Customer Relationship Management for San Francisco Case Study

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This is a research paper focused on the Case Study presented. 

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Chapter 3 Information Systems, Organizations, and Strategy

Case 2: Customer Relationship Management for San Francisco’s City Government

Tags: Customer Relationship Management; CRM; San Francisco; data database; phone operator call center
service; 311; government information systems

Summary

When you call a city department for help, CRM is the infrastructure behind the answers you receive. CRM
allows operators to route your service request and to follow up to see if any action was taken. This also
creates a database of problems and solutions, so that changing trends can be addressed. This video describes
the changes brought in basic government/business processes by the implementation of a customer
relationship management system for the City of San Francisco. L= 4:05

URL: http://www.youtube.com/watch?v=2eoEoaev9BI

Case

San Francisco is the fourth largest city in California by population and one of the most populous cities in the
United States. With approximately 800,000 residents, local government has a tall order in responding to the
needs of San Franciscans every day. So it’s important that government agencies use information systems
designed for maximum efficiency and ease of use for citizens.

As anyone that’s been held up at the DMV for hours knows, government services are not always models of
efficiency. San Francisco was no exception. The example shown in the video is the abandoned vehicle detail
process. San Franciscans called in with complaints, or reports, of vehicles that had been abandoned for 72
hours or longer. Then a patrolling officer would locate the vehicle and mark it for towing.

But the city of San Francisco’s voice mail system was overly complicated and difficult to use. It was
difficult for citizens to successfully provide the city with information about abandoned vehicles, and often
the city would have trouble dealing with multiple reports about the same vehicle. San Francisco needed a
better system for managing abandoned vehicle reports.

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The Department of Telecommunications and Information Services (DTIS) helped solve the problem by
identifying the existing business processes, beginning with the complaint intake process and ending with the
resolution of an abandoned vehicle complaint, and provided an overhaul of the existing CRM system based
on the needs of government employees.

Callers would now use the existing 311 service, allowing them to place a one-contact phone call with a
human being in order to report a vehicle. And by providing applications that were similar to applications
performing other government functions, the CRM systems fostered greater interdepartmental collaboration
and provided the benefits of Web accessibility, tracking of work, and better customer service. San
Franciscans can be confident that they will have a similar experience and receive similar service whether
they call for library hours or to report an abandoned vehicle.

Case Study Questions

1. How did the DTIS CRM team change the business process for dealing with abandoned vehicles in San
Francisco? How did the old business process work, and what kinds of problems arose? Why was it
necessary to change the business process before developing a new CRM system?

2. Why is a CRM particularly useful for the support of “interaction” jobs (described in the text chapter) as
opposed to “transaction jobs?”

3. How does this city-wide system help different agencies collaborate with one another?

4. How has the system installed by DTIS helped integrate information among city agencies? What
difference would this make for customer service?

5. Considering the types of information systems discussed in the chapter, what type of system is this? How
would you characterize this system?

Copyright © 2009 Kenneth Laudon. Copyright © 2009 Pearson Education.

