difficult to interpret, and project managers often use
both techniques.
These project management techniques can help managers identify bottle-
necks and determine the impact that problems will have on project comple-
tion times. They can also help systems developers partition projects into
smaller, more manageable segments with defined, measurable business results.
Standard control techniques can successfully chart the progress of the project
against budgets and target dates, so deviations from the plan can be spotted.
Increasing User Involvement and Overcoming
User Resistance
Projects with relatively little structure and many requirements must
involve users fully at all stages. Users must be mobilized to support one of many
possible design options and to remain committed to a single design. External
integration tools consist of ways to link the work of the implementation team
to users at all organizational levels. For instance, users can become active mem-
bers of the project team, take on leadership roles, and take charge of installation
and training. The implementation team can demonstrate its responsiveness to
users, promptly answering questions, incorporating user feedback, and show-
ing their willingness to help.
Participation in implementation activities may not be enough to overcome
the problem of user resistance to organizational change. Different users may be
affected by the system in different ways. Whereas some users may welcome a
new system because it brings changes they perceive as beneficial to them, oth-
ers may resist these changes because they believe the shifts are detrimental to
their interests.
Chapter 14 Managing Projects 549
FIGURE 14.4 A GANTT CHART
The Gantt chart in this figure shows the task, person-days, and initials of each responsible person as well as the start and finish
dates for each task. The resource summary provides a good manager with the total person-days for each month and for each
person working on the project to manage the project successfully. The project described here is a data administration project.
HRIS COMBINED PLAN–HR
DATA ADMINISTRATION SECURITY
QMF security review/setup
Security orientation
QMF security maintenance
Data entry sec. profiles
Data entry sec. views est.
Data entry security profiles
DATA DICTIONARY
Orientation sessions
Data dictionary design
DD prod. coordn-query
DD prod. coordn-live
Data dictionary cleanup
Data dictionary maint.
PROCEDURES REVISION
DESIGN PREP
Work flows (old)
Payroll data flows
HRIS P/R model
P/R interface orient. mtg.
P/R interface coordn. 1
P/R interface coordn. 2
Benefits interfaces (old)
Benefits interfaces (new flow)
Benefits communication strategy
New work flow model
Posn. data entry flows
RESOURCE SUMMARY
Edith Farrell
Woody Vinton
Charles Pierce
Ted Leurs
Toni Cox
Patricia Knopp
Jane Lawton
David Holloway
Diane O'Neill
Joan Albert
Marie Marcus
Don Stevens
Casual
Kathy Mendez
Anna Borden
Gail Loring
UNASSIGNED
Co-op
Casual
TOTAL DAYS
Who
EF
EF
TP
EF
EF
EF
EF
EF
GL
EF
EF
EF
PK
JL
PK
PK
PK
PK
JL
JL
PK
PK
WV
EF
WV
CP
TL
TC
PC
JL
DH
DO
JA
MM
DS
CASL
KM
AB
GL
X
CO
CAUL
Da
20
2
35
4
12
65
1
32
20
40
35
35
10
31
11
6
15
8
5
8
3
15
14
TP
JA
GL
TP
TP
TP
WV
GL
GL
GL
JL
PK
JL
JL
JL
JL
JL
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
0.0
5.0
5.0
2
5
1
7
1
4
6
5
15
4
49
21
17
5
12
11
23
9
4
14
6
7
4
3
1
3
6
147
24
20
11
17
10
30
16
5
17
2
5
4
5
6
4
176
24
19
20
17
11
34
21
5
16
1
4
3
16
5
196
23
12
13
19
11
27
19
5
13
7
1
5
20
9
9
194
22
10
9
17
12
25
21
2
11
6
1
19
10
10
174
22
14
10
14
19
15
21
7
9
2
4
22
16
17
2
193
27
10
7
12
19
24
20
5
4
1
7
19
15
18
3
3
195
34
2
6
15
21
25
17
4
9
20
11
17
4
3
190
34
8
16
21
16
15
16
5
18
12
10
9
4
3
181
29
4
2
21
11
14
2
3
20
19
13
2
140
26
4
1
17
13
12
5
2
11
10
10
4
125
28
4
1
17
17
14
5
2
7
10
236
16
358
19
4
1
12
10
8
1
1
7
225
288
14
4
1
9
3
5
17
230
284
4
3
14
216
237
3
2
13
178
196
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
2018 2019 2020
Feb
12
Mar
If the use of a system is voluntary, users may choose to avoid it; if use is
mandatory, resistance will take the form of increased error rates, disruptions,
turnover, and even sabotage. Therefore, the implementation strategy must not
only encourage user participation and involvement, but it must also address
the issue of counterimplementation. Counterimplementation is a deliberate
550 Part Four Building and Managing Systems
strategy to thwart the implementation of an information system or an innova-
tion in an organization.
Strategies to overcome user resistance include user participation (to elicit
commitment as well as to improve design), user education and training, man-
agement edicts and policies, and better incentives for users who cooperate. The
new system can be made more user-friendly by improving the end-user inter-
face. Users will be more cooperative if organizational problems are solved prior
to introducing the new system.
Designing for the Organization
Because the purpose of a new system is to improve the organization’s perfor-
mance, information systems projects must explicitly address the ways in which
the organization will change when the new system is installed, including instal-
lation of mobile and web applications. In addition to procedural changes, trans-
formations in job functions, organizational structure, power relationships, and
the work environment should be carefully planned.
Areas where users interface with the system require special attention, with
sensitivity to ergonomics issues. Ergonomics refers to the interaction of people
and machines in the work environment. It considers the design of jobs, health
issues, and the end-user interface of information systems. Table 14.5 lists the
organizational dimensions that must be addressed when planning and imple-
menting information systems.
FIGURE 14.5 A PERT CHART
This is a simplified PERT chart for creating a small website. It shows the ordering of project tasks and the relationship
of a task with preceding and succeeding tasks.
Select Hosting Service
2
1/19/19 1/20/19
1 day
Design Web site
1
1/8/19 1/18/19
10 days
Write HTML
3
1/19/19 2/7/19
20 days
Test
6
2/15/19 2/25/19
10 days
Finalize Code
5
2/8/19 2/14/19
6 days
Create Art Work
4
1/19/19 1/29/19
10 days
Chapter 14 Managing Projects 551
Although systems analysis and design activities are supposed to include
an organizational impact analysis, this area has traditionally been neglected.
An organizational impact analysis explains how a proposed system will af-
fect organizational structure, attitudes, decision making, and operations. To in-
tegrate information systems successfully with the organization, thorough and
fully documented organizational impact assessments must be given more at-
tention in the development effort.
Sociotechnical Design
One way of addressing human and organizational issues is to incorporate
sociotechnical design practices into information systems projects. Designers
set forth separate sets of technical and social design solutions. The social de-
sign plans explore different workgroup structures, allocation of tasks, and the
design of individual jobs. The proposed technical solutions are compared with
the proposed social solutions. The solution that best meets both social and
technical objectives is selected for the final design. The resulting sociotechni-
cal design is expected to produce an information system that blends techni-
cal efficiency with sensitivity to organizational and human needs, leading to
higher job satisfaction and productivity.
You can see some of these project management strategies at work in the
Interactive Session on Management, which describes how ConocoPhillips im-
plemented a new access control system.
Project Management Software Tools
Commercial software tools that automate many aspects of project management
facilitate the project management process. Project management software typi-
cally features capabilities for defining and ordering tasks, assigning resources
to tasks, establishing starting and ending dates to tasks, tracking progress at
both individual and team levels, and facilitating modifications to tasks and re-
sources. Many automate the creation of Gantt and PERT charts and provide
communication, collaboration, and social tools.
Some of these tools are large sophisticated programs for managing very
large projects, dispersed work groups, and enterprise functions. These high-
end tools can manage very large numbers of tasks and activities and com-
plex relationships. The most widely used project management tool today
is Microsoft Project, but there are also lower-cost tools for smaller projects
and small businesses. Many project management applications are now
cloud-based to enable project team members to access project management
TABLE 14.5 ORGANIZATIONAL FACTORS IN SYSTEMS PLANNING AND
IMPLEMENTATION
Employee participation and involvement
Job design
Standards and performance monitoring
Ergonomics (including equipment, user interfaces, and the work environment)
Employee grievance resolution procedures
Health and safety
Government regulatory compliance
552 Part Four Building and Managing Systems
ConocoPhillips Co. is an American multinational
energy corporation headquartered in Houston,
Texas. It is the world’s largest independent oil
and natural gas exploration and production com-
pany, with $88 billion in total assets as of March
2017. It has 11,600 employees and operations in 17
countries to find and produce oil and natural gas.
Information systems are an important tool for man-
aging exploration and production operations, fos-
tering collaboration across functions and business
units, recruiting and developing highly talented sci-
entists and engineers, managing risks, and making
sound investments.
ConocoPhillips has a large and complex net-
work of global users requiring access to its systems.
Consequently, managing access control for the com-
pany’s information systems is very challenging and
the enterprise must work especially hard to meet
governance, risk, and compliance (GRC) require-
ments such as access control and segregation of du-
ties (SoD). (Review the discussion of both of these
topics in Chapter 8).
In 2009, ConocoPhillips began using SAP Access
Control for this purpose. Access Control is a SAP
product for streamlining the process of managing
and validating user access to applications and data.
SAP Access Control works with SAP and non-SAP
applications, including SAP Finance, SAP Sales &
Distribution, and Oracle software tools. It automates
user access assignments and can automatically re-
view user access and role authorizations and detect
and remediate risk violations. The software sup-
ports policies regarding the segregation of duties
so that people don’t have conflicting activities or
rights.
SAP has made many improvements to the soft-
ware, including greater stability and customiza-
tion features. ConocoPhillips has continuously
implemented new releases of the application, the
most recent being the upgrade from version 10.0
to 10.1. Every time SAP upgraded the software,
certain things that were working previously were
affected in moving to the latest release. It might
take months to get all processes back to the way
ConocoPhillips expected them to run. The latest
upgrade to SAP Access Control required a year-long
stabilization project.
Throughout this upgrade project and stabilization,
SAP and ConocoPhillips worked to keep lines of com-
munication open. ConocoPhillips works closely with
SAP and receives a direct line to SAP experts. In turn,
the company provides SAP with ideas and sugges-
tions for improving future releases of Access Control.
By collaborating with SAP experts and experimenting
with different approaches, ConocoPhillips was able
to configure the system to suit the enterprise’s exact
needs. ConocoPhillips improved its ability to sched-
ule necessary jobs, enable emergency access man-
agement, and evaluate SoD risks.
SAP Access Control 10.1 had a new capability for
customizing user interfaces, which was one of the
main selling points for ConocoPhillips to move to
this new release. In configuring the user interface,
the company removed data fields it didn’t use and
showed users only what they actually needed to
see. ConocoPhillips also added more additional help
features. The resulting user interface made it sig-
nificantly easier for end users to submit or process
requests.
The project also increased system usability
by minimizing workflows. ConocoPhillips GRC
Administrator Trevor Wyatt tried to keep workflows
at a controllable number, both to streamline the
project as well to make the system solution easier
to use. Although other organizations might set up
SAP Access Control with hundreds of workflows,
ConocoPhillips only has a handful. According to
Wyatt, the more workflows you have, the harder
it is to troubleshoot and the more things could go
wrong. Having simpler workflows for end users
means less risk. Instead of taking months to obtain
approvals, it takes minutes. Keeping workflows
simple minimizes complexity, which causes risk in
the workflow.
ConocoPhillips was highly attentive to the needs
of the end users throughout the entire upgrade and
stabilization project and thereafter. The company
provides users with job aids, hands-on training,
and in-class training, depending on their needs.
Wyatt also believes continuous training is very
important, especially when users don’t have a
background in the technology. ConocoPhillips tries
to train and train again. By training thoroughly,
ConocoPhillips was able to get thousands of users
INTERACTIVE SESSION MANAGEMENT
ConocoPhillips Implements a New System for Access Control
Chapter 14 Managing Projects 553
1. How important was this project for
ConocoPhillips? Why?
2. What project management techniques described
in this chapter were used to implement the new
version of SAP Access Control?
3. Why was the project so successful? What manage-
ment, organization, and technology issues were
addressed?
accustomed to the functionality the newly con-
figured SAP Access Control 10.1 offered with few
complaints.
Once fully implemented, SAP Access Control 10.1
has working seamlessly at ConocoPhillips, with very
few workflow issues. The access control solution is
heavily scrutinized by both internal and external
auditors to ensure it’s working properly. Due to that
scrutiny and the success of the SAP Access Control
upgrade, there’s less work that has to be done dur-
ing audit season. As SAP Access Control became
more stable, auditors have more confidence in the
system and don’t have to dig as deep. Additionally,
auditors can pull information directly from the sys-
tem instead of having to request that information
from the company’s GRC team. This saves time and
streamlines processes for both auditors and GRC
professionals.
After such a careful process of removing issues
from the system and configuring it in the way that’s
best for the business, ConocoPhillips is reaping the
benefits of very trustworthy access control processes.
It doesn’t have to second-guess the system, and
has full confidence that it is performing exactly as
expected.
Sources: www.sap.com, accessed January 7, 2018; Nicole D’Angelo,
“ConocoPhillips Drills Down into Access Control,” SAP Insider
Profiles, July 12, 2017; and www.conocophillips.com, accessed
January 7, 2018.
CASE STUDY QUESTIONS
tools and their data wherever they are working. The Interactive Session on
Technology describes some capabilities of cloud-based Microsoft Project
Online.
While project management software helps organizations track individual
projects, the resources allocated to them, and their costs, project portfolio
management software helps organizations manage portfolios of projects and
dependencies among them. Project portfolio management software helps man-
agers compare proposals and projects against budgets and resource capacity lev-
els to determine the optimal mix and sequencing of projects that best achieves
the organization’s strategic goals.
14-5 How will MIS help my career?
Here is how Chapter 14 and this book will help you find an entry-level job as an
IT project management assistant.
The Company
XYZ Multimedia Entertainment, a large multinational mass media and enter-
tainment company headquartered in Los Angeles, is looking for an entry-level
IT project management assistant. XYZ Multimedia creates films, TV shows,
recordings, streaming Internet content, interactive games, and consumer
products for a worldwide audience. It is an intensive user of leading-edge in-
formation technology in its products, services, and operations.
http://www.sap.com
http://www.conocophillips.com
554 Part Four Building and Managing Systems
Arup Group Limited is a multinational profes-
sional services firm headquartered in London that
provides engineering, design, planning, project
management, and consulting services for all as-
pects of structures and environments of human
construction. Founded in 1946, Arup now has over
13,000 staff based in 85 offices across 35 countries
throughout the globe. The company defines itself
as one where professionals of diverse disciplines—
engineers, planners, designers, financial ex-
perts, consulting specialists, and sustainability
professionals—can work together to deliver projects
and services of greater quality than by working in
isolation. Arup has worked on projects in over 160
countries, including the Pompidou Center in Paris,
the Sydney Opera House, the high-speed railway be-
tween London and Paris, and the National Aquatics
Center for the 2008 Beijing Olympics.
Arup is an intensive user of information technol-
ogy in all aspects of its work, including working with
clients, designing buildings, running structural simu-
lations, and coordinating projects. Its management
wants to ensure that Arup’s information systems
group is working on all the right IT projects for fur-
thering the business and is doing so in the right way.
Arup’s systems have to be stable, leading edge, and
available at all times, with employees able to access
the information they need at any time and any place.
Until recently Arup’s IT staff relied on Microsoft
Excel spreadsheets or Microsoft Word documents as
their project management tools. Reports were spo-
radic and in diverse formats, collaboration was very
limited, project delivery styles were inconsistent,
and there was no central visibility into what was
happening with each project. Arup set up a Global
IT Portfolio Management Office to oversee its entire
portfolio of IT projects, but it was hampered by hav-
ing to manually create reports using spreadsheets
and e-mail updates from regional offices.
Working with Program Framework consultants
who specialize in project portfolio management,
Arup decided to adopt Microsoft Project Online to
improve project management. Project Online is
Microsoft’s cloud-based project management tool,
and it helps organizations efficiently plan projects,
track status, and collaborate with others from any
location and any device. Members of Arup’s global
workforce have immediate access to project data
at any time wherever they are working. The cloud
solution also makes it possible to report on projects
using live data, with the system able to tie in to other
processes such as service and change management.
Program Framework consultants helped Arup imple-
ment Project Online and train employees. They also
developed a customized Project and Program Status
Reporting capability for Project Online.
In the past, Arup’s Global IT Portfolio
Management Office had to spend 40 hours per
month compiling reports manually. By the time it
created a status report, the report was already out
of date. Project Online gives Arup instant views
into the status of all of its IT projects. Regional em-
ployees can view their own portfolios of projects,
while Arup’s Global IT Portfolio Management Office
has immediate views of all global projects. Arup’s
management can examine and classify projects
throughout the entire enterprise based on their red,
green, and amber status indicators. (Red designates
projects with critical status, while amber designates
those at risk.) The ability to see Arup’s entire project
portfolio gives management better insight into proj-
ect delivery. The Global IT Portfolio Management
Office can obtain key project status summaries,
and highlight reporting of individual projects where
it can drill down for further detail, enabling it to
make better decisions based on up-to-date data.
Project Online has become essential for supporting
a common approach to Arup’s project management
across the globe. There is less duplication of effort
and more strategic value in Arup’s overall project
portfolio.
Project Online is part of Microsoft’s cloud-based
Office 365 software suite, so it works seamlessly with
other Microsoft productivity and communication
tools such as OneDrive for Business (cloud storage),
Skype for Business (voice, video, chat), Yammer (en-
terprise social networking), and Visual Studio Team
Foundation Server, which Arup uses for software
development projects. Arup also plans to implement
additional Project Online capabilities for demand and
capacity planning, portfolio prioritization, and port-
folio balancing. Users can easily copy information
from Project and paste it into Office applications like
PowerPoint and Word.
INTERACTIVE SESSION TECHNOLOGY
Arup Moves Project Management to the Cloud
Chapter 14 Managing Projects 555
1. What is the relationship between information
technology, project management, and Arup’s busi-
ness model and business strategy?
2. How does Microsoft Project Online support Arup’s
business strategy? How did it change the way the
company works?
3. What management, organization, and technology
issues did Arup have to address when selecting
Project Online as its global project portfolio man-
agement tool?
Arup uses Project Online for its IT Project
Pipeline, a central repository of ideas for future
development. Each idea recorded in the Pipeline
requires that the initiator furnish information such
as project description, budget, and resource needs.
Arup’s Global IT Portfolio Management Office
sends this information to Arup’s management com-
mittee members to review and prioritize for new
initiatives.
When ideas are approved, their Project Pipeline
information can easily be transferred to active proj-
ects. It only takes a few minutes for Project Pipeline
to create a project or program within Project Online.
Each has its own Project Details Pages, which in-
clude a built-in schedule template and a connected
Microsoft SharePoint Server site with document re-
pository and status reporting. This capability saves
Arup’s Global IT Portfolio Management Office man-
ager Carolyn Bundey several days of work for each
new project, creating significant time savings for an
annual portfolio of approximately 180 IT projects.
Several years ago, Project Online had about
150 users, but Arup is thinking about providing
the tool for all of its employees. Arup licenses
three different versions of Project Online. Project
managers, owners, and administrators use Project
Online with Project Professional for Office 365,
enabling them to create and edit project plans
inside or outside a web browser. Arup executives
use Project Online to review project status. Project
team members can view assignments or collabo-
rate with other team members using the lower-cost
Project Lite version.
Sources: “Engineering Firm Uses Cloud-Based Solution to Generate,
Execute, and Monitor IT Projects,” www.microsoft.com, accessed
January 2, 2018; “Leading Arup at the Forefront of Innovation
in Today’s Built Environment,” www.gineersnow.com, accessed
January 3, 2018; and www.arup.com, accessed January 2, 2018.
CASE STUDY QUESTIONS
Position Description
The IT project management assistant will help IT project managers with plan-
ning, budgeting, and overseeing all aspects of information technology projects
for the firm. Job responsibilities include:
• Performing tasks designed to enhance the functions and services provided
by the firm’s centralized Project Management Office. This might include
identifying and documenting best practices, investigating available tools, and
making recommendations for improving processes and procedures.
• Collaborating with project managers to ensure that the scope and direction of
each technical project is on schedule.
• Working with other project stakeholders for support.
Job Requirements
• Bachelor’s degree in Computer Science, Computer Engineering, Management
Information Systems, Project Management, or a related field
• Knowledge of project management (PMI) teachings
• Knowledge of process documentation (process flow charting)
http://www.microsoft.com
http://www.gineersnow.com
http://www.arup.com
556 Part Four Building and Managing Systems
• Proficiency with Microsoft Word, Excel, PowerPoint
• Strong interviewing and research skills
• Experience with SharePoint and/or Microsoft Project desirable
Interview Questions
1. Have you ever worked on an IT project? What did you do? Did you work
with any project management tools such as Microsoft Project?
2. Did you ever work on a non-IT project? What were your responsibilities? Did
you use project management software for your work?
3. Have you taken course work in project management? What do you know
about process documentation?
4. What is your proficiency level with Microsoft Office tools and with Microsoft
Project and SharePoint?
Author Tips
1. Review this chapter and also Chapter 13 on building information systems
to familiarize yourself with project management and systems development
techniques and methodologies.
2. Use the web to do more research on project management methodologies and
tools. Explore the Project Management Institute (PMI) website or review the
Project Management Institute’s book, A Guide to the Project Management Body
of Knowledge.
3. Try to find information on how projects are managed at XYZ Multimedia.
Inquire what project management methodologies and tools are used at this
company. If possible, show you are familiar with these tools and approaches.
4. Provide examples of any project management work you have done in your
courses or on a job. Alternatively, provide examples of your writing and ver-
bal communication skills.
14-1 What are the objectives of project management, and why is it so essential in developing informa-
tion systems?
Good project management is essential for ensuring that systems are delivered on time and on bud-
get and provide genuine business benefits. Project management activities include planning the work,
assessing the risk, estimating and acquiring resources required to accomplish the work, organizing
the work, directing execution, and analyzing the results. Project management must deal with five
major variables: scope, time, cost, quality, and risk.
14-2 What methods can be used for selecting and evaluating information systems projects and align-
ing them with the firm’s business goals?
Organizations need an information systems plan that describes how information technology sup-
ports the attainment of their business goals and documents all their system applications and IT in-
frastructure components. Large corporations will have a management structure to ensure the most
important systems projects receive priority. Portfolio analysis and scoring models can be used to
identify and evaluate alternative information systems projects.
14-3 How can firms assess the business value of information systems?
To determine whether an information systems project is a good investment, one must calcu-
late its costs and benefits. Tangible benefits are quantifiable, and intangible benefits that cannot be
REVIEW SUMMARY
Chapter 14 Managing Projects 557
immediately quantified may provide quantifiable benefits in the future. Benefits that exceed costs
should be analyzed using capital budgeting methods to make sure a project represents a good return
on the firm’s invested capital.
14-4 What are the principal risk factors in information systems projects, and how can they be managed?
The level of risk in a systems development project is determined by (1) project size, (2) project
structure, and (3) experience with technology. IS projects are more likely to fail when there is insuf-
ficient or improper user participation in the systems development process, lack of management sup-
port, and poor management of the implementation process. There is a very high failure rate among
projects involving business process reengineering, enterprise applications, and mergers and acquisi-
tions because they require extensive organizational change.
Implementation refers to the entire process of organizational change surrounding the introduction
of a new information system. User support and involvement and management support and control
of the implementation process are essential, as are mechanisms for dealing with the level of risk in
each new systems project. Project risk factors can be brought under some control by a contingency
approach to project management. The risk level of each project determines the appropriate mix of
external integration tools, internal integration tools, formal planning tools, and formal control tools
to be applied. Project management software helps organizations track individual projects and project
portfolio management software helps them manage portfolios of projects and dependencies among
them.
Key Terms
Capital budgeting, 542
Change agent, 545
Change management, 545
Counterimplementation, 549
Ergonomics, 550
External integration tools, 548
Formal control tools, 548
Formal planning tools, 548
Gantt chart, 548
Implementation, 545
Information systems plan, 538
Intangible benefits, 542
Internal integration tools, 547
Organizational impact analysis, 551
PERT chart, 548
Portfolio analysis, 540
Project, 536
Project management, 536
Project portfolio management, 553
Scope, 537
Scoring model, 541
Sociotechnical design, 551
Tangible benefits, 542
User-designer communications gap, 545
User interface, 536
MyLab MIS
To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.
Review Questions
14-1 What are the objectives of project
management, and why is it so essential in
developing information systems?
• Describe information system problems
resulting from poor project management.
• Define project management. List and
describe the project management activi-
ties and variables addressed by project
management.
14-2 What methods can be used for selecting and
evaluating information systems projects and
aligning them with the firm’s business goals?
• Name and describe the groups responsible
for the management of information sys-
tems projects.
• Describe the purpose of an information
systems plan and list the major categories
in the plan.
558 Part Four Building and Managing Systems
• Explain how portfolio analysis and scoring
models can be used to select information
systems projects.
14-3 How can firms assess the business value of
information systems?
• List and describe the major costs and ben-
efits of information systems.
• Distinguish between tangible and intan-
gible benefits.
14-4 What are the principal risk factors in
information systems projects, and how can they
be managed?
• Identify and describe each of the
principal risk factors in information
systems projects.
• Explain why builders of new information
systems need to address implementation
and change management.
• Explain why eliciting support of manage-
ment and end users is so essential for
successful implementation of information
systems projects.
• Explain why there is such a high failure
rate for implementations involving enter-
prise applications, business process reen-
gineering, and mergers and acquisitions.
• Identify and describe the strategies for
controlling project risk.
• Identify the organizational considerations
that should be addressed by project plan-
ning and implementation.
• Explain how project management soft-
ware tools contribute to successful project
management.
Discussion Questions
14-5 How much does project management impact
the success of a new information system?
14-6 It has been said that most systems
fail because systems builders ignore
MyLab MIS
MyLab MIS
organizational behavior problems. Why
might this be so?
14-7 What is the role of end users in information
systems project management?MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience evaluating information systems projects, using spread-
sheet software to perform capital budgeting analyses for new information systems investments, and using web
tools to analyze the financing for a new home. Visit the MyLab MIS Multimedia Library to access this chapter’s
Hands-on MIS Projects.
Management Decision Problems
14-8 The U.S. Census launched an IT project to arm its census takers in the field with high-tech handheld
devices that would save taxpayer money by directly beaming population data to headquarters from
census takers in the field. Census officials signed a $600 million contract with Harris Corporation in 2006
to build 500,000 devices but still weren’t sure which features they wanted included in the units. Census
officials did not specify the testing process to measure the performance of the handheld devices. As the
project progressed, 400 change requests to project requirements were added. Two years and hundreds of
millions of taxpayer dollars later, the handhelds were far too slow and unreliable to be used for the 2010
U.S. census. What could Census Bureau management and the Harris Corporation have done to prevent
this outcome?
14-9 Caterpillar is the world’s leading maker of earth-moving machinery and supplier of agricultural
equipment. Caterpillar wants to end its support for its Dealer Business System (DBS), which it licenses
to its dealers to help them run their businesses. The software in this system is becoming outdated,
and senior management wants to transfer support for the hosted version of the software to Accenture
Consultants so it can concentrate on its core business. Caterpillar never required its dealers to use DBS,
but the system had become a de facto standard for doing business with the company. The majority
of the 50 Cat dealers in North America use some version of DBS, as do about half of the 200 or so Cat
dealers in the rest of the world. Before Caterpillar turns the product over to Accenture, what factors and
issues should it consider? What questions should it ask? What questions should its dealers ask?
Chapter 14 Managing Projects 559
Improving Decision Making: Using Spreadsheet Software for Capital Budgeting for a New
CAD System
Software skills: Spreadsheet formulas and functions
Business skills: Capital budgeting
14-10 This project provides you with an opportunity to use spreadsheet software to use the capital budgeting
models discussed in this chapter and its Learning Tracks to analyze the return on an investment for a
new computer-aided design (CAD) system.
Your company would like to invest in a CAD system that requires purchasing hardware, software, and
networking technology as well as expenditures for installation, training, and support. MyLab MIS contains tables
showing each cost component for the new system as well as annual maintenance costs over a five-year period,
along with a Learning Track on capital budgeting models. You believe the new system will reduce the amount of
labor required to generate designs and design specifications, thereby increasing your firm’s annual cash flow.
• Using the data provided in these tables, create a worksheet that calculates the costs and benefits of
the investment over a five-year period and analyzes the investment using the four capital budgeting
models presented in this chapter’s Learning Track.
• Is this investment worthwhile? Why or why not?
Improving Decision Making: Using Web Tools for Buying and Financing a Home
Software skills: Internet-based software
Business skills: Financial planning
14-11 This project will develop your skills using web-based software for searching for a home and calculating
mortgage financing for that home.
You would like to purchase a home in Fort Collins, Colorado. Ideally, it should be a single-family house
with at least three bedrooms and one bathroom that costs between $170,000 and $300,000 and can be financed
with a 30-year fixed rate mortgage. You can afford a down payment that is 20 percent of the value of the house.
Before you purchase a house, you would like to find out what homes are available in your price range, find a
mortgage, and determine the amount of your monthly payment. Use the Realtor.com site to help you with the
following tasks:
• Locate homes in Fort Collins, Colorado, that meet your specifications.
• Find a mortgage for 80 percent of the list price of the home. Compare rates from at least three sites
(use search engines to find sites other than Yahoo).
• After selecting a mortgage, calculate your closing costs and the monthly payment.
When you are finished, evaluate the whole process. For example, assess the ease of use of the site and
your ability to find information about houses and mortgages, the accuracy of the information you found, and
the breadth of choice of homes and mortgages.
Collaboration and Teamwork Project
Identifying Implementation Problems
14-12 Form a group with three or four other students. Write a description of the implementation problems you
might expect to encounter in one of the systems described in the Interactive Sessions or chapter-ending
cases in this text. Write an analysis of the steps you would take to solve or prevent these problems. If pos-
sible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presenta-
tion of your findings for the class.
http://Realtor.com
560 Part Four Building and Managing Systems
there was responsibility on both sides for system
performance and service delivery. How did all of this
happen?
Phase 1 of UCMS (wage records) was implemented
in May 2008. Phase 2, which included the employer
tax portion of the system, went live in March 2011
but required additional work, which took years to fix.
Phase 3 for benefit claims processing, payment, and
appeals continued to lag behind with problems and
ultimately never went live.
In 2012, DLI enlisted the Carnegie Mellon
Software Engineering Insitute to conduct an inde-
pendent assessment of the UCMS. The study was
completed in July 2013, and recommended continu-
ing work on remaining Phase 2 problems, but stop-
ping work on Phase 3. Many of the problems it iden-
tified for Phase 3 could not be solved.
The Carnegie Mellon study found many flaws in
the systems development process. IBM had extensive
systems experience and technology knowledge but
its proposal underestimated the project’s scope and
complexity. DLI lacked sufficient staffing and experi-
ence for effective oversight and management of the
contract and project. There was no formal delegation
of roles and responsibilities for managing the project.
No one at DLI was held accountable. DLI essentially
relied on the contractor to self-manage.
UCMS was considered a large-scale software proj-
ect due to its complexity, large number of informa-
tion requirements and business rules, and its cost.
DLI’s solicitation for vendor proposals for UCMS
exhibited ambiguity in communicating all of these
requirements, and also neglected to define and de-
scribe quantitative and qualitative performance mea-
sures and metrics for the proposed system.
A large-scale software-intensive system such as
UCMS requires a rigorous and disciplined testing
strategy, but this was not implemented. IBM de-
cided to use DLI users to help develop test scripts.
They provided the business expertise, but IBM did
not use IT test experts on its end. User acceptance
testing was initiated before completing system tests
for Phase 2 and Phase 3. Rigorous testing came too
late in the project. DLI did not specify a minimum
of metrics for UCMS system performance so that
there were no identifiable criteria and evidence for
The Pennsylvania Department of Labor and Industry (DLI) is responsible for the admin-istration and operation of the state’s unem-
ployment compensation program, which provides
temporary income to replace lost wages for quali-
fied workers. DLI employs over 500 people and
has approximately 200 offices statewide to serve
Pennsylvania’s 6.4 million workers and nearly
300,000 employers. Unemployment compensation
(UC) claims are usually filed online or by telephone
or mailed to a UC service center.
