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Chapter 1

1. Why are information systems essential in business today? Describe four trends in the global business environment that have made information systems so important.

The emergence of a global economy, transformation of industrial economies, transformation of the business enterprise, and the emergence of the digital firm make information systems essential in business today. These trends present the business firm and its management with several new challenges. Table 1-1 summarizes these challenges.

As a growing percentage of the advanced industrial economies in the United States, Europe and Asia depends on imports and exports, information systems supply both communications and analytic instruments for engaging in trade and for managing businesses that are spread throughout the world.

The major industrial powers in the United States, Europe and Asia are being transformed from industrial economies to knowledge- and information-based service economies. In such economies, information systems and technology have become critical to these economies, and in this day and age, they have become essential to economies that primarily remain reliant upon manufacturing.

Development of the power and capabilities of information systems has transformed the possibilities for organizing and managing business enterprises. Businesses of this style are less hierarchical (flatter) and are more decentralized, allowing them to rely more on informal commitments and temporary task forces. Many managers have become more reliant upon individuals who report to them for decision making as these reportees have more learning and current knowledge. Also, more and more under this transformation, companies are becoming more customer-oriented.

The emerging technology and the organizational redesign that has accompanied it have created the condition for the emergence of the digital firm. While firms of this type are still few and far between, they are growing in number. Perhaps more important right now, almost all larger firms and even many smaller ones have become reliant upon the digital firm technology for much of their activity, including relations with customers and suppliers.

2. Describe the capabilities of a digital firm. Why are digital firms so powerful? What are the four principal systems driving the movement toward digital firms?

Digital firms extensively use Internet technology for electronic commerce and electronic business to manage their internal processes and relationships with customers, suppliers, and other external entities. Core business processes, key corporate assets, and environmental responses are digitally managed. Because a digital firm relies heavily on information technology to enable, mediate, and streamline its internal and external operations, the firm is more flexible, profitable, competitive, and efficient than a traditional firm.

Supply chain management systems, customer relationship management systems, enterprise systems, and knowledge management systems are the four principal systems driving the movement toward digital firms. As the textbook suggests, these four systems are where corporations are digitally integrating information flows and making significant information systems investments.

3. What is an information system? Distinguish between a computer, a computer program, and an information system. What is the difference between data and information?

The textbook defines an information system as interrelated components that work together to collect, process, store, and disseminate information to support decision making, coordination, control, analysis, and visualization in an organization. A computer system is the physical equipment used for input, processing, and output activities in an information system. Computer programs provide the computer with necessary instructions on how to process the data into information. Data are raw facts; these raw facts, in their current form, are not in a useful format. Information is data that have been processed into a useful, meaningful form.

It is important for students to recognize that a computer and an information system are not equivalent. It is important to stress that information systems have management, organization, and technology dimensions. Computers and programs are technology components of an information system. Without addressing the organization and management dimensions, the technology components are relatively useless. For instance, you can purchase a computer and software, but unless you have determined how the technology will be used to help manage and organize your work, you essentially have a decorative box for your desk.

4. What activities convert raw data to usable information in information systems? What is their relationship to feedback?

Input captures raw data, processing converts the data into a more meaningful form, and output transfers the processed information to people or activities where it will be used. Some of the output will be used to correct any problems found, and also to provide feedback that will then be used to evaluate the data.

5. What are the functions of an information system from a business perspective? What role do they play in the business information value chain?

Information systems facilitate the acquisition, transformation, and distribution of information. Information systems can improve decision making, enhance organizational performance, and help increase firm profitability, thus contributing to corporate value.

6. What is information systems literacy? How does it differ from computer literacy?

Information systems literacy is a broad-based understanding of information systems. In contrast, computer literacy is limited to understanding computers. Information systems literacy includes the behavioral understanding of the organization and management dimensions of information systems, as well as the technological dimensions.

7. What are the organization, management, and technology dimensions of information systems?

Organization: Information systems are part of organizations, and in some cases (such as credit card companies and financial information services), they are the organization. Information systems will have the SOPs and the culture of an organization imbedded within them.

Management: Information systems supply tools and information needed by managers to allocate, coordinate and monitor their work, make decisions, create new products, and services and make long-range strategic decisions.