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1IIICI MCI <3IVMI» Using online software tools to calculate shipping costs Using online interactive mapping software to plan efficient transportation routes Researching product information and evaluating Web sites for auto sales Using Internet newsgroups for marketing Researching travel costs using online travel sites Searching online databases for products and services Using Web search engines for business research Researching and evaluating business outsourcing services Researching and evaluating supply chain management services Evaluating e-commerce hosting services Using shopping bots to compare product price, features, and availability Using online software tools for retirement planning Redesigning business processes for Web procurement Researching real estate prices Researching international markets and pricing A n?tlvtif*5il \A/ pit inn a riH Pcocontatinn Qlf i 1 Ic"^MMcnyniiCH, w riniiy cti lu rrociiidiiuii OI\M o BUSINESS PROBLEM Management analysis of a business Value chain and competitive forces analysis Business strategy formulation Formulating a corporate privacy policy Employee productivity analysis Disaster recovery planning Locating and evaluating suppliers Developing an e-commerce strategy Identifying knowledge management opportunities Identifying international markets *Dirt Bikes Running Case on MyMISLab Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 CHAPTER Chapter 1 Chapter 3 Chapter 4 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 15 !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% Management Information Systems MANAGING THE DIGITAL FIRM TWELFTH EDITION Kenneth C. Laudon New York University Jane P. Laudon Azimuth Information Systems Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Library of Congress Cataloging-in-Publication Information is available. Executive Editor: Bob Horan Editorial Director: Sally Yagan Editor in Chief: Eric Svendsen Product Development Manager: Ashley Santora Editorial Assistant: Jason Calcano Editorial Project Manager: Kelly Loftus Senior Marketing Manager: Anne Fahlgren Senior Managing Editor: Judy Leale Senior Production Project Manager: Karalyn Holland Senior Operations Specialist: Arnold Vila Operations Specialist: Cathleen Petersen Senior Art Director: Janet Slowik Cover Designer: Jill Lehan Cover Illustration/Photo: Merve Poray/Shutterstock Images Manager, Rights and Permissions: Hessa Albader Media Editor: Denise Vaughn Media Project Manager: Lisa Rinaldi Composition: Azimuth Interactive, Inc. Full-Service Project Management: Azimuth Interactive, Inc. Printer/Binder: Courier/Kendallville Typeface: 10.5/13 ITC Veljovic Std Book Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text (or on page P1). Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. Screen shots and icons reprinted with permission from the Microsoft Corporation. This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation. Copyright © 2012, 2010, 2007, 2006 by Pearson Education, Inc., Upper Saddle River, New Jersey, 07458. Pearson Prentice Hall. All rights reserved. Printed in the United States of America. This publication is protected by Copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permis- sion(s), write to: Rights and Permissions Department. Pearson Prentice Hall™ is a trademark of Pearson Education, Inc. Pearson® is a registered trademark of Pearson plc Prentice Hall® is a registered trademark of Pearson Education, Inc. Pearson Education Ltd., London Pearson Education North Asia, Ltd., Hong Kong Pearson Education Singapore, Pte. Ltd Pearson Educación de Mexico, S.A. de C.V. Pearson Education, Canada, Ltd Pearson Education Malaysia, Pte. Ltd. Pearson Education-Japan Pearson Education Upper Saddle River, New Jersey Pearson Education Australia PTY, Limited 10 9 8 7 6 5 4 3 2 1 ISBN-13: 978-0-13-214285-4 ISBN-10: 0-13-214285-6 A b o u t t h e A u t h o r s iii 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 twelve books dealing with electronic commerce, information systems, organizations, and society. Professor Laudon has also written over forty 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 information 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 enter- prise system implementation, computer-related organizational and occupational changes in large organizations, changes in management ideology, changes in public policy, and under- standing 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), Department of Homeland Security, and to 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 consultant in the information systems area and the author of seven books. Her special interests include systems analysis, data management, 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 Oriental lan- guages and civilizations. The Laudons have two daughters, Erica and Elisabeth, to whom this book is dedicated. B r i e f C o n t e n t s 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 206 Chapter 7 Telecommunications, the Internet, and Wireless Technology 244 Chapter 8 Securing Information Systems 290 Part Three Key System Applications for the Digital Age 333 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 334 Chapter 10 E-Commerce: Digital Markets, Digital Goods 370 Chapter 11 Managing Knowledge 414 Chapter 12 Enhancing Decision Making 452 Part Four Building and Managing Systems 485 Chapter 13 Building Information Systems 486 Chapter 14 Managing Projects 526 Chapter 15 Managing Global Systems 558 (available on the Web at www.pearsonhighered.com/laudon) References R 1 Glossary G 1 Photo and Screen Shot Credits P 1 Indexes I 1 iv www.pearsonhighered.com/laudon v C o m p l e t e C o n t e n t s Part One Organizations, Management, and the Networked Enterprise 1 Chapter 1 Information Systems in Global Business Today 2 !Opening Case: The New Yankee Stadium Looks to the Future 3 1.1 The Role of Information Systems in Business Today 5 How Information Systems Are Transforming Business 5 • What’s New In Management Information Systems? 6 • Globalization Challenges and Opportunities: A Flattened World 8 !Interactive Session: Management MIS in Your Pocket 10 The Emerging Digital Firm 11 • Strategic Business Objectives of Information Systems 12 1.2 Perspectives on Information Systems 15 What is an Information System? 