DLI had a legacy mainframe system for processing
unemployment benefits that was over 40 years old.
However, it became increasingly expensive to main-
tain and difficult to modify, with limited functional-
ity for case management and integrating newer tools
and technologies to enhance productivity.
In June 2006, DLI awarded IBM a fixed price con-
tract totaling $109.9 million for the Unemployment
Compensation Modernization System (UCMS), which
would replace the antiquated mainframe system.
The initial contract with IBM called for more modern
and efficient technology and business processes for
(1) maintaining wage records, (2) processing em-
ployer taxes, and (3) claims processing, payment,
and appeals, to be completed by February 2010. IBM
won the UCMS contract after a three-year bidding
process, claiming to be the only vendor with the type
of proprietary databases capable of supporting a to-
tally integrated computer system.
However, this project experienced significant
delays and cost overruns, ultimately costing nearly
$180 million, with much of the system never com-
pleted when the contract expired in September 2013.
By that time, the project was 45 months behind
schedule and $60 million over budget. Pennsylvania
taxpayers had paid IBM nearly $170 million for what
was supposed to be a comprehensive, integrated, and
modern system that it never got. IBM’s contract was
not renewed. In March 2017, Pennsylvania sued IBM
for breach of contract, fraudulent and negligent mis-
representation, and charging taxpayers for services
it did not provide. IBM said Pennsylvania’s claims
had no merit and that it would fight the lawsuit. A
spokesman for the company laid some of the blame
for the project’s problems on the state, saying that
Pennsylvania’s Unemployment Compensation
Modernization System: Unfinished Business
CASE STUDY
Chapter 14 Managing Projects 561
transfer of essential knowledge for the entire project,
a loss of “project memory.” Since the UCMS project’s
start, 638 different contractors and staff members
worked on the project. The majority of the project
workforce spent less than one year on the project
and 75 percent spent less than 2 years. All of these
discontinuities and workforce churn most likely con-
tributed to IBM’s schedule delays and inability to pro-
vide an accurate picture of the state of the project.
Work on Pennsylvania’s UC system contin-
ued without IBM. In 2013, the Pennsylvania
Legislature passed Act 34, which created a Services
Infrastructure Improvement Fund (SIIF) as a tem-
porary supplemental funding source to improve
UC services and systems. A total of $178.4 million
was authorized and spent during calendar years
2013 through 2016. Even then the project stumbled.
Pennsylvania Auditor General Eugene A. DePasquale
initiated an audit in January 2017 to determine how
the $178 million in SIIF funds were spent. The audi-
tors found that DLI did not use proper accounting
methods to record specific SIIF expenditures. DLI
comingled unemployment compensation administra-
tive funds from all sources, including federal funds
for unemployment compensation administration and
interest on unemployment compensation tax money
as well as outlays from SIIF.
On a more positive note, there were noticeable
improvements and efficiencies from 2013 through
2016 in services provided to UC claimants and in UC
system infrastructure. For example, the percentage
of first payments paid promptly increased from 81.6
percent to 93.4 percent. However, DLI was unable to
show how exactly the SIIF expenditures contributed
to these outcomes.
When SIIF funding was not reauthorized and
supplemental funding ended in December 2016, DLI
was forced to cut $57.5 million from its UC adminis-
trative budget for 2017, causing the immediate clo-
sure of three of the state’s eight UC service centers in
December 2016 and the elimination of 521 positions.
Customer service declined significantly with claim-
ants not being able to get through on the phone lines
and delays in processing claims.
Despite earlier setbacks, DLI is determined to
complete the modernization of its unemployment
compensation benefits delivery system. In June
2017, DLI signed a $35 million contract with Florida-
based Geographic Solutions to create a system that
enhances customer service, improves quality, is more
operationally efficient, and is sustainable into the
determining that Phase 2 and Phase 3 application re-
leases were stable.
DLI staff had approved IBM’s representation of
business system requirements without fully under-
standing what they were approving. IBM’s software
development and testing program for this project
lacked rigor. This resulted in a higher number of
software defects than industry norms, software code
that was excessively complex (which makes testing
too difficult), and late discovery of missing business
requirements.
The vast majority of the software defects were
serious, and 50 percent were not discovered until
the User Acceptance test, very late in the system
development cycle. Without thorough and complete
testing throughout the development process, there
is no way to know how many of the total defects re-
siding in software will be discovered as a system is
being used. Carnegie Mellon also found that IBM had
not performed a stress test to determine the perfor-
mance limits of the UCMS system.
IBM’s software development plan was supposed to
use industry and company standards and practices,
but there was no ongoing discipline to execute these
standards and practices during the project. DLI ac-
cepted Phase 2 prematurely for production in March
2011 with known defects impacting system perfor-
mance, including software defects, unresolved data
conversion issues, and problems with batch process-
ing operations.
A project of this complexity and magnitude re-
quires a high degree of continuity in knowledge
throughout the system development cycle, but this
was never achieved. During requirements determi-
nation, DLI didn’t have enough user subject matter
experts to participate in joint application design
(JAD; see Chapter 13) sessions with technical mem-
bers of the project team. Thirty-six JAD subcontrac-
tors were prematurely removed from the project,
leaving IBM with incomplete understanding of
unemployment claims processing business require-
ments. System design and testing staff were not in-
cluded in the JAD process, running counter to sound
business practice. Including them was essential to
ensure UC business requirements were defined in
sufficient detail to be testable. DLI staff often ap-
proved JAD requirements documents and Detailed
System Design documents under pressure to meet
short deadlines for approval.
Ineffective project management and constant
changes in the contractor’s workforce prevented
562 Part Four Building and Managing Systems
future. Geographic Solutions specializes in design-
ing, developing, and maintaining web-based systems
for the workforce development and unemployment
insurance industries and has developed over 80 work-
force systems for state and local agencies across the
United States. Geographic Solutions was scheduled to
begin work on the system on August 1, 2017 with a
projected 18 to 24 months for completion.
In 2015, DLI had hired Chicago-based CSG
Government Solutions for $6.1 million to assist
with planning for and monitoring this project. CSG
specializes in planning, managing, and supporting
complex projects that modernize the information
technology and business processes of large govern-
ment programs. CSG analyzed existing systems
and workflows, developed the project strategy and
technology roadmap, and gathered business and
technical requirements to develop an RFP. CSG also
established a full-service Project Management Office
to monitor project progress, and is providing techni-
cal oversight, UC subject matter expertise, require-
ments management, and testing support throughout
the system modernization. Once the new system has
been fully implemented, cost savings from benefit
modernization are estimated to range from 5 to 10
percent of total UC administrative costs.
Sources: www.geographicsolutions.com, accessed January 3,
2018; www.csgdelivers.com, accessed January 3, 2018; Jan
Murphy, “Take Two: Labor & Industry Tries Again to Modernize
Jobless Benefits Computer System,” Penn Live, June 23, 2017;
Commonwealth of Pennsylvania Department of the Auditor
General, “Performance Audit Report: Pennsylvania Department
of Labor and Industry Service and Infrastructure Improvement
Fund (SIIF),” April 2017; and Constance Bennett, Nanette
Brown, Julie Cohen, Dr. Betsy Clark, Jeff Davenport, Eric
Ferguson, John Gross, Michael H. McLendon, and Gregory Such,
“Independent Assessment of the Commonwealth of Pennsylvania
Unemployment Compensation Modernization System Program
(UCMS),” Carnegie Mellon University Software Engineering
Institute, July 2013.
CASE STUDY QUESTIONS
14-13 Assess the importance of the Unemployment
Compensation Modernization System project
for the state of Pennsylvania.
14-14 Why was unemployment compensation mod-
ernization a risky project in Pennsylvania?
Identify the key risk factors.
14-15 Classify and describe the problems encoun-
tered by the UCMS projects. What manage-
ment, organization, and technology factors
were responsible for these problems?
14-16 What could have been done to mitigate the
risks of these projects?
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
14-17 Identify and describe two methods for helping managers select information systems projects.
14-18 Compare the two major types of planning and control tools.
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564
MyLab MIS
Discussion Questions: 15-5, 15-6; Hands-on MIS Projects: 15-7, 15-8, 15-9, 15-10;
Writing Assignments: 15-15, 15-16; eText with Conceptual Animations
CHAPTER CASES
New Systems Help Eli Lilly Standardize as a
Global Company
The Global Internet Goes Multimedia
AbbVie Builds a Global Systems
Infrastructure
E-commerce in China: Opportunities and
Obstacles
VIDEO CASES
Daum Runs Oracle Apps on Linux
Lean Manufacturing and Global ERP:
Humanetics and Global Shop
LEARNING OBJECTIVES
After reading this chapter, you will be able to
answer the following questions:
15-1 What major factors are driving the
internationalization of business?
15-2 What are the alternative strategies for
developing global businesses?
15-3 What are the challenges posed by
global information systems and
management solutions for these
challenges?
15-4 What are the issues and technical
alternatives to be considered when
developing international information
systems?
15-5 How will MIS help my career?
Managing Global Systems15CHAPTER
565
Eli Lilly and Company is one of the world’s leading pharmaceutical manu-facturers, marketing its pharmaceutical and animal health care products in 120 countries. Headquartered in Indianapolis, Indiana, Lilly has 41,000
employees throughout the United States and 73 other countries, 2017 revenue
of $22.9 billion, and 13 manufacturing and 6 research and development (R&D)
locations around the globe.
As a far-flung global company, Lilly had dozens of disparate local and re-
gional information systems customized to support local business processes, and
they were very difficult to coordinate. Imagine the data redundancies and inef-
ficiencies when 40 different local controllers executed the month-end financial
closing process on 40 different systems with different data standards!
In order to manage Lilly as a global en-
terprise and reduce costs, Lilly moved to a
shared services model in which common
processes are centralized at a regional level
or outsourced completely. The company set
up four regional shared service centers in
Indiana, Ireland, Mexico, and Malaysia. The
shared service model helps eliminate re-
dundancies and trim costs by pulling busi-
ness processes away from local units and
regionalizing them at the shared service
centers.
These systems needed to be retired and
replaced by a common IT platform—in this
case, a single enterprise-wide ERP system.
Starting in 2010, Lilly began rolling out a
single global instance of SAP to all its loca-
tions. Today, essentially all of Lilly’s global business runs on SAP ERP and 17
other SAP software solutions, including systems for governance, risk manage-
ment, and compliance (GRC).
Of special importance was Lilly’s adoption in 2013 of SAP GRC Process
Control for process automation. Previously, Lilly’s financial control group tried
to manage the control structure regionally by using individual spreadsheets
that identified controls for different locations. The company’s master control
matrix was a large workbook incorporating data from individual spreadsheets
with color coding to manage changes to the file. It was both frustrating and
time-consuming to identify which controls were in place at any point in time
throughout Lilly’s global organization.
SAP GRC Process Controls is a tool that provides organizations with a contin-
uous view of their key compliance activities across all business processes, such
New Systems Help Eli Lilly Standardize as a
Global Company
© Docstockmedia/Shutterstock
566 Part Four Building and Managing Systems
as compliance with Sarbanes-Oxley (SOX), segregation of duties (SoD), and op-
erational controls for managing the business. (SOX controls the accuracy and
security of data reported within financial statements, and SoD assigns more
than one individual to perform a single task to prevent fraud and error.) SAP
GRC Process Control serves as a central repository to store data from a global
control matrix for Lilly’s entire enterprise and improves management of those
controls with automated monitoring. The Process Control tool can issue alerts
when controls need to be tested, store testing and sign-off documentation,create
and delegate remediation plans, and keep an audit trail of changes to controls.
By standardizing and streamlining execution of its process controls and busi-
ness rules throughout the enterprise, Eli Lilly has become even more efficient
and effective as a global company.
Sources: www.sap.com, accessed January 9, 2018; Lauren Bonneau, “Eli Lilly and Company
Continues Its Global Standardization and Automation Initiative with a rollout of SAP Process
Control,” SAP Insider Profiles, August 10, 2017; www.lilly.com, accessed January 9, 2018; and
Dave Hannon, “Lilly Brings Process Consistency to a Diversified Global Organization,” SAP
Insider Profiles, April 1, 2011.
Eli Lilly’s efforts to create global reporting systems and a regional shared services model identify some of the issues that truly global
organizations need to consider if they want to operate worldwide. Like
many large, multinational firms, Eli Lilly has numerous operating units
in many different countries. These units had their own systems, business
processes, and reporting standards. As a result, Eli Lilly was unable to ef-
fectively coordinate global operations or manage its financial reporting
controls across multiple countries and regions. Management was unable
to see how Lilly was meeting governance, risk, and compliance standards
enterprise-wide.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. To solve its global management and business chal-
lenges, Eli Lilly moved to a shared services model and standardized and stream-
lined its business processes on a global level. The company implemented a
single instance of the SAP ERP software worldwide. Lilly also implemented
SAP Process Control to create a global framework for governance, risk manage-
ment, and compliance (GRC). Eli Lilly’s global systems provide the firm with
enterprise-wide information on firm operations and financial performance so
that the company can be more easily managed and coordinated from a global
perspective.
Here are some questions to think about: How did information technology
improve operations and management decision making at Eli Lilly? How did
Lilly’s new ERP and Process Control systems help Lilly become a more global
organization?
http://www.sap.com
http://www.lilly.com
Chapter 15 Managing Global Systems 567
15-1 What major factors are driving the
internationalization of business?
In earlier chapters, we describe the emergence of a global economic system
and global world order driven by advanced networks and information systems.
The new world order is sweeping away many national corporations, national
industries, and national economies controlled by domestic politicians. Many
localized firms will be replaced by fast-moving networked corporations that
transcend national boundaries. The growth of international trade has radically
altered domestic economies around the globe.
Consider the path to market for an iPhone, which is illustrated in Figure 15.1.
The iPhone was designed by Apple engineers in the United States, sourced with
more than 200 high-tech components from around the world, and assembled
in China. Companies in Taiwan, South Korea, Japan, France, Italy, Germany,
and the United States provided components such as the case, camera, proces-
sor, accelerator, gyroscope, electronic compass, power management chip, touch
screen controller, and high-definition display screen. Foxconn, a Chinese divi-
sion of Taiwan’s Hon Hai Group, is in charge of manufacturing and assembly.
Developing an International Information Systems
Architecture
This chapter describes how to go about building an international information
systems architecture suitable for your international strategy. An international
information systems architecture consists of the basic information systems
required by organizations to coordinate worldwide trade and other activities.
Figure 15.2 illustrates the reasoning we follow throughout the chapter and
Technology
Organization
Management
Business
Challenges
Information
System
Business
Solutions
• Design global strategy
and business model
• Globalize
business processes and
reporting
• Regional shared service
centers
• SAP ERP
• Global footprint
• Support global business
processes and reporting
• Streamline and standardize
process controls and business
rules globally
Global ERP System
Global Process Control System
• Increase eciency
• Reduce costs
• Increase revenue
• Disparate local business processes,
systems, and data
• SAP GRC Process Control
568 Part Four Building and Managing Systems
depicts the major dimensions of an international information systems
architectue.
The basic strategy to follow when building an international system is to un-
derstand the global environment in which your firm is operating. This means
understanding the overall market forces, or business drivers, that are pushing
your industry toward global competition. A business driver is a force in the en-
vironment to which businesses must respond and that influences the direction
of the business. Likewise, examine carefully the inhibitors or negative factors
that create management challenges—factors that could scuttle the development
FIGURE 15.1 APPLE IPHONE’S GLOBAL SUPPLY CHAIN
Apple designs the iPhone in the United States and relies on suppliers in the United
States, Germany, Italy, France, Japan, and South Korea for other parts. Much of the final
assembly occurs in China.
U.S.
Germany
Italy/France South Korea
JapanChina
FIGURE 15.2 INTERNATIONAL INFORMATION SYSTEMS ARCHITECTURE
The major dimensions for developing an international information systems architecture
are the global environment, the corporate global strategies, the structure of the organi-
zation, the management and business processes, and the technology platform.
Global Environment:
Business Drivers and Challenges
Corporate Global Strategies
Organization Structure
Management and Business
Processes
Technology Platform
Chapter 15 Managing Global Systems 569
of a global business. Once you have examined the global environment, you will
need to consider a corporate strategy for competing in that environment. How
will your firm respond? You could ignore the global market and focus on do-
mestic competition only, sell to the globe from a domestic base, or organize pro-
duction and distribution around the globe. There are many in-between choices.
After you have developed a strategy, it is time to consider how to structure
your organization so it can pursue the strategy. How will you accomplish a divi-
sion of labor across a global environment? Where will production, administra-
tion, accounting, marketing, and human resource functions be located? Who
will handle the systems function?
Next, you must consider the management issues in implementing your strat-
egy and making the organization design come alive. Key here will be the design
of business processes. How can you discover and manage user requirements?
How can you induce change in local units to conform to international require-
ments? How can you reengineer on a global scale, and how can you coordinate
systems development?
The last issue to consider is the technology platform. Although changing
technology is a key driving factor leading toward global markets, you need to
have a corporate strategy and structure before you can rationally choose the
right technology.
After you have completed this process of reasoning, you will be well on your
way toward an appropriate international information systems portfolio capable
of achieving your corporate goals. Let’s begin by looking at the overall global
environment.
The Global Environment: Business Drivers and
Challenges
Table 15.1 lists the business drivers in the global environment that are leading
all industries toward global markets and competition.
The global business drivers can be divided into two groups: general cultural
factors and specific business factors. Easily recognized general cultural factors
have driven internationalization since World War II. Information, communi-
cation, and transportation technologies have created a global village in which
communication (by telephone, television, radio, or computer network) around
the globe is no more difficult than communication down the block. The cost of
moving goods and services to and from geographically dispersed locations has
fallen dramatically.
The development of global communications has created a global village in a
second sense: A global culture created by television, the Internet, and other
globally shared media such as movies now permits different cultures and
TABLE 15.1 THE GLOBAL ENVIRONMENT: BUSINESS DRIVERS AND
CHALLENGES
GENERAL CULTURAL FACTORS SPECIFIC BUSINESS FACTORS
Global communication and transportation
technologies
Global markets
Development of global culture Global production and operations
Emergence of global social norms Global coordination
Political stability Global workforce
Global knowledge base Global economies of scale
570 Part Four Building and Managing Systems
peoples to develop common expectations about right and wrong, desirable and
undesirable, heroic and cowardly.
A last factor to consider is the growth of a global knowledge base. At the
end of World War II, knowledge, education, science, and industrial skills were
highly concentrated in North America, Western Europe, and Japan, with the
rest of the world euphemistically called the Third World. This is no longer true.
Latin America, China, southern Asia, and Eastern Europe have developed pow-
erful educational, industrial, and scientific centers, resulting in a much more
democratically and widely dispersed knowledge base.
These general cultural factors leading toward internationalization result in
specific business globalization factors that affect most industries. The growth
of powerful communications technologies and the emergence of world cultures
lay the groundwork for global markets—global consumers interested in consum-
ing similar products that are culturally approved. Coca-Cola, American sneak-
ers (made in Korea but designed in Los Angeles), and Cable News Network
(CNN) programming can now be sold in Latin America, Africa, and Asia.
Responding to this demand, global production and operations have emerged
with precise online coordination between far-flung production facilities and cen-
tral headquarters thousands of miles away. At Maersk, a major global shipping
company based in Copenhagen, Denmark, shipping managers at Copenhagen
and other locations can watch the loading of ships in Rotterdam online, check
trim and ballast, and trace packages to specific ship locations as the activity pro-
ceeds. This is all possible through an international satellite link.
The new global markets and pressure toward global production and operation
have called forth whole new capabilities for global coordination. Production, ac-
counting, marketing and sales, human resources, and systems development (all
the major business functions) can be coordinated on a global scale.
Frito-Lay, for instance, can develop a marketing sales force automation sys-
tem in the United States and, once provided, may try the same techniques and
technologies in Spain. Micromarketing—marketing to very small geographic
and social units—no longer means marketing to neighborhoods in the United
States but to neighborhoods throughout the world! Internet-based marketing
means marketing to individuals and social networks across the globe. These
new levels of global coordination permit, for the first time in history, the loca-
tion of business activity according to comparative advantage. Design should be
located where it is best accomplished, as should marketing, production, and
finance.
Finally, global markets, production, and administration create the conditions
for powerful, sustained global economies of scale. Production driven by world-
wide global demand can be concentrated where it can best be accomplished,
fixed resources can be allocated over larger production runs, and production
runs in larger plants can be scheduled more efficiently and precisely estimated.
Lower-cost factors of production can be exploited wherever they emerge. The
result is a powerful strategic advantage to firms that can organize globally.
These general and specific business drivers have greatly enlarged world trade
and commerce.
Not all industries are similarly affected by these trends. Clearly, manufactur-
ing has been much more affected than services that still tend to be domestic
and highly inefficient. However, the localism of services is breaking down in
telecommunications, entertainment, transportation, finance, law, and general
business. Clearly, those firms that can understand the internationalization of
their own industry and respond appropriately will reap enormous gains in pro-
ductivity and stability.
Chapter 15 Managing Global Systems 571
Business Challenges
Although the possibilities of globalization for business success are significant,
fundamental forces are operating to inhibit a global economy and to disrupt
international business. Table 15.2 lists the most common and powerful chal-
lenges to the development of global systems.
At a cultural level, particularism, making judgments and taking action on
the basis of narrow or personal characteristics, in all its forms (religious, na-
tionalistic, ethnic, regionalism, geopolitical position) rejects the very concept
of a shared global culture and rejects the penetration of domestic markets by
foreign goods and services. Differences among cultures produce differences
in social expectations, politics, and ultimately legal rules. In certain countries,
such as the United States, consumers expect domestic name-brand products
to be built domestically and are disappointed to learn that much of what they
thought of as domestically produced is in fact foreign made.
Different cultures produce different political regimes. Among the many dif-
ferent countries of the world are different laws governing the movement of
information, information privacy of their citizens, origins of software and hard-
ware in systems, and radio and satellite telecommunications. Even the hours of
business and the terms of business trade vary greatly across political cultures.
These different legal regimes complicate global business and must be consid-
ered when building global systems.
For instance, European countries have different laws concerning transborder
data flow and privacy from those in the United States. Transborder data flow
is defined as the movement of information across international boundaries in
any form. In 1998, the European Union adopted a Data Protection Directive
that broadened and standardized privacy protection in E.U. nations, and al-
lowed for the transfer of personal data to systems located in the United States
and other nations where these systems met European privacy standards. The
General Data Protection Regulation (GDPR), which went into effect in May
2018, provides additional privacy protection for European citizens and applies
to all data produced by EU citizens, whether or not the company collecting the
data in question is located within the EU, as well as all people whose data is
stored within the EU, whether or not they are actually EU citizens. (Review the
discussion of GDPR in Chapter 4.)
Cultural and political differences profoundly affect organizations’ business
processes and applications of information technology. A host of specific barri-
ers arise from the general cultural differences, everything from different reli-
ability of phone networks to the shortage of skilled consultants.
National laws and traditions have created disparate accounting practices
in various countries, which affects the ways profits and losses are analyzed.
German companies generally do not recognize the profit from a venture until
the project is completely finished and they have been paid. Conversely, British
TABLE 15.2 CHALLENGES AND OBSTACLES TO GLOBAL BUSINESS SYSTEMS
GLOBAL SPECIFIC
Cultural particularism: Regionalism, nationalism, language
differences
Standards: Different Electronic Data Interchange (EDI), email,
telecommunications standards
Social expectations: Brand-name expectations, work hours Reliability: Phone networks not uniformly reliable
Political laws: Transborder data and privacy laws, commercial
regulations
Speed: Different data transfer speeds, many slower than
United States
Personnel: Shortages of skilled consultants
572 Part Four Building and Managing Systems
firms begin posting profits before a project is completed, when they are reason-
ably certain they will get the money.
These accounting practices are tightly intertwined with each country’s legal
system, business philosophy, and tax code. British, U.S., and Dutch firms share
a predominantly Anglo-Saxon outlook that separates tax calculations from re-
ports to shareholders to focus on showing shareholders how fast profits are
growing. Continental European accounting practices are less oriented toward
impressing investors, focusing rather on demonstrating compliance with strict
rules and minimizing tax liabilities. These diverging accounting practices make
it difficult for large international companies with units in different countries to
evaluate their performance.
Language remains a significant barrier. Although English has become a kind
of standard business language, this is truer at higher levels of companies and
not throughout the middle and lower ranks. Software may have to be built with
local language interfaces before a new information system can be successfully
implemented.
Currency fluctuations can play havoc with planning models and projections.
A product that appears profitable in Mexico or Japan may actually produce a
loss because of changes in foreign exchange rates.
These inhibiting factors must be taken into account when you are designing
and building international systems for your business. For example, companies
trying to implement “lean production” systems spanning national boundaries
typically underestimate the time, expense, and logistical difficulties of making
goods and information flow freely across different countries.
State of the Art
One might think, given the opportunities for achieving competitive advantages
as outlined previously and the interest in future applications, that most inter-
national companies have rationally developed marvelous international systems
architectures. Nothing could be further from the truth. Most companies have
inherited patchwork international systems from the distant past, often based
on outdated concepts of information processing, with reporting from indepen-
dent foreign divisions to corporate headquarters, manual entry of data from
one legacy system to another, and little online control and communication.
Corporations in this situation increasingly face powerful competitive challenges
in the marketplace from firms that have rationally designed truly international
systems. Still other companies have recently built technology platforms for in-
ternational systems but have nowhere to go because they lack global strategy.
As it turns out, there are significant difficulties in building appropriate in-
ternational architectures. The difficulties involve planning a system appropri-
ate to the firm’s global strategy, structuring the organization of systems and
business units, solving implementation issues, and choosing the right technical
platform. Let’s examine these problems in greater detail.
15-2 What are the alternative strategies
for developing global businesses?
Three organizational issues face corporations seeking a global position: choosing
a strategy, organizing the business, and organizing the systems management
area. The first two are closely connected, so we discuss them together.
Chapter 15 Managing Global Systems 573
Global Strategies and Business Organization
Four main global strategies form the basis for global firms’ organizational
structure. These are domestic exporter, multinational, franchiser, and trans-
national. Each of these strategies is pursued with a specific business organi-
zational structure (see Table 15.3). For simplicity’s sake, we describe three
kinds of organizational structure or governance: centralized (in the home
country), decentralized (to local foreign units), and coordinated (all units
participate as equals). Other types of governance patterns can be observed
in specific companies (e.g., authoritarian dominance by one unit, a confed-
eracy of equals, a federal structure balancing power among strategic units,
and so forth).
The domestic exporter strategy is characterized by heavy centralization of
corporate activities in the home country of origin. Nearly all international com-
panies begin this way, and some move on to other forms. Production, finance/
accounting, sales/marketing, human resources, and strategic management are
set up to optimize resources in the home country. International sales are some-
times dispersed using agency agreements or subsidiaries, but even here, foreign
marketing relies on the domestic home base for marketing themes and strate-
gies. Caterpillar Corporation and other heavy capital-equipment manufacturers
fall into this category of firm.
The multinational strategy concentrates financial management and control
out of a central home base while decentralizing production, sales, and market-
ing operations to units in other countries. The products and services on sale in
different countries are adapted to suit local market conditions. The organiza-
tion becomes a far-flung confederation of production and marketing facilities in
different countries. Many financial service firms, along with a host of manufac-
turers, such as General Motors and Intel, fit this pattern.
Franchisers are an interesting mix of old and new. On the one hand, the
product is created, designed, financed, and initially produced in the home
country but for product-specific reasons must rely heavily on foreign person-
nel for further production, marketing, and human resources. Food franchisers
such as McDonald’s and KFC fit this pattern. McDonald’s created a new form of
fast-food chain in the United States and continues to rely largely on the United
States for inspiration of new products, strategic management, and financing.
Nevertheless, because the product must be produced locally—it is perishable—
extensive coordination and dispersal of production, local marketing, and local
recruitment of personnel are required.
Generally, foreign franchisees are clones of the mother country units, but
fully coordinated worldwide production that could optimize factors of produc-
tion is not possible. For instance, potatoes and beef can generally not be bought
where they are cheapest on world markets but must be produced reasonably
close to the area of consumption.
TABLE 15.3 GLOBAL BUSINESS STRATEGY AND STRUCTURE
BUSINESS FUNCTION DOMESTIC EXPORTER MULTINATIONAL FRANCHISER TRANSNATIONAL
Production Centralized Dispersed Coordinated Coordinated
Finance/accounting Centralized Centralized Centralized Coordinated
Sales/marketing Mixed Dispersed Coordinated Coordinated
Human resources Centralized Centralized Coordinated Coordinated
Strategic management Centralized Centralized Centralized Coordinated
574 Part Four Building and Managing Systems
Transnational firms are the stateless, truly globally managed firms that may
represent a larger part of international business in the future. Transnational
firms have no single national headquarters but instead have many regional head-
quarters and perhaps a world headquarters. In a transnational strategy, nearly
all the value-adding activities are managed from a global perspective without
reference to national borders, optimizing sources of supply and demand wher-
ever they appear, and taking advantage of any local competitive advantages.
Transnational firms take the globe, not the home country, as their management
frame of reference. The governance of these firms has been likened to a federal
structure in which there is a strong central management core of decision mak-
ing but considerable dispersal of power and financial muscle throughout the
global divisions. Few companies have actually attained transnational status.
Information technology and improvements in global telecommunications
are giving international firms more flexibility to shape their global strategies.
Protectionism and a need to serve local markets better encourage companies
to disperse production facilities and at least become multinational. At the same
time, the drive to achieve economies of scale and take advantage of short-term
local advantage moves transnationals toward a global management perspective
and a concentration of power and authority. Hence, there are forces of decentral-
ization and dispersal as well as forces of centralization and global coordination.
Global Systems to Fit the Strategy
Information technology and improvements in global telecommunications are giv-
ing international firms more flexibility to shape their global strategies. The con-
figuration, management, and development of systems tend to follow the global
strategy chosen. Figure 15.3 depicts the typical arrangements. By systems we mean
the full range of activities involved in building and operating information systems:
conception and alignment with the strategic business plan, systems development,
and ongoing operation and maintenance. For the sake of simplicity, we consider
four types of systems configuration. Centralized systems are those in which systems
development and operation occur totally at the domestic home base. Duplicated
systems are those in which development occurs at the home base but operations
are handed over to autonomous units in foreign locations. Decentralized systems
are those in which each foreign unit designs its own unique solutions and sys-
tems. Networked systems are those in which systems development and operations
occur in an integrated and coordinated fashion across all units.
FIGURE 15.3 GLOBAL STRATEGY AND SYSTEMS CONFIGURATIONS
The large X’s show the dominant patterns, and the small x’s show the emerging patterns.
For instance, domestic exporters rely predominantly on centralized systems, but there is
some development of decentralized systems in local marketing regions.
SYSTEM
CONFIGURATION
Centralized
Domestic
Exporter
Multinational Franchiser Transnational
X
X X X
X
X X
Duplicated
Decentralized
Networked
Strategy
Chapter 15 Managing Global Systems 575
As can be seen in Figure 15.3, domestic exporters tend to have highly cen-
tralized systems in which a single domestic systems development staff develops
worldwide applications. Multinationals offer a direct and striking contrast: Here,
foreign units devise their own systems solutions based on local needs with few
if any applications in common with headquarters (the exceptions being financial
reporting and some telecommunications applications). Franchisers have the sim-
plest systems structure: Like the products they sell, franchisers develop a single
system usually at the home base and then replicate it around the world. Each
unit, no matter where it is located, has identical applications. Last, the most am-
bitious form of systems development is found in transnational firms: Networked
systems are those in which there is a solid, singular global environment for devel-
oping and operating systems. This usually presupposes a powerful telecommu-
nications backbone, a culture of shared applications development, and a shared
management culture that crosses cultural barriers. The networked systems
structure is the most visible in financial services where the homogeneity of the
product—money and money instruments—seems to overcome cultural barriers.
Reorganizing the Business
How should a firm organize itself for doing business on an international scale?