Technology: Management uses technology (hardware, software, storage, and telecommunications) to carry out their functions. It is one of the many tools managers use to cope with change.

8. Distinguish between a behavioral and a technical approach to information systems in terms of the questions asked and the answers provided. What major disciplines contribute to an understanding of information systems?

A behavioral approach to information systems focuses on questions such as strategic business integration, behavioral problems of systems utilization, system design and implementation, social and organizational impacts of information systems, political impacts of information systems, and individual responses to information systems. Solutions to problems created by information technology are primarily changes in attitudes, management, organizational policy, and behavior.

A technical approach to information systems emphasizes mathematically-based models to study information systems and the physical technology and formal capabilities of information systems. Students should know the differences between computer science (theories of computability, computation methods, and data storage and access methods), management science (development of models for decision making and managerial practice), and operations research (mathematical techniques for optimizing organizational parameters such as transportation, inventory control and transaction costs).

9. What is the relationship between an organization and its information systems? How has this relationship changed over time?

Notable changes occurring over time include a growing interdependence between the organization and its information systems and a movement from primarily technical changes to include both managerial and institutional changes. There is a growing interdependence between the organization and its information systems. Often, a change in the business's strategy, rules, or procedures requires changes in the information systems software, hardware, databases, and telecommunications. An organization’s present and future accomplishments depend in many respects on what its systems will permit it to do now and later. Also, system projects are increasing in reach and scope. Whereas early information systems addressed primarily technical or operational issues, contemporary information systems are integral to the management and strategic goals of the firm. Today information systems affect a much larger part of the organization itself, such as organizational products, objectives, and structure. More and more business activities at all levels involve the use of information systems.

10. What are the Internet and World Wide Web? How have they changed the role played by information systems in organizations?

The Internet is an international network of hundreds of thousands of public and private networks with over 500 million people connected in over 200 countries working in science, education, government, and business. Individuals and organizations use the Internet to exchange information and perform business transactions with other individuals and organizations around the globe. It should be noted that the digital firm uses the Internet as its primary technology platform.

The World Wide Web is a system with universally accepted standards for storing, retrieving, formatting, and displaying information in a networked environment. The Web is a part of the Internet that provides a graphically-based system of pages for storing information on the Internet.

The Internet and World Wide Web have had a tremendous impact on the role information systems play in organizations. The Internet and World Wide Web are responsible for the increased connectivity and collaboration within and outside the organization. The Internet, World Wide Web, and other technologies have led to the redesign and reshaping of organizations. The Internet and World Wide Web have helped transform the organization's structure, scope of operations, reporting and control mechanisms, work practices, work flows, and products and services.

11. Describe some of the major changes that information systems are bringing to organizations.

Information systems are driving both daily operations and organizational strategy. Powerful computers, software, and networks, including the Internet, have helped organizations become more flexible, eliminate layers of management, separate work from location, and restructure work flows, giving new powers to both line workers and management. The flattening of organizations is probably one change that students are likely to cite, particularly with the concern over downsizing. The parallel increase in information and in the decision power of line workers (empowerment) also increased the workers’ corresponding work satisfaction as management span of control is broadened. The empowering of the line worker means managers can spend more time thinking more strategically.

12. How are information systems changing the management process?

Contemporary information systems are providing managers with powerful new tools for more precise planning, forecasting and monitoring, allowing them to respond more quickly to changes in the market for a product or in production conditions. Systems also give managers new tools for communicating with their subordinates so that they can manage larger numbers of people across greater distances than in the past.

13. What is the relationship between network revolution, the digital firm, electronic commerce, and electronic business?

The Internet and other networks have made it possible for the firm to replace manual and paper-based processes with the electronic flow of information. This change can enable many companies ultimately to become digital firms. The digital firm uses the Internet and digital technology to expedite the exchange of information and facilitates communication and coordination both inside the organization and between the organization and its partners. Without this linkage of buyers and sellers through the networks and the Internet, there would be no way to transmit the many transactions of the electronic market, which would leave buyers and sellers to depend on paper transactions with their time delays, inaccuracies, and expenses.

14. What are interorganizational systems? Why are they becoming more important? How has Internet and Web technology affected these systems?

Interorganizational systems automate the flow of information across organizational boundaries, linking a company to its customers, distributors, or suppliers, and sometimes even their competitors.