15 • Dimensions of Information Systems 17 !Interactive Session: Technology UPS Competes Globally with Information Technology 22 It Isn’t Just Technology: A Business Perspective on Information Systems 24 • Complementary Assets: Organizational Capital and the Right Business Model 26 1.3 Contemporary Approaches to Information Systems 28 Technical Approach 29 • Behavioral Approach 29 • Approach of This Text: Sociotechnical Systems 29 1.4 Hands-on MIS Projects 31 Management Decision Problems 31 • Improving Decision Making: Using Databases to Analyze Sales Trends 31 • Improving Decision Making: Using the Internet to Locate Jobs Requiring Information Systems Knowledge 32 Learning Track Modules: How Much Does IT Matter?; Information Systems and Your Career, The Emerging Mobile Digital Platform 32 Review Summary 33 • Key Terms 34 • Review Questions 34 • Discussion Questions 35 • Video Cases 35 • Collaboration and Teamwork: Creating a Web Site for Team Collaboration 35 !Case Study: What’s the Buzz on Smart Grids? 36 Chapter 2 Global E-Business and Collaboration 40 !Opening Case: America’s Cup 2010: USA Wins with Information Technology 41 2.1 Business Processes and Information Systems 43 Business Processes 43 • How Information Technology Enhances Business Processes 44 2.2 Types of Business Information Systems 45 Systems for Different Management Groups 45 • Systems for Linking the Enterprise 51 !Interactive Session: Organizations Domino’s Sizzles with Pizza Tracker 52 E-business, E-commerce, and E-government 55 2.3 Systems for Collaboration and Teamwork 55 What is Collaboration? 56 • Business Benefits of Collaboration and Teamwork 57 • Building a Collaborative Culture and Business Processes 58 • Tools and Technologies for Collaboration and Teamwork 59 !Interactive Session: Management Virtual Meetings: Smart Management 62 2.4 The Information Systems Function in Business 68 The Information Systems Department 68 • Organizing the Information Systems Function 69 2.5 Hands-on MIS Projects 70 Management Decision Problems 70 • Improving Decision Making: Using a Spreadsheet to Select Suppliers 70 • Achieving Operational Excellence: Using Internet Software to Plan Efficient Transportation Routes 71 Learning Track Modules: Systems from a Functional Perspective; IT Enables Collaboration and Teamwork; Challenges of Using Business Information Systems; Organizing the Information Systems Function 72 Review Summary 72 • Key Terms 73 • Review Questions 73 • Discussion Questions 74 • Video Cases 74 • Collaboration and Teamwork: Describing Management Decisions and Systems 74 !Case Study: Collaboration and Innovation at Procter & Gamble 75 Chapter 3 Information Systems, Organizations, and Strategy 78 !Opening Case: Verizon or AT&T—Which Company Has the Best Digital Strategy? 79 3.1 Organizations and Information Systems 81 What Is an Organization? 82 • Features of Organizations 84 3.2 How Information Systems Impact Organizations and Business Firms 89 Economic Impacts 89 • Organizational and Behavioral Impacts 91 • The Internet and Organizations 93 • Implications for the Design and Understanding of Information Systems 94 3.3 Using Information Systems to Achieve Competitive Advantage 94 Porter’s Competitive Forces Model 95 Information System Strategies for Dealing with Competitive Forces 96 • The Internet’s Impact on Competitive Advantage 99 !Interactive Session: Organizations How Much Do Credit Card Companies Know About You? 100 The Business Value Chain Model 102 !Interactive Session: Management Is the iPad a Disruptive Technology? 103 Synergies, Core Competencies, and Network-Based Strategies 106 vi Contents 3.4 Using Systems for Competitive Advantage: Management Issues 111 Sustaining Competitive Advantage 111 • Aligning IT with Business Objectives 111 • Managing Strategic Transitions 112 3.5 Hands-on MIS Projects 113 Management Decision Problems 113 • Improving Decision Making: Using a Database to Clarify Business Strategy 113 • Improving Decision Making: Using Web Tools to Configure and Price an Automobile 114 Learning Track Module: The Changing Business Environment for Information Technology 115 Review Summary 115 • Key Terms 116 • Review Questions 116 • Discussion Questions 117 • Video Cases 117 • Collaboration and Teamwork: Identifying Opportunities for Strategic Information Systems 117 !Case Study: Will TV Succumb to the Internet? 118 Chapter 4 Ethical and Social Issues in Information Systems 120 !Opening Case: Behavioral Targeting And Your Privacy: You’re the Target 121 4.1 Understanding Ethical and Social Issues Related to Systems 123 A Model for Thinking About Ethical, Social, and Political Issues 124 • Five Moral Dimensions of the Information Age 125 • Key Technology Trends That Raise Ethical Issues 126 4.2 Ethics in an Information Society 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 The Moral Dimensions of Information Systems 131 Information Rights: Privacy and Freedom in the Internet Age 131 • Property Rights: Intellectual Property 138 • Accountability, Liability, and Control 141 • System Quality: Data Quality and System Errors 143 • Quality of Life: Equity, Access, and Boundaries 143 !Interactive Session: Organizations The Perils of Texting 147 !Interactive Session: Technology Too Much Technology 151 4.4 Hands-on MIS Projects 153 Management Decision Problems 153 • Achieving Operational Excellence: Creating a Simple Blog 154 • Improving Decision Making: Using Internet Newsgroups for Online Market Research 154 Learning Track Modules: Developing a Corporate Code of Ethics for Information Systems 155 Review Summary 155 • Key Terms 155• Review Questions 156 • Discussion Questions 156 • Video Cases 156 • Collaboration and Teamwork: Developing a Corporate Ethics Code 156 !Case Study: When Radiation Therapy Kills 157 Contents vii Part Two Information Technology Infrastructure 161 Chapter 5 IT Infrastructure and Emerging Technologies 162 !Opening Case: BART Speeds Up with a New IT Infrastructure 163 5.1 IT Infrastructure 165 Defining IT Infrastructure 165 • Evolution of IT Infrastructure 166 • Technology Drivers of Infrastructure Evolution 170 5.2 Infrastructure Components 175 Computer Hardware Platforms 175 • Operating System Platforms 177 • Enterprise Software Applications 177 !Interactive Session: Technology New to the Touch 178 Data Management and Storage 179 • Networking/Telecommunications Platforms 180 • Internet Platforms 180 • Consulting and System Integration Services 181 5.3 Contemporary Hardware Platform Trends 181 The Emerging Mobile Digital Platform 181 • Grid Computing 182 • Virtualization 182 • Cloud Computing 183 • Green Computing 184 • Autonomic Computing 185 • High-performance and Power-saving Processors 185 !Interactive Session: Organizations Is Green Computing Good for Business? 