To develop a global company and information systems support structure, a firm
needs to follow these principles:
1. Organize value-adding activities along lines of comparative advantage. For
instance, marketing/sales functions should be located where they can best
be performed for least cost and maximum impact; likewise with production,
finance, human resources, and information systems.
2. Develop and operate systems units at each level of corporate activity— regional,
national, and international. To serve local needs, there should be host country
systems units of some magnitude. Regional systems units should handle telecom-
munications and systems development across national boundaries that take
place within major geographic regions (European, Asian, American). Transna-
tional systems units should be established to create the linkages across major
regional areas and coordinate the development and operation of international
telecommunications and systems development (Roche, 1992).
3. Establish at world headquarters a single office responsible for development
of international systems—a global chief information officer (CIO) position.
Many successful companies have devised organizational systems structures
along these principles. The success of these companies relies not only on the
proper organization of activities but also on a key ingredient—a management
team that can understand the risks and benefits of international systems and
that can devise strategies for overcoming the risks. We turn to these manage-
ment topics next.
15-3 What are the challenges posed by global
information systems and management
solutions for these challenges?
Table 15.4 lists the principal management problems posed by developing in-
ternational systems. It is interesting to note that these problems are the chief
difficulties managers experience in developing ordinary domestic systems as
well. But these are enormously complicated in the international environment.
576 Part Four Building and Managing Systems
A Typical Scenario: Disorganization on a Global Scale
Let’s look at a common scenario. A traditional multinational consumer-goods
company based in the United States and operating in Europe would like to ex-
pand into Asian markets and knows that it must develop a transnational strategy
and a supportive information systems structure. Like most multinationals, it
has dispersed production and marketing to regional and national centers while
maintaining a world headquarters and strategic management in the United
States. Historically, it has allowed each of the subsidiary foreign divisions to
develop its own systems. The only centrally coordinated system is financial
controls and reporting. The central systems group in the United States focuses
only on domestic functions and production.
The result is a hodgepodge of hardware, software, and telecommunications.
The email systems between Europe and the United States are incompatible.
Each production facility uses a different manufacturing resources planning
system (or a different version of the same ERP system) and different market-
ing, sales, and human resource systems. Hardware and database platforms are
wildly different. Communications between different sites are poor, given the
high cost of European intercountry communications.
What do you recommend to the senior management leaders of this com-
pany, who now want to pursue a transnational strategy and develop an infor-
mation systems architecture to support a highly coordinated global systems
environment? Consider the problems you face by reexamining Table 15.4. The
foreign divisions will resist efforts to agree on common user requirements; they
have never thought about much other than their own units’ needs. The systems
groups in U.S. local sites, which have been enlarged recently and told to focus
on local needs, will not easily accept guidance from anyone recommending a
transnational strategy. It will be difficult to convince local managers anywhere
in the world that they should change their business procedures to align with
other units in the world, especially if this might interfere with their local per-
formance. After all, local managers are rewarded in this company for meeting
local objectives of their division or plant. Finally, it will be difficult to coordi-
nate development of projects around the world in the absence of a powerful
telecommunications network and, therefore, difficult to encourage local users
to take on ownership in the systems developed.
Global Systems Strategy
Figure 15.4 lays out the main dimensions of a solution. First, consider that
not all systems should be coordinated on a transnational basis; only some
core systems are truly worth sharing from a cost and feasibility point of view.
Core systems support functions that are absolutely critical to the organiza-
tion. Other systems should be partially coordinated because they share key
TABLE 15.4 MANAGEMENT CHALLENGES IN DEVELOPING GLOBAL
SYSTEMS
Agreeing on common user requirements
Introducing changes in business processes
Coordinating applications development
Coordinating software releases
Encouraging local users to support global systems
Chapter 15 Managing Global Systems 577
elements, but they do not have to be totally common across national boundar-
ies. For such systems, a good deal of local variation is possible and desirable. A
final group of systems is peripheral, truly provincial, and needed to suit local
requirements only.
Define the Core Business Processes
How do you identify core systems? The first step is to define a short list of criti-
cal core business processes. Business processes are defined and described in
Chapter 2, which you should review. Briefly, business processes are sets of logi-
cally related tasks to produce specific business results, such as shipping out cor-
rect orders to customers or delivering innovative products to the market. Each
business process typically involves many functional areas, communicating and
coordinating work, information, and knowledge.
The way to identify these core business processes is to conduct a business
process analysis. How are customer orders taken, what happens to them once
they are taken, who fills the orders, and how are they shipped to the customers?
What about suppliers? Do they have access to manufacturing resource plan-
ning systems so that supply is automatic? You should be able to identify and
set priorities in a short list of 10 business processes that are absolutely critical
for the firm.
Next, can you identify centers of excellence for these processes? Is the cus-
tomer order fulfillment superior in the United States, manufacturing process
control superior in Germany, and human resources superior in Asia? You
should be able to identify some areas of the company, for some lines of busi-
ness, where a division or unit stands out in the performance of one or several
business functions.
When you understand the business processes of a firm, you can rank- order
them. You then can decide which processes should be core applications,
FIGURE 15.4 LOCAL, REGIONAL, AND GLOBAL SYSTEMS
Agency and other coordination costs increase as the firm moves from local option
systems toward regional and global systems. However, transaction costs of participating
in global markets probably decrease as firms develop global systems. A sensible
strategy is to reduce agency costs by developing only a few core global systems that are
vital for global operations, leaving other systems in the hands of regional and local units.
Source: From Managing Information Technology in Multinational Corporations by Edward M. Roche, © 1992. Adapted by permission of
Prentice Hall, Inc., Upper Saddle River, NJ.
Local
Option
Systems
Global
Core
Systems
Global
Core
Business
Processes
Regional
Coordi-
nated
Systems
Local
Business
Processes
Regional
Business
Processes
Business Systems ScopeGeographic Business Scope
578 Part Four Building and Managing Systems
centrally coordinated, designed, and implemented around the globe and which
should be regional and local. At the same time, by identifying the critical busi-
ness processes, the really important ones, you have gone a long way to defining
a vision of the future that you should be working toward.
Identify the Core Systems to Coordinate Centrally
By identifying the critical core business processes, you begin to see opportuni-
ties for transnational systems. The second strategic step is to conquer the core
systems and define these systems as truly transnational. The financial and po-
litical costs of defining and implementing transnational systems are extremely
high. Therefore, keep the list to an absolute minimum, letting experience be
the guide and erring on the side of minimalism. By dividing off a small group of
systems as absolutely critical, you divide opposition to a transnational strategy.
At the same time, you can appease those who oppose the central worldwide
coordination implied by transnational systems by permitting peripheral sys-
tems development to progress unabated with the exception of some technical
platform requirements.
Choose an Approach: Incremental, Grand Design,
Evolutionary
A third step is to choose an approach. Avoid piecemeal approaches. These
surely will fail for lack of visibility, opposition from all who stand to lose from
transnational development, and lack of power to convince senior management
that the transnational systems are worth it. Likewise, avoid grand design ap-
proaches that try to do everything at once. These also tend to fail because of
an inability to focus resources. Nothing gets done properly, and opposition to
organizational change is needlessly strengthened because the effort requires
extraordinary resources. An alternative approach is to evolve transnational ap-
plications incrementally from existing applications with a precise and clear vi-
sion of the transnational capabilities the organization should have in five years.
This is sometimes referred to as the “salami strategy,” or one slice at a time.
Make the Benefits Clear
What is in it for the company? One of the worst situations to avoid is to build
global systems for the sake of building global systems. From the beginning,
it is crucial that senior management at headquarters and foreign division
managers clearly understand the benefits that will come to the company
as well as to individual units. Although each system offers unique bene-
fits to a particular budget, the overall contribution of global systems lies in
four areas.
Global systems—truly integrated, distributed, and transnational systems—
contribute to superior management and coordination. A simple price tag can-
not be put on the value of this contribution, and the benefit will not show up in
any capital budgeting model. It is the ability to switch suppliers on a moment’s
notice from one region to another in a crisis, the ability to move production in
response to natural disasters, and the ability to use excess capacity in one re-
gion to meet raging demand in another.
A second major contribution is vast improvement in production, operation,
and supply and distribution. Imagine a global value chain with global sup-
pliers and a global distribution network. For the first time, senior managers
can locate value-adding activities in regions where they are most economically
performed.
Chapter 15 Managing Global Systems 579
Third, global systems mean global customers and global marketing. Fixed
costs around the world can be amortized over a much larger customer base.
This will unleash new economies of scale at production facilities.
Last, global systems mean the ability to optimize the use of corporate funds
over a much larger capital base. This means, for instance, that capital in a sur-
plus region can be moved efficiently to expand production of capital-starved
regions; that cash can be managed more effectively within the company and
put to use more effectively.
These strategies will not by themselves create global systems. You will have
to implement what you strategize.
The Management Solution: Implementation
We now can reconsider how to handle the most vexing problems facing man-
agers developing the global information systems architectures that were de-
scribed in Table 15.4.
Agreeing on Common User Requirements
Establishing a short list of the core business processes and core support sys-
tems will begin a process of rational comparison across the many divisions of
the company, develop a common language for discussing the business, and
naturally lead to an understanding of common elements (as well as the unique
qualities that must remain local).
Introducing Changes in Business Processes
Your success as a change agent will depend on your legitimacy, your authority,
and your ability to involve users in the change design process. Legitimacy is
defined as the extent to which your authority is accepted on grounds of com-
petence, vision, or other qualities. The selection of a viable change strategy,
which we have defined as evolutionary but with a vision, should assist you in
convincing others that change is feasible and desirable. Involving people in
change, assuring them that change is in the best interests of the company and
their local units, is a key tactic.
Coordinating Applications Development
Choice of change strategy is critical for this problem. At the global level there is
far too much complexity to attempt a grand design strategy of change. It is far
easier to coordinate change by making small incremental steps toward a larger
vision. Imagine a five-year plan of action rather than a two-year plan of action,
and reduce the set of transnational systems to a bare minimum to reduce coor-
dination costs.
Coordinating Software Releases
Firms can institute procedures to ensure that all operating units convert to new
software updates at the same time so that everyone’s software is compatible.
Encouraging Local Users to Support Global Systems
The key to this problem is to involve users in the creation of the design
without giving up control over the development of the project to parochial
interests. The overall tactic for dealing with resistant local units in a transna-
tional company is cooptation. Cooptation is defined as bringing the opposi-
tion into the process of designing and implementing the solution without
giving up control over the direction and nature of the change. As much
580 Part Four Building and Managing Systems
as possible, raw power should be avoided. Minimally, however, local units
must agree on a short list of transnational systems, and raw power may
be required to solidify the idea that transnational systems of some sort are
truly required.
How should cooptation proceed? Several alternatives are possible. One alter-
native is to permit each country unit the opportunity to develop one transna-
tional application first in its home territory and then throughout the world. In
this manner, each major country systems group is given a piece of the action
in developing a transnational system, and local units feel a sense of ownership
in the transnational effort. On the downside, this assumes the ability to develop
high-quality systems is widely distributed and that a German team, for example,
can successfully implement systems in France and Italy. This will not always be
the case.
A second tactic is to develop new transnational centers of excellence, or a
single center of excellence. There may be several centers around the globe that
focus on specific business processes. These centers draw heavily from local
national units, are based on multinational teams, and must report to world-
wide management. Centers of excellence perform the initial identification and
specification of business processes, define the information requirements, per-
form the business and systems analysis, and accomplish all design and testing.
Implementation, however, and pilot testing are rolled out to other parts of the
globe. Recruiting a wide range of local groups to transnational centers of excel-
lence helps send the message that all significant groups are involved in the
design and will have an influence.
Even with the proper organizational structure and appropriate management
choices, it is still possible to stumble over technology issues. Choices of technol-
ogy platforms, networks, hardware, and software are the final element in build-
ing transnational information systems architectures.
15-4 What are the issues and technical alternatives
to be considered when developing
international information systems?
Once firms have defined a global business model and systems strategy, they
must select hardware, software, and networking standards along with key
system applications to support global business processes. Hardware, soft-
ware, and networking pose special technical challenges in an international
setting.
One major challenge is finding some way to standardize a global computing
platform when there is so much variation from operating unit to operating unit
and from country to country. Another major challenge is finding specific soft-
ware applications that are user-friendly and that truly enhance the productivity
of international work teams. The universal acceptance of the Internet around
the globe has greatly reduced networking problems. But the mere presence of
the Internet does not guarantee that information will flow seamlessly through-
out the global organization because not all business units use the same appli-
cations, and the quality of Internet service can be highly variable (just as with
the telephone service). For instance, German business units may use an open
source collaboration tool to share documents and communicate, which is in-
compatible with American headquarters teams, which use Microsoft solutions.
Chapter 15 Managing Global Systems 581
Overcoming these challenges requires systems integration and connectivity on
a global basis.
Computing Platforms and Systems Integration
The development of a transnational information systems architecture based
on the concept of core systems raises questions about how the new core sys-
tems will fit in with the existing suite of applications developed around the
globe by different divisions and different people and for different kinds of
computing hardware. The goal is to develop global, distributed, and integrated
systems to support digital business processes spanning national boundaries.
Briefly, these are the same problems faced by any large domestic systems de-
velopment effort. However, the problems are magnified in an international
environment. Just imagine the challenge of integrating systems based on the
Windows, Linux, Unix, or proprietary operating systems running on IBM,
Oracle, HP, and other hardware in many different operating units in many dif-
ferent countries!
Moreover, having all sites use the same hardware and operating system does
not guarantee integration. Some central authority in the firm must establish data
standards as well as other technical standards with which sites are to comply.
For instance, technical accounting terms such as the beginning and end of the
fiscal year must be standardized (review the earlier discussion of the cultural
challenges to building global businesses) as well as the acceptable interfaces be-
tween systems, communication speeds and architectures, and network software.
Connectivity
Truly integrated global systems must have connectivity—the ability to link to-
gether the systems and people of a global firm into a single integrated network just
like the phone system but capable of voice, data, and image transmissions. The
Internet has provided an enormously powerful foundation for providing connectiv-
ity among the dispersed units of global firms. However, many issues remain. The
public Internet does not guarantee any level of service (even in the United States).
Few global corporations trust the security of the public Internet and generally
use private networks to communicate sensitive data and Internet virtual private
networks (VPNs) for communications that require less security. Not all countries
support even basic Internet service that requires obtaining reliable circuits, coor-
dinating among different carriers and the regional telecommunications authority,
and obtaining standard agreements for the level of telecommunications service
provided. Table 15.5 lists the major challenges posed by international networks.
TABLE 15.5 CHALLENGES OF INTERNATIONAL NETWORKS
Quality of service
Security
Costs and tariffs
Network management
Installation delays
Poor quality of international service
Regulatory constraints
Network capacity
582 Part Four Building and Managing Systems
While private networks have guaranteed service levels and better security
than the Internet, the Internet is the primary foundation for global corporate
networks when lower security and service levels are acceptable. Companies
can create global intranets for internal communication or extranets to exchange
information more rapidly with business partners in their supply chains. They
can use the public Internet to create global networks using VPNs from Internet
service providers, which provide many features of a private network using the
public Internet (see Chapter 7). However, VPNs may not provide the same level
of quick and predictable response as private networks, especially during times
of the day when Internet traffic is very congested, and they may not be able to
support large numbers of remote users.
Access to Internet service is limited in many developing countries (see
Figure 15.5). Where an Internet infrastructure exists in less-developed coun-
tries, it often lacks bandwidth capacity and is unreliable in part due to power
grid issues. The purchasing power of most people in developing countries
makes access to Internet services very expensive in local currencies, although
inexpensive mobile devices and low-cost data plans are becoming more widely
available.
In addition, many countries monitor transmissions. Governments in China,
Iran, and Saudi Arabia monitor Internet traffic and block access to websites con-
sidered morally or politically offensive. On the other hand, the rate of growth
in the Internet population has been faster in Asia, Africa, and the Middle East
than in North America and Europe. Therefore, in the future, Internet connec-
tivity will be much more widely available and reliable in less-developed regions
of the world, and it will play a significant role in integrating these economies
with the world economy.
Software Localization
The development of core systems poses unique challenges for application
software: How will the old systems interface with the new? Entirely new in-
terfaces must be built and tested if old systems are kept in local areas (which
is common). These interfaces can be costly and messy to build. If new soft-
ware must be created, another challenge is to build software that can be
FIGURE 15.5 INTERNET POPULATION IN SELECTED COUNTRIES
The percentage of the total population using the Internet in developing countries is
much smaller than in the United States and Europe, but it is growing rapidly.
Source: Based on data from Internetworldstats.com, 2017 and authors.
0.0%
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Chapter 15 Managing Global Systems 583
realistically used by multiple business units from different countries given
that business units are accustomed to their unique business processes and
definitions of data.
Aside from integrating the new with the old systems, there are problems of
human interface design and functionality of systems. For instance, to be truly
useful for enhancing productivity of a global workforce, software interfaces
must be easily understood and mastered quickly. When international systems
involve knowledge workers only, English may be the assumed international
standard. But as international systems penetrate deeper into management and
clerical groups, a common language may not be assumed and human interfaces
must be built to accommodate different languages and even conventions. The
entire process of converting software to operate in a second language is called
software localization.
Most of the world’s population accesses the Internet using a mobile device,
so apps must be built for mobile platforms, tiny screens, and low bandwidth.
Since many mobile Internet users cannot read or write, special interfaces using
video and audio need to be built to serve this group. The Interactive Session on
Technology addresses this issue.
What are the most important software applications? Many international
systems focus on basic transaction and management reporting systems.
Increasingly, firms are turning to supply chain management and enterprise
resource planning systems to standardize their business processes on a global
basis and to create coordinated global supply chains and workforces (see the
Interactive Session on Management). However, these cross-functional systems
are not always compatible with differences in languages, cultural heritages,
and business processes in other countries. Company units in countries that
are not technically sophisticated may also encounter problems trying to
manage the technical complexities of enterprise applications.
Electronic Data Interchange (EDI) systems and supply chain management
systems are widely used by manufacturing and distribution firms to connect
to suppliers on a global basis. Collaboration and enterprise social network-
ing systems, email, and videoconferencing are especially important world-
wide tools for knowledge- and data-based firms, such as advertising firms,
research-based firms in medicine and engineering, and graphics and publish-
ing firms.
15-5 How will MIS help my career?
Here is how Chapter 15 and this book can help you find a job as an entry-level
sales and marketing trainee for a global data services company.
The Company
Global Online Stats, a leading global provider of quantitative data, statistics,
and market research products, has an open position for an entry-level sales
and marketing trainee. The company has more than 500 employees and of-
fices in Boston, London, and Paris. The company provides tools and services
for accessing an online quantitative database aimed at business firms of all
sizes, including consulting firms, media agencies, and marketing departments
in large corporations from a variety of industries and countries.
584 Part Four Building and Managing Systems
Megh Singh is a porter in India’s New Delhi rail-
road station, earning less than $8 per day. From
time to time throughout the day he can be found
under the station stairwell whispering into his
smartphone. Singh is using speech recognition
software to access the Internet using the station’s
free Wi-Fi system. His smartphone is a no-frills
Sony Corp. model with pared-down storage (4
gigabytes, compared to 32 gigabytes, which is
prevalent in developed countries). Singh’s smart-
phone has Google search Facebook’s What’s App
but Singh also uses apps, such as JC Browser, MX
Player, and SHAREit, that have been explicitly
designed for slow connections and minimal data
storage.
Most Indian porters still believe smartphones
are only for the rich and literate, but a growing
minority have been using cheap smartphones to
go online since the railroad station started provid-
ing free Wi-Fi service in 2015. Singh likes to use
his smartphone to check train schedules, message
his family, and download movies. He arrives at
the station early each morning to send his family
and friends recorded messages via WhatsApp. He
receives recorded replies from them throughout
the day. Singh also uses YouTube, Google, and MX
Player to search the Internet for shows and clips.
He uses voice search on YouTube, downloading
20 clips per day to watch at night when he
returns to the room he shares with five other
porters.
Singh is not comfortable reading or using a key-
board. He doesn’t know anything about email or
how to send it. However, he claims he can enjoy the
Internet to its fullest by relying on video and voice.
Singh represents the new wave of new Internet users
around the world. Instead of typing searches and
emails, the “next billion” Internet newcomers will be
primarily using voice activation and communicating
with images.
Text is not disappearing entirely from the
Internet, and it still has its uses. But instead of
typing searches and reading text-based web pages,
Internet users will be increasingly using audio
and video. Influential communicators will rely
more and more on podcasts, Instagram, YouTube
videos, and apps such as HHQ Trivia. This is true
in wealthy advanced countries such as the United
States and Germany as well as in poorer coun-
tries with low per capita income and Internet
penetration.
During the early years of the Internet, text
used to be the only format with which comput-
ers could easily work. Today, with more powerful
and sophisticated hardware and software, com-
puters can decipher and manipulate multimedia.
For many people, including those who cannot
read and write, it has become much easier to
communicate through images and sounds than
through text.
Only 400 million of India’s 1.3 billion people are
online, and the vast majority access the Internet
via a mobile device. Thanks to a price war and
vendors’ efforts to court low-income users, these
numbers are rising. Vodafone India, a subsidiary
of Vodafone PLC, found that new users didn’t
understand data limits. It decided to offer a new
option to buy as much data as they wanted at a
cost of less than 25 cents per hour. Facebook has
sponsored free Wi-Fi hotspots across India, where
it has 200 million active users. Developers at the
company’s Menlo Park, California headquarters
stage “2G Tuesdays” when they can experience
how Facebook works on slow Internet connections.
Facebook has built a lighter, less data-consuming
version for emerging markets as has LinkedIn.
LinkedIn Lite is a less data-heavy app that works
on 2G phones and will help blue-collar workers
find jobs.
New companies are springing up to provide apps
and services tailored to less-affluent, less-educated
Internet users. The apps on Mr. Singh’s phone are
a good example. UC Browser from Alibaba Holding
Group’s UCWeb is optimized to use less data for low-
speed connections. UC Browser accounts for over 40
percent of India’s mobile browser market. Lenovo
Group’s SHAREit enables users to send files, photos,
videos, and apps from one device to another using
direct Wi-Fi connections. YouTube apps created
for India make it easier to work with slow Internet
speeds, save videos to watch offline, and monitor
their data use.
Google changed the way certain searches from
India appear on the Internet. For example, if a user
INTERACTIVE SESSION TECHNOLOGY
The Global Internet Goes Multimedia
Chapter 15 Managing Global Systems 585
1. Why are voice and video becoming the primary
means of communication over the Internet?
2. How will this trend impact companies trying to
do business worldwide? How will it affect the
way they run their businesses and interact with
customers?
3. What kinds of companies are likely to benefit from
a more multimedia Internet? Explain.
is searching for a local cricket star, the top of the
search will display videos and photos instead of long
text lists of links.
In 2016 Indian banks launched a mobile pay-
ment system to help people who were not very
tech-literate use their phones to make payments and
transfer money. The sign-up process was simplified.
Paytm is the largest mobile money app in India, with
over 200 million users, far more than the number of
Indians owning credit cards.
Sources: Farhad Manjoo, “Welcome to the Post-Text Future,” New York
Times, February 14, 2018; www-shareit.com, accessed February 16,
2018; Eric Ballman, “The End of Typing: The Next Billion Mobile
Users Will Rely on Voice and Video,” Wall Street Journal, August 7,
2017; and Julia Love, “YouTube Unveils India Mobile App for Spotty
Internet Signals,” Reuters, April 4, 2017.
CASE STUDY QUESTIONS
Position Description
This position works closely with the Managing Director and Head of Global
Sales to develop and maintain sales leads and new accounts. Job responsibili-
ties include:
• Developing new accounts with leads generated by existing customers and
relationships with media and industry associations as well as through cold
calling, emailing, and online prospecting.
• Developing account relationships to turn sporadic customers into long-term
business accounts.
• Developing sales opportunities for various categories of products and lines of
business.
• Finding and scheduling appointments with new prospective clients.
• Updating customer and client profiles.
Job Requirements
• Four-year college degree
• Very strong verbal and written communication skills
• Microsoft Office skills
• Experience at a sales or marketing internship or in cold calling desirable
• Outgoing, competitive, proactive sales personality
Interview Questions
1. Did you work with quantitative data in your college courses or at a prior job?
What did you do with the data?
2. Have you ever worked with online databases or database software? Exactly
what did you do with these databases? Did you ever take a database course?
http://www-shareit.com
586 Part Four Building and Managing Systems
AbbVie, headquartered in Chicago, Illinois, is a global
research-based biopharmaceutical company that
was spun off from Abbott Laboratories in January
2013. As a separate entity, AbbVie is still a very large
company, with more than 29,000 employees in over
70 countries and 19 research and manufacturing
sites across the globe. In 2017, AbbVie produced
$28.2 billion in revenue. Humira for treating rheu-
matoid arthritis and Crohn’s disease is among its top-
selling global products.
When AbbVie separated from Abbott Laboratories,
the company had inherited 50 or 60 disparate legacy
systems that were supporting mission-critical pro-
cesses in over 100 worldwide locations. The legacy
systems were supported by Abbott under a transi-
tional services agreement (TSA) and were due to be
terminated at the end of 2015. AbbVie’s management
had to make a choice: Should the company continue
to run these legacy systems on its own or should it
invest in a more up-to-date platform for supporting
business processes across all of its global affiliates
and manufacturing locations?
Complicating the decision were time pressures:
AbbVie had only until the end of 2015 (three years)
to implement a solution and slightly over two years
to establish an infrastructure stipulated by the TSA.
AbbVie decided to create standard business processes
for all its affiliates and manufacturing facilities and
to support these processes with a single instance
of SAP ERP across the globe. The project was very
ambitious: The new system had to be globally op-
erational in more than 150 countries within 3 years.
AbbVie designed a new operating model that in-
cluded many organizational changes, including busi-
ness process outsourcing, centers of excellence, and
regional shared services.
AbbVie didn’t waste any time. It selected IBM
Global Business Services consultants to guide the
global SAP deployment. Starting in August 2013,
AbbVie rolled out SAP ERP to 110 affiliates and
manufacturing sites within 18 months. The com-
pany standardized end-to-end processes using a
global SAP template, and allowed the software to be
customized only for country-specific requirements.
These requirements were identified in advance by
teams creating local implementation guides.
AbbVie business process teams hammered out
standard definitions for end-to-end processes such as
procure-to-pay, order-to-cash, record-to-report, and
warehouse management. AbbVie made the template
usable globally by extending the functionality for
multiple currencies and languages and updating it on
a country-by-country basis depending on local regu-
lations or legal requirements.
Each time an affiliate requested a customiza-
tion, the AbbVie project team reviewed it against
the list of local legal requirements it had collected.
AbbVie then determined if the customization was
required by other countries or was for only one, and
it pushed back on one-of-a-kind requests. Testing
and confirming with several affiliates helped ensure
that the template met the requirements of most
countries, so the need for future customization was
minimal.
AbbVie tested the effectiveness of its global
template during development, capturing metrics
around adoption—number of adoptions, adapta-
tions, additions, and abstentions. The project team
compared the percentages of those metrics from
country to country and reported the results to
AbbVie’s business unit leaders. If, for instance, the
metrics showed that Germany had adopted 82 per-
cent of the template and France 70 percent, busi-
ness support could investigate to see if there was a
process that needed to be changed in France. This
was key to deploying the entire global instance of
SAP ERP in 18 months.
The project team was also tasked with migrating
data from different legacy applications to the data
structure for the global SAP ERP system. For each
stand-alone legacy system, the team extracted raw
data, stored them in a secure data warehouse, and
then identified any missing or inaccurate fields and
other data cleansing requirements. While the team
was consolidating and cleansing the data, it taught
business users about SAP-specific data fields, how
the fields were used, and how they changed previ-
ous business processes. The team would obtain data
from the business, put it in a data mapping template,
and load the data in various test environments. Once
business users verified the accuracy of data, it would
be ready to go live in production.
INTERACTIVE SESSION MANAGEMENT
AbbVie Builds a Global Systems Infrastructure
3. What is your level of expertise with Microsoft Office tools—Word, Excel,
PowerPoint, Access?
4. What sales experience have you had?
5. Do you have any foreign language proficiency?
6. What challenges would you anticipate in trying to sell our products and
services to non-U.S. organizations?
Author Tips
1. Review Sections 15-1, 15-3, and 15-4 of this chapter, Chapter 6 on data
management, and the Chapter 12 discussion of business intelligence and
analytics.
2. Use the web to research the company, its products, services, and custom-
ers, and the way it operates. Think about what the company needs to do to
expand sales globally.
3. Ask exactly how you would be using Microsoft Office tools in your job.
4. Ask about how much training you would receive in how to use the
company’s data products.
Chapter 15 Managing Global Systems 587
1. What management problems typical of global
systems was AbbVie experiencing? What
management, organization, and technology factors
were responsible for those problems?
2. What elements of the global systems strategy de-
scribed in this chapter did AbbVie pursue?
3. How did AbbVie’s new SAP ERP system support
its global business strategy?
4. How did AbbVie’s new system improve operations
and management decision making?
These activities facilitated change management by
placing a high value on both system transparency and
training. About six months before rolling out a new
location, country-specific transition leaders would
train users on the template and familiarize them with
any process changes. The transition leaders were liai-
sons between AbbVie’s technology team and its busi-
ness process team, helping the company to quickly
address change management issues as they arose.
AbbVie also took the time during implementa-
tion to verify it was in compliance with all local
data privacy regulations. In May 2015, the company
completed the global rollout of SAP ERP. The com-
pany was thus able to successfully standardize global
processes and meet the TSA. Other major benefits of
the new global system were unprecedented levels of
agility and transparency.
AbbVie now has a set of key metrics that are mea-
sured at the end of every month, such as the length
of time to create new customers, vendor payments,
payment terms, or order fulfillments. The global
system features dashboards for managers to look at
every country, measure results, find the root cause
of problems, and take corrective action more easily.
Reporting from the system is more accurate.
AbbVie was able to pull off a major global system
implementation because it was far-sighted and well
organized and did the difficult work of streamlining
processes on a global scale at the project outset. The
global SAP project team questioned existing pro-
cesses and found it could streamline many of them,
making the enterprise much more agile. AbbVie’s
business efficiency also improved because correc-
tive actions often led to additional process improve-
ments. By looking at the metrics, the project team
can suggest measures to improve a process to get
more out of the company’s investment. AbbVie can
now operate as a single business across countries.
Sources: “AbbVie Builds a Global Pharmaceuticals Company on New
Foundations with SAP and IBM,” https://www-01.ibm.com, ac-
cessed January 6, 2018; Ken Murphy, “Biopharmaceutical Startup
AbbVie Receives Healthy Long-Term Prognosis,” SAP Insider Profiles,
September 19, 2017; and www.abbvie.com, accessed January 6, 2018.
CASE STUDY QUESTIONS
https://www-01.ibm.com
http://www.abbvie.com
588 Part Four Building and Managing Systems
15-1 What major factors are driving the internationalization of business?
The growth of inexpensive international communication and transportation has created a world
culture with stable expectations or norms. Political stability and a growing global knowledge base that
is widely shared also contribute to the world culture. These general factors create the conditions for
global markets, global production, coordination, distribution, and global economies of scale.
15-2 What are the alternative strategies for developing global businesses?
There are four basic international strategies: domestic exporter, multinational, franchiser, and
transnational. In a transnational strategy, all factors of production are coordinated on a global scale.
However, the choice of strategy is a function of the type of business and product.
There is a connection between firm strategy and information systems design. Transnational firms
must develop networked system configurations and permit considerable decentralization of devel-
opment and operations. Franchisers almost always duplicate systems across many countries and use
centralized financial controls. Multinationals typically rely on decentralized independence among
foreign units with some movement toward development of networks. Domestic exporters typically
are centralized in domestic headquarters with some decentralized operations permitted.
15-3 What are the challenges posed by global information systems and management solutions for
these challenges?
Global information systems pose challenges because cultural, political, and language diversity
magnifies differences in organizational culture and business processes and encourages proliferation
of disparate local information systems that are difficult to integrate. Typically, international systems
have evolved without a conscious plan. The remedy is to define a small subset of core business pro-
cesses and focus on building systems to support these processes. Tactically, managers will have to co-
opt widely dispersed foreign units to participate in the development and operation of these systems,
being careful to maintain overall control.