Interorganizational systems allow companies to electronically conduct transactions with different companies. By electronically conducting transactions with other companies, the companies can respond more quickly to market demands and lower transaction costs. Moreover, the companies can work jointly and more quickly and fully with partners to design, produce, and sell products. This method can result in higher levels of efficiency, value to customers, and even result in a significant competitive advantage.

The Web and the Internet can lower the cost for all those involved, even making it possible for small companies to participate where they might not if costs were higher. Also, many firms find their employees need little or no training to use the Internet and the Web.

15. What do we mean by information architecture and information technology infrastructure? Why are they important concerns for managers?

The information architecture of the organization is the particular form or design that information technology assumes in a specific organization to achieve selected goals or functions. It is a design for the business application systems that serve each functional specialty and level of the organization and the specific ways that they are used by each organization. Contemporary information architectures are increasingly designed around business processes and clusters of system applications spanning multiple functions and organizational levels.

The firm’s information technology (IT) infrastructure provides the technology platform for this architecture and consists of computer hardware, software, data and storage technology, and networks along with the human resources required to operate the technology. Because managers and employees directly interact with these systems, it is important for the company now and in the future that the information architecture and IT infrastructure meet the business requirements of the company and that the systems can work together where needed.

16. What are the key management challenges involved in building, operating, and maintaining information systems today?

The textbook identifies five key management challenges, including the strategic business challenge, globalization challenge, information architecture and infrastructure challenge, information systems investment challenge, and the responsibility and control challenge. The strategic business challenge encourages students to realize that they must be able to use information technology to design organizations so that they are competitive, effective and digitally-enabled. The globalization challenge facing students is that they know how firms can understand the systems requirements of a global economic environment. The information architecture and infrastructure challenge is that students must be able to help their organizations develop an information architecture that is able to support the company goals when both the business conditions and the technologies are changing so rapidly. The information systems investment challenge is for students to know how their organization can determine the business value of systems. Finally, the responsibility and control challenge is for students to understand how organizations can ensure that their information systems are used in an ethically and socially responsible way.


Case Study – ShopKo and Pamida: Systems Triumph or Tragedy?

1. Evaluate the role of information systems in the way ShopKo and Pamida run their business. How important are they?

ShopKo and Pamida's information systems are very important to the successful management of the businesses. However, the traditional information systems are ineffective and are not helping the companies achieve their business objectives. The new information systems are supportive of the businesses' requirements and enabling the businesses to achieve their overall objectives.

ShopKo uses its information system to determine appropriate markdown prices for overstocked items. The traditional system determined a product's markdown price based on the clearance price used in previous years. Since the information system was unable to factor local geography and culture into the equation, a product's clearance price was the same at all stores. The traditional information system was ineffective, in that ShopKo was losing money, and the system was not helping the company realize its business objectives. In contrast, the new system (Markdown Optimizer) allowed the company to price its products based on various factors, including season, geography, local tastes, and historical demand. The Markdown Optimizer "stores the previous recommendation for each item in each individual store so that it can evaluate past results and then produce recommendations for the closeout of the current cycle." Because of the improved system, ShopKo saw a 25 percent increase in its gross margin, decreased payroll costs by 24 percent, and the percentage of unsold goods was reduced from 7 percent to 2 percent.

As the case scenario indicates, Pamida's strategy is to maintain a high in-stock-rate. However, Pamida's traditional system did not help the company achieve its objective. Stores were out of stock on items, while the same items were sitting in Pamida's warehouses. Although Pamida changed its warehouse from a flow-through facility to a full-service distribution center, it did not update or replace its warehousing software. According to Pamida's CIO Dan Nicklen, the reason the warehouse management software was not updated was because "the software had been working fine under the old distribution system." As a result of the inadequate warehouse management information system, bottlenecks occurred, earnings declined in the first nine months of 2001, and ShopKo lost $6.7 million in overall revenue. As a result of the product supply shortage for the 2000 holiday season, estimated sales losses were $5 million, and lawsuits were filed by shareholders. It is obvious that Pamida's current technology did not support the transition from a flow-through facility to a full-service distribution center.

2. Evaluate the importance of Pamida's distribution center consolidation project for both Pamida and ShopKo. What management, organization and technology factors prevented Pamida's new distribution center from working successfully?