186 5.4 Contemporary Software Platform Trends 187 Linux and Open Source Software 187 • Software for the Web: Java and Ajax 188 • Web Services and Service-Oriented Architecture 189 • Software Outsourcing and Cloud Services 191 5.5 Management Issues 194 Dealing with Platform and Infrastructure Change 194 • Management and Governance 194 • Making Wise Infrastructure Investments 195 5.6 Hands-on MIS Projects 198 Management Decision Problems 198 • Improving Decision Making: Using a Spreadsheet to Evaluate Hardware and Software Options 198 • Improving Decision Making: Using Web Research to Budget for a Sales Conference 199 Learning Track Modules: How Computer Hardware and Software Work; Service Level Agreements; The Open Source Software Initiative; Comparing Stages in IT Infrastructure Evolution 200 Review Summary 200 • Key Terms 201 • Review Questions 202 • Discussion Questions 202 • Video Cases 202 • Collaboration and Teamwork: Evaluating Server Operating Systems 202 !Case Study: Salesforce.com: Cloud Services Go Mainstream 203 Chapter 6 Foundations of Business Intelligence: Databases and Information Management 206 !Opening Case: RR Donnelley Tries to Master Its Data 207 6.1 Organizing Data in a Traditional File Environment 209 File Organization Concepts 209 • Problems with the Traditional File Environment 210 viii Contents 6.2 The Database Approach to Data Management 212 Database Management Systems 212 • Capabilities of Database Management Systems 217 • Designing Databases 219 6.3 Using Databases to Improve Business Performance and Decision Making 221 • Data Warehouses 222 • Tools for Business Intelligence: Multidimensional Data Analysis and Data Mining 224 !Interactive Session: Technology What Can Businesses Learn from Text Mining? 227 Databases and the Web 228 6.4 Managing Data Resources 230 Establishing an Information Policy 230 • Ensuring Data Quality 230 !Interactive Session: Organizations Credit Bureau Errors—Big People Problems 232 6.5 Hands-on MIS Projects 234 Management Decision Problems 234 • Achieving Operational Excellence: Building a Relational Database for Inventory Management 235 • Improving Decision Making: Searching Online Databases for Overseas Business Resources 236 Learning Track Modules: Database Design, Normalization, and Entity- Relationship Diagramming; Introduction to SQL; Hierarchical and Network Data Models 236 Review Summary 237 • Key Terms 238 • Review Questions 239 • Discussion Questions 239 • Video Cases 239 • Collaboration and Teamwork: Identifying Entities and Attributes in an Online Database 239 !Case Study: The Terror Watch List Database’s Troubles Continue 240 Chapter 7 Telecommunications, the Internet, and Wireless Technology 244 !Opening Case: Hyundai Heavy Industries Creates a Wireless Shipyard 245 7.1 Telecommunications and Networking in Today’s Business World 247 Networking and Communication Trends 247 • What Is a Computer Network? 247 • Key Digital Networking Technologies 250 7.2 Communications Networks 252 Signals: Digital vs. Analog 252 • Types of Networks 253 • Physical Transmission Media 255 7.3 The Global Internet 257 What Is the Internet? 257 • Internet Addressing and Architecture 258 • Internet Services and Communication Tools 261 !Interactive Session: Organizations The Battle Over Net Neutrality 262 !Interactive Session: Management Monitoring Employees on Networks: Unethical or Good Business? 266 The Web 268 7.4 The Wireless Revolution 275 Cellular Systems 276 • Wireless Computer Networks and Internet Access 276 • RFID and Wireless Sensor Networks 279 Contents ix 7.5 Hands-on MIS Projects 282 Management Decision Problems 282 • Improving Decision Making: Using Spreadsheet Software to Evaluate Wireless Services 282 • Achieving Operational Excellence: Using Web Search Engines for Business Research 282 Learning Track Modules: Computing and Communications Services Provided by Commercial Communications Vendors; Broadband Network Services and Technologies; Cellular System Generations; Wireless Applications for CRM, SCM, and Healthcare; Web 2.0 283 Review Summary 284 • Key Terms 285 • Review Questions 286 • Discussion Questions 286 • Video Cases 286 • Collaboration and Teamwork: Evaluating Smartphones 286 !Case Study: Google, Apple, and Microsoft Struggle for Your Internet Experience 287 Chapter 8 Securing Information Systems 290 !Opening Case: You’re On Facebook? Watch Out! 291 8.1 System Vulnerability and Abuse 293 Why Systems Are Vulnerable 293 • Malicious Software: Viruses, Worms, Trojan Horses, and Spyware 296 • Hackers and Computer Crime 298 • Internal Threats: Employees 302 • Software Vulnerability 303 !Interactive Session: Management When Antivirus Software Cripples Your Computers 304 8.2 Business Value of Security and Control 305 Legal and Regulatory Requirements for Electronic Records Management 306 • Electronic Evidence and Computer Forensics 307 8.3 Establishing a Framework for Security and Control 308 Information Systems Controls 308 • Risk Assessment 309 • Security Policy 310 • Disaster Recovery Planning and Business Continuity Planning 310 • The Role of Auditing 312 8.4 Technologies and Tools for Protecting Information Resources 312 Identity Management and Authentication 312 • Firewalls, Intrusion Detection Systems, and Antivirus Software 314 • Securing Wireless Networks 316 • Encryption and Public Key Infrastructure 317 • Ensuring System Availability 318 • Security Issues for Cloud Computing and the Mobile Digital Platform 320 • Ensuring Software Quality 320 !Interactive Session: Technology How Secure Is the Cloud? 321 8.5 Hands-on MIS Projects 323 Management Decision Problems 323 • Improving Decision Making: Using Spreadsheet Software to Perform a Security Risk Assessment 324 • Improving Decision Making: Evaluating Security Outsourcing Services 325 Learning Track Modules: 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 325 Review Summary 326 • Key Terms 326 • Review Questions 327 • Discussion Questions 328 • Video Cases 328 • Collaboration and Teamwork: Evaluating Security Software Tools 328 !Case Study: Are We Ready for Cyberwarfare? 329 x Contents Part Three Key System Applications for the Digital Age 333 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 334 !Opening Case: Cannondale Learns to Manage a Global Supply Chain 335 9.1 Enterprise Systems 337 What Are Enterprise Systems? 337 • Enterprise Software 338 • Business Value of Enterprise Systems 339 9.2 Supply Chain Management Systems 340 The Supply Chain 340 • Information and Supply Chain Management 342 • Supply Chain Management Software 344 !Interactive Session: Organizations Southwest Airlines Takes Off with Better Supply Chain Management 345 Global Supply Chains and the Internet 346 • Business Value of Supply Chain Management Systems 348 9.3 Customer Relationship Management Systems 349 What Is Customer Relationship Management? 