15-4 What are the issues and technical alternatives to be considered when developing international
information systems?
Implementing a global system requires an implementation strategy that considers both busi-
ness design and technology platforms. The main hardware and telecommunications issues are
systems integration and connectivity. The choices for integration are to go either with a propri-
etary architecture or with open systems technology. Global networks are extremely difficult to
build and operate. Firms can build their own global networks or they can create global networks
based on the Internet (intranets or virtual private networks). The main software issues concern
building interfaces to existing systems and selecting applications that can work with multiple cul-
tural, language, and organizational frameworks.
REVIEW SUMMARY
Key Terms
Business driver, 568
Cooptation, 579
Core systems, 576
Domestic exporter, 573
Franchisers, 573
Global culture, 569
International information systems architecture, 567
Legitimacy, 579
Multinational, 573
Particularism, 571
Software localization, 583
Transborder data flow, 571
Transnational, 574
MyLab MIS
To complete the problems with MyLab MIS, go to EOC Discussion Questions in MyLab MIS.
Chapter 15 Managing Global Systems 589
Review Questions
15-1 What major factors are driving the
internationalization of business?
• List and describe the five major dimensions
for developing an international information
systems architecture.
• Describe the five general cultural factors
leading toward growth in global business
and the four specific business factors.
Describe the interconnection among these
factors.
• List and describe the major challenges to
the development of global systems.
• Explain why some firms have not planned
for the development of international
systems.
15-2 What are the alternative strategies for
developing global businesses?
• Describe the four main strategies for global
business and organizational structure.
• Describe the four different system configu-
rations that can be used to support different
global strategies.
15-3 What are the challenges posed by global
information systems and management solutions
for these challenges?
• List and describe the major management is-
sues in developing international systems.
• Identify and describe three principles to
follow when organizing the firm for global
business.
• Identify and describe three steps of a man-
agement strategy for developing and imple-
menting global systems.
• Define cooptation and explain how it can
be used in building global systems.
15-4 What are the issues and technical alternatives
to be considered when developing international
information systems?
• Describe the main technical issues facing
global systems.
• Identify some technologies that will help
firms develop global systems.
Discussion Questions
15-5 If you were a manager in a company that
operates in many countries, what criteria
would you use to determine whether an
application should be developed as a global
application or as a local application?
MyLab MIS
15-6 Describe ways the Internet can be used in
international information systems.MyLab MIS
Hands-On MIS Projects
The projects in this section give you hands-on experience conducting international market research, analyzing
international systems issues for an expanding business, and building a job posting database and web page for an
international company. Visit MyLab MIS to access this chapter’s Hands-on MIS Projects.
Management Decision Problems
15-7 United Parcel Service (UPS) has been expanding its package delivery and logistics services in China,
serving both multinational companies and local businesses. UPS drivers in China need to use UPS
systems and tools such as its handheld Delivery Information Acquisition Device for capturing package
delivery data. UPS wants to make its WorldShip and other shipping-management services accessible to
Chinese and multinational customers via the web. What are some of the international systems issues UPS
must consider in order to operate successfully in China?
15-8 Your company manufactures and sells tennis racquets and would like to start selling outside the United
States. You are in charge of developing a global web strategy, and the first countries you are thinking of
targeting are Brazil, China, Germany, Italy, and Japan. Using the statistics in the CIA World Factbook and
other online sources, which of these countries would you target first? What criteria did you use? What
other considerations should you address in your web strategy? What features would you put on your
website to attract buyers from the countries you target?
590 Part Four Building and Managing Systems
Achieving Operational Excellence: Building a Job Database and Web Page for an
International Consulting Firm
Software skills: Database and web page design
Business skills: Human resources internal job postings
15-9 Companies with many overseas locations need a way to inform employees about available job
openings in these locations. In this project you’ll use database software to design a database for posting
internal job openings and a web page for displaying this information.
KTP Consulting operates in various locations around the world. KTP specializes in designing, devel-
oping, and implementing enterprise systems for medium- to large-size companies. KTP offers its employees
opportunities to travel, live, and work in various locations throughout the United States, Europe, and Asia. The
firm’s human resources department has a simple database that enables its staff to track job vacancies. When an
employee is interested in relocating, she or he contacts the human resources department for a list of KTP job
vacancies. KTP also posts its employment opportunities on the company website.
What type of data should be included in the KTP job vacancies database? What information should
not be included in this database? Based on your answers to these questions, build a job vacancies database for
KTP. Populate the database with at least 20 records. You should also build a simple web page that incorporates
job vacancy data from your newly created database. Submit a copy of the KTP database and web page to your
professor.
Improving Decision Making: Conducting International Marketing and Pricing Research
Software skills: Internet-based software
Business skills: International pricing and marketing
15-10 In this project you’ll use the web to research overseas distributors and customs regulations and use
Internet-based software to calculate prices in foreign currencies.
You are in charge of marketing for a U.S. manufacturer of furniture that has decided to enter the interna-
tional market. You want to test the market by contacting a European office furniture retailer to offer it a specific
desk that you have to sell at about $165. Using the web, locate the information needed to locate and contact this
firm and to find out how many euros you would get for the chair in the current market. In addition, consider us-
ing a universal currency converter website, which determines the value of one currency expressed in other cur-
rencies. Obtain both the information needed to contact the firm and the price of your chair in its local currency.
Then locate and obtain customs and legal restrictions on the products you will export from the United States and
import into the country of the retailer you have selected. Finally, locate a company that will represent you as a
customs agent and gather information on shipping costs.
Collaboration and Teamwork Project
Identifying Technologies for Global Business Strategies
15-11 With a group of students, identify an area of information technology and explore how this technology
might be useful for supporting global business strategies. For instance, you might choose email, smart-
phones, virtual private networks, enterprise systems, collaboration software, or the web. It will be nec-
essary to identify a business scenario to discuss the technology. You might choose an automobile parts
franchise or a clothing franchise, such as Express, as example businesses. Which applications would you
make global, which core business processes would you choose, and how would the technology be helpful?
If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a pre-
sentation of your findings for the class.
Chapter 15 Managing Global Systems 591
What’s the world’s largest and fastest-growing e-commerce market? It’s China, with over 800 million Internet users, and accounting
for over 50 percent of global retail e-commerce sales
(projected to be nearly 60% by 2021). China’s mobile
payment market is a whopping 11 times the size of
the U.S. market. The volume of online sales in China
now exceeds that in the United States. E-commerce
is predicted to account for 40.8 percent of all retail
sales in China by 2021.
Chinese e-commerce is very mobile: By the end
of 2018, more than 75 percent of ecommerce sales in
China—over $1 trillion worth—were transacted via a
mobile device. M-commerce accounted for 81.6 per-
cent of Chinese e-commerce sales in 2017. Payment
for both online and in-store sales via mobile phone
services such as WeChat is sweeping the country.
According to iResearch Consulting Group, a Chinese
firm, mobile payments in China totaled $9 trillion in
2016, compared to $112 billion in mobile payments
that same year in the United States. China has also
become the world’s largest mobile-payment market.
Tencent’s WeChat, with over 900 million active
users, is the dominant mobile platform in China.
Retailers and brands have found that capturing the
consumer’s attention typically requires operating
within the WeChat environment on the WeChat plat-
form, as opposed to building a direct-to-consumer
mobile app. Retailers such as Estee Lauder, Coach,
and Gap run their loyalty programs within the
WeChat app, and conduct customer relationship
management (CRM) on the WeChat platform itself.
Max Factor built a new social CRM system on the
WeChat platform. It created a detailed customer da-
tabase with 36 categories of tags using online and of-
fline data. Max Factor built now use real-time data to
send personalized messages based on different stages
of the customer life cycle via the WeChat platform.
Credit cards never became widely used in China.
Until recently, discretionary spending was not really
possible for many Chinese, and there has been a long-
standing cultural aversion to debt. On top of that, the
government made it difficult for companies such as
Visa Inc. and Mastercard Inc. to set up shop.
E-commerce has given China’s digital consum-
ers access to products from overseas, and a notable
share of consumers appears to be taking advantage.
Cross-border shoppers appear to prefer items that are
either too expensive or too scarce domestically.
The most popular categories of goods Chinese pur-
chased online include apparel, food and beverages,
household products, consumer electronics, appli-
ances, and personal care products. Food, luxury, and
sports and wellness products are key categories for
future growth. Chinese online shoppers tend to be
young, urban, and highly educated. They are much
more consumption-oriented than older generations,
which were shaped as savers by different political
and economic circumstances. Younger shoppers are
more willing to spend.
Social media is an important channel for initiat-
ing online purchases. About 45 percent of Chinese
consumers use social media to discover new prod-
ucts, 54 percent to review and comment on products,
and 25 percent to purchase directly through a social
channel. Retailers and brands need to build and par-
ticipate in social communities and engage with cus-
tomers on social platforms.
To some extent, e-commerce is replacing shopping
in physical marketplaces in China, and will comprise
42 percent of growth in private consumption by 2020,
according to Boston Consulting and AliResearch.
For this reason, superstores such as Walmart and
Carrefour have shut down a number of stores.
It sounds like there are opportunities galore for
global companies that want to sell into the Chinese
e-commerce market. Not so easy. China may be the
world’s largest and fastest-growing e-commerce mar-
ket, but it is also one of the most difficult for foreign
firms to penetrate. E-commerce in China is crowded
and hyper-competitive, and the country is not en-
tirely open for online business.
First, there’s what’s called the Great Firewall of
China—a combination of legislation and technolo-
gies to regulate the Internet domestically in China.
China blocks access to select foreign websites (such
as Google, Snapchat, Facebook, Twitter, and the
New York Times) and can slow down cross-border
Internet traffic. China limits access to foreign infor-
mation sources, blocks foreign Internet tools such as
Google search and mobile apps), and requires foreign
companies to adapt to domestic regulations. A new
E-Commerce in China: Opportunities and Obstacles
CASE STUDY
592 Part Four Building and Managing Systems
cybersecurity law that went into effect in June 2017
requires security checks on foreign companies and
forces firms to store key data in China. For example,
Apple works with a local Chinese company to store
Chinese data from its iCloud service at a data center
in southwest China.
The Great Firewall has also impacted China’s inter-
nal Internet economy by nurturing domestic compa-
nies and reducing the appeal of products from foreign
Internet companies. The Great Firewall fosters trade
protectionism that has allowed China to grow its
own Internet giants: Tencent, Alibaba, and Baidu.
Tencent is one of the world’s largest Internet and
technology companies, as well as its largest and most
valuable gaming and social media company. It also
owns the majority of China’s music services. Alibaba
Group Holding is a multinational e-commerce, retail,
Internet, AI, and technology conglomerate that pro-
vides consumer-to-consumer, business-to-consumer,
and business-to-business sales services via web por-
tals, as well as electronic payment services, shopping
search engines, and data-centric cloud computing
services. Baidu provides Internet search services in
China and internationally along with transaction ser-
vices, such as Baidu Deliveries, Baidu Mobile Game,
Baidu Wallet, and Baidu Maps.
China has its own version of many popular
foreign e-commerce businesses, such as weibo.
com (Twitter), Youku Tudou (YouTube), WeChat
(Facebook), and Ctrip (Orbitz and others). Alibaba
has outmaneuvered eBay, and Uber had to sell
its Chinese business to a local rival. The Internet
behind the Great Firewall can be considered a
“parallel universe” to the Internet that exists out-
side. According to a report on Internet freedom
published by Freedom House, a U.S. pro-democracy
group, China ranked last among the countries of
the world for Internet openness.
There are costs for gaining entry to the Chinese
market. Initial deposits can range from $8,000 to
$25,000, annual service fees from $5,000–$10,000,
and commissions on sales revenue around 5%. Other
costs can include being required to use approved
agencies in the production of storefronts and sales
information as well as guaranteed stock availability
and stock location. Agency fees alone can run into
many thousands of dollars. Technical requirements
of Chinese Internet filters can make operating dif-
ficult, and may force firms to find alternatives to
the services technology companies rely on outside
China.
It is possible to work with businesses that allow
Chinese consumers to purchase from international
brands, without the brand having to have a Chinese
presence. For example, Xiaoshongshu (Little Red
Book) features a mobile app that allows customers to
select products from key foreign markets and pay the
company for them. Xiaoshongshu then sources these
products for the customer.
Some other points to keep in mind: Although
China heavily regulates the Internet, most Chinese
are not that interested in bypassing government
filters to visit foreign websites such as Google or
Facebook. China has an array of domestic websites
to fill the void. Even when foreign websites aren’t
blocked, Chinese competitors usually prevail because
so many people are using their products that they
become indispensable. Internet calling and messag-
ing apps such as Skype and WhatsApp are accessible
in China, but they’re often no substitute for Chinese
products in the Chinese market. In China, Tencent’s
WeChat app is far more popular than Skype,
WhatsApp, and Slack.
Once a new technology or business model ap-
pears, the Chinese can quickly adapt it to the local
market. Oppo and Vivo, China’s first and third smart-
phone brands by market share in 2016, appeal to
young people and residents in smaller, less-wealthy
cities. Their phones look like iPhones and have
many of the same features, but they cost less than
half the price of an iPhone. While Oppo and Vivo
have doubled their Chinese market share, Apple’s
has fallen by 13 percent to the fourth position.
To keep up with increasing demand from smaller
urban and rural areas, online retailers are seeking
to expand logistics infrastructure and services. For
example, Cainiao, the logistics arm of Alibaba, owns
180,000 express delivery stations for the shipment
of products and has recently expanded its fresh food
distribution centers across China. Logistics remains
a major challenge as Chinese e-commerce play-
ers attempt to reach more customers over wider
geographic regions. China’s logistics system is far
from efficient, with insufficient warehouse space
and trucking routes throughout the country. China’s
package-delivery business has been growing 30 per-
cent annually, but that’s not fast enough to keep up
with demand. The scarcity of high-quality logistics
providers in China often burdens e-commerce firms
with late deliveries, damaged and lost parcels, slow
collect-on-delivery (COD) processes, poor return pro-
cedures, and no special services such as installation
http://weibo.com
http://weibo.com
Here,” Pricewaterhouse Coopers, 2017; McKinsey & Company,
“How Savvy Social Shoppers Are Transforming E-Commerce,”
McKinsey Digital, April 2016; and Alan Lau and Min Su, “China’s
E-commerce Soft Spot: Logistics,” McKinsey Quarterly, April 2016.
CASE STUDY QUESTIONS
15-12 Describe the political, cultural, and organi-
zational obstacles for foreign companies that
want to do business online in China.
15-13 How do these factors impede companies from
setting up e-commerce businesses in China?
15-14 What would your company need to do to
create a successful e-commerce presence in
China? Explain.
or the ability to try on purchases. These inefficien-
cies add considerably to e-commerce operating costs
and erode profit margins.
Sources: “Overview of China Ecommerce Market,” ecommerceworld-
wide.com, accessed February 1, 2018; Paul Mozur, “China Presses
Its Internet Censorship Issues Across the Globe,” New York Times,
March 2, 2018; “China E-commerce Market (B2B, B2C, Mobile) in
Q3 2017,” China Internet Watch, January 25, 2018; Corey McNair,
“Worldwide Retail and Ecommerce Sales,” eMarketer, January
2018; Paul Mozur and Carolyn Zhang, “In China, Silicon Valley
Giants Confront New Walls,” New York Times, July 22, 2017; “Retail
Ecommerce Sales in China 2016–2021,” eMarketer, June 2017;
“New eMarketer Forecast Sees Mobile Driving Retail Ecommerce in
China,” July 5, 2017; “eCommerce in China—the Future Is Already
MyLab MIS
Go to the Assignments section of MyLab MIS to complete these writing exercises.
15-15 Identify and describe solutions to the five management challenges of developing global systems.
15-16 Identify and describe five problems of international networks that prevent companies from developing
effective global systems.
Chapter 15 References
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Emerging Market Supply Chains, Study Says.” (September 16,
2014).
Bisson, Peter, Elizabeth Stephenson, and S. Patrick Viguerie. “Glob-
al Forces: An Introduction.” McKinsey Quarterly (June 2010).
Burtch, Gordon, Anindya Ghose, and Sunil Watta. “Cultural Differ-
ences and Geography as Determinants of Online Prosocial
Lending.” MIS Quarterly 38, No. 3 (September 2014).
Chakravorti, Bhaskar, Ajay Bhalla, and Ravi Shankar Chaturved.
“The 4 Dimensions of Digital Trust, Charted Across 42 Coun-
tries.” Harvard Business Review (February 19, 2018).
Davison, Robert. “Cultural Complications of ERP.” Communications
of the ACM 45, No. 7 (July 2002).
Deans, Candace P., and Michael J. Kane. International Dimensions
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(1992).
Dewhurst, Martin, Jonathan Harris, and Suzanne Heywood. “The
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Ghislanzoni, Giancarlo, Risto Penttinen, and David Turnbull. “The
Multilocal Challenge: Managing Cross-Border Functions.”
McKinsey Quarterly (March 2008).
Gulati, Ranjay. “GE’s Global Growth Experiment.” Harvard Busi-
ness Review (September–October 2017).
Ives, Blake, and Sirkka Jarvenpaa. “Applications of Global Informa-
tion Technology: Key Issues for Management.” MIS Quarterly
15, No. 1 (March 1991).
Ives, Blake, S. L. Jarvenpaa, and R. O. Mason. “Global Business
Drivers: Aligning Information Technology to Global Business
Strategy.” IBM Systems Journal 32, No. 1 (1993).
King, William R., and Vikram Sethi. “An Empirical Analysis of
the Organization of Transnational Information Systems.”
Journal of Management Information Systems 15, No. 4 (Spring
1999).
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Dynamic of Control.” Information Systems Research 15, No. 4
(December 2004).
Martinsons, Maris G. “ERP In China: One Package Two Profiles.”
Communications of the ACM 47, No. 7 (July 2004).
Meyer, Erin. “When Culture Doesn’t Translate.” Harvard Business
Review (October 2015).
McKinsey & Company. “Lions Go Digital: The Internet’s
Transformative Potential in Africa.” (November 2013).
Mouchawar, Ronaldo. “Souq.com’s CEO on Building an E-
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Roche, Edward M. Managing Information Technology in Multina-
tional Corporations. New York: Macmillan (1992).
Su, Ning. “Cultural Sensemaking in Offshore Information
Technology Service Suppliers: A Cultural Frame Perspective.”
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Country Compare?” theguardian.com, accessed February 23,
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Design Decisions in a Global Versus Domestic Context.” MIS
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Chapter 15 Managing Global Systems 593
http://ecommerceworldwide.com
http://ecommerceworldwide.com
http://theguardian.com
INTEGRATING BUSINESS WITH TECHNOLOGY
By completing the projects in this text, students will be able to demonstrate business knowledge,
application software proficiency, and Internet skills.These projects can be used by instructors as learning
assessment tools and by students as demonstrations of business, software, and problem-solving skills to
future employers. Here are some of the skills and competencies students using this text will be able to
demonstrate:
Business Application skills: Use of both business and software skills in real-world business applications.
Demonstrates both business knowledge and proficiency in spreadsheet, database, and web page/blog cre-
ation tools.
Internet skills: Ability to use Internet tools to access information, conduct research, or perform online
calculations and analysis.
Analytical, writing and presentation skills: Ability to research a specific topic, analyze a problem,
think creatively, suggest a solution, and prepare a clear written or oral presentation of the solution, working
either individually or with others in a group.
Business Application Skills
BUSINESS SKILLS SOFTWARE SKILLS CHAPTER
Finance and Accounting
Financial statement analysis Spreadsheet charts Chapter 2*
Spreadsheet formulas Chapter 10
Spreadsheet downloading and formatting
Pricing hardware and software Spreadsheet formulas Chapter 5
Technology rent vs. buy decision Spreadsheet formulas Chapter 5*
Total Cost of Ownership (TCO) analysis
Analyzing telecommunications services and costs Spreadsheet formulas Chapter 7
Risk assessment Spreadsheet charts and formulas Chapter 8
Retirement planning Spreadsheet formulas and logical functions Chapter 11
Capital budgeting Spreadsheet formulas Chapter 14
Chapter 14*
Human Resources
Employee training and skills tracking Database design Chapter 13*
Database querying and reporting
Job posting database and Web page Database design Chapter 15
Web page design and creation
Manufacturing and Production
Analyzing supplier performance and pricing Spreadsheet date functions Chapter 2
Database functions
Data filtering
Inventory management Importing data into a database Chapter 6
Database querying and reporting
Bill of materials cost sensitivity analysis Spreadsheet data tables Chapter 12*
Spreadsheet formulas
Sales and Marketing
Sales trend analysis Database querying and reporting Chapter 1
Customer reservation system Database querying and reporting Chapter 3
Internet Skills
Using online software tools for job hunting and career development Chapter 1
Using online interactive mapping software to plan efficient transportation routes Chapter 2
Researching product information and evaluating websites for auto sales Chapter 3
Analyzing web browser privacy protection Chapter 4
Researching travel costs using online travel sites Chapter 5
Searching online databases for products and services Chapter 6
Using web search engines for business research Chapter 7
Researching and evaluating business outsourcing services Chapter 8
Researching and evaluating supply chain management services Chapter 9
Evaluating e-commerce hosting services Chapter 10
Using shopping bots to compare product price, features, and availability Chapter 11
Using online software tools for retirement planning Chapter 12
Analyzing website design and information requirements Chapter 13
Researching real estate prices Chapter 14
Researching international markets and pricing Chapter 15
Improving marketing decisions Spreadsheet pivot tables Chapter 12
Customer profiling Database design Chapter 6*
Database querying and reporting
Customer service analysis Database design Chapter 9
Database querying and reporting
Sales lead and customer analysis Database design Chapter 13
Database querying and reporting
Blog creation and design Blog creation tool Chapter 4
Analytical, Writing and Presentation Skills*
BUSINESS PROBLEM CHAPTER
Management analysis of a business Chapter 1
Value chain and competitive forces analysis Chapter 3
Business strategy formulation
Formulating a corporate privacy policy Chapter 4
Employee productivity analysis Chapter 7
Disaster recovery planning Chapter 8
Locating and evaluating suppliers Chapter 9
Developing an e-commerce strategy Chapter 10
Identifying knowledge management opportunities Chapter 11
Identifying international markets Chapter 15
*Dirt Bikes Running Case on MyLab MIS
G-1
3-D printing Uses machines to make solid objects, layer by layer,
from specifications in a digital file. Also known as additive manu-
facturing.
3G networks Cellular networks based on packet-switched technol-
ogy with speeds ranging from 144 Kbps for mobile users to more
than 2 Mbps for stationary users, enabling users to transmit
video, graphics, and other rich media in addition to voice.
4G networks Recent wireless communication technology capable
of providing between 1 Mbps and 1 Gbps speeds; up to 10 times
faster than 3G networks.
5G networks Next wireless technology evolution, supporting
transmission of huge amounts of data in the gigabit range, with
fewer transmission delays and the ability to connect many more
devices (such as sensors and smart devices) at once than existing
cellular systems.
acceptable use policy (AUP) Defines acceptable uses of the firm’s
information resources and computing equipment, including desk-
top and laptop computers, wireless devices, telephones, and the
Internet, and specifies consequences for noncompliance.
acceptance testing Provides the final certification that the system is
ready to be used in a production setting.
accountability The mechanisms for assessing responsibility for
decisions made and actions taken.
advertising revenue model Website generating revenue by attract-
ing a large audience.
affiliate revenue model An e-commerce revenue model in which
websites are paid as “affiliates” for sending their visitors to other
sites in return for a referral fee.
agency theory Economic theory that views the firm as a nexus of
contracts among self-interested individuals who must be super-
vised and managed.
agent-based modeling Modeling complex phenomena as systems
of autonomous agents that follow relatively simple rules for
interaction.
agile development Rapid delivery of working software by breaking a
large project into a series of small sub-projects that are completed
in short periods of time using iteration and continuous feedback.
analytic platform Preconfigured hardware-software system that is
specifically designed for high-speed analysis of large datasets.
analytical CRM Customer relationship management applications
dealing with the analysis of customer data to provide information
for improving business performance.
Android A mobile operating system developed by Android, Inc.
(purchased by Google) and later the Open Handset Alliance as a
flexible, upgradeable mobile device platform.
anti-malware software Software designed to detect, and often elimi-
nate, malware from an information system.
application controls Specific controls unique to each computerized
application that ensure that only authorized data are completely
and accurately processed by that application.
application server Software that handles all application operations
between browser-based computers and a company’s back-end
business applications or databases.
apps Small pieces of software that run on the Internet, on your
computer, or on your cell phone and are generally delivered over
the Internet.
artificial intelligence (AI) Effort to develop computer-based sys-
tems that can think and behave like humans.
attribute A piece of information describing a particular entity.
augmented reality (AR) A technology for enhancing visualization.
Provides a live direct or indirect view of a physical real-world
environment whose elements are augmented by virtual
computer-generated imagery.
authentication The ability of each party in a transaction to ascertain
the identity of the other party.
automation Using the computer to speed up the performance of
existing tasks.
backward chaining A strategy for searching the rule base in an
expert system that acts like a problem solver by beginning with a
hypothesis and seeking out more information until the hypoth-
esis is either proved or disproved.
balanced scorecard method Framework for operationalizing a
firm’s strategic plan by focusing on measurable financial, busi-
ness process, customer, and learning and growth outcomes of
firm performance.
bandwidth The capacity of a communications channel as measured
by the difference between the highest and lowest frequencies
that can be transmitted by that channel.
behavioral models Descriptions of management based on behav-
ioral scientists’ observations of what managers actually do in
their jobs.
behavioral targeting Tracking the click-streams (history of clicking
behavior) of individuals across multiple websites for the purpose of
understanding their interests and intentions, and exposing them to
advertisements that are uniquely suited to their interests.
benchmarking Setting strict standards for products, services, or ac-
tivities and measuring organizational performance against those
standards.
best practices The most successful solutions or problem-solving
methods that have been developed by a specific organization or
industry.
big data Data sets with volumes so huge that they are beyond the
ability of typical relational DBMS to capture, store, and analyze.
The data are often unstructured or semi-structured.
biometric authentication Technology for authenticating system
users that compares a person’s unique characteristics such as
fingerprints, face, or retinal image against a stored set profile of
these characteristics.
bit A binary digit representing the smallest unit of data in a comput-
er system. It can only have one of two states, representing 0 or 1.
blockchain Distributed ledger system that stores permanent and
tamper-proof records of transactions and shares them among a
distributed network of computers.
blog Popular term for “weblog,” designating an informal yet struc-
tured website where individuals can publish stories, opinions,
and links to other websites of interest.
blogosphere Totality of blog-related websites.
Bluetooth Standard for wireless personal area networks that can
transmit up to 722 Kbps within a 10-meter area.
botnet A group of computers that have been infected with bot
malware without users’ knowledge, enabling a hacker to use the
amassed resources of the computers to launch distributed denial-
of-service attacks, phishing campaigns, or spam.
broadband High-speed transmission technology. Also designates a
single communications medium that can transmit multiple chan-
nels of data simultaneously.
bugs Software program code defects.
bullwhip effect Distortion of information about the demand for a
product as it passes from one entity to the next across the supply
chain.
business continuity planning Planning that focuses on how the
company can restore business operations after a disaster strikes.
GLOSSARY
Glossary G-2
business driver A force in the environment to which businesses
must respond and that influences the direction of business.
business ecosystem Loosely coupled but interdependent networks
of suppliers, distributors, outsourcing firms, transportation ser-
vice firms, and technology manufacturers.
business functions Specialized tasks performed in a business
organization, including manufacturing and production, sales and
marketing, finance and accounting, and human resources.
business intelligence Applications and technologies to help users
make better business decisions.
business model An abstraction of what an enterprise is and how
the enterprise delivers a product or service, showing how the
enterprise creates wealth.
business performance management (BPM) Attempts to system-
atically translate a firm’s strategies (e.g., differentiation, low-cost
producer, market share growth, and scope of operation) into
operational targets.
business process management (BPM) An approach to business
that aims to continuously improve and manage business
processes.
business process redesign Type of organizational change in which
business processes are analyzed, simplified, and redesigned.
business processes The unique ways in which organizations coordi-
nate and organize work activities, information, and knowledge to
produce a product or service.
business-to-business (B2B) electronic commerce Electronic sales
of goods and services among businesses.
business-to-consumer (B2C) electronic commerce Electronic
retailing of products and services directly to individual
consumers.
BYOD Stands for “bring your own device,” and refers to employees
using their own computing devices in the workplace.
byte A string of bits, usually eight, used to store one number or char-
acter in a computer system.
cable Internet connections Internet connections that use digital
cable lines to deliver high-speed Internet access to homes and
businesses.
capital budgeting The process of analyzing and selecting various
proposals for capital expenditures.
carpal tunnel syndrome (CTS) Type of RSI in which pressure on
the median nerve through the wrist’s bony carpal tunnel struc-
ture produces pain.
change agent In the context of implementation, the individual act-
ing as the catalyst during the change process to ensure successful
organizational adaptation to a new system or innovation.
change management Managing the impact of organizational
change associated with an innovation, such as a new informa-
tion system.
chat Live, interactive conversations over a public network.
chatbot Software agent designed to simulate a conversation with one
or more human users via textual or auditory methods.
chief data officer (CDO) Responsible for enterprise-wide gover-
nance and utilization of information to maximize the value the
organization can realize from its data.
chief information officer (CIO) Senior manager in charge of the
information systems function in the firm.
chief knowledge officer (CKO) Senior executive in charge of the
organization’s knowledge management program.
chief privacy officer (CPO) Responsible for ensuring the company
complies with existing data privacy laws.
chief security officer (CSO) Heads a formal security function
for the organization and is responsible for enforcing the firm’s
security policy.
choice Simon’s third stage of decision making, when the individual
selects among the various solution alternatives.
Chrome OS Google’s lightweight computer operating system for
users who do most of their computing on the Internet; runs on
computers ranging from netbooks to desktop computers.
churn rate Measurement of the number of customers who stop us-
ing or purchasing products or services from a company. Used as
an indicator of the growth or decline of a firm’s customer base.
classical model of management Traditional description of manage-
ment that focused on its formal functions of planning, organizing,
coordinating, deciding, and controlling.
click fraud Fraudulently clicking on an online ad in pay per click
advertising to generate an improper charge per click.
client The user point-of-entry for the required function in client/
server computing. Normally a desktop computer, workstation, or
laptop computer.
client/server computing A model for computing that splits process-
ing between clients and servers on a network, assigning functions
to the machine most able to perform the function.
cloud computing Model of computing in which computer process-
ing, storage, software, and other services are provided as a shared
pool of virtualized resources over a network, primarily the
Internet.
collaboration Working with others to achieve shared and explicit
goals.
communities of practice (COPs) Informal social networks of
professionals and employees within and outside the firm who
have similar work-related activities and interests and share their
knowledge.
community provider A website business model that creates a
digital online environment where people with similar interests
can transact (buy and sell goods); share interests, photos, videos;
communicate with like-minded people; receive interest-related
information; and even play out fantasies by adopting online per-
sonalities called avatars.
competitive forces model Model used to describe the interaction
of external influences, specifically threats and opportunities, that
affect an organization’s strategy and ability to compete.
complementary assets Additional assets required to derive value
from a primary investment.
component-based development Building large software systems by
combining preexisting software components.
computer abuse The commission of acts involving a computer that
may not be illegal but are considered unethical.
computer crime The commission of illegal acts through the use of a
computer or against a computer system.
computer forensics The scientific collection, examination, authen-
tication, preservation, and analysis of data held on or retrieved
from computer storage media in such a way that the information
can be used as evidence in a court of law.
computer hardware Physical equipment used for input, processing,
and output activities in an information system.
computer literacy Knowledge about information technology, focus-
ing on understanding of how computer-based technologies work.
computer software Detailed, preprogrammed instructions that con-
trol and coordinate the work of computer hardware components
in an information system.
computer virus Rogue software program that attaches itself to other
software programs or data files in order to be executed, often
causing hardware and software malfunctions.
computer vision syndrome (CVS) Eyestrain condition related
to computer display screen use; symptoms include headaches,
blurred vision, and dry and irritated eyes.
computer vision systems Systems that try to emulate the human
visual system to view and extract information from real-world
images.
computer-aided design (CAD) Information system that automates
the creation and revision of designs using sophisticated graphics
software.
computer-aided software engineering (CASE) Automation of
step-by-step methodologies for software and systems develop-
ment to reduce the amounts of repetitive work the developer
needs to do.