The distribution center consolidation project was very important for both Pamida and ShopKo. One of the goals of the distribution center was to enable Pamida's stores to maintain a high in-stock rate. Additionally, ShopKo wanted to expand its Pamida stores into small towns. The distribution center was key to achieving these management objectives.

The management challenge was to move Pamida's distribution center from a flow-through facility to a full-service facility. The organizational elements include suppliers, the warehouses, and the individual stores. The technology included using outdated Catalyst, International warehouse management software and mainframe systems. Unfortunately, the CIO assumed that the existing technology would satisfy management objectives because the technology had worked fine in the past. The case points out that the existing technology was inflexible and required the new distribution center to conform to the technology, as opposed to having the technology support the new management and organizational requirements. This is a very good example of why it is important to examine the management, organization, and technology dimensions of an information system, and that you cannot just assume that existing technology can satisfy current and future business requirements.

3. Are ShopKo and Pamida using information systems effectively? Why or why not? How much value do their systems provide to the business?

The traditional systems described in the case were very ineffective. Because of its traditional system, ShopKo was using a markdown strategy that was costly, time-consuming, and not very useful. Pamida's traditional system caused the company to have too many out-of-stock items and a decreasing gross margin. However, ShopKo's new information system enables the company to more effectively determine markdown pricing strategies for each product within a given store. This improved system has helped the company increase its gross margin, decrease payroll costs, decrease the amount of unsold goods, and reduce payroll expenses. The case scenario mentions that Pamida has implemented a new distribution center and that ShopKo is confident with the new system.

The value of the systems is very apparent from the case scenario. When the systems were not functioning properly, the systems were a detriment to the company, as opposed to being an asset. The systems were causing the companies to lose money, items were either overstocked or under stocked, and employee time was inefficiently used. In the case of Pamida, shareholders sued the company. However, when the systems were improved and aligned with management objectives, the information systems enabled ShopKo and Pamida to achieve objectives and earn a profit.

4. If you were the CEO of ShopKo, how would you have addressed the problem? If you were the CEO of Pamida when it was purchased by ShopKo, would you have recognized the problem? Explain. How would you have solved the problem?

Students will provide different answers for this question. As CEO of ShopKo, students should recognize that the consolidation project required changes in the information systems for both companies. These changes require an examination of the management, organization, and technology dimensions of the information systems. It is apparent from the case that management wanted the distribution center to adapt to the technology, as opposed to the technology being upgraded to address the new requirements for the distribution center. As the CEO, students should recognize that the management requirements and organization requirements should be identified, and then the technology required to satisfy these requirements can be identified and then implemented.

5. What management challenges does this case study illustrate? Explain your answer.

ShopKo faces several management challenges, including strategic business, information architecture and infrastructure, information systems investment, and responsibility and control challenges.

Strategic Business Challenge. Pamida's decision to continue using its existing warehouse management software rather than update the software shows the unwillingness of the company's management to explore how technology can be used to help the company achieve a strategic advantage.

Information Architecture and IT Infrastructure Challenge. ShopKo's decision to use Spotlight Solution's Markdown Optimizer and Pamida's refusal to upgrade to new warehouse management software are good examples of the information architecture and infrastructure challenge. ShopKo's move to the Markdown Optimizer shows the company's willingness to modify its information technology infrastructure in an attempt to meet both current and future business requirements. After changing its infrastructure, ShopKo then changed its information architecture. This is apparent by its ability to now manage and tailor markdown pricing strategies for each of its stores. Pamida's unwillingness to make changes in its underlying infrastructure caused the information systems to become outdated and unable to satisfy the company's current business requirements.

Information Systems Investment Challenge. ShopKo did address the information systems investment challenge. It appears that the company did evaluate the potential benefits and costs for the new information system. The new system did provide the company with a sizable payoff and has definitely increased its value. In contrast, Pamida should have examined in more detail how investing in an improved information system could have provided the company with a better payoff and increased corporate value.

Responsibility and Control Challenge. Students can use Table 1-5 to help answer this part of the question. ShopKo's new information system has had several positive impacts on the company. For instance, ShopKo's new system does help it evaluate purchase patterns, and thus determine more appropriate markdown pricing strategies for its individual stores. Additionally, Pamida's latest distribution system should help it better manage its stock in its stores.