349 • Customer Relationship Management Software 351 • Operational and Analytical CRM 354 • Business Value of Customer Relationship Management Systems 355 9.4 Enterprise Applications: New Opportunities and Challenges 355 Enterprise Application Challenges 355 • Next Generation Enterprise Applications 356 !Interactive Session: Technology Enterprise Applications Move to the Cloud 358 9.5 Hands-on MIS Projects 361 Management Decision Problems 361 • Improving Decision Making: Using Database Software to Manage Customer Service Requests 361 • Achieving Operational Excellence: Evaluating Supply Chain Management Services 362 Learning Track Modules: SAP Business Process Map; Business Processes in Supply Chain Management and Supply Chain Metrics; Best Practice Business Processes in CRM Software 363 Review Summary 363 • Key Terms 364 • Review Questions 364 • Discussion Questions 365 • Video Cases 365 • Collaboration and Teamwork: Analyzing Enterprise Application Vendors 365 !Case Study: Border States Industries Fuels Rapid Growth with ERP 366 Chapter 10 E-Commerce: Digital Markets, Digital Goods 370 !Opening Case: 4Food: Burgers Go Social 371 10.1 E-commerce and the Internet 373 E-Commerce Today 373 • Why E-Commerce Is Different 374 • Key Concepts in E-Commerce: Digital Markets and Digital Goods in a Global Marketplace 378 10.2 E-commerce: Business and Technology 381 Types of E-commerce 381 • E-commerce Business Models 382 Contents xi !Interactive Session: Organizations Twitter Searches for a Business Model 385 E-commerce Revenue Models 387 • Web 2.0: Social Networking and the Wisdom of Crowds 389 !Interactive Session: Management Facebook: Managing Your Privacy for Their Profit 390 E-commerce Marketing 392 • B2B E-Commerce: New Efficiencies and Relationships 395 10.3 The Mobile Digital Platform and Mobile E-commerce 399 M-Commerce Services and Applications 399 10.4 Building an E-commerce Web Site 401 Pieces of the Site-building Puzzle 401 • Business Objectives, System Functionality, and Information Requirements 402 • Building the Web Site: In-house Versus Outsourcing 402 10.5 Hands-on MIS 405 Management Decision Problems 405 • Improving Decision Making: Using Spreadsheet Software to Analyze a Dot-Com Business 406 • Achieving Operational Excellence: Evaluating E-Commerce Hosting Services 406 Learning Track Modules: Building a Web Page; E-Commerce Challenges: The Story of Online Groceries; Build an E-commerce Business Plan; Hot New Careers in E-commerce 407 Review Summary 407 • Key Terms 408 • Review Questions 408 • Discussion Questions 409 • Video Cases 409 • Collaboration and Teamwork: Performing a Competitive Analysis of E-Commerce Sites 409 !Case Study: Amazon vs. Walmart: Which Giant Will Dominate E-commerce? 410 Chapter 11 Managing Knowledge 414 !Opening Case: Canadian Tire Keeps the Wheels Rolling With Knowledge Management Systems 415 11.1 The Knowledge Management Landscape 417 Important Dimensions of Knowledge 417 • The Knowledge Management Value Chain 419 • Types of Knowledge Management Systems 421 11.2 Enterprise-Wide Knowledge Management Systems 422 Enterprise Content Management Systems 422 • Knowledge Network Systems 424 • Collaboration Tools and Learning Management Systems 424 11.3 Knowledge Work Systems 426 Knowledge Workers and Knowledge Work 426 • Requirements of Knowledge Work Systems 426 • Examples of Knowledge Work Systems 427 !Interactive Session: Technology Augmented Reality: Reality Gets Better 429 11.4 Intelligent Techniques 431 Capturing Knowledge: Expert Systems 432 • Organizational Intelligence: Case-Based Reasoning 434 • Fuzzy Logic Systems 434 • Neural Networks 436 • Genetic Algorithms 438 !Interactive Session: Organizations The Flash Crash: Machines Gone Wild? 439 Hybrid AI Systems 441 • Intelligent Agents 441 11.5 Hands-on MIS Projects 443 xii Contents Management Decision Problems 443 • Improving Decision Making: Building a Simple Expert System for Retirement Planning 443 • Improving Decision Making: Using Intelligent Agents for Comparison Shopping 444 Learning Track Module: Challenges of Knowledge Management Systems 444 Review Summary 445 • Key Terms 446 • Review Questions 446 • Discussion Questions 447 • Video Cases 447 • Collaboration and Teamwork: Rating Enterprise Content Management Systems 447 !Case Study: San Francisco Public Utilities Commission Preserves Expertise with Better Knowledge Management 448 Chapter 12 Enhancing Decision Making 452 !Opening Case: What to Sell? What Price to Charge? Ask the Data 453 12.1 Decision Making and Information Systems 455 Business Value of Improved Decision Making 455 • Types of Decisions 455 • The Decision-Making Process 457 • Managers and Decision Making in the Real World 458 • High-Velocity Automated Decision Making 461 12.2 Business Intelligence in the Enterprise 461 What Is Business Intelligence? 462 • The Business Intelligence Environment 463 • Business Intelligence and Analytics Capabilities 464 • Management Strategies for Developing BI and BA Capabilities 468 !Interactive Session: Organizations Data-Driven Schools 469 12.3 Business Intelligence Constituencies 471 Decision Support for Operational and Middle Management 471 • Decision Support for Senior Management: Balanced Scorecard and Enterprise Performance Management Methods 473 • Group Decision-Support Systems (GDSS) 475 !Interactive Session: Management Piloting Valero with Real-time Management 476 12.4 Hands-on MIS Projects 478 Management Decision Problems 478 • Improving Decision Making: Using PivotTables to Analyze Sales Data 478 • Improving Decision Making: Using a Web-Based DSS for Retirement Planning 479 Learning Track Module: Building and Using Pivot Tables 479 Review Summary 479 • Key Terms 480 • Review Questions 481 • Discussion Questions 481 • Video Cases 481 • Collaboration and Teamwork: Designing a University GDSS 481 !Case Study: Does CompStat Reduce Crime? 482 Contents xiii Part Four Building and Managing Systems 475 Chapter 13 Building Information Systems 486 !Opening Case: CIMB Group Redesigns Its Account Opening Process 487 13.1 Systems as Planned Organizational Change 489 Systems Development and Organizational Change 489 • Business Process Redesign 491 13.2 Overview of Systems Development 494 !Interactive Session: Organizations Can Business Process Management Make a Difference? 