G-3 Glossary
consumer-to-consumer (C2C) Consumers selling goods and ser-
vices electronically to other consumers.
consumerization of IT New information technology originating in
the consumer market that spreads to business organizations.
controls All of the methods, policies, and procedures that ensure
protection of the organization’s assets, accuracy and reliability of
its records, and operational adherence to management standards.
conversion The process of changing from the old system to the new
system.
cookies Tiny file deposited on a computer hard drive when an
individual visits certain websites. Used to identify the visitor and
track visits to the website.
cooptation Bringing the opposition into the process of designing and
implementing a solution without giving up control of the direc-
tion and nature of the change.
copyright A statutory grant that protects creators of intellectual
property against copying by others for any purpose for a mini-
mum of 70 years.
core competency Activity at which a firm excels as a world-class
leader.
core systems Systems that support functions that are absolutely
critical to the organization.
cost transparency The ability of consumers to discover the actual
costs merchants pay for products.
counterimplementation A deliberate strategy to thwart the
implementation of an information system or an innovation in an
organization.
cross-selling Marketing complementary products to customers.
crowdsourcing Using large Internet audiences for advice, market
feedback, new ideas, and solutions to business problems. Related
to the “wisdom of crowds” theory.
culture The set of fundamental assumptions about what products
the organization should produce, how and where it should pro-
duce them, and for whom they should be produced.
customer lifetime value (CLTV) Difference between revenues
produced by a specific customer and the expenses for acquiring
and servicing that customer minus the cost of promotional mar-
keting over the lifetime of the customer relationship, expressed
in today’s dollars.
customer relationship management (CRM) Business and technol-
ogy discipline that uses information systems to coordinate all of
the business processes surrounding the firm’s interactions with
its customers in sales, marketing, and service.
customer relationship management systems Information systems
that track all the ways in which a company interacts with its
customers and analyze these interactions to optimize revenue,
profitability, customer satisfaction, and customer retention.
customization The modification of a software package to meet an
organization’s unique requirements without destroying the pack-
age software’s integrity.
customization In e-commerce, changing a delivered product or
service based on a user’s preferences or prior behavior.
cybervandalism Intentional disruption, defacement, or destruction
of a website or corporate information system.
cyberwarfare State-sponsored activity designed to cripple and defeat
another state or nation by damaging or disrupting its computers
or networks.
data Streams of raw facts representing events occurring in organiza-
tions or the physical environment before they have been organized
and arranged into a form that people can understand and use.
data administration A special organizational function for managing
the organization’s data resources, concerned with information
policy, data planning, maintenance of data dictionaries, and data
quality standards.
data cleansing Activities for detecting and correcting data in a data-
base or file that are incorrect, incomplete, improperly formatted,
or redundant. Also known as data scrubbing.
data definition DBMS capability that specifies the structure and
content of the database.
data dictionary An automated or manual tool for storing and orga-
nizing information about the data maintained in a database.
data element A field.
data flow diagram (DFD) Primary tool for structured analysis that
graphically illustrates a system’s component process and the flow
of data between them.
data governance Policies and processes for managing the availabil-
ity, usability, integrity, and security of the firm’s data.
data inconsistency The presence of different values for same attri-
bute when the same data are stored in multiple locations.
data lake Repository for raw unstructured data or structured data
that for the most part have not yet been analyzed.
data management technology Software governing the organization
of data on physical storage media.
data manipulation language A language associated with a database
management system that end users and programmers use to
manipulate data in the database.
data mart A small data warehouse containing only a portion of the
organization’s data for a specified function or population of users.
data mining Analysis of large pools of data to find patterns and rules
that can be used to guide decision making and predict future
behavior.
data quality audit A survey and/or sample of files to determine ac-
curacy and completeness of data in an information system.
data redundancy The presence of duplicate data in multiple data
files.
data visualization Technology for helping users see patterns and
relationships in large amounts of data by presenting the data in
graphical form.
data warehouse A database, with reporting and query tools, that stores
current and historical data extracted from various operational sys-
tems and consolidated for management reporting and analysis.
data workers People such as secretaries or bookkeepers who process
the organization’s paperwork.
database A group of related files.
database (rigorous definition) A collection of data organized to
service many applications at the same time by storing and man-
aging data so that they appear to be in one location.
database administration Refers to the more technical and opera-
tional aspects of managing data, including physical database
design and maintenance.
database management system (DBMS) Special software to create
and maintain a database and enable individual business applica-
tions to extract the data they need without having to create sepa-
rate files or data definitions in their computer programs.
database server A computer in a client/server environment that is
responsible for running a DBMS to process SQL statements and
perform database management tasks.
decisional roles Mintzberg’s classification for managerial roles
where managers initiate activities, handle disturbances, allocate
resources, and negotiate conflicts.
decision-support systems (DSS) Information systems at the orga-
nization’s management level that combine data and sophisticated
analytical models or data analysis tools to support semi-structured
and unstructured decision making.
“deep learning” Using multiple layers of neural networks to reveal
the underlying patterns in data, and in some limited cases iden-
tify patterns without human training.
deep packet inspection (DPI) Technology for managing network
traffic by examining data packets, sorting out low-priority data
from higher priority business-critical data, and sending packets in
order of priority.
demand planning Determining how much product a business needs
to make to satisfy all its customers’ demands.
denial-of-service (DoS) attack Flooding a network server or web
server with false communications or requests for services in
order to crash the network.
design Simon’s second stage of decision making, when the individual
conceives of possible alternative solutions to a problem.
Glossary G-4
DevOps Organizational strategy to create a culture and environment
to promote rapid and agile development practices by emphasiz-
ing close collaboration between software developers and the IT
operational staff.
digital asset management systems Classify, store, and distribute
digital objects such as photographs, graphic images, video, and
audio content.
digital certificate An attachment to an electronic message to verify
the identity of the sender and to provide the receiver with the
means to encode a reply.
digital dashboard Displays all of a firm’s key performance indica-
tors as graphs and charts on a single screen to provide one-page
overview of all the critical measurements necessary to make key
executive decisions.
digital divide Large disparities in access to computers and the Inter-
net among different social groups and different locations.
digital firm Organization where nearly all significant business
processes and relationships with customers, suppliers, and
employees are digitally enabled, and key corporate assets are
managed through digital means.
digital goods Goods that can be delivered over a digital network.
Digital Millennium Copyright Act (DMCA) Adjusts copyright
laws to the Internet Age by making it illegal to make, distribute,
or use devices that circumvent technology-based protections of
copyrighted materials.
digital subscriber line (DSL) A group of technologies providing
high-capacity transmission over existing copper telephone lines.
direct cutover strategy A risky conversion approach where the new
system completely replaces the old one on an appointed day.
direct goods Goods used in a production process.
disaster recovery planning Planning for the restoration of
computing and communications services after they have been
disrupted.
disintermediation The removal of organizations or business
process layers responsible for certain intermediary steps in a
value chain.
disruptive technologies Technologies with disruptive impact on
industries and businesses, rendering existing products, services,
and business models obsolete.
distributed database Database stored in multiple physical locations.
distributed denial-of-service (DDoS) attack Numerous computers
inundating and overwhelming a network from numerous launch
points.
documentation Descriptions of how an information system works
from either a technical or end-user standpoint.
domain name English-like name that corresponds to the unique
32-bit numeric Internet Protocol (IP) address for each computer
connected to the Internet.
Domain Name System (DNS) A hierarchical system of servers
maintaining a database enabling the conversion of domain names
to their numeric IP addresses.
domestic exporter Form of business organization characterized by
heavy centralization of corporate activities in the home county
of origin.
downtime Period of time in which an information system is not
operational.
drill down The ability to move from summary data to lower and
lower levels of detail.
drive-by download Malware that comes with a downloaded file a
user intentionally or unintentionally requests.
due process A process in which laws are well-known and understood
and there is an ability to appeal to higher authorities to ensure
that laws are applied correctly.
dynamic pricing Pricing of items based on real-time interactions
between buyers and sellers that determine what a item is worth
at any particular moment.
e-government Use of the Internet and related technologies to digi-
tally enable government and public sector agencies’ relationships
with citizens, businesses, and other arms of government.
edge computing Method of optimizing cloud computing systems by
performing some data processing on a set of linked servers at the
edge of the network, near the source of the data.
efficient customer response system System that directly links
consumer behavior back to distribution, production, and supply
chains.
electronic business (e-business) The use of the Internet and digi-
tal technology to execute all the business processes in the enter-
prise. Includes e-commerce as well as processes for the internal
management of the firm and for coordination with suppliers and
other business partners.
electronic commerce (e-commerce) The process of buying and
selling goods and services electronically involving transactions
using the Internet, networks, and other digital technologies.
electronic data interchange (EDI) The direct computer-to-computer
exchange between two organizations of standard business transac-
tions, such as orders, shipment instructions, or payments.
email The computer-to-computer exchange of messages.
employee relationship management (ERM) Software dealing with
employee issues that are closely related to CRM, such as setting
objectives, employee performance management, performance-
based compensation, and employee training.
encryption The coding and scrambling of messages to prevent their
being read or accessed without authorization.
end-user development The development of information systems
by end users with little or no formal assistance from technical
specialists.
end-user interface The part of an information system through
which the end user interacts with the system, such as online
screens and commands.
end users Representatives of departments outside the information
systems group for whom applications are developed.
enterprise applications Systems that can coordinate activities,
decisions, and knowledge across many different functions,
levels, and business units in a firm. Include enterprise
systems, supply chain management systems, and knowledge
management systems.
enterprise content management (ECM) Help organizations
manage structured and semi-structured knowledge, providing
corporate repositories of documents, reports, presentations, and
best practices and capabilities for collecting and organizing email
and graphic objects.
enterprise software Set of integrated modules for applications
such as sales and distribution, financial accounting, investment
management, materials management, production planning, plant
maintenance, and human resources that allow data to be used by
multiple functions and business processes.
enterprise systems Integrated enterprise-wide information systems
that coordinate key internal processes of the firm.
enterprise-wide knowledge management systems General-
purpose, firmwide systems that collect, store, distribute, and
apply digital content and knowledge.
entity A person, place, thing, or event about which information must
be kept.
entity-relationship diagram A methodology for documenting
databases illustrating the relationship between various entities in
the database.
ergonomics The interaction of people and machines in the work
environment, including the design of jobs, health issues, and the
end-user interface of information systems.
e-tailer Online retail stores from the giant Amazon to tiny local
stores that have websites where retail goods are sold.
ethical no-free-lunch rule Assumption that all tangible and intangi-
ble objects are owned by someone else, unless there is a specific
declaration otherwise, and that the creator wants compensation
for this work.
ethics Principles of right and wrong that can be used by individu-
als acting as free moral agents to make choices to guide their
behavior.
G-5 Glossary
evil twins Wireless networks that pretend to be legitimate to entice
participants to log on and reveal passwords or credit card num-
bers.
exchange Third-party Net marketplace that is primarily transaction
oriented and that connects many buyers and suppliers for spot
purchasing.
executive support systems (ESS) Information systems at
the organization’s strategic level designed to address un-
structured decision making through advanced graphics and
communications.
expert system Knowledge-intensive computer program that
captures the expertise of a human in limited domains of
knowledge.
explicit knowledge Knowledge that has been documented.
external integration tools Project management technique that
links the work of the implementation team to that of users at all
organizational levels.
extranet Private intranet that is accessible to authorized outsiders.
Fair Information Practices (FIP) A set of principles originally set
forth in 1973 that governs the collection and use of information
about individuals and forms the basis of most U.S. and European
privacy laws.
fault-tolerant computer systems Systems that contain extra hard-
ware, software, and power supply components that can back a
system up and keep it running to prevent system failure.
feasibility study As part of the systems analysis process, the way to
determine whether the solution is achievable, given the organiza-
tion’s resources and constraints.
feedback Output that is returned to the appropriate members of the
organization to help them evaluate or correct input.
field A grouping of characters into a word, a group of words, or a
complete number, such as a person’s name or age.
file A group of records of the same type.
File Transfer Protocol (FTP) Tool for retrieving and transferring
files from a remote computer.
FinTech Start-up innovative financial technology firms and
services.
firewall Hardware and software placed between an organization’s
internal network and an external network to prevent outsiders
from invading private networks.
foreign key Field in a database table that enables users find related
information in another database table.
formal control tools Project management technique that helps
monitor the progress toward completion of a task and fulfillment
of goals.
formal planning tools Project management technique that struc-
tures and sequences tasks, budgeting time, money, and technical
resources required to complete the tasks.
forward chaining A strategy for searching the rule base in an expert
system that begins with the information entered by the user and
searches the rule base to arrive at a conclusion.
franchiser Form of business organization in which a product is
created, designed, financed, and initially produced in the home
country, but for product-specific reasons relies heavily on for-
eign personnel for further production, marketing, and human
resources.
free/fremium revenue model An e-commerce revenue model in
which a firm offers basic services or content for free while charg-
ing a premium for advanced or high-value features.
Gantt chart Visually represents the timing, duration, and resource
requirements of project tasks.
general controls Overall control environment governing the design,
security, and use of computer programs and the security of data
files in general throughout the organization’s information tech-
nology infrastructure.
General Data Protection Regulation (GDPR) Legislation effective
May 25, 2018 that updates and unifies data privacy laws across
the European Union, focusing on making businesses more trans-
parent and expanding the privacy rights of data subjects.
genetic algorithms Problem-solving methods that promote the evo-
lution of solutions to specified problems using the model of living
organisms adapting to their environment.
geoadvertising services Delivering ads to users based on their GPS
location.
geographic information system (GIS) System with software that
can analyze and display data using digitized maps to enhance
planning and decision-making.
geoinformation services Information on local places and things
based on the GPS position of the user.
geosocial services Social networking based on the GPS location of
users.
global culture The development of common expectations, shared
artifacts, and social norms among different cultures and peoples.
Golden Rule Putting oneself in the place of others as the object of a
decision.
Gramm-Leach-Bliley Act Requires financial institutions to ensure
the security and confidentiality of customer data.
green computing (green IT) Refers to practices and technologies
for designing, manufacturing, using, and disposing of comput-
ers, servers, and associated devices such as monitors, printers,
storage devices, and networking and communications systems to
minimize impact on the environment.
group decision-support system (GDSS) An interactive computer-
based system to facilitate the solution to unstructured problems
by a set of decision makers working together as a group.
hacker A person who gains unauthorized access to a computer net-
work for profit, criminal mischief, or personal pleasure.
Hadoop Open source software framework that enables distributed
parallel processing of huge amounts of data across many inexpen-
sive computers.
hertz Measure of frequency of electrical impulses per second, with 1
Hertz equivalent to 1 cycle per second.
HIPAA Law outlining rules for medical security, privacy, and the
management of healthcare records.
hotspot A specific geographic location in which an access point
provides public Wi-Fi network service.
HTML5 Next evolution of HTML, which makes it possible to embed
images, video, and audio directly into a document without add-on
software.
hubs Very simple devices that connect network components, send-
ing a packet of data to all other connected devices.
hybrid cloud Computing model where firms use both their own IT
infrastructure and also public cloud computing services.
Hypertext Markup Language (HTML) Page description language
for creating web pages.
Hypertext Transfer Protocol (HTTP) The communications stan-
dard used to transfer pages on the web. Defines how messages
are formatted and transmitted.
identity management Business processes and software tools for
identifying the valid users of a system and controlling their ac-
cess to system resources.
identity theft Theft of key pieces of personal information, such as
credit card or Social Security numbers, in order to obtain mer-
chandise and services in the name of the victim or to obtain false
credentials.
Immanuel Kant’s categorical imperative A principle that states
that if an action is not right for everyone to take it is not right for
anyone.
implementation All the organizational activities surrounding the
adoption, management, and routinization of an innovation, such
as a new information system.
in-memory computing Technology for very rapid analysis and
processing of large quantities of data by storing the data in the
computer’s main memory rather than in secondary storage.
indirect goods Goods not directly used in the production process,
such as office supplies.
inference engine The strategy used to search through the rule base
in an expert system; can be forward or backward chaining.
Glossary G-6
information Data that have been shaped into a form that is mean-
ingful and useful to human beings.
information asymmetry Situation where the relative bargaining
power of two parties in a transaction is determined by one party
in the transaction possessing more information essential to the
transaction than the other party.
information density The total amount and quality of information
available to all market participants, consumers, and merchants.
information policy Formal rules governing the maintenance, distri-
bution, and use of information in an organization.
information requirements A detailed statement of the informa-
tion needs that a new system must satisfy; identifies who needs
what information, and when, where, and how the information is
needed.
information rights The rights that individuals and organizations
have with respect to information that pertains to themselves.
information system Interrelated components working together to
collect, process, store, and disseminate information to support
decision making, coordination, control, analysis, and visualiza-
tion in an organization.
information systems audit Identifies all the controls that govern
individual information systems and assesses their effectiveness.
information systems department The formal organizational unit
that is responsible for the information systems function in the
organization.
information systems literacy Broad-based understanding of
information systems that includes behavioral knowledge about
organizations and individuals using information systems as well
as technical knowledge about computers.
information systems managers Leaders of the various specialists
in the information systems department.
information systems plan A road map indicating the direction of
systems development: the rationale, the current situation, the
management strategy, the implementation plan, and the budget.
information technology (IT) All the hardware and software tech-
nologies a firm needs to achieve its business objectives.
information technology (IT) infrastructure Computer hardware,
software, data, storage technology, and networks providing a
portfolio of shared IT resources for the organization.
informational roles Mintzberg’s classification for managerial roles
where managers act as the nerve centers of their organizations,
receiving and disseminating critical information.
informed consent Consent given with knowledge of all the facts
needed to make a rational decision.
input The capture or collection of raw data from within the orga-
nization or from its external environment for processing in an
information system.
instant messaging Chat service that allows participants to create
their own private chat channels so that a person can be alerted
whenever someone on his or her private list is online to initiate a
chat session with that particular individual.
intangible benefits Benefits that are not easily quantified; they
include more efficient customer service or enhanced decision
making.
intellectual property Intangible property created by individuals
or corporations that is subject to protections under trade secret,
copyright, and patent law.
intelligence The first of Simon’s four stages of decision making,
when the individual collects information to identify problems
occurring in the organization.
intelligent agent Software program that uses a built-in or learned
knowledge base to carry out specific, repetitive, and predictable
tasks for an individual user, business process, or software applica-
tion.
intelligent techniques Technologies that aid human decision mak-
ers by capturing individual and collective knowledge, discovering
patterns and behaviors in large quantities of data, and generating
solutions to problems that are too large and complex for human
beings to solve on their own.
internal integration tools Project management technique that
ensures that the implementation team operates as a cohesive
unit.
international information systems architecture The basic
information systems required by organizations to coordinate
worldwide trade and other activities.
Internet Global network of networks using universal standards to
connect millions of different networks.
Internet of Things Pervasive web in which each object or machine
has a unique identity and is able to use the Internet to link
with other machines or send data. Also known as the Industrial
Internet.
Internet Protocol (IP) address Four-part numeric address indicat-
ing a unique computer location on the Internet.
Internet service provider (ISP) A commercial organization with a
permanent connection to the Internet that sells temporary con-
nections to subscribers.
Internet2 Research network with new protocols and transmission
speeds that provides an infrastructure for supporting high-
bandwidth Internet applications.
interorganizational systems Information systems that automate
the flow of information across organizational boundaries and link
a company to its customers, distributors, or suppliers.
interpersonal roles Mintzberg’s classification for managerial roles
where managers act as figureheads and leaders for the organiza-
tion.
intranet An internal network based on Internet and World Wide Web
technology and standards.
intrusion detection system Tools to monitor the most vulner-
able points in a network to detect and deter unauthorized
intruders.
iOS Operating system for the Apple iPad, iPhone, and iPod Touch.
IPv6 New IP addressing system using 128-bit IP addresses. Stands for
Internet Protocol version 6.
IT governance Strategy and policies for using information technol-
ogy within an organization, specifying the decision rights and
accountabilities to ensure that information technology supports
the organization’s strategies and objectives.
iterative A process of repeating over and over again the steps to
build a system.
Java Programming language that can deliver only the software
functionality needed for a particular task, such as a small applet
downloaded from a network; can run on any computer and
operating system.
joint application design (JAD) Process to accelerate the genera-
tion of information requirements by having end users and infor-
mation systems specialists work together in intensive interactive
design sessions.
just-in-time strategy Scheduling system for minimizing inventory
by having components arrive exactly at the moment they are
needed and finished goods shipped as soon as they leave the as-
sembly line.
key field A field in a record that uniquely identifies instances of that
record so that it can be retrieved, updated, or sorted.
key performance indicators Measures proposed by senior manage-
ment for understanding how well the firm is performing along
specified dimensions.
keylogger Spyware that records every keystroke made on a com-
puter to steal personal information or passwords or to launch
Internet attacks.
knowledge Concepts, experience, and insight that provide a frame-
work for creating, evaluating, and using information.
knowledge base Model of human knowledge that is used by expert
systems.
knowledge discovery Identification of novel and valuable patterns
in large databases.
knowledge management The set of processes developed in an
organization to create, gather, store, maintain, and disseminate
the firm’s knowledge.
G-7 Glossary
knowledge management systems Systems that support the cre-
ation, capture, storage, and dissemination of firm expertise and
knowledge.
knowledge workers People such as engineers or architects who
design products or services and create knowledge for the organi-
zation.
knowledge work systems Information systems that aid knowledge
workers in the creation and integration of new knowledge into
the organization.
learning management system (LMS) Tools for the management,
delivery, tracking, and assessment of various types of employee
learning.
legacy system A system that has been in existence for a long time
and that continues to be used to avoid the high cost of replacing
or redesigning it.
legitimacy The extent to which one’s authority is accepted on
grounds of competence, vision, or other qualities.
liability The existence of laws that permit individuals to recover the
damages done to them by other actors, systems, or organizations.
Linux Reliable and compactly designed operating system that is an
offshoot of UNIX and that can run on many different hardware
platforms and is available free or at very low cost. Used as alter-
native to UNIX.
local area network (LAN) A telecommunications network that
requires its own dedicated channels and that encompasses a lim-
ited distance, usually one building or several buildings in close
proximity.
location-based services GPS map services available on smart-
phones.
location analytics Ability to gain insights from the location (geo-
graphic) component of data, including location data from mobile
phones, output from sensors or scanning devices, and data from
maps.
long tail marketing Refers to the ability of firms to profitably
market goods to very small online audiences, largely because of
the lower costs of reaching very small market segments (people
who fall into the long tail ends of a Bell curve).
machine learning Software that can identify patterns and rela-
tionships in very large data sets without explicit programming
although with significant human training.
mainframe Largest category of computer, used for major business
processing.
maintenance Changes in hardware, software, documentation, or
procedures to a production system to correct errors, meet new
requirements, or improve processing efficiency.
malware Malicious software programs such as computer viruses,
worms, and Trojan horses.
managed security service provider (MSSP) Company that pro-
vides security management services for subscribing clients.
management information systems (MIS) Specific category of
information system providing reports on organizational perfor-
mance to help middle management monitor and control the
business.
management information systems (MIS) The study of informa-
tion systems focusing on their use in business and management.
managerial roles Expectations of the activities that managers should
perform in an organization.
market creator An e-commerce business model in which firms pro-
vide a digital online environment where buyers and sellers can
meet, search for products, and engage in transactions.
market entry costs The cost merchants must pay to bring their
goods to market.
marketspace A marketplace extended beyond traditional boundaries
and removed from a temporal and geographic location.
mashups Composite software applications that depend on high-
speed networks, universal communication standards, and open
source code.
mass customization The capacity to offer individually tailored prod-
ucts or services using mass production resources.
massive open online course (MOOC) Online course made avail-
able via the web to very large numbers of participants.
menu costs Merchants’ costs of changing prices.
metropolitan area network (MAN) Network that spans a metro-
politan area, usually a city and its major suburbs. Its geographic
scope falls between a WAN and a LAN.
microblogging Blogging featuring very short posts, such as using
Twitter.
micropayment systems Payment for a very small sum of money,
often less than $10.
middle management People in the middle of the organizational hi-
erarchy who are responsible for carrying out the plans and goals
of senior management.
minicomputer Middle-range computer used in systems for universi-
ties, factories, or research laboratories.
mobile commerce (m-commerce) The use of wireless devices,
such as smartphones or tablets to conduct both business-to-
consumer and business-to-business e-commerce transactions over
the Internet.
mobile device management (MDM) Software that monitors,
manages, and secures mobile devices that are deployed across
multiple mobile service providers and multiple mobile operating
systems used in the organization.
mobile web app Internet-enabled app with specific functionality
for mobile devices that is accessed through a mobile device’s web
browser.
mobile website Version of a regular website that is scaled down in
content and navigation for easy access and search on a small
mobile screen.
modem A device for translating a computer’s digital signals into
analog form for transmission over analog networks or for trans-
lating analog signals back into digital form for reception by a
computer.
Moore’s Law Assertion that the number of components on a chip
doubles each year.
multicore processor Integrated circuit to which two or more proces-
sors have been attached for enhanced performance, reduced
power consumption, and more efficient simultaneous processing
of multiple tasks.
multinational Form of business organization that concentrates
financial management, and control out of a central home base
while decentralizing production, sales, and marketing.
multitiered (N-tier) client/server architecture Client/server
network in which the work of the entire network is balanced over
several different levels of servers.
multitouch Interface that features the use of one or more finger
gestures to manipulate lists or objects on a screen without using a
mouse or keyboard.
nanotechnology Technology that builds structures and processes
based on the manipulation of individual atoms and molecules.
native advertising Placing ads within social network newsfeeds or
traditional editorial content, such as a newspaper article.
native app Standalone application designed to run on a specific plat-
form and device and installed directly on the mobile device
natural language processing (NLP) AI technique for enabling a
computer to understand and analyze natural language as opposed
to language formatted to be understood by computers.
near field communication (NFC) Short-range wireless connectiv-
ity standard that uses electromagnetic radio fields to enable two
compatible devices to exchange data when brought within a few
centimeters of each other.
net marketplace A single digital marketplace based on Internet
technology linking many buyers to many sellers.
network The linking of two or more computers to share data or
resources, such as a printer.
network economics Model of strategic systems at the industry
level based on the concept of a network where adding another
participant entails zero marginal costs but can create much larger
marginal gains.
Glossary G-8
network operating system (NOS) Special software that routes
and manages communications on the network and coordinates
network resources.
networking and telecommunications technology Physical devic-
es and software that link various computer hardware components
and transfer data from one physical location to another.
neural network Algorithms loosely based on the processing patterns
of the biological brain that can be trained to classify objects into
known categories based on data inputs.
non-relational database management system Database manage-
ment system for working with large quantities of structured
and unstructured data that would be difficult to analyze with a
relational model.
nonobvious relationship awareness (NORA) Technology that
can find obscure hidden connections between people or other
entities by analyzing information from many different sources to
correlate relationships.
normalization The process of creating small stable data structures
from complex groups of data when designing a relational
database.
object Software building block that combines data and the proce-
dures acting on the data.
object-oriented development Approach to systems development
that uses the object as the basic unit of systems analysis and
design. The system is modeled as a collection of objects and the
relationship between them.
Office 365 Hosted cloud version of Microsoft Office productivity and
collaboration tools as a subscription service.
offshore outsourcing Outsourcing systems development work or
maintenance of existing systems to external vendors in another
country.
on-demand computing Firms off-loading peak demand for comput-
ing power to remote, large-scale data processing centers, invest-
ing just enough to handle average processing loads and paying
for only as much additional computing power as the market
demands. Also called utility computing.
online analytical processing (OLAP) Capability for manipulating
and analyzing large volumes of data from multiple perspectives.
online transaction processing Transaction processing mode in
which transactions entered online are immediately processed by
the computer.
open source software Software that provides free access to its pro-
gram code, allowing users to modify the program code to make
improvements or fix errors.
operating system Software that manages the resources and activi-
ties of the computer.
operational CRM Customer-facing applications, such as sales force
automation, call center and customer service support, and mar-
keting automation.
operational intelligence Business analytics that delivers insight
into data, streaming events, and business operations.
operational management People who monitor the day-to-day activi-
ties of the organization.
opt-in Model of informed consent permitting prohibiting an orga-
nization from collecting any personal information unless the
individual specifically takes action to approve information collec-
tion and use.
opt-out Model of informed consent permitting the collection of per-
sonal information until the consumer specifically requests that
the data not be collected.
organization (behavioral definition) A collection of rights, privi-
leges, obligations, and responsibilities that are delicately balanced
over a period of time through conflict and conflict resolution.
organization (technical definition) A stable, formal, social struc-
ture that takes resources from the environment and processes
them to produce outputs.
organizational and management capital Investments in organiza-
tion and management such as new business processes, manage-
ment behavior, organizational culture, or training.
organizational impact analysis Study of the way a proposed
system will affect organizational structure, attitudes, decision
making, and operations.
organizational learning Creation of new standard operating proce-
dures and business processes that reflect organizations’ experi-
ence.
output The distribution of processed information to the people who
will use it or to the activities for which it will be used.
outsourcing The practice of contracting computer center operations,
telecommunications networks, or applications development to
external vendors.
packet switching Technology that breaks messages into small, fixed
bundles of data and routes them in the most economical way
through any available communications channel.
paradigm shift Radical reconceptualization of the nature of the busi-
ness and the nature of the organization.
parallel strategy A safe and conservative conversion approach
where both the old system and its potential replacement are run
together for a time until everyone is assured that the new one
functions correctly.
particularism Making judgments and taking action on the basis
of narrow or personal characteristics, in all its forms (religious,
nationalistic, ethnic, regionalism, geopolitical position).
partner relationship management (PRM) Automation of the
firm’s relationships with its selling partners using customer data
and analytical tools to improve coordination and customer sales.
password Secret word or string of characters for authenticating users
so they can access a resource such as a computer system.
patch Small pieces of software to repair the software flaws without
disturbing the proper operation of the software.
patent A legal document that grants the owner an exclusive mo-
nopoly on the ideas behind an invention for 20 years; designed to
ensure that inventors of new machines or methods are rewarded
for their labor while making widespread use of their inventions.
peer-to-peer Network architecture that gives equal power to all com-
puters on the network; used primarily in small networks.
personal area network (PAN) Computer network used for commu-
nication among digital devices that are close to one person.
personalization Ability of merchants to target marketing messages
to specific individuals by adjusting the message for a person’s
name, interests, and past purchases.
PERT chart Network diagram depicting project tasks and their inter-
relationships.
pharming Phishing technique that redirects users to a bogus web
page, even when an individual enters the correct web page ad-
dress.
phased approach Introduces the new system in stages either by
functions or by organizational units.
phishing Form of spoofing involving setting up fake websites or
sending email messages that resemble those of legitimate busi-
nesses that ask users for confidential personal data.
pilot study strategy A strategy to introduce the new system to a
limited area of the organization until it is proven to be fully func-
tional; only then can the conversion to the new system across the
entire organization take place.
pivot table Spreadsheet tool for reorganizing and summarizing two
or more dimensions of data in a tabular format.
platform Business providing information systems, technologies, and
services that thousands of other firms in different industries use
to enhance their own capabilities.
podcasting Publishing audio broadcasts via the Internet so that
subscribing users can download audio files onto their personal
computers or portable music players.
portal Web interface for presenting integrated personalized content
from a variety of sources. Also refers to a website service that
provides an initial point of entry to the web.
portfolio analysis An analysis of the portfolio of potential applica-
tions within a firm to determine the risks and benefits, and to
select among alternatives for information systems.