495 Systems Analysis 496 • Systems Design 498 • Completing the Systems Development Process 499 • Modeling and Designing Systems: Structured and Object-Oriented Methodologies 502 13.3 Alternative Systems-Building Approaches 506 Traditional Systems Life Cycle 506 • Prototyping 507 • End-User Development 508 • Application Software Packages and Outsourcing 510 !Interactive Session: Technology Zimbra Zooms Ahead with OneView 512 13.4 Application Development for the Digital Firm 513 Rapid Application Development (RAD) 514 • Component-Based Development and Web Services 515 13.5 Hands-on MIS Projects 516 Management Decision Problems 516 • Improving Decision Making: Using Database Software to Design a Customer System for Auto Sales 517 • Achieving Operational Excellence: Redesigning Business Processes for Web Procurement 518 Learning Track Modules: Unified Modeling Language (UML); A Primer on Business Process Design and Documentation 518 Review Summary 519 • Key Terms 520 • Review Questions 520 • Discussion Questions 521 • Video Cases 521 • Collaboration and Teamwork: Preparing Web Site Design Specifications 521 !Case Study: Are Electronic Medical Records a Cure for Health Care? 522 Chapter 14 Managing Projects 526 !Opening Case: Coca-Cola: “Opening Happiness” with a New Project Management System 527 14.1 The Importance of Project Management 529 Runaway Projects and System Failure 529 • Project Management Objectives 530 14.2 Selecting Projects 531 Management Structure for Information Systems Projects 531 • Linking Systems Projects to the Business Plan 532 • Critical Success Factors 532 • Portfolio Analysis 534 • Scoring Models 535 14.3 Establishing the Business Value of Information Systems 536 Information System Cost and Benefits 537 • Real Options Pricing Models 538 • Limitations of Financial Models 539 xiv Contents 14.4 Managing Project Risk 539 Dimensions of Project Risk 539 • Change Management and the Concept of Implementation 540 • Controlling Risk Factors 542 • Designing for the Organization 546 !Interactive Session: Organizations DTS Systems Scores with Scrum and Application Lifecycle Management 547 Project Management Software Tools 548 !Interactive Session: Management Motorola Turns to Project Portfolio Management 550 14.5 Hands-on MIS Projects 552 Management Decision Problems 552 • Improving Decision Making: Using Spreadsheet Software for Capital Budgeting for a New CAD System 552 • Improving Decision Making: Using Web Tools for Buying and Financing a Home 553 Learning Track Modules: Capital Budgeting Methods for Information System Investments; Information Technology Investments and Productivity; Enterprise Analysis (Business Systems Planning) 553 Review Summary 554 • Key Terms 554 • Review Questions 555 • Discussion Questions 555 • Video Cases 555 • Collaboration and Teamwork: Identifying Implementation Problems 555 !Case Study: JetBlue and WestJet: A Tale of Two IS Projects 556 Chapter 15 Managing Global Systems 558 (available on the Web at www.pearsonhighered.com/laudon) !Opening Case: 3M: Sticky Film and Scratchy Things That Sell Around the World 559 15.1 The Growth of International Information Systems 561 Developing an International Information Systems Architecture 562 • The Global Environment: Business Drivers and Challenges 563 • State of the Art 566 15.2 Organizing International Information Systems 567 Global Strategies and Business Organization 567 • Global Systems to Fit the Strategy 568 • Reorganizing the Business 569 15.3 Managing Global Systems 570 A Typical Scenario: Disorganization on a Global Scale 570 • Global Systems Strategy 571 • The Management Solution: Implementation 573 !Interactive Session: Management Fonterra: Managing the World’s Milk Trade 575 15.4 Technology Issues and Opportunities for Global Value Chains 576 Computing Platforms and Systems Integration 577 • Connectivity 577 • Software Localization 579 !Interactive Session: Organizations How Cell Phones Support Economic Development 580 15.5 Hands-on MIS 582 Management Decision Problems 582 • Achieving Operational Excellence: Building a Job Database and Web Page for an International Consulting Contents xv www.pearsonhighered.com/laudon Firm 583 • Improving Decision Making: Conducting International Marketing and Pricing Research 583 Review Summary 584 • Key Terms 584 • Review Questions 585 • Discussion Questions 585 • Video Cases 585 • Collaboration and Teamwork: Identifying Technologies for Global Business Strategies 585 !Case Study: WR Grace Consolidates Its General Ledger System 586 References R 1 Glossary G 1 Photo and Screen Shot Credits P 1 Indexes I 1 xvi Contents !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*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 The New Yankee Stadium Looks to the Future MIS in Your Pocket UPS Competes Globally with Information Technology What’s the Buzz on Smart Grids? Chapter 2: Global E-Business and Collaboration America’s Cup 2010: USA Wins with Information Technology Domino’s Sizzles with Pizza Tracker Virtual Meetings: Smart Management Collaboration and Innovation at Procter & Gamble Chapter 3: Information Systems, Organizations, and Strategy Verizon or AT&T—Which Company Has the Best Digital Strategy? How Much Do Credit Card Companies Know About You? Is the iPad a Disruptive Technology? Will TV Succumb to the Internet? Chapter 4: Ethical and Social Issues in Information Systems Behavioral Targeting And Your Privacy: You’re the Target The Perils of Texting Too Much Technology When Radiation Therapy Kills Chapter 5: IT Infrastructure and Emerging Technologies BART Speeds Up with a New IT Infrastructure New to the Touch Is Green Computing Good for Business? Salesforce.com: Cloud Services Go Mainstream Chapter 6: Foundations of Business Intelligence: Databases and Information Management RR Donnelley Tries to Master Its Data What Can Businesses Learn from Text Mining? Credit Bureau Errors—Big People Problems The Terror Watch List Database’s Troubles Continue Chapter 7: Telecommunications, the Internet and Wireless Technology Hyundai Heavy Industries Creates a Wireless Shipyard The Battle Over Net Neutrality Monitoring Employees on Networks: Unethical or Good Business? Google, Apple, and Microsoft Struggle for Your Internet Experience Chapter 8: Securing Information Systems You’re On Facebook? Watch Out! When Antivirus Software Cripples Your Computers How Secure Is the Cloud? Are We Ready for Cyberwarfare? Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications Cannondale Learns to Manage a Global Supply Chain Southwest Airlines Takes Off with Better Supply Chain Management Enterprise Applications Move to the Cloud Border States Industries Fuels Rapid Growth with ERP Chapter 10: E-Commerce: Digital Markets, Digital Goods 4Food: Burgers Go Social Twitter Searches for a Business Model Facebook: Managing Your Privacy for Their Profit Amazon vs. Walmart: Which Giant Will Dominate E-commerce? Chapter 11: Managing Knowledge Canadian Tire Keeps the Wheels Rolling With Knowledge Management Systems Augmented Reality: Reality Gets Better The Flash Crash: Machines Gone Wild? San Francisco Public Utilities Commission Preserves Expertise with Better Knowledge Management Chapter 12: Enhancing Decision Making What to Sell? What Price to Charge? Ask the Data Data-Driven Schools Piloting Valero with Real-time Management Does CompStat Reduce Crime? Chapter 13: Building Information Systems CIMB Group Redesigns Its Account Opening Process Can Business Process Management Make a Difference? Zimbra Zooms Ahead with OneView Are Electronic Medical Records a Cure for Health Care? Chapter 14: Managing Projects Coca-Cola: “Opening Happiness” with a New Project Management System DTS Systems Scores with Scrum and Application Lifecycle Management Motorola Turns to Project Portfolio Management JetBlue and WestJet: A Tale of Two IS Projects Chapter 15: Managing Global Systems 3M: Sticky Film and Scratchy Things That Sell Around the World Fonterra: Managing the World’s Milk Trade How Cell Phones Support Economic Development WR Grace Consolidates Its General Ledger System !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% Preface We wrote this book for business school students who want an in-depth look at how today's business firms use information technologies and systems to achieve corporate objectives. Information systems are one of the major tools available to business managers for achieving operational excellence, developing new products and services, improving decision making, and achieving compet- itive advantage. Students will find here the most up-to-date and comprehensive overview of information systems used by business firms today. When interviewing potential employees, business firms often look for new hires who know how to use information systems and technologies for achieving bottom-line business results. Regardless of whether a student is an accounting, finance, management, operations management, marketing, or information sys- tems major, the knowledge and information found in this book will be valuable throughout a business career. xxi WHAT’S NEW IN THIS EDITION CURRENCY The 12th edition features all new opening, closing, and Interactive Session cases. The text, figures, tables, and cases have been updated through November 2010 with the latest sources from industry and MIS research. NEW FEATURES • Thirty video case studies (2 per chapter) and 15 instructional videos are available online. • Additional discussion questions are provided in each chapter. • Management checklists are found throughout the book; they are designed to help future managers make better decisions. NEW TOPICS • Expanded coverage of business intelligence and business analytics • Collaboration systems and tools • Cloud computing • Cloud-based software services and tools • Windows 7 and mobile operating systems • Emerging mobile digital platform • Office 2010 and Google Apps • Green computing • 4G networks • Network neutrality • Identity management xxii Preface WHAT’S NEW IN MIS Plenty. A continuing stream of information technology innovations is trans- forming the traditional business world. What makes the MIS field the most exciting area of study in schools of business is this continuous change in tech- nology, management, and business processes. (Chapter 1 describes these changes in more detail.) Examples of transforming technologies include the emergence of cloud com- puting, the growth of a mobile digital business platform based on smartphones, netbook computers, and, not least, the use of social networks by managers to achieve business objectives. Most of these changes have occurred in the last few years. These innovations enable 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 busi- nesses, even entire industries, are being destroyed while new businesses are springing up. For instance, the emergence of online music stores—driven by millions of consumers who prefer iPods and MP3 players—has forever changed the older business model of distributing music on physical devices, such as records and CDs, and then selling them in retail stores. Say goodbye to your local music store! Streaming Hollywood movies from Netflix is transforming the old model of distributing films through theaters and then through DVD rentals at physical stores. Say goodbye to Blockbuster! The growth of cloud computing, and huge data centers, along with high-speed broadband connections to the home sup- port these business model changes. E-commerce is back, generating over $255 billion in revenue in 2010 and esti- mated to grow to over $354 billion by 2014. Amazon's revenue grew 39 percent in the 12-month period ending June 30, 2010, despite the recession, while offline retail grew by 5 percent. E-commerce is changing how firms design, pro- duce, and deliver their products 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 net- working sites such as YouTube, Twitter, and Second Life 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 U.S., cropping up alongside is a whole new value stream based on selling services, not goods. Information systems and technologies are the foun- dation of this new services-based e-commerce. Likewise, the management of business firms has changed: With new mobile smartphones, high-speed Wi-Fi networks, and wireless laptop computers, • Augmented reality • Search engine optimization (SEO) • Freemium pricing models in e-commerce • Crowdsourcing and the wisdom of crowds • E-commerce revenue models • Building an e-commerce Web site • Business process management • Security issues for cloud and mobile platforms Preface xxiii remote salespeople on the road are only seconds away from their managers' questions and oversight. Managers on the move are in direct, continuous con- tact 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 important infor- mation they need for accurate and timely decisions. In addition to their public uses on the Web, wikis and blogs are becoming important corporate tools for communication, collaboration, and information sharing. THE 12TH EDITION: THE COMPREHENSIVE SOLUTION FOR THE MIS CURRICULUM Since its inception, this text has helped to define the MIS course around the globe. This edition continues to be authoritative, but is also more customizable, flexible, and geared to meeting the needs of different colleges, universities, and individual instructors. This book is now part of a complete learning package that includes the core text and an extensive offering of supplemental materials on the Web. The core text consists of 15 chapters with hands-on projects covering essen- tial topics in MIS. An important part of the core text is the Video Case Study and Instructional Video package: 30 video case studies (2 video cases per chapter) plus 15 instructional videos that illustrate business uses of information systems, explain new technologies, and explore concepts. Video cases are keyed to the topics of each chapter. In addition, for students and instructors who want to go deeper into selected topics, there are over 40 online Learning Tracks that cover a variety of MIS top- ics in greater depth. myMISlab provides more in-depth coverage of chapter topics, career resources, additional case studies, supplementary chapter material, and data files for hands-on projects. 