G-9 Glossary
post-implementation audit Formal review process conducted after
a system has been placed in production to determine how well
the system has met its original objectives.
predictive analytics The use of data mining techniques, historical
data, and assumptions about future conditions to predict out-
comes of events, such as the probability a customer will respond
to an offer or purchase a specific product.
predictive search Part of a search alogrithm that predicts what a
user query is looking as it is entered based on popular searches.
price discrimination Selling the same goods, or nearly the same
goods, to different targeted groups at different prices.
price transparency The ease with which consumers can find out
the variety of prices in a market.
primary activities Activities most directly related to the production
and distribution of a firm’s products or services.
primary key Unique identifier for all the information in any row of
a database table.
privacy The claim of individuals to be left alone, free from surveil-
lance or interference from other individuals, organizations, or
the state.
private cloud A proprietary network or a data center that ties
together servers, storage, networks, data, and applications as
a set of virtualized services that are shared by users inside a
company.
private exchange Another term for a private industrial network.
private industrial networks Web-enabled networks linking systems
of multiple firms in an industry for the coordination of trans-
organizational business processes.
process specifications Describe the logic of the processes occurring
within the lowest levels of a data flow diagram.
processing The conversion, manipulation, and analysis of raw input
into a form that is more meaningful to humans.
product differentiation Competitive strategy for creating brand
loyalty by developing new and unique products and services that
are not easily duplicated by competitors.
production The stage after the new system is installed and the con-
version is complete; during this time the system is reviewed by
users and technical specialists to determine how well it has met
its original goals.
production or service workers People who actually produce the
products or services of the organization.
profiling The use of computers to combine data from multiple
sources and create electronic dossiers of detailed information on
individuals.
program-data dependence The close relationship between
data stored in files and the software programs that update
and maintain those files. Any change in data organization or
format requires a change in all the programs associated with
those files.
programmers Highly trained technical specialists who write com-
puter software instructions.
programming The process of translating the system specifications
prepared during the design stage into program code.
project Planned series of related activities for achieving a specific
business objective.
project management Application of knowledge, tools, and tech-
niques to achieve specific targets within a specified budget and
time period.
project portfolio management Helps organizations evaluate and
manage portfolios of projects and dependencies among them.
protocol A set of rules and procedures that govern transmission
between the components in a network.
prototype The preliminary working version of an information sys-
tem for demonstration and evaluation purposes.
prototyping The process of building an experimental system quickly
and inexpensively for demonstration and evaluation so that users
can better determine information requirements.
public cloud A cloud maintained by an external service provider, ac-
cessed through the Internet, and available to the general public.
public key encryption Uses two keys: one shared (or public) and
one private.
public key infrastructure (PKI) System for creating public and
private keys using a certificate authority (CA) and digital certifi-
cates for authentication.
pull-based model Supply chain driven by actual customer orders
or purchases so that members of the supply chain produce and
deliver only what customers have ordered.
push-based model Supply chain driven by production master sched-
ules based on forecasts or best guesses of demand for products,
and products are “pushed” to customers.
quantum computing Use of principles of quantum physics to rep-
resent data and perform operations on the data, with the ability
to be in many different states at once and to perform many differ-
ent computations simultaneously.
query language Software tool that provides immediate online an-
swers to requests for information that are not predefined.
radio frequency identification (RFID) Technology using tiny tags
with embedded microchips containing data about an item and its
location to transmit short-distance radio signals to special RFID
readers that then pass the data on to a computer for processing.
ransomware Malware that extorts money from users by taking con-
trol of their computers or displaying annoying pop-up messages.
Rapid Application Development (RAD) Process for developing
systems in a very short time period by using prototyping, state-
of-the-art software tools, and close teamwork among users and
systems specialists.
rationalization of procedures The streamlining of standard operat-
ing procedures, eliminating obvious bottlenecks, so that automa-
tion makes operating procedures more efficient.
record A group of related fields.
referential integrity Rules to ensure that relationships between
coupled database tables remain consistent.
relational DBMS A type of logical database model that treats data as
if they were stored in two-dimensional tables. It can relate data
stored in one table to data in another as long as the two tables
share a common data element.
repetitive stress injury (RSI) Occupational disease that occurs
when muscle groups are forced through repetitive actions with
high-impact loads or thousands of repetitions with low-impact
loads.
request for proposal (RFP) A detailed list of questions submitted
to vendors of software or other services to determine how well
the vendor’s product can meet the organization’s specific require-
ments.
responsibility Accepting the potential costs, duties, and obligations
for the decisions one makes.
responsive web design Ability of a website to automatically change
screen resolution and image size as a user switches to devices of
different sizes, such as a laptop, tablet computer, or smartphone.
Eliminates the need for separate design and development work
for each new device.
revenue model A description of how a firm will earn revenue, gen-
erate profits, and produce a return on investment.
richness Measurement of the depth and detail of information that a
business can supply to the customer as well as information the
business collects about the customer.
risk assessment Determining the potential frequency of the occur-
rence of a problem and the potential damage if the problem were
to occur. Used to determine the cost/benefit of a control.
risk aversion principle Principle that one should take the action
that produces the least harm or incurs the least cost.
robotics Use of machines that can substitute for human movements
as well as computer systems for their control, sensory feedback,
and information processing.
router Specialized communications processor that forwards packets
of data from one network to another network.
routines Precise rules, procedures, and practices that have been
developed to cope with expected situations.
Glossary G-10
RSS Technology using aggregator software to pull content from web-
sites and feed it automatically to subscribers’ computers.
safe harbor Private self-regulating policy and enforcement
mechanism that meets the objectives of government
regulations but does not involve government regulation or
enforcement.
sales revenue model Selling goods, information, or services to cus-
tomers as the main source of revenue for a company.
Sarbanes-Oxley Act Law passed in 2002 that imposes responsibil-
ity on companies and their management to protect investors by
safeguarding the accuracy and integrity of financial information
that is used internally and released externally.
scalability The ability of a computer, product, or system to expand
to serve a larger number of users without breaking down.
scope Defines what work is and is not included in a project.
scoring model A quick method for deciding among alternative sys-
tems based on a system of ratings for selected objectives.
search costs The time and money spent locating a suitable product
and determining the best price for that product.
search engine A tool for locating specific sites or information on the
Internet.
search engine marketing Use of search engines to deliver in their
results sponsored links, for which advertisers have paid.
search engine optimization (SEO) The process of changing a web-
site’s content, layout, and format in order to increase the ranking
of the site on popular search engines and to generate more site
visitors.
Secure Hypertext Transfer Protocol (S-HTTP) Protocol used for
encrypting data flowing over the Internet; limited to individual
messages.
Secure Sockets Layer (SSL) Enables client and server computers to
manage encryption and decryption activities as they communi-
cate with each other during a secure web session.
security Policies, procedures, and technical measures used to pre-
vent unauthorized access, alteration, theft, or physical damage to
information systems.
security policy Statements ranking information risks, identifying
acceptable security goals, and identifying the mechanisms for
achieving these goals.
semantic search Search technology capable of understanding
human language and behavior.
semi-structured decisions Decisions in which only part of
the problem has a clear-cut answer provided by an accepted
procedure.
senior management People occupying the topmost hierarchy
in an organization who are responsible for making long-range
decisions.
sensitivity analysis Models that ask “what-if” questions repeatedly
to determine the impact of changes in one or more factors on the
outcomes.
sentiment analysis Mining text comments in an email message,
blog, social media conversation, or survey form to detect favor-
able and unfavorable opinions about specific subjects.
server Computer specifically optimized to provide software and
other resources to other computers over a network.
service level agreement (SLA) Formal contract between customers
and their service providers that defines the specific responsibili-
ties of the service provider and the level of service expected by
the customer.
service-oriented architecture (SOA) Software architecture of a
firm built on a collection of software programs that communicate
with each other to perform assigned tasks to create a working
software application
shopping bot Software with varying levels of built-in intelligence to
help electronic commerce shoppers locate and evaluate products
or service they might wish to purchase.
Six Sigma A specific measure of quality, representing 3.4 defects per
million opportunities; used to designate a set of methodologies
and techniques for improving quality and reducing costs.
smart card A credit-card-size plastic card that stores digital informa-
tion and that can be used for electronic payments in place
of cash.
smartphone Wireless phone with voice, text, and Internet capa-
bilities.
sniffer Type of eavesdropping program that monitors information
traveling over a network.
social business Use of social networking platforms, including
Facebook, Twitter, and internal corporate social tools, to engage
employees, customers, and suppliers.
social CRM Tools enabling a business to link customer conversa-
tions, data, and relationships from social networking sites to CRM
processes.
social engineering Tricking people into revealing their passwords
by pretending to be legitimate users or members of a company in
need of information.
social graph Map of all significant online social relationships, com-
parable to a social network describing offline relationships.
social networking sites Online community for expanding users’
business or social contacts by making connections through their
mutual business or personal connections.
social search Effort to provide more relevant and trustworthy search
results based on a person’s network of social contacts.
social shopping Use of websites featuring user-created web pages to
share knowledge about items of interest to other shoppers.
sociotechnical design Design to produce information systems that
blend technical efficiency with sensitivity to organizational and
human needs.
sociotechnical view Seeing systems as composed of both technical
and social elements.
software as a service (SaaS) Services for delivering and providing
access to software remotely as a web-based service.
software-defined networking (SDN) Using a central control pro-
gram separate from network devices to manage the flow of data
on a network.
software-defined storage (SDS) Software to manage provisioning
and management of data storage independent of the underlying
hardware.
software localization Process of converting software to operate in a
second language.
software package A prewritten, precoded, commercially available
set of programs that eliminates the need to write software pro-
grams for certain functions.
spam Unsolicited commercial email.
spoofing Tricking or deceiving computer systems or other computer
users by hiding one’s identity or faking the identity of another
user on the Internet.
spyware Technology that aids in gathering information about a per-
son or organization without their knowledge.
SQL injection attack Attacks against a website that take advantage
of vulnerabilities in poorly coded SQL (a standard and com-
mon database software application) applications in order to
introduce malicious program code into a company’s systems
and networks.
strategic transitions A movement from one level of sociotechnical
system to another. Often required when adopting strategic sys-
tems that demand changes in the social and technical elements
of an organization.
streaming A publishing method for music and video files that flows
a continuous stream of content to a user’s device without being
stored locally on the device.
structure chart System documentation showing each level of de-
sign, the relationship among the levels, and the overall place in
the design structure; can document one program, one system, or
part of one program.
structured Refers to the fact that techniques are carefully drawn up,
step by step, with each step building on a previous one.
structured decisions Decisions that are repetitive and routine and
have a definite procedure for handling them.
G-11 Glossary
structured knowledge Knowledge in the form of structured docu-
ments and reports.
Structured Query Language (SQL) The standard data manipula-
tion language for relational database management systems.
subscription revenue model Website charging a subscription fee for
access to some or all of its content or services on an ongoing basis.
supervised learning Machine learning algorithm trained by provid-
ing specific examples of desired inputs and outputs classified by
humans in advance.
supply chain Network of organizations and business processes for
procuring materials, transforming raw materials into intermedi-
ate and finished products, and distributing the finished products
to customers.
supply chain execution systems Systems to manage the flow of
products through distribution centers and warehouses to ensure
that products are delivered to the right locations in the most ef-
ficient manner.
supply chain management systems Information systems that au-
tomate the flow of information between a firm and its suppliers
in order to optimize the planning, sourcing, manufacturing, and
delivery of products and services.
supply chain planning systems Systems that enable a firm to gen-
erate demand forecasts for a product and to develop sourcing and
manufacturing plans for that product.
support activities Activities that make the delivery of a firm’s pri-
mary activities possible. Consist of the organization’s infrastruc-
ture, human resources, technology, and procurement.
switch Device to connect network components that has more intel-
ligence than a hub and can filter and forward data to a specified
destination.
switching costs The expense a customer or company incurs in lost
time and expenditure of resources when changing from one sup-
plier or system to a competing supplier or system.
system testing Tests the functioning of the information system as
a whole in order to determine if discrete modules will function
together as planned.
systems analysis The analysis of a problem that the organization
will try to solve with an information system.
systems analysts Specialists who translate business problems and
requirements into information requirements and systems, acting
as liaison between the information systems department and the
rest of the organization.
systems design Details how a system will meet the information
requirements as determined by the systems analysis.
systems development The activities that go into producing an
information systems solution to an organizational problem or
opportunity.
systems life cycle A traditional methodology for developing an
information system that partitions the systems development pro-
cess into formal stages that must be completed sequentially with
a very formal division of labor between end users and informa-
tion systems specialists.
T lines High-speed guaranteed service level data lines leased from
communications providers, such as T-1 lines (with a transmission
capacity of 1.544 Mbps).
tablet computer Mobile handheld computer that is larger than a
mobile phone and operated primarily by touching a flat screen.
tacit knowledge Expertise and experience of organizational mem-
bers that has not been formally documented.
tangible benefits Benefits that can be quantified and assigned
a monetary value; they include lower operational costs and
increased cash flows.
taxonomy Method of classifying things according to a predetermined
system.
teams Formal groups whose members collaborate to achieve specific
goals.
teamware Group collaboration software that is customized for
teamwork.
technology standards Specifications that establish the compatibility
of products and the ability to communicate in a network.
telepresence Telepresence is a technology that allows a person to
give the appearance of being present at a location other than his
or her true physical location.
Telnet Network tool that allows someone to log on to one computer
system while doing work on another.
test plan Prepared by the development team in conjunction with the
users; it includes all of the preparations for the series of tests to
be performed on the system.
testing The exhaustive and thorough process that determines
whether the system produces the desired results under known
conditions.
text mining Discovery of patterns and relationships from large sets
of unstructured data.
token Physical device similar to an identification card that is de-
signed to prove the identity of a single user.
total cost of ownership (TCO) Designates the total cost of owning
technology resources, including initial purchase costs, the cost of
hardware and software upgrades, maintenance, technical support,
and training.
total quality management (TQM) A concept that makes quality con-
trol a responsibility to be shared by all people in an organization.
touch point Method of firm interaction with a customer, such as
telephone, email, customer service desk, conventional mail, or
point-of-purchase.
trade secret Any intellectual work or product used for a business
purpose that can be classified as belonging to that business, pro-
vided it is not based on information in the public domain.
transaction costs Costs incurred when a firm buys on the market-
place what it cannot make itself.
transaction cost theory Economic theory stating that firms grow
larger because they can conduct marketplace transactions
internally more cheaply than they can with external firms in the
marketplace.
transaction fee revenue model An online e-commerce revenue
model where the firm receives a fee for enabling or executing
transactions.
transaction processing systems (TPS) Computerized systems that
perform and record the daily routine transactions necessary to
conduct the business; they serve the organization’s operational
level.
transborder data flow The movement of information across inter-
national boundaries in any form.
Transmission Control Protocol/Internet Protocol (TCP/IP)
Dominant model for achieving connectivity among differ-
ent networks. Provides a universally agreed-on method for
breaking up digital messages into packets, routing them to the
proper addresses, and then reassembling them into coherent
messages.
transnational Truly global form of business organization with
no national headquarters; value-added activities are managed
from a global perspective without reference to national borders,
optimizing sources of supply and demand and local competitive
advantage.
Trojan horse A software program that appears legitimate but con-
tains a second hidden function that may cause damage.
tuple A row or record in a relational database.
two-factor authentication Validating user identity with two means
of identification, one of which is typically a physical token, and
the other of which is typically data.
unified communications Integrates disparate channels for voice
communications, data communications, instant messaging,
email, and electronic conferencing into a single experience
where users can seamlessly switch back and forth between differ-
ent communication modes.
unified threat management (UTM) Comprehensive secu-
rity management tool that combines multiple security tools,
Glossary G-12
including firewalls, virtual private networks, intrusion detection
systems, and web content filtering and anti-spam software.
uniform resource locator (URL) The address of a specific resource
on the Internet.
unit testing The process of testing each program separately in the
system. Sometimes called program testing.
Unix Operating system for all types of computers, which is machine
independent and supports multiuser processing, multitasking,
and networking. Used in high-end workstations and servers.
unstructured decisions Nonroutine decisions in which the decision
maker must provide judgment, evaluation, and insights into the
problem definition; there is no agreed-upon procedure for mak-
ing such decisions.
unsupervised learning Machine learning algorithm trained to use
information that is neither classified nor labeled in advance and to
find patterns in that information without explicit human guidance.
user interface The part of the information system through which
the end user interacts with the system; type of hardware and the
series of on-screen commands and responses required for a user
to work with the system.
user-designer communications gap The difference in back-
grounds, interests, and priorities that impede communication
and problem solving among end users and information systems
specialists.
utilitarian principle Principle that assumes one can put values in
rank order of utility and understand the consequences of various
courses of action.
value chain model Model that highlights the primary or support
activities that add a margin of value to a firm’s products or ser-
vices where information systems can best be applied to achieve a
competitive advantage.
value web Customer-driven network of independent firms who use
information technology to coordinate their value chains to col-
lectively produce a product or service for a market.
virtual company Organization using networks to link people, assets,
and ideas to create and distribute products and services without
being limited to traditional organizational boundaries or physical
location.
virtual private network (VPN) A secure connection between two
points across the Internet to transmit corporate data. Provides a
low-cost alternative to a private network.
virtual reality systems Interactive graphics software and hardware
that create computer-generated simulations that provide sensa-
tions that emulate real-world activities.
virtualization Presenting a set of computing resources so that they
can all be accessed in ways that are not restricted by physical
configuration or geographic location.
visual web Refers to web linking visual sites such as Pinterest where
pictures replace text documents and where users search on pic-
tures and visual characteristics.
Voice over IP (VoIP) Facilities for managing the delivery of voice
information using the Internet Protocol (IP).
war driving Technique in which eavesdroppers drive by buildings or
park outside and try to intercept wireless network traffic.
web beacons Tiny objects invisibly embedded in email messages
and web pages that are designed to monitor the behavior of the
user visiting a website or sending email.
web browser An easy-to-use software tool for accessing the World
Wide Web and the Internet.
web hosting service Company with large web server computers to
maintain the websites of fee-paying subscribers.
web mining Discovery and analysis of useful patterns and informa-
tion from the World Wide Web.
web server Software that manages requests for web pages on the
computer where they are stored and that delivers the page to the
user’s computer.
web services Set of universal standards using Internet technology
for integrating different applications from different sources with-
out time-consuming custom coding. Used for linking systems of
different organizations or for linking disparate systems within the
same organization.
website All of the World Wide Web pages maintained by an organiza-
tion or an individual.
Wi-Fi Stands for “wireless fidelity” and refers to the 802.11 family of
wireless networking standards.
wide area network (WAN) Telecommunications network that
spans a large geographical distance. May consist of a variety of
cable, satellite, and microwave technologies.
wiki Collaborative website where visitors can add, delete, or modify
content, including the work of previous authors.
WiMax Popular term for IEEE Standard 802.16 for wireless network-
ing over a range of up to 31 miles with a data transfer rate of up
to 75 Mbps. Stands for Worldwide Interoperability for Microwave
Access.
Windows Microsoft family of operating systems for both network
servers and client computers.
Windows 10 Most recent Microsoft Windows client operating
system.
Wintel PC Any computer that uses Intel microprocessors (or com-
patible processors) and a Windows operating system.
wireless sensor networks (WSNs) Networks of interconnected
wireless devices with built-in processing, storage, and radio
frequency sensors and antennas that are embedded into the
physical environment to provide measurements of many points
over large spaces.
wisdom The collective and individual experience of applying knowl-
edge to the solution of problems.
wisdom of crowds The belief that large numbers of people
can make better decisions about a wide range of topics or
products than a single person or even a small committee of
experts.
World Wide Web A system with universally accepted standards for
storing, retrieving, formatting, and displaying information in a
networked environment.
worms Independent software programs that propagate themselves to
disrupt the operation of computer networks or destroy data and
other programs.
XML (Extensible Markup Language) General-purpose language
that describes the structure of a document and can perform
presentation, communication, and storage of data, allowing data
to be manipulated by the computer.
zero-day vulnerabilities Security vulnerabilities in software,
unknown to the creator, that hackers can exploit before the
vendor becomes aware of the problem.
I-1
INDEXES
Name Index
A
Acemoglu, Daron, 148
Amoruso, Sophia, 414
Autor, David, 148
B
Beckham, Odell, 52
Bessen, James, 149
Bonanno, Mike, 400
Brin, Sergey, 273–274
Brown Simpson, Nicole, 239, 240
Brynjolfsson, Erik, 147
C
Camp, Garrett, 389
Caras, Jason, 270
Carr, Nicholas, 151, 152
Casey, Jim, 23
Chapmen, Andrew, 534
Chui, Michael, 148
Clinton, Hillary, 247
Cook, Tim, 158, 290
Corden, James, 374
Cryan, John, 37
Curley, Jim, 163
D
Davis, Betty, 414
Davis, Miles, 414
Delavan, Charles, 295
Deming, W. Edwards, 496
Dittakavi, Sundar, 231
Dixon, Pamela, 334
E
Eakin, Samuel, 74
F
Fayol, Henri, 465
Filo, David, 273
Flannery, Jeff, 488
Ford, Henry, 57
Friedman, Thomas, 11
G
Gamble, John, 333
Gates, Bill, 57
Goldman, Ronald, 239
Gownder, J. P., 447
H
Hammonds, Kim, 37
Hawkins, Adrian, 295
Hawkins, Dave, 295
Hernandez, Scott, 75
Hughes, Ian, 447
I
Immelt, Jeffrey, 487, 488
J
Jobs, Steve, 57
Johnson, Sherry, 148
Jones, Dow, 324
Juran, Joseph, 496
K
Kalanick, Travis, 389
Kelley, Devin Patrick, 239
Khan, Iftekhar, 208
Khosrowshahi, Dara, 389
Kriebal, Dennis, 148
L
Litan, Avivah, 333
Lozano, Vicky, 98
M
Manyika, James, 148
McAfee, Andrew P., 147
Metcalfe, Robert, 173
Meyers, Greg, 446
Mintzberg, Henry, 88
Miremadi, Mehdi, 148
Moakler, Steve, 399
Moore, Gordon, 171
Moskites, Tammy, 208
Mubarak, Hosni, 345
Mueller, Robert, 295
Myers, Deanna, 442
O
Obama, Barack, 247, 265
Oxley, Michael, 310
P
Page, Larry, 273
Porter, Michael, 94
R
Reinkemeyer, Lars, 472
Rennells, Joshua, 368
Restrepo, Pascual, 148
Ryan, Claude, 23
S
Sarbanes, Paul, 310
Schultz, Debbie Wasserman, 295
Serry, Mohammed, 345
Simon, H., 463
Simpson, O.J., 239
Singh, Megh, 584
Smith, David M., 240
Smith, Richard, 333, 334
Smoker, Pat, 459
Stefanek, Ann, 239
T
Tamene, Yared, 295
Torvalds, Linus, 190
Trump, Donald, 247, 265, 295, 400
Indexes I-2
Trump, Ivanka, 400
Twenge, Jean, 151
U
Ulzheimer, John, 333
V
Vukojevic, Aleksandar, 181
W
Walsh, John, 399
Ward, Adrian, 151
Y
Yang, Jerry, 273
Z
Zeppenfeld, Chris, 211
Zuckerberg, Mark, 291, 292, 446
Organizations Index
A
ABB, 488
AbbVie, 586
Accenture, 38, 92, 180, 324
Advanced Micro Design (AMD), 11
Airbnb, 107, 388, 405
Akershus University Hospital(Ahus), 419
Alcoa, 344
Alibaba Group, 584, 592
Amazon, 7, 13, 45, 52, 61, 94, 97, 100, 101, 105, 109, 116–118,
134–135, 141, 143–144, 157, 171, 180, 185–188, 225,
246, 263, 265–266, 273–274, 292, 304, 324–325,
376, 378, 382–388, 391–392, 405–406, 427, 430–431,
438, 488, 501, 519
American Airlines, 109
American Bar Association (ABA), 131
American Medical Association (AMA), 131
Ann Taylor, 108
Anthem Inc., 480
Apache, 179, 190, 228, 272, 333
Apple Inc., 14–15, 37, 151, 157, 158, 206, 207, 290–292
Arby, 400
Argo AI, 453
Arup Group, 554
Association for Computing Machinery (ACM), 131
Association of Information Technology Professionals (AITP), 131
AT&T, 108, 179, 254, 262, 279–280, 292, 323, 441
Audi, 442, 446
Avon, 339
B
BAE Systems, 403
Baidu, 592
Ball State University, 148
Banco Santander, 38
Bank of America, 105, 124, 406, 441, 473
Bank of New York, 105
Barnes & Noble, 228
BASF, 74
BBC, 373
Bear Stearns, 467
Best Buy, 45, 406
Black & Veatch, 476
Blackstone, 207
Blockbuster, 87
Blogger.com, 277
Blue Apron, 118
BMW, 148, 398
Boeing, 181
Boohoo, 415
Boston Consulting Group, 455, 591
BP plc, 488
C
C3 IoT, 488
Cable News Network (CNN), 570
Cablevision, 254, 268
Cadillac, 454
Caesars Entertainment, 234
California Pizza Kitchen, 476
Cameron International Corporation, 493, 494
Capgemini, 419
Carnegie Mellon, 561
Carter, 497
CBS, 373
CenterPoint Properties, 269
Charlotte Hornets, 211–213
Cisco Systems, 12, 23, 90, 171, 186, 320
Citibank, 15, 88, 109
Clemens Food Group, 368
Coca-Cola, 343, 440, 570
Comcast, 254, 265
ComScore, 279
ConEdison, 102
conglomerates, 488
ConocoPhillips, 552
Consumer Reports, 158, 391
Costco, 117
Covestro, 75
Crayola, 97–99
CSG Government Solutions, 562
Cyence, 334
D
Dell Inc., 90
Deloitte Consultants, 118, 497
Delta Airlines, 359
Deutsche Bank, 36–38
DHL, 181
Digital Equipment Corporation (DEC), 167
DixonTiconderoga, 98
Dollar General, 117
Dollar Rent A Car, 193
Dropbox, 63, 182, 186–188, 386
Duke Energy, 181
DuPont, 460
E
EarthLink, 262
Eastman Chemical Company, 90
eBay, 12–13, 101, 107, 109, 304–305, 376, 383, 385–386, 388, 392, 414,
473, 592
Electronic Frontier Foundation, 265
Elemica, 385–386
Eli Lilly and Company, 565
Enron, 310
Epinions, 392
Equifax, 128, 333–335
ESPN, 446
Esquel Group, 75
Estee Lauder, 591
ETrade, 386
I-3 Indexes
Exostar, 386, 403
Expedia, 262, 376, 386, 388
F
Faber-Castelli, 98
Facebook, 6–8, 57, 61, 63–64, 74–75, 97–99, 101, 107, 109, 134–135, 137,
142, 146, 157–159, 182, 189, 195, 206, 208, 228–229, 236, 265–266,
268, 270, 273, 275, 277–278, 290–292, 301, 353, 362, 377–379,
386–388, 391, 394, 396–400, 405–408, 414, 430–431, 437–438, 446,
470, 584, 591–592
Fair Isaac Corporation, 334
Famous Footwear, 224
Federal Communications Commission (FCC), 265
Federal Deposit Insurance Corporation, 334
Federal Trade Commission, 133
FedEx, 6, 23, 45, 104, 109, 186, 280, 472–473
Fidelity Financial Services, 388
Fitbit, 102
FogHorn Systems, 488
Food Marketing Institute, 116
Ford Motor Company, 444, 453
Foursquare, 405
Foxconn, 90, 567
G
Gap.com, 391
Garmin, 102
Gartner Inc., 121, 179, 181, 237, 333