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. A diagram accompanying each chapter-opening case graphically illustrates how management, organi- zation, and technology elements work together to create an informa- tion system solution to the business challenges discussed in the case. xxiv Preface C h a p t e r O r g a n i z a t i o n Each chapter contains the following elements: • 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, organi- zation, and technology model used throughout the text • A series of learning objectives • Two Interactive Sessions with case study questions and MIS in Action projects • A Hands-on MIS Projects section featuring two management decision prob- lems, a hands-on application software project, and a project to develop Internet skills • A Learning Tracks section identifying supplementary material on myMISlab • A Review Summary section keyed to the 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 pointer to downloadable video cases • A Collaboration and Teamwork project to develop teamwork and presenta- tion skills, with options for using open source collaboration tools • A chapter-ending case study for students to apply chapter concepts KEY FEATURES We have enhanced the text to make it more interactive, leading-edge, and appealing to both students and instructors. The features and learning tools are described in the following sections. B u s i n e s s - D r i v e n w i t h B u s i n e s s C a s e s a n d E x a m p l e s 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 only current (2010) 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 students, such as Google, Facebook, the New York Yankees, Procter & Gamble, and Walmart. I n t e r a c t i v i t y There's no better way to learn about MIS than by doing MIS. We provide differ- ent kinds of hands-on projects where students can work with real-world busi- ness scenarios and data, and learn first hand what MIS is all about. These pro- jects heighten student involvement in this exciting subject. • New Online Video Case Package. Students' can watch short videos online, either in-class or at home or work, and then apply the concepts of the book to the analysis of the video. Every chapter contains at least two business video cases (30 videos in all) that explain how business firms and managers are using information systems, describe new management practices, and Preface xxv explore concepts discussed in the chapter. Each video case consists of a video about a real-world company, a background text case, and case study ques- tions. These video cases enhance students' understanding of MIS topics and the relevance of MIS to the business world. In addition, there are 15 instruc- tional videos that describe developments and concepts in MIS keyed to respective chapters. • Management Decision Problems. Each chapter contains two management decision problems that teach students how to apply chapter concepts to real- world business scenarios requiring analysis and decision making. • Collaboration and Teamwork Projects. Each chapter features a collabora- tive project that encourages students working in teams to use Google sites, Google Docs, and other open-source collaboration tools. The first team pro- ject in Chapter 1 asks students to build a collaborative Google site. • Hands-on MIS Projects. Every chapter concludes with a Hands-on MIS Projects section containing three types of projects: two management 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 running case in myMISlab provides additional hands-on projects for each chapter. Two real-world business sce- narios per chapter provide opportunities for students to apply chapter concepts and practice management decision making. Students practice using soft- ware in real-world settings for achieving operational excel- lence and enhancing decision making. xxvi Preface Each chapter contains two Interactive Sessions focused on management, organiza- tions, or technology using real- world companies to illustrate chapter concepts and issues. Each chapter features a pro- ject to develop Internet skills for accessing information, conducting research, and per- forming online calculations and analysis. • 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 con- cludes with two types of activities: case study questions and MIS in Action. The case study questions provide topics for class discussion, Internet discus- sion, or written assignments. MIS in Action features hands-on Web activities for exploring issues discussed in the case more deeply. Preface xxvii A s s e s s m e n t a n d A A C S B A s s e s s m e n t G u i d e l i n e s The Association to Advance Collegiate Schools of Business (AACSB) is a not-for- profit corporation of educational institutions, corporations, and other organiza- tions that seeks to improve business education primarily by accrediting univer- sity business programs. As a part of its accreditation activities, the AACSB has developed an Assurance of Learning program designed to ensure that schools teach students what the schools promise. Schools are required to state a clear mission, develop a coherent business program, identify student learning objec- tives, and then prove that students achieve the objectives. We have attempted in this book to support AACSB efforts to encourage assessment-based education. The front end papers of this edition identify stu- dent learning objectives and anticipated outcomes for our Hands-on MIS pro- jects. In the Instructor Resource Center and myMISlab is a more inclusive and detailed assessment matrix that identifies the learning objectives of each chap- ter and points to all the available assessment tools that ensure students achieve the learning objectives. Because each school is different and may have different missions and learning objectives, no single document can satisfy all situations. Therefore, the authors will provide custom advice to instructors on how to use this text in their respective colleges. Instructors should e-mail the authors or contact their local Pearson Prentice Hall representative for contact information. For more information on the AACSB Assurance of Learning program and how this text supports assessment-based learning, visit the Instructor Resource Center and myMISlab. C u s t o m i z a t i o n a n d F l e x i b i l i t y : N e w L e a