General Electric (GE), 278, 474, 487, 488
General Motors, 453
GettyImages.com, 386
GlaxoSmithKline, 124
Goodyear Tire & Rubber Co., 437
Google, 7, 12–13, 61, 63, 87, 94, 97, 99, 101, 109, 121, 127, 134–138, 140,
144, 158, 171, 178, 181–183, 185, 187–191, 195, 225, 228–229, 235,
247–248, 265–268, 272–277, 284, 290–292, 305, 309–310, 373–378,
384, 386–389, 391, 394, 398, 405–406, 427, 431, 436, 438, 453, 467,
488, 584, 591–592
Government Accountability Office (GAO), 239
Grokster, 141
GUESS, 108
GumGum, 437
H
H&M, 415
Harrah’s Entertainment, 234
Hatfield Quality Meats, 368
Haworth Incorporated, 350
Heinz, 61, 230–231
Hercules Technology Growth Capital Inc., 415
Hewlett Packard Enterprise, 37, 459
HighJump, 415
Hilton Hotels, 99–100
Hitachi, 515, 528–529
Home Depot, 305, 406
Hon Hai Group, 567
Honda, 90, 187
Honeywell, 488
Hulu, 265, 373, 391, 446
Hunch.com, 473
I
IBM, 61, 63–65, 75, 87–88, 163–164, 167, 169, 171, 176–180,
183, 187, 191, 229–230, 237, 247, 268, 277–278, 323, 343, 419–420,
425, 435–436, 440, 468, 473, 479, 488, 501, 560–561, 581, 586
IKEA, 194–195, 398
Infor Global Solutions, 343
Information Builders, 514
Infosys, 180
Instacart, 117
Instagram, 98, 275, 291, 378, 388, 396–397, 414, 584
Institute of Electrical and Electronics Engineers (IEEE), 282
Intel, 207
International Data Center, 227
International Data Corp (IDC), 270
Internet Architecture Board (IAB), 264
Internet Corporation for Assigned Names and Numbers (ICANN), 264
Internet Research Agency, 157
Intrawest, 49
J
JANA Partners, 151
Javelin Strategy & Research, 304
JCPenney, 14–15, 378
JD Edwards Enterprise, 345
JDA Software, 339–341, 350, 361, 436
JPMorgan Chase, 105, 406
Juniper Networks, 179, 320
K
Kazaa, 141
Kennametal, 361
KFC, 573
Kickstarter.com, 388, 398
Kiehl Stores, 405
Kmart, 360–361
Knight Capital, 468
Kodak, 90
Kraft Foods, 230
Kraft Heinz, 230–231
Kroger, 117
L
Lacoste, 76
Langone Medical Center, 445
Lehman Brothers, 467
Levi Strauss, 108
LexisNexis Risk Solutions, 128
Li & Fung, 108, 350
LinkedIn, 278, 301, 362, 378, 388, 396–397, 399, 584
LLBean.com, 391
Lockheed Martin, 400, 403
Lyft, 378, 390, 405, 453
M
Mack Trucks, 399
Macy’s, 283, 378, 406
Maersk, 570
Mandarin Oriental, 14
MapMyFitness, 102
Marcus & Millichap, 118
MasterCard, 128, 142, 308, 315, 591
Match.com, 391
McAfee, 147, 309
McKinsey & Company, 56, 58, 148, 277
MEGA, 98
Megaupload, 141
Mercedes, 453
Meridian Energy Ltd., 247
MetLife, 225
Microsoft, 4, 75, 187, 270, 488
Mizuho Bank, 436
MobileIron, 207
ModCloth, 75
Monsanto, 460
Morpheus, 141
Motorola, 446
Mozilla Foundation, 137
Indexes I-4
MSN, 386–387
MyPoints, 392
N
Napster, 141
NASA, 75, 183
Nasty Gal, 414
National Cyber Security Center (NCSC), 278
National Health Service (NHS), 246
Netflix, 7–8, 141, 143, 186, 265–266, 303, 384, 391, 415, 430–431, 446, 518
Network Advertising Initiative, 137
NetZero, 262
New York Times, 157, 378, 591
NextBio, 229
NFL, 52–53
Nick’s Sausage Company, 368
Nike, 76, 97, 100, 292, 346–348
Nissan, 157, 453–454
Nordstrom, 400
Novell, 170
O
Oculus VR, 446
Old Navy, 10
Open Handset Alliance, 178
OpenSignal, 206
OpenSource.org, 190
Oracle, 488
Oscar Mayer, 230
OshKosh B’gosh, 497
P
Panda Security, 301
Pandora, 141, 391
Panorama Consulting Solutions, 360
PayPal, 97, 304, 383, 392, 430
Paytm, 585
PCL, 3
PDC, 481
Pennsylvania Department of Labor and Industry, 560
Pepsico, 61, 398
PeroxyChem, 163
Phizzle, 211
Photobucket.com, 386
Pinterest, 98, 275, 378, 397, 408
Pixar Animation Studios, 278
Pluto TV, 446
Pompidou Center, 554
Ponemon Institute, 303–304
Priceline.com, 386
Procter & Gamble (P&G), 348, 438
Produban, 62
Progressive Insurance, 478
Proofpoint, 270
Purdue University, 459
Q
Qualcomm, 177, 441
Quantcast, 136
Quantum View Manage® technology, 24
R
Ralph Lauren, 76
Raytheon, 403
Red Hat, 191
Reebok, 108
Renault, 437
Ricoh, 181
Rolls-Royce PLC, 403
S
SalesForce.com, 68, 87, 111, 171, 185, 187–188, 195, 354, 362, 388
Sam’s Club, 117
Samsung, 157, 290
Sanofi Pasteur, 41
SAP, 61, 87, 163, 171, 179, 194, 207, 211, 212, 229–231, 343, 350, 354,
361–362, 368–369, 442–443, 468, 471, 479, 488, 493–495, 497–498,
521, 533–535, 552–553, 565–566, 586
Sargent & Lundy, 442
SAS Institute, 488
Schlumberger Holdings Corporation, 493
Schneider National, 351, 474, 496
Sears, 96
Shopkick, 406
Sidecar, 389, 390
Siegel+Gale, 158
Siemens AG, 471, 488
Six Flags, 55
Skype, 61–62, 265, 268, 482, 554, 592
Snapchat, 393, 414, 591
Sony, 305–306, 584
Southwest Airlines, 193
Sports Authority, 406
Spotify, 80, 121, 141, 246, 303, 384
Sprint, 108, 279
Stamos Capital Partners LP, 415
Standard Oil, 292
Stanford University, 173, 273
Staples, 117, 387, 445
Starbucks, 10, 79–80, 100, 472, 474–475
State Teachers’ Retirement System (CalSTRS), 151
Stepan, 533, 534
Sun Microsystems, 191
SunGard Availability Services, 315
Swiss Re, 207
Sybase, 177, 179
Symantec, 139, 146, 321, 323
T
Taco Bell, 476
TAL Apparel Ltd., 15
Target, 13–14, 49, 80, 97, 111, 127, 133, 137, 142, 157, 159, 291, 295–296,
303–306, 308, 359, 368, 381, 397, 401, 431, 434, 471, 474, 479, 536,
540, 548
Tasty Baking Company, 343
Tenaris, 441
Tencent, 592
Tesla, 324, 453, 454
The Pirate Bay, 141
The Software Alliance, 141
ThomasNet.com, 236
TIBCO, 501
Time Warner, 268
T-Mobile, 108, 279
Tower Records, 87
Toyota, 90, 94, 99–100
Travelocity, 101
Tumblr, 7–8, 305, 388, 397
Twitter, 6–8, 57, 74–75, 98, 142, 144, 182, 208, 227, 229, 246, 265, 275,
277–278, 301, 303, 353, 362, 378, 386, 388, 396–399, 405–408, 414,
466, 470, 591–592
TypePad.com, 277
U
U.S. Air Force, 239
U.S. Department of Commerce, 134
U.S. Department of Defense Advanced Research Projects Agency
(DARPA), 258
U.S. Department of Defense, 176, 258, 262
I-5 Indexes
U.S. Department of Homeland Security, 278
U.S. Federal Highway Administration, 425
U.S. Federal Reserve, 38
U.S. Internal Revenue Service, 47
U.S. National Institute of Standards and Technology (NIST), 184
U.S. Postal Service, 23
Uber, 100, 107, 117, 144, 292, 324, 378, 382, 388–389, 405, 453–455, 592
Under Armour, 101–102
United Parcel Service (UPS), 6, 23, 521
United States Patent and Trademark Office, 139
Universal Robots, 437
UPS Capital, 24
UPS Supply Chain Solutions, 23, 351
Uptake, 488
Urban Outfitters, 415
V
Vail Resorts, 49
Venafi, 207, 208
Veriato, 270
Verizon, 15, 87, 108, 179, 254, 262, 279–280, 305, 323–324
VEVO, 373
Viacom, 324
Virgin Entertainment Group, 268
Visa Inc., 591
Visa, 117, 128, 308, 433, 591
Vodafone, 584
Volkswagen, 181, 402, 446
Volvo, 454
W
Wall Street Journal, 136, 273, 324, 381
Walmart, 14, 94, 96–97, 117–118, 283
Waze, 405
WebEx, 61, 482
Whole Foods, 116–118
World Bank, 425
WorldCom, 310
WSJ.com, 386
X
Xamarin, 521
Y
Yahoo!, 267, 333, 335
Yelp, 392
YouTube, 8, 98–99, 101, 137, 206, 208, 246, 265, 291, 301, 323, 362,
373–375, 378, 399, 431, 584, 592
Z
Zara, 415
Zebra Technologies, 52
ZipRealty, 195
Subject Index
A
acceptable use policy (AUP), 314
acceptance testing, 505
access points, 298–299
access rules, 318
accountability, 129, 153–154
accounting practices, 571–572
ad hoc query, 472, 480
Ad Network, 137, 395
addressing and architecture, 262
Adobe Acrobat Reader, 10
Adobe Connect, 61
Adobe Illustrator, 195
advertising, 238, 276, 283, 290–292
advertising, blast-and-scatter, 396
advertising, display, 377
advertising revenue model, 390
affiliate revenue model, 392
agency theory, 90
agent-based modeling, 438
agile development, 517–518, 524
AI. See artificial intelligence
algorithms, 291
algorithms, genetic, 435–436, 449
algorithms, Hummingbird search, 275
Altair 8800, 88, 169
Amazon Alexa, 430
Amazon Prime, 116–117
Amazon Relational Database Service, 225
ambient data, 311
analog signal, 259
analytic platforms, 229, 231, 246, 357, 468
analytic software, 4
analytical CRM, 357–358, 364
Ancestry.com, 391
Android operating system, 175, 196, 291–292
Android, 178
Anti-malware software, 320
antivirus software, 297, 305
AOL Instant Messenger, 267
Apache, 177, 179, 190, 204, 228, 272, 333
App Internet, 278
Apple iOS, 329
Apple iPad, 9–10, 178
Apple iPhone, 9–10, 108, 377, 568
Apple iPod, 87
Apple iTunes, 7, 97, 141, 384
Apple Safari, 191
Apple Watch, 381, 406
application controls, 312, 328
application layer, 258–259, 487
application proxy filtering, 318–319
application server, 169, 236
applications, international information systems, 560
applications, location-based services, 401–402
apps, 195
AR. See augmented reality
architecture and governance, 263
artificial intelligence (AI), 419, 427, 447, 449
as-is process, 471
asset management systems, 440
associations, 64, 104, 127–128, 131, 145, 233, 451, 585
asymmetry, 382, 384, 410
ATMs. See automated teller machines
attribute, 214
auditing, 315, 329
augmented reality (AR), 445, 449
AUP. See acceptable use policy
authentication, 226, 298, 307, 311, 315–318, 324, 327–329, 518
automated teller machines (ATMs), 15
Automation, 495
autonomous vehicles, 453–455
avatar, 61, 388, 446
aversion principle, 130, 153
AWS. See Amazon Web Service
Azure cloud service, 185
B
BA. See business analytics
balanced scorecard method, 478
bandwidth, 261, 264–267, 287
Indexes I-6
bar code devices, 23
behavioral approach, 28–29, 32
behavioral models, 465
behavioral targeting, 393
behavioral view of organization, 83
benchmarking, 103, 482
best practices, 104
BI. See business intelligence
bias, 75, 247, 503
big data, 227–230, 234–235, 242, 246–248, 459–460, 473–474
Bing, 273, 276, 289, 387
biometric authentication, 317, 329
bit, 213–214
bits per second (bps), 261
blast-and-scatter advertising, 396
blockchain, 225–226, 322
Blog, 277
blogosphere, 277
blogroll, 277
bluetooth, 280, 299
bot, 146, 157, 303
botnet, 301, 303
BPM. See business performance management
BPR. See business process reengineering
break-even point, 477
bring your own device (BYOD), 182, 208
broadband connections, 254, 262
broadcast model, 381
broadcast, 8, 55, 87, 135, 226, 299, 381, 437
Brown Bag Software v. Symantec Corp, 139
bugs, 136–137, 143–144, 307, 326, 328, 395
bullwhip effect, 348–349, 364
business analytics (BA), 468
Business ByDesign, 361
business challenges, 5, 21, 112, 165, 213, 375, 409, 421, 461, 483,
566–567, 571
business continuity planning, 315
business drivers, 568–570
business ecosystems, 107–109, 113
business functions, 9, 19–20, 46, 53, 70, 195, 221, 328, 367, 489, 539,
570, 577
business intelligence (BI), 47, 468
business models, 14–15, 378–379, 467
business objectives, 7, 13, 15–16, 84, 109, 406, 410, 541
business performance management (BPM), 479, 498
business process redesign, 495–498, 501, 523
business process reengineering (BPR), 546
business processes, 12, 19–20, 51
business value, 328, 424–425, 534, 538
Business-to-business (B2B), 385
Business-to-consumer (B2C), 385
BYOD. See bring your own device
byte, 213–214
C
cable Internet connections, 262, 287
cable modems, 259
cable networks, 143, 259
CAD. See computer-aided design
capital budgeting, 542–543, 557–559, 578
capital investments, 89
carpal tunnel syndrome (CTS), 149
cash flow, 24, 345–346, 470, 479, 559
CDO. See chief data officer
cellular systems, 279
central systems group, 576
centralization, 364
centralized systems, 574–575
CGI. See Common Gateway Interface
Change agent, 545
Change management, 545
chat systems, 267
chatbots, 292, 433, 438, 449
Chatter, 61, 64, 70
checkout counters, 16
chief data officer (CDO), 67
chief information officer (CIO), 67, 575
chief knowledge officer (CKO), 67
chief operating officer (COO), 50
chief privacy officer (CPO), 67
chief security officer (CSO), 67
Children’s Online Privacy Protection Act (COPPA), 132–133
China, 591–593
choice, 463
Chrome operating system, 178
Chrome web browser, 178, 190
chromosomes, 435
churn rate, 358, 364
CIO. See chief information officer
circuit-switched networks, 257
CKO. See chief knowledge officer
class, 508–510
classical model of management, 465
classifications, 233, 466
click fraud, 305
click-throughs, 276
client computers, 138, 169, 255–256, 268
client/server computing, 169, 256–257, 261, 268, 288, 298
client/server era, 169–170
Clients, 169
cloud collaboration services, 61, 63
cloud computing, 170, 183–188, 225, 309–310, 323–325, 345–346, 361
Cloud Security Alliance (CSA), 326
cloud software service, 515, 529
cloud streaming, 384
cloud-based software, 194–195
CLTV. See customer lifetime value
clustering, 234, 483
Code Division Multiple Access (CDMA), 279, 287
codes of conduct, 131
coercive goals, 89
cognitive computing, 419
collaboration, 56, 421, 524–526
command and control, 60
Common Gateway Interface (CGI), 236
common user requirements, 576, 579
communities of practice (COPs), 425, 443
community providers, 388, 410
competition, 144
competitive advantage, 14–15, 109–110, 352, 516
competitive forces model, 94, 108, 112, 198–199, 202
competitive strategies, 94, 100–101
complementary assets, 16, 26–27, 32
component-based development, 518, 524
CompStat, 246
computer abuse, 146, 154
computer crime, 145–146, 154, 302–304, 311
computer forensics, 311, 328
Computer Fraud and Abuse Act, 304
computer hardware, 21, 170, 176–177, 180, 188, 298
computer literacy, 18, 27
computer networks, 253–255, 257, 280, 287, 301
Computer Software Copyright Act, 139
Computer software, 21
Computer virus, 299
computer vision syndrome (CVS), 150, 154
Computer vision systems, 436
computer-aided design (CAD), 426, 444, 449, 559
I-7 Indexes
computer-aided software engineering, 511
computerized tomography (CT), 445
computer-to-computer exchange, 401
Consumer Reports, 158, 391
Consumerization of IT, 182
Consumer-to-consumer (C2C), 385
content providers, 375, 387, 391, 410
continuous measurement, 499
continuous quality improvement, 496
control weaknesses, 316, 328
Controls, 297
conversational commerce, 377
Conversion, 506
COO. See chief operating officer
cookies, 134–136, 138, 153, 307, 394–395
cooptation, 579–580
COPPA. See Children’s Online Privacy Protection Act
COPs. See communities of practice
copyright law, 138–139, 153
Copyright, 138
core business processes, 12, 32, 577–579, 588, 590
core competency, 105–106, 441
core systems, 576–578, 581–582
corporate assets, 12
cost transparency, 381
cost-per-click, 291
counterimplementation, 549
CPO. See chief privacy officer
credit cards, 36, 142, 333–334, 585
CRM. See customer relationship management
crop yields, 460
cross-functional systems, 46, 583
cross-selling, 355, 358, 470
crowdsource funding, 388
Crowdsourcing, 398
CryptoLocker, 300
Crystal Reports, 222
CSA. See Cloud Security Alliance
CSO. See chief security officer
CT. See computerized tomography
CTS. See carpal tunnel syndrome
Culture, 20
currency fluctuations, 572
customer intimacy, 14, 352, 364
customer lifetime value (CLTV), 357
customer relationship management (CRM), 54, 68–70, 99, 187,
353–354, 362
customer service, 20, 364
customization, 97, 195, 343, 360–361, 368–369, 379, 381, 404, 410, 446,
494, 515, 586
CVS. See computer vision syndrome
cyberbullying, 145
cybercrime, 146, 303
cybervandalism, 302
cyberwarfare, 295, 306, 335
cycles per second, 261
D
dark web, 273
DARPA. See Department of Defense Advanced Research
Projects Agency
data administration, 237–238, 242, 549
data analysis, 99, 122, 126–128, 153, 229, 231–233, 242, 246, 354,
357–358, 362, 460, 477, 480, 482, 489
data breaches, 304–305, 335
data brokers, 155
data cleansing, 238, 242, 361, 369, 586
data collection, 459
Data definition, 221
Data dictionary, 221
data flow diagram (DFD), 507, 523
data governance, 237–238
Data inconsistency, 215
Data lake, 231
data management, 13, 21, 32
data manipulation language, 219, 221, 241–242
Data mart, 228
data mining, 133, 233
Data Protection Directive, 134, 571
Data quality audit, 238
data quality, 111–112
Data redundancy, 215
data resource, 213, 236, 241–242
data transfer rate, 260
data visualization, 211, 362, 469–471
data warehouse, 211–213, 228
data workers, 19–20, 32
Data, 16, 422
Database administration, 237
database management system (DBMS), 217, 241
Database server, 236
Database, 216
DBMS. See database management system
DDoS attack, 303, 325
DDoS. See distributed denial-of-service
dealership in a briefcase, 446
debugging, 327
decentralized client-server, 144
decentralized systems, 574
decision making, 461–464
decisional role, 465–466
decision-support systems (DSS), 49, 70, 476, 484
“Deep learning,” 434
deep packet inspection (DPI), 323
delivery platform, 469, 476, 484
demand planning, 350
denial-of-service (DoS) attack, 303, 328
Department of Defense Advanced Research Projects
Agency (DARPA), 258
Department of Defense, 176, 258, 262, 306
deregulation, 253, 265
Design, 463
developing countries, 292, 582
DevOps, 517–518, 524–525
DFD. See data flow diagram
digital asset management systems, 440
digital certificates, 321–322, 329
digital dashboard, 4, 15, 50–51, 246
digital divide, 147
digital firm, 3–4, 8, 12, 32, 108, 517, 524
digital goods, 382–385
digital information, 7, 62, 127, 147, 173, 261, 320, 439
digital markets, 382–384, 410
Digital Millennium Copyright Act (DMCA), 141
digital networks, 12, 55, 141, 174, 256, 323
digital signal, 259
digital subscriber line (DSL), 262, 287
digital versus analog, 259
direct cutover strategy, 506
direct goods, 403, 408
Directive on Data Protection, 134
direct-marketing campaigns, 355, 357
disaster recovery planning, 315
disintermediation, 383–384, 408
dispatchers, 23
disruptive technologies, 87–88
dissemination, 25, 42, 216, 425
Distributed database, 225
Indexes I-8
distributed denial-of-service (DDoS), 303
distribution center, 12, 23, 346, 350, 463, 592
distribution model, 14, 384
DMCA. See Digital Millennium Copyright Act
DNS. See Domain Name System
documentation, 3, 311, 316, 363, 498, 504–507, 511, 514, 515,
555–556, 566
Dodd-Frank Wall Street Reform and Consumer Protection Act, 16
Domain Name System (DNS), 262, 287
domain name, 262–264, 268, 272, 287
domestic exporter, 573–575
DoS attack, 303, 306
DoS. See denial-of-service
DoubleClick, 394
downstream, 347–349, 530
Downtime, 323
DPI. See deep packet inspection
drill down, 50, 180, 234, 443, 471–472, 479, 484, 554
drive-by downloads, 301
driving habits, 127
Dropbox, 10, 63, 182, 186–188, 386
DSL modems, 259
DSL. See digital subscriber line
DSS. See decision-support systems
due process, 129, 132, 248
duplicated systems, 574
dynamic pricing, 382, 384
E
Earthlink, 262
e-business, 55
ECM. See enterprise content management
e-commerce, 7–8, 13, 116–117
economic value, 24, 107
economies of scale, 175, 186, 270, 569–570, 574, 579, 588
ecosystem strategic model, 108
Edge computing, 189
EDI. See Electronic Data Interchange
efficient customer response system, 96, 351
e-government, 55, 132
Electronic business (e-business), 55
Electronic commerce (e-commerce), 55
Electronic Data Interchange (EDI), 401, 571, 583
electronic document retention policy, 311
electronic records management, 308, 311, 328
electronic surveillance, 270
e-mail, 80–81, 93, 267, 478, 554
embezzlement, 311, 313
employee relationship management (ERM), 353, 364
encrypted communications, 271
encryption, 138, 226, 300, 307, 320–321, 325–326, 329
encyclopedia industry, 100
Endomondo, 102
End-user development, 514
End-user interface, 513
end-user, 67, 198, 506–514, 523–524, 538, 550
enforcement of fair trade, 134
enlarged world trade, 570
enterprise applications, 51, 69–70, 425, 447, 546–547
enterprise content management (ECM), 439, 449, 452
enterprise content, 425, 439–440
enterprise resource planning (ERP), 53, 342, 541
enterprise software, 61, 194–195, 342, 361, 526
enterprise solutions, 361
enterprise suites, 361
enterprise systems, 51, 53–54
enterprise-wide knowledge management systems, 426, 439, 449
Entity, 214
entity-relationship diagram, 223–224, 242
environmental scanning, 86
ergonomics, 550–551, 553
ERM. See employee relationship management
ERP. See enterprise resource planning
ESS. See executive support systems
e-tailers, 386–388, 410
ethanol, 95, 289
ethernet, 173, 175–176, 260
ethical analysis, 129, 131, 153, 155
ethical dilemma, 122–124, 129, 131
ethical no-free-lunch rule, 130, 153
ethics, 124, 129, 131, 156, 435
ETrade, 386
European Union (EU), 134
evil twins, 304
exchanges, 264, 352, 395, 401–404, 412, 438, 467
executive support systems (ESS), 50, 70, 478, 484
expert systems, 424, 426, 428–430, 449
explicit knowledge, 422, 438
exports, 11
extensible markup language (XML), 518
external integration tools, 548, 557
extranets, 21, 54–55, 70, 108, 286, 402, 582
F
Facebook, 31, 57, 61, 101, 107, 109, 134–135, 137, 142, 290–292, 301,
396–400, 437–438, 446–447, 470, 584, 591–592
facial recognition software, 158, 275
factors of production, 570, 573, 588
Fair Information Practices (FIP), 132
fault-tolerant computer systems, 323, 329
feasibility study, 503
federal privacy laws, 132
Feedback, 17
Festi, 146
Field, 213
file organization, 213, 216
File Transfer Protocol (FTP), 267–268
file, 213
file-sharing services, 63, 70, 141
filtering software, 146
filters, 146, 466–467, 484, 592
financial crisis, 36, 38
financial models, 543
Financial Services Modernization Act, 310
financial services, 133–134
fingerprint identification devices, 318
FinTech, 392
FIP. See Fair Information Practices
Firefox web browser, 190
firewalls, 318–320, 329, 332
5G networks, 279
Flash, 140, 191
flexibility, 206, 208
forecasting, 234, 247, 354, 541
foreign key, 218–219, 224
foreign trade, 11
formal control tools, 548, 557
formal planning tools, 548, 557
4G networks, 279
franchisers, 573, 575, 588
fraud detection, 473
free/freemium revenue model, 391
FTP. See File Transfer Protocol
G
Galaxy, 139–140
Gantt chart, 548–549
GDSS. See group decision-support systems
I-9 Indexes
general controls, 312–313
General Data Protection Regulation (GDPR), 134
Genetic algorithms, 435
geoadvertising services, 405
Geographic information systems (GIS), 475
geoinformation services, 405, 410
geosocial services, 405
global culture, 569, 571
global markets, 569–570, 577, 588
global networks, 582, 588
Global Positioning System (GPS), 251, 405, 453
global supply chain, 339, 350–351, 364, 568, 583
Global System for Mobile Communications (GSM), 279, 287
global systems, 566, 571, 574, 576–579, 581, 586–588
global telecommunications, 574
global threats, 306
global workforce, 529, 569, 583
globalization, 11–12, 32, 70, 109, 350, 570–571
Golden Rule, 130, 153
goods and service, 12, 15, 54–55, 84, 86, 90, 103, 148, 196, 278, 346, 375,
385–386, 403–404, 406, 569, 571
Google Apps, 388
Google Chrome, 156, 191
Google Cloud Spanner, 225
Google Docs, 35, 63, 73, 115, 156, 185, 205, 245, 289, 332, 367, 386, 413,
452, 486, 527, 559, 590
Google Drive, 35, 63, 73, 115, 156, 174, 188, 205, 245, 289, 292, 332, 367,
413, 452, 486, 527, 559, 590
Google Hangouts, 267
Google Maps, 73, 97, 182, 195
Google Search, 136, 140, 235, 274–275, 291–292, 431, 584, 591
Google Sites, 35, 66, 73, 115, 156, 205, 245, 289, 332, 367, 388, 413, 452,
486, 527, 559, 590
Google, 7, 12–13, 109, 115, 121, 127, 181–183, 185, 187–191, 195, 205,
225, 228–229, 247–248, 263, 265–268, 272–277, 290–292, 373–378,
384, 386–389, 391, 394, 398, 405–406, 413, 427, 431, 436, 438,
452–453, 467, 486, 488, 527, 559, 584, 590–592
governance, 67–68, 196–197, 202, 237–238, 263, 552, 565–566,
573–574
GPS. See Global Positioning System
Gramm-Leach-Bliley Act, 132–133, 310, 328
grand design approach, 578
graphical user interface, 191, 517–518
green computing, 180, 189, 202
green IT, 189
grocery delivery, 117–118
group decision-support systems (GDSS), 481, 484
Grupo Santander, 62
GSM. See Global System for Mobile Communications
H
hackers, 142, 146, 157, 206, 295–297, 299, 301–308, 318, 328, 333–335
Hadoop Distributed File System (HDFS), 229, 231
Hadoop, 228
hard disk drives, 87, 311
HCM. See human capital management
HDFS. See Hadoop Distributed File System
Health Insurance Portability and Accountability Act (HIPAA), 132,
134, 310
health risks, 149, 248
healthcare industry, 310, 419
healthcare, 124, 134, 152, 181, 190, 246, 305, 310, 362, 419, 471,
473–474, 480, 482–483, 487, 520, 528
heartbleed bug, 307
Hertz, 261
Hypertext Markup Language (HTML), 191–192, 271, 287
Hypertext Transfer Protocol (HTTP), 258, 272
high-speed Internet, 167, 171, 179, 262, 268, 282
HIPAA. See Health Insurance Portability and Accountability Act
hotspots, 281–282, 459, 584
HTML. See hypertext markup language
HTML5, 191
HTTP. See Hypertext Transfer Protocol
hubs, 255, 264, 286, 402
Huddle, 52
human capital management (HCM), 361, 442, 528–529
human interface design, 583
Hummingbird search, 275
hybrid cloud computing, 188
Hypertext Markup Language (HTML), 191
Hypertext Transfer Protocol (HTTP), 272
I
IaaS. See infrastructure as a service
IBM Cloud, 164, 183
IBM Connections, 61, 64, 70, 75
IBM Notes, 61, 63–65, 70, 277
IBM PureData System, 229
identity management, 316, 327–329
identity theft, 303–304, 333–334
IIS. See Internet Information Services
IM. See instant messaging
Immanuel Kant’s categorical imperative, 130
Implementation, 463, 545
imports, 10
independent software developers, 179
indirect goods, 403
Industrial Internet, 487, 489
industrial revolution, 11
inference engine, 429
information age, 126
Information asymmetry, 382
Information density, 381
Information policy, 237
Information requirements, 503
information resources, 147, 314, 316, 329, 440
Information rights, 126
Information system, 16
Information systems audit, 315
Information systems department, 66
Information systems literacy, 18
Information systems managers, 66
Information systems plan, 538
information systems project, 534–538
Information technology (IT) infrastructure, 22
information technology (IT), 16, 22, 36, 165, 536
Information, 16
informational role, 465–466
informed consent, 134, 137, 153
infrastructure as a service (IaaS), 184, 185, 345
inheritance, 435, 509–510
in-memory computing, 228–229, 242, 362, 368
input controls, 312
Input, 17
Instagram, 98, 275, 584
instant messaging (IM), 60, 267, 299
in-store experience, 79
insurance rates, 122
intangible benefits, 542–544, 556
intellectual property rights, 126, 140
Intellectual property, 138, 387
Intelligence, 463
intelligent agent software, 275
Intelligent agents, 437
“Intelligent” techniques, 426
internal integration tool, 547, 557
internal rate of return (IRR), 543
internal supply chain processes, 347
Indexes I-10
International Data Center (IDC), 227
international information systems, 567–569, 580, 588
Internet challenges to, 135
Internet communications, 175
Internet Explorer, 136–137, 156, 191, 247
Internet Information Services (IIS), 272
Internet layer, 258
Internet of Things (IoT), 7, 101, 122, 133, 231, 252, 278, 285, 287, 301,
362, 430, 459, 474, 488
Internet Protocol (IP), 258, 262, 286
Internet service providers (ISPs), 141, 262, 304
Internet services, 265, 267, 280, 287, 580–582
Internet, 21–22, 253–276, 278–282, 284–287, 289–292, 474, 569–570,
580–584, 591–592
Internet2, 266
Internet-based marketing, 570
interorganizational system, 54
interpersonal role, 465–466
intranets, 21, 54–55, 70, 176, 286, 582, 588
intrusion detection systems, 318–320, 329
iOS, 178
IoT. See Internet of Things
IP. See Internet Protocol
IPv6, 266
IRR. See internal rate of return
ISPs. See Internet service providers
IT governance, 68
IT. See information technology
iterative process, 435, 512
Iterative, 512
J
JAD. See joint application design
Java, 177, 190, 191, 202, 521
Jeopardy, 8, 435
joint application design (JAD), 517
Juniper Networks, 179, 320
just-in-time, 7, 144, 348, 401
K
Kant’s categorical imperative, 130
key field, 218–219, 221, 505
key performance indicators (KPIs), 478–479
keyloggers, 302
keywords, 64, 137, 274, 276, 391, 399, 408, 441
KMS. See knowledge management systems
Knowledge, 422
Knowledge base, 429
knowledge management systems (KMS), 51, 54
Knowledge management, 423
knowledge work systems (KWS), 426, 444–445
Knowledge workers, 19
KPIs. See key performance indicators
KWS. See knowledge work systems
L
Law of Mass Digital Storage, 173
learning management system (LMS), 441, 442
legacy systems, 37, 180, 187, 193, 340, 358, 368, 495, 534, 546–547, 586
legal liability, 308
legislation, 16, 133, 134, 137, 138, 159, 239, 292, 305, 311, 455, 491
legitimacy, 579
leisure time, 145
liability, 50, 120, 124, 129, 142–143, 308, 571
link farms, 276
LinkedIn, 31, 69, 112, 201, 278, 301, 362, 378, 388, 396, 448, 584
Linux, 16, 175, 177–179, 183, 190–191, 205, 255, 260, 581
literacy, 18, 27
LMS. See learning management system
local area network (LAN), 173–174, 175, 176, 179, 255, 256,
259–260, 299
location analytics, 474, 484
location-based services, 377, 378, 404–405, 521
logical view, 217
logistics system, 592
long tail marketing, 393
Long Term Evolution (LTE), 279
LTE. See Long Term Evolution
M
MacBooks, 140
machine learning, 419–420, 427–438
MAEs. See metropolitan area exchanges
magnetic resonance imaging (MRI), 445
mainframe computers, 22, 144, 167, 180, 191
Maintenance, 506
malicious software, 298, 299–302, 303, 305, 308
malware, 146, 295–296, 297, 298, 299–301, 303, 305, 306,
318–319, 320, 326
MAN. See metropolitan area network
managed security service providers (MSSPs), 323
Management Information Systems (MIS), 18, 29, 47, 476
management, 16–30
managerial roles, 464–466
manual labor, 149
MapReduce, 229
market creator, 378, 386, 388
Market entry costs, 380
market niche, 96–97, 100
market space, 95
marketing, 19–20, 212–213, 228, 377–379, 405–407, 443, 572–575, 579
marketplace, 12, 15, 74, 87, 89–90, 95, 106, 137, 140, 143–144, 167,
182, 188, 224, 227, 282, 340, 352, 377–382, 388, 392, 400, 402–403,
422–423, 572, 591
mart, 227, 472–473
mashups, 191, 195, 197–198, 276
mass customization, 97
massive open online courses (MOOCs), 441
Match.com, 391
m-commerce, 386, 404–406, 591
MDM. See mobile device management
media, 74–75, 591–592
menu costs, 382, 384
Metcalfe’s Law, 173–174, 202
metropolitan area exchanges (MAEs), 264
metropolitan area network (MAN), 260, 287
microblogging, 277
micromarketing, 570
micropayment systems, 391
microprocessing power, 171–173
microprocessor chips, 11, 87, 177, 308
Microsoft Access, 34, 115, 218, 221, 482–483
Microsoft Dynamics, 211, 254
Microsoft Excel, 230, 477
Microsoft Office, 16, 63, 175, 185, 201, 230, 241, 273, 285–286, 363–364,
448, 482, 514
Microsoft OneDrive, 63
Microsoft Project, 551–553, 554
Microsoft SharePoint, 61, 63, 555
Microsoft SQL, 218, 225
Microsoft Xbox Live, 391
middle management, 19, 46, 47, 60, 462, 467, 475–476, 538
millions of instructions per second (MIPS), 171
minicomputers, 167
mining, 231–232, 468–470
MIPS. See millions of instructions per second
mobile application development, 519–522
Mobile commerce (m-commerce), 386
I-11 Indexes
mobile computing, 10, 144, 167–168, 174, 177, 196, 198, 290, 438, 481
mobile device management (MDM), 196, 326
mobile devices, 3, 4, 7–8, 196, 404–405
mobile digital, 7, 8, 109, 178, 180, 190, 195, 206, 279, 323–326
mobile e-commerce, 8, 376–377, 404–405
mobile employees, 255, 482
mobile search, 274, 276, 290, 291
mobile web app, 519
mobile website, 23, 519
MobileIron, 207–208
modems, 259, 266
MOOCs. See massive open online courses
Moore’s Law, 171–173
moral dimensions, 125–126, 131
MOST, 7–8
MRI. See magnetic resonance imaging
MSN, 386–387
MSSPs. See managed security service providers
Multicore processor, 190
multidimensional data model, 233
multinational company, 589
multinational strategy, 573
multitiered client/server architecture, 169, 267
multitouch interface, 178
MyFitnessPal, 102
MyPoints, 392
MySQL, 177, 179, 218, 225
N
NAI. See Network Advertising Initiative
nanotechnology, 173
nanotubes, 173
NAPs. See network access points
NAT. See Network Address Translation
National Information Infrastructure Protection Act, 305
National Institute of Standards and Technology (NIST), 184
native advertising, 396
native app, 519, 521
natural language, 234, 262, 419–420, 421, 423–424, 427, 436
Natural language processing (NLP), 419–420, 428, 436
near field communication (NFC), 282, 284
negative social costs, 144
net marketplaces, 106, 402–403
net neutrality, 264
Netflix, 7–8, 141, 143, 186, 265–266, 303, 384, 391, 415, 430,
446, 518
Netscape.com, 376
Network, 21
network access points (NAPs), 264
Network Address Translation (NAT), 318
Network Advertising Initiative (NAI), 137
network economics, 94, 107
network interface controller (NIC), 299
network interface layer, 258
network operating system (NOS), 254–255
network-based strategies, 105, 107
networked systems, 454, 574–575
Networking and telecommunications technology, 21
NetZero, 262
neural networks, 424, 425, 426, 428, 430, 432–436
NIC. See network interface controller
NIST. See National Institute of Standards and Technology
netbooks, 180
Nonobvious relationship awareness (NORA), 128
Non-relational database management systems, 225
normalization, 223
normative goals, 89
NOS. See network operating system
NoSQL, 225
Novell Netware, 170
N-tier client/server architecture, 169
O
Object, 509
object-oriented development, 507, 509–511, 518–519
object-oriented programming language, 191
offline media, 407
offshore outsourcing, 516–517
oil and gas industry, 362, 487–488
OLAP. See online analytical processing
on-demand computing, 188
on-demand economy, 388, 405
online advertising, 138, 276, 285, 290, 305, 378, 391, 394
online analytical processing (OLAP), 232, 357, 468
online marketing, 276, 285, 377, 379, 415
online retail stores, 387
online transaction processing, 323
OnQ system, 99
Open Handset Alliance, 178
open source software, 179, 190, 228
operating costs, 75, 96, 189, 231, 348, 593
operating systems, 16, 178, 196–197
operational CRM, 357
operational intelligence, 474
operational management, 19, 46, 462–463, 538
opt-in model, 137
opt-out model, 137
Oracle Cloud platform, 514–515, 529
Oracle Database, 218, 222, 225, 229
order fulfillment, 43–44, 463, 577, 587
order processing, 8, 192, 312–313, 340, 537, 541
organization (definition), 81–84
Organizational and management capital, 26
organizational capital, 26, 423
organizational change, 30, 494
organizational impact analysis, 551
organizational learning, 360, 423, 543
ORION, 23
Output, 17
output controls, 312
outsourcing, 193–195, 511–514
P
PaaS. See platform as a service
package tracking system, 20, 22, 47, 109
packet filtering, 318–319
packet switching, 256–257, 268
Pandora, 141, 391
PANs. See personal area networks
paradigm shift, 495–496, 498, 501
parallel strategy, 506
parameterized reports, 470, 476
particularism, 571
partner relationship management (PRM), 353
partner relationship, 353
passwords, 295, 317
patch management, 307
patch, 307–310, 316, 324, 333, 437
patents, 138–139
patient records, 310
Patriot Act, 144
Pattern detection program, 432
pattern recognition, 147, 432–433, 436
pay-per-click, 305
pay-per-use model, 186
pay-per-view, 191
payroll processing, 46–47, 194
PCs. See personal computers
Indexes I-12
peer-to-peer, 226, 260
performance indicators, 50
personal area networks (PANs), 280, 478
personal computers (PCs), 169
personal identification number (PIN), 318
personalization, 379, 381, 384–385
personnel system, 314
PERT charts, 548, 551
pharming, 304
phased approach strategy, 506
phishing, 146, 295–296, 301, 304
physical transmission media, 261
physical view, 217
pilot study strategy, 506
PIN. See personal identification number
Pinterest, 98, 275, 378, 397, 408
pipeline-management software, 488
piracy, 141, 384
pivot table, 470, 472, 477
Pixar wiki, 278
planning systems, 104, 349, 577, 583
platform (business model), 108–109
platform as a service (PaaS), 185, 188
Platforms, 109
podcasting, 378, 387
point-of-sale terminals, 96
Point-to-Point Tunneling Protocol (PPTP), 271
political issues, 123–126, 130, 140
portal, 50, 52
Porter’s competitive forces model, 94–95, 100–101
portfolio analysis, 540–541
post-implementation audit, 506
postindustrial organizations, 91
PPTP. See Point-to-Point Tunneling Protocol
precision agriculture, 461–464
Predictive analytics, 472
predictive search, 275
Predix, 430, 487–489
presence map, 406–407
price discrimination, 381, 382, 384
price transparency, 381
PriceGrabber, 275
pricing methods, 265
primary activities, 103
primary key, 218–219
print publishers, 142
Privacy Act, 132
privacy, 132–138
private cloud, 186–187, 325
private exchange, 402
private industrial networks, 352, 402
PRM. See partner relationship management
process specifications, 509
Processing, 17
processing controls, 312
product differentiation, 80, 95, 100
product number, 233, 238
Production, 506
Production or service workers, 19, 506
production reports, 470, 475–476
professional work, 56, 241
profiling, 127, 157
program-data dependence, 214–215
programmatic ad buying, 395
programmatic advertising, 398
programmers, 66–67
programming, 61, 504
Project, 536
Project Management Institute, 546
project management, 534–540
project portfolio management software, 553
project structure, 544
property rights, 125, 131, 138, 140
protocol, 256, 258
prototyping, 511–514, 517–520
public cloud, 171, 186–187, 310, 324–325
public key encryption, 321
public key infrastructure (PKI), 320–321, 322
pull-based model, 351
push-based model, 351
Python, 191–192
Q
quantum computing, 180, 183
query language, 221, 514
R
R&D. See research and development
RAD. See rapid application development
radio frequency identification (RFID) tags, 52, 282–283
RAM. See main memory
ransomware, 300, 302, 306
rapid application development (RAD), 517–518
rationalization of procedures, 495–496
real-time bidding platforms (RTB), 395
record, 213
recording industry, 141
records management, 308, 311
redundancy, 215, 217–218
reengineering work, 147
referential integrity, 224
referral fees, 387, 392
Refining Dashboard, 50
regional distribution, 477–578
regional systems, 575
registration system, 507–508
regulations, 15, 27, 86, 121, 133, 237, 389, 571, 586–587
relational DBMS, 216, 218, 228
rent-versus-buy, 195
repetitive stress injury (RSI), 149–150
request for proposal (RFP), 515
research and development (R&D), 106, 565
Responsibility, 129
responsive web design, 520
Retail Link system, 14
return on investment (ROI), 543
revenue models, 382, 385, 390–391
revenues, 89–90
RFID. See radio frequency identification
RFP. See request for proposal
Richness, 380
ride-sharing service, 389
Risk assessment, 313
Risk aversion principle, 130
Robotics, 437
robots, 148–149, 437, 454
ROI. See return on investment
routers, 179, 255, 266
routines, 84
RSI. See repetitive stress injury
RSS, 277
RTB. See real-time bidding platforms
Ruby, 191
runaway projects, 535–536
S
SaaS. See software as a service
safe harbor, 134
I-13 Indexes
safety stock, 348
sales data, 48, 96, 228, 283, 341, 439
sales force automation (SFA), 354
sales revenue model, 391
Salesforce Chatter, 61, 64
Salesforce.com, 68–69, 87, 111, 171, 185, 187, 195, 354, 359, 367,
388, 448
SAP ERP, 230, 343, 495, 533, 535, 565, 586–587
Sarbanes-Oxley Act, 15, 310
satellite Internet connections, 262
scalability, 187, 196–197, 415
SCM. See supply chain management
scope, 57, 90, 259–260, 335, 360, 406, 479, 534, 537
scoring models, 473, 541–542
SDN. See software-defined networking
SDS. See software-defined storage
Search costs, 380
search engine marketing, 276–277, 285–286, 288, 393, 407
Search engine marketing, 276
search engine optimization (SEO), 276, 285, 288
search engines, 87, 245, 272–277, 288, 305, 386, 396, 424, 426, 436, 518
Second Life, 61
Secure Hypertext Transfer Protocol (S-HTTP), 321
Secure Sockets Layer (SSL), 319, 320
Security policy, 314
Security, 297
self-regulation, 133, 137
sellers, 117, 386, 388, 402–403
semantic search, 274, 278
semi-structured decisions, 463, 476, 484
senior management, 18–19
sensitivity analysis, 477
sensor-generated data, 487
sentiment analysis, 234, 436, 481
SEO. See search engine optimization
sequences, 233, 248, 258
server computers, 169, 179, 320
Server, 169
Service level agreement (SLA), 195
service platform, 167
service set identifiers (SSIDs), 299
service workers, 18–19, 148
service-oriented architecture (SOA), 190, 192
service-oriented computing, 518
SFA. See sales force automation
shopping bots, 275, 438
S-HTTP. See Secure Hypertext Transfer Protocol
Shutterstock, 10, 41, 79, 121, 227, 373, 470
Silverlight, 191
SimpleDB, 225
simulation, 142, 247, 426, 438, 444, 475, 478
six sigma, 496
Skype, 61, 265, 268, 482, 554, 592
slippery slope rule, 130
smart cards, 317
smart products, 101–103
Smartphones, 279
Snapchat, 393, 414, 591
Sniffer, 302
sniffer programs, 299, 317
SOA. See service-oriented architecture
social business, 56–66, 74–76, 421–426, 440–441
social CRM, 362, 591
social e-commerce, 396–398
social engineering, 307, 317
social graph, 397
social media, 406–408
social networking, 275, 278, 291, 374–375, 440, 554, 583
social search, 275, 398
social shopping, 397
society, 27, 90, 124, 129, 144–147, 390
sociotechnical design, 551–553
sociotechnical systems, 28–30, 111
Sociotechnical view, 29
Software and Information Industry Association (SIIA), 141
software as a service (SaaS), 142, 185, 194, 278, 378, 388, 514–515
Software localization, 583
Software package, 194
software-defined networking (SDN), 255
software-defined storage (SDS), 183
space shifting, 12
spam, 146, 159, 291, 296, 303, 305, 320, 436
spear phishing, 304
spoofing, 302, 304
Spotify, 80, 121, 141, 246, 303, 384
spyware, 136, 138, 146, 299–302, 320
SQL commands, 222
SQL injection attacks, 302
SQL. See Structured Query Language
SSID. See service set identifiers
SSIIA. See oftware and Information Industry Association
SSL. See Secure Sockets Layer
standard operating procedures, 84, 86, 496
stateful inspection, 318–319
storage, 179, 424, 584
strategic business objective, 13–16
strategic systems analysis, 110
strategic transitions, 110–111
streaming, 265, 270, 374–375, 387
structure chart, 509
Structured, 507
structured decisions, 462–463, 476
structured knowledge, 439, 440
structured methodologies, 507–511
Structured Query Language (SQL), 221
subscription revenue model, 391
substitute products and services, 95, 110
Supervised learning, 431
supply and demand, 104–105, 574
supply chain execution systems, 350
supply chain management (SCM), 54, 103, 344–352, 361
Supply chain planning systems, 349
Supply Chain Solutions, 23, 351
Supply chain, 346
support activities, 101–103
switches, 124, 254–255
switching costs, 95, 99–100, 361, 382, 384
symmetric key encryption, 321
synergies, 94, 105
system design, 494, 502, 512, 561
system integration services, 180
system portfolio, 540
system quality, 123–124, 143, 326
system testing, 505
Systems analysis, 502
systems analysts, 66–67, 511, 514, 520, 538
systems control, 312–313
Systems design, 503
Systems development, 502
systems integration, 497, 547, 581
systems life cycle, 511–512, 514
T
T lines, 262
Tableau, 470
tablet computers, 6–7, 178, 180, 190, 298, 378, 386
tacit knowledge, 422, 439, 442
tag suggest, 275
Indexes I-14
tagging, 440
tangible benefits, 542–543
tap-and-go services, 284
taxi service, 389, 455
taxonomy, 440
TCO. See total cost of ownership
TCP/IP reference model for, 258
TCP/IP. See Transmission Control Protocol/Internet
Protocolteams
technical approach, 28
technical complexity, 547
technical solutions, 29, 138, 545, 551
Technology standards, 175
telecommunications, 177, 253–255
telephone networks, 174, 253–254, 268
telephone systems, 143
telepresence, 61, 62–63, 466
Telnet, 267
test plan, 505
Testing, 505
text mining, 234, 436
Third World, 570
threats, 298–299
3-D printing, 445
3G networks, 279
time shifting, 12
time/space matrix, 65–66
time-based competition, 144
TLS. See Transport Layer Security
token, 317–318
total cost of ownership (TCO), 198, 542
total quality management (TQM), 496
touch point, 353, 357–358, 407
Toxic Substances Control Act, 15
TPS. See transaction processing systems
TQM. See total quality management
trackbacks, 277
tracking files, 136
tractors, 101, 148
trade secrets, 140, 298–299
Trademarks, 140
traditional markets, 380, 382–383
transaction brokers, 388
transaction cost theory, 89
Transaction costs, 380
transaction fee revenue model, 392
transaction processing systems (TPS), 46–48
transborder data flow, 571
Transmission Control Protocol/Internet Protocol (TCP/IP), 170,
256, 258
transmission media, 261
transnational strategy, 574, 576, 578
transnational systems, 575, 578–580
Transnational, 574
Transport Layer Security (TLS), 320
transport layer, 258, 320
Trojan horse, 299, 301, 320
Tumblr, 7–8, 305, 388, 397
tunneling, 271
tuples, 218–219
Twitter, 74–75, 182, 277–278, 396–399, 466, 470, 591–592
two-factor authentication, 318
two-tiered client/server architecture, 169
U
Ubimax, 181
ubiquity, 379–380
unified communications, 269
unified threat management (UTM), 320
uniform resource locator (URL), 272
unit testing, 505, 507
United Kingdom, 263, 339, 415
Unix, 175–179, 190, 581
unstructured decisions, 462
Unsupervised learning, 431
upstream, 347–349
URL. See uniform resource locator
user content generation, 381
user errors, 313
User interface, 536, 550
user-designer communications gap, 545
utilitarian principle, 130
UTM. See unified threat management
V
value chain model, 94, 101, 103–104, 387
value web, 104–106, 110
Veriato Investigator, 270
VEVO, 373
video streaming, 375, 387
videoconferencing, 62–63, 74, 269, 440, 443, 583
virtual company, 107–108
virtual meeting systems, 61
virtual private network (VPN), 271, 320
virtual reality (VR), 445
virtual worlds, 61, 446
virtualization, 178, 180, 183, 189
viruses, 299–302, 320
visitor tracking, 394
visual search, 275, 278
visual web, 275
VMware, 183
voice over IP (VoIP), 268–269
voice recognition software, 131, 147
VPN. See virtual private network
VR. See virtual reality
W
walkthrough, 327
WANs. See wide area networks
war driving, 299
Warehouse Management System (WMS), 350, 414
wearable computing devices, 180
web beacons, 136–137
web browsers, 190–192, 196, 267, 277, 309–310, 406
web bugs, 136–138
web design, 520
web hosting service, 179
web mining, 234–235
web search tools, 387
web server, 136, 169
web services, 170, 185, 186
WebFOCUS, 514
weblining, 158
website (definition), 271
WEP. See Wired Equivalent Privacy
what-if analysis, 476
wide area networks (WANs), 260
Wi-Fi networks, 8, 255, 281, 282, 299
wikis, 8, 44, 61, 277
WiMax, 279, 282, 378
Windows 10, 170, 178
Windows operating system, 169–170, 175, 178, 299
Wintel PC, 169, 175
Wired Equivalent Privacy (WEP), 320
wireless modems, 259
wireless sensor networks (WSNs), 282, 284–285
Wisdom, 422
I-15 Indexes
wisdom of crowds, 57, 59, 398
WMS. See Warehouse Management System
WordPress, 277
World Intellectual Property Organization Treaty, 141
World Wide Web, 22, 87, 93, 176, 192, 235,
264, 267
worms, 299–301, 320
WSNs. See wireless sensor networks
X
XML, 192. See also extensible markup language
Y
Yahoo! Messenger, 267
Yammer, 41–43, 61, 64, 75–76, 554
YouTube, 362
Z
zero defects, 143, 307
zero-day vulnerabilities, 307
Zeus Trojan, 302
zombie PCs, 303
Zoom, 61, 520
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ISBN-10: 0-13-519179-3
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Front Cover
Title Page
Copyright Page
Brief Contents
Complete Contents
Part One Organizations, Management, and the Networked Enterprise
Chapter 1 Information Systems in Global Business Today
Opening Case: PCL Construction: The New Digital Firm
1-1 How are information systems transforming business, and why are they so essential for running and managing a business today?
How Information Systems Are Transforming Business
What’s New in Management Information Systems?
Interactive Session | Management Can You Run the Company with Your iPhone?
Globalization Challenges and Opportunities: A Flattened World
The Emerging Digital Firm
Strategic Business Objectives of Information Systems
1‑2 What is an information system? How does it work? What are its management, organization, and technology components? Why are complementary assets essential for ensuring that information systems provide genuine value for organizations?
What Is an Information System?
Dimensions of Information Systems
Interactive Session | Technology UPS Competes Globally with Information Technology
It Isn’t Just Technology: A Business Perspective on Information Systems
Complementary Assets: Organizational Capital and the Right Business Model
1‑3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems?
Technical Approach
Behavioral Approach
Approach of This Text: Sociotechnical Systems
1‑4 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Did Information Systems Cause Deutsche Bank to Stumble?
References:
Chapter 2 Global E-business and Collaboration
Opening Case: Enterprise Social Networking Helps Sanofi Pasteur Innovate and Improve Quality
2‑1 What are business processes? How are they related to information systems?
Business Processes
How Information Technology Improves Business Processes
2‑2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance?
Systems for Different Management Groups
Systems for Linking the Enterprise
Interactive Session | Organizations Data Changes How NFL Teams Play the Game and How Fans See It
E-business, E-commerce, and E-government
2-3 Why are systems for collaboration and social business so important, and what technologies do they use?
What Is Collaboration?
What Is Social Business?
Business Benefits of Collaboration and Social Business
Building a Collaborative Culture and Business Processes
Tools and Technologies for Collaboration and Social Business
Interactive Session | Technology Videoconferencing: Something for Everyone
2‑4 What is the role of the information systems function in a business?
The Information Systems Department
Organizing the Information Systems Function
2‑5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Should Companies Embrace Social Business?
References:
Chapter 3 Information Systems, Organizations, and Strategy
Opening Case: Technology Helps Starbucks Find Better Ways to Compete
3-1 Which features of organizations do managers need to know about to build and use information systems successfully?
What Is an Organization?
Features of Organizations
3-2 What is the impact of information systems on organizations?
Economic Impacts
Organizational and Behavioral Impacts
The Internet and Organizations
Implications for the Design and Understanding of Information Systems
3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?
Porter’s Competitive Forces Model
Information System Strategies for Dealing with Competitive Forces
Interactive Session | Organizations Digital Technology Helps Crayola Brighten Its Brand
The Internet’s Impact on Competitive Advantage
The Business Value Chain Model
Interactive Session | Technology Smart Products—Coming Your Way
Synergies, Core Competencies, and Network-Based Strategies
3-4 What are the challenges posed by strategic information systems, and how should they be addressed?
Sustaining Competitive Advantage
Aligning IT with Business Objectives
Managing Strategic Transitions
3-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Grocery Wars
References:
Chapter 4 Ethical and Social Issues in Information Systems
Opening Case: Are Cars Becoming Big Brother on Wheels?
4-1 What ethical, social, and political issues are raised by information systems?
A Model for Thinking about Ethical, Social, and Political Issues
Five Moral Dimensions of the Information Age
Key Technology Trends that Raise Ethical Issues
4-2 What specific principles for conduct can be used to guide ethical decisions?
Basic Concepts: Responsibility, Accountability, and Liability
Ethical Analysis
Candidate Ethical Principles
Professional Codes of Conduct
Some Real-World Ethical Dilemmas
4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?
Information Rights: Privacy and Freedom in the Internet Age
Property Rights: Intellectual Property
4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life?
Computer-Related Liability Problems
System Quality: Data Quality and System Errors
Quality of Life: Equity, Access, and Boundaries
Interactive Session | Organizations Will Automation Kill Jobs?
Health Risks: Rsi, Cvs, and Cognitive Decline
Interactive Session | Technology How Harmful Are Smartphones?
4-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Facebook Privacy: Your Life for Sale
References:
Part Two Information Technology Infrastructure
Chapter 5 IT Infrastructure and Emerging Technologies
Opening Case: PeroxyChem’s Cloud Computing Formula for Success
5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution?
Defining IT Infrastructure
Evolution of IT Infrastructure
Technology Drivers of Infrastructure Evolution
5-2 What are the components of IT infrastructure?
Computer Hardware Platforms
Operating System Platforms
Enterprise Software Applications
Data Management and Storage
Networking/Telecommunications Platforms
Internet Platforms
Consulting and System Integration Services
5-3 What are the current trends in computer hardware platforms?
The Mobile Digital Platform
Consumerization of IT and BYOD
Interactive Session | Technology Is Business Ready for Wearable Computers?
Quantum Computing
Virtualization
Cloud Computing
Interactive Session | Organizations Look to the Cloud
Edge Computing
Green Computing
High-Performance and Power-Saving Processors
5-4 What are the current computer software platforms and trends?
Linux and Open Source Software
Software for the Web: Java, HTML, and HTML5
Web Services and Service-Oriented Architecture
Software Outsourcing and Cloud Services
5-5 What are the challenges of managing IT infrastructure and management solutions?
Dealing with Platform and Infrastructure Change
Management and Governance
Making Wise Infrastructure Investments
5-6 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Is BYOD Good for Business?
References:
Chapter 6 Foundations of Business Intelligence: Databases and Information Management
Opening Case: Data Management Helps the Charlotte Hornets Learn More About Their Fans
6-1 What are the problems of managing data resources in a traditional file environment?
File Organization Terms and Concepts
Problems with the Traditional File Environment
6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful?
Database Management Systems
Capabilities of Database Management Systems
Designing Databases
Non-relational Databases, Cloud Databases, and Blockchain
6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?
The Challenge of Big Data
Business Intelligence Infrastructure
Interactive Session | Technology Kraft Heinz Finds a New Recipe for Analyzing Its Data
Analytical Tools: Relationships, Patterns, Trends
Databases and the Web
6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?
Establishing an Information Policy
Ensuring Data Quality
Interactive Session | Organizations Databases Where the Data Aren’t There
6-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: How Reliable Is Big Data?
References:
Chapter 7 Telecommunications, the Internet, and Wireless Technology
Opening Case: Tour de France Wins with Wireless Technology
7-1 What are the principal components of telecommunications networks and key networking technologies?
Networking and Communication Trends
What Is a Computer Network?
Key Digital Networking Technologies
7-2 What are the different types of networks?
Signals: Digital Versus Analog
Types of Networks
Transmission Media and Transmission Speed
7-3 How do the Internet and Internet technology work, and how do they support communication and e-business?
What Is the Internet?
Internet Addressing and Architecture
Interactive Session | Organizations Net Neutrality: The Battle Rages On
Internet Services and Communication Tools
Interactive Session | Management Monitoring Employees on Networks: Unethical or Good Business?
The Web
7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access?
Cellular Systems
Wireless Computer Networks and Internet Access
Rfid and Wireless Sensor Networks
7-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Google, Apple, and Facebook Battle for Your Internet Experience
References:
Chapter 8 Securing Information Systems
Opening Case: Hackers Target the U.S. Presidential Election: What Happened?
8-1 Why are information systems vulnerable to destruction, error, and abuse?
Why Systems are Vulnerable
Malicious Software: Viruses, Worms, Trojan Horses, and Spyware
Hackers and Computer Crime
Internal Threats: Employees
Software Vulnerability
8-2 What is the business value of security and control?
Interactive Session | Technology Meltdown and Spectre Haunt the World’s Computers
8-3 What are the components of an organizational framework for security and control?
Information Systems Controls
Risk Assessment
Security Policy
Disaster Recovery Planning and Business Continuity Planning
The Role of Auditing
8-4 What are the most important tools and technologies for safeguarding information resources?
Identity Management and Authentication
Firewalls, Intrusion Detection Systems, and Anti-malware Software
Securing Wireless Networks
Encryption and Public Key Infrastructure
Securing Transactions with Blockchain
Ensuring System Availability
Security Issues for Cloud Computing and the Mobile Digital Platform
Interactive Session | Management How Secure Is the Cloud?
Ensuring Software Quality
8-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On Mis Projects
Collaboration and Teamwork Project
Case Study: Is the Equifax Hack the Worst Ever—and Why?
References:
Part Three Key System Applications for the Digital Age
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications
Opening Case: Avon Beautifies Its Supply Chain
9-1 How do enterprise systems help businesses achieve operational excellence?
What are Enterprise Systems?
Enterprise Software
Business Value of Enterprise Systems
9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?
Interactive Session | Management Soma Bay Prospers with ERP in the Cloud
The Supply Chain
Information Systems and Supply Chain Management
Supply Chain Management Software
Global Supply Chains and the Internet
Business Value of Supply Chain Management Systems
9-3 How do customer relationship management systems help firms achieve customer intimacy?
What Is Customer Relationship Management?
Customer Relationship Management Software
Operational and Analytical CRM
Business Value of Customer Relationship Management Systems
9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies?
Enterprise Application Challenges
Interactive Session | Organizations Kenya Airways Flies High with Customer Relationship Management
Next-Generation Enterprise Applications
9-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Clemens Food Group Delivers with New Enterprise Applications
References:
Chapter 10 E-commerce: Digital Markets, Digital Goods
Opening Case: Youtube Transforms the Media Landscape
10-1 What are the unique features of e-commerce, digital markets, and digital goods?
E-commerce Today
The New E-commerce: Social, Mobile, Local
Why E-commerce Is Different
Key Concepts in E-commerce: Digital Markets and Digital Goods in a Global Marketplace
10-2 What are the principal e-commerce business and revenue models?
Types of E-commerce
E-commerce Business Models
Interactive Session | Organizations Uber: Digital Disruptor
E-commerce Revenue Models
10-3 How has e-commerce transformed marketing?
Behavioral Targeting
Social E-commerce and Social Network Marketing
Interactive Session | Management “Socializing” with Customers
10-4 How has e-commerce affected business-to-business transactions?
Electronic Data Interchange (EDI)
New Ways of B2B Buying and Selling
10-5 What is the role of m-commerce in business, and what are the most important m-commerce applications?
Location-Based Services and Applications
Other Mobile Commerce Services
10-6 What issues must be addressed when building an e-commerce presence?
Develop an E-commerce Presence Map
Develop a Timeline: Milestones
10-7 How will MIS help my career?
The Company
Job Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: A Nasty Ending for Nasty Gal
References:
Chapter 11 Managing Knowledge and Artificial Intelligence
Opening Case: Machine Learning Helps Akershus University Hospital Make Better Treatment Decisions
11-1 What is the role of knowledge management systems in business?
Important Dimensions of Knowledge
The Knowledge Management Value Chain
Types of Knowledge Management Systems
11-2 What are artificial intelligence (AI) and machine learning? How do businesses use AI?
Evolution of AI
Major Types of AI
Expert Systems
Machine Learning
Neural Networks
Genetic Algorithms
Natural Language Processing, Computer Vision Systems, and Robotics
Intelligent Agents
11-3 What types of systems are used for enterprise-wide knowledge management, and how do they provide value for businesses?
Enterprise Content Management Systems
Locating and Sharing Expertise
Learning Management Systems
11-4 What are the major types of knowledge work systems, and how do they provide value for firms?
Knowledge Workers and Knowledge Work
Interactive Session | Management Sargent & Lundy Learns to Manage Employee Knowledge
Requirements of Knowledge Work Systems
Examples of Knowledge Work Systems
Interactive Session | Technology The Reality of Virtual Reality
11-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Can Cars Drive Themselves—And Should They?
References:
Chapter 12 Enhancing Decision Making
Opening Case: Big Data and the Internet of Things Drive Precision Agriculture
12-1 What are the different types of decisions, and how does the decision-making process work?
Business Value of Improved Decision Making
Types of Decisions
The Decision-Making Process
12-2 How do information systems support the activities of managers and management decision making?
Managerial Roles
Real-World Decision Making
High-Velocity Automated Decision Making
12-3 How do business intelligence and business analytics support decision making?
What Is Business Intelligence?
The Business Intelligence Environment
Business Intelligence and Analytics Capabilities
Interactive Session | Technology Siemens Makes Business Processes More Visible
12-4 How do different decision-making constituencies in an organization use business intelligence, and what is the role of information systems in helping people working in a group make decisions more efficiently?
Decision Support for Operational and Middle Management
Decision Support for Senior Management: Balanced Scorecard and Enterprise Performance Management Methods
Interactive Session | Management Anthem Benefits from More Business Intelligence
Group Decision-Support Systems (GDSS)
12-5 How will MIS help my career?
The Company
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Is Predix GE’s Future?
References:
Part Four Building and Managing Systems
Chapter 13 Building Information Systems
Opening Case: Cameron International Builds a New System for Financial Reporting
13-1 How does building new systems produce organizational change?
Systems Development and Organizational Change
Interactive Session | Organizations Carter’s Redesigns Its Business Processes
Business Process Redesign
13-2 What are the core activities in the systems development process?
Systems Analysis
Systems Design
Completing the Systems Development Process
13-3 What are the principal methodologies for modeling and designing systems?
Structured Methodologies
Object-Oriented Development
Computer-Aided Software Engineering
13-4 What are alternative methods for building information systems?
Traditional Systems Life Cycle
Prototyping
End-User Development
Application Software Packages, Software Services, and Outsourcing
13-5 What are new approaches for system building in the digital firm era?
Rapid Application Development (RAD), Agile Development, and DevOps
Component-Based Development and Web Services
Mobile Application Development: Designing for a Multiscreen World
13-6 How will MIS help my career?
The Company
Position Description
Interactive Session | Technology Systems Development Is Different for Mobile Apps
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Hitachi Consulting Moves Human Resources to the Cloud
References:
Chapter 14 Managing Projects
Opening Case: Sound Project Management Helps Stepan Company Improve Financial Planning and Reporting
14-1 What are the objectives of project management, and why is it so essential in developing information systems?
Runaway Projects and System Failure
Project Management Objectives
14-2 What methods can be used for selecting and evaluating information systems projects and aligning them with the firm’s business goals?
Management Structure for Information Systems Projects
Linking Systems Projects to the Business Plan
Portfolio Analysis
Scoring Models
14-3 How can firms assess the business value of information systems?
Information System Costs and Benefits
Capital Budgeting for Information Systems
Limitations of Financial Models
14-4 What are the principal risk factors in information systems projects, and how can they be managed?
Dimensions of Project Risk
Change Management and the Concept of Implementation
Controlling Risk Factors
Designing for the Organization
Project Management Software Tools
Interactive Session | Management ConocoPhillips Implements a New System for Access Control
14-5 How will MIS help my career?
The Company
Interactive Session | Technology Arup Moves Project Management to the Cloud
Position Description
Job Requirements
Interview Questions
Author Tips
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: Pennsylvania’s Unemployment Compensation Modernization System: Unfinished Business
References:
Chapter 15 Managing Global Systems
Opening Case: New Systems Help Eli Lilly Standardize as a Global Company
15-1 What major factors are driving the internationalization of business?
Developing an International Information Systems Architecture
The Global Environment: Business Drivers and Challenges
State of the Art
15-2 What are the alternative strategies for developing global businesses?
Global Strategies and Business Organization
Global Systems to Fit the Strategy
Reorganizing the Business
15-3 What are the challenges posed by global information systems and management solutions for these challenges?
A Typical Scenario: Disorganization on a Global Scale
Global Systems Strategy
The Management Solution: Implementation
15-4 What are the issues and technical alternatives to be considered when developing international information systems?
Computing Platforms and Systems Integration
Connectivity
Software Localization
15-5 How will MIS help my career?
The Company
Interactive Session | Technology The Global Internet Goes Multimedia
Interactive Session | Management AbbVie Builds a Global Systems Infrastructure
Review Summary
Key Terms
Review Questions
Discussion Questions
Hands-On MIS Projects
Collaboration and Teamwork Project
Case Study: E-Commerce in China: Opportunities and Obstacles
References:
Glossary
Indexes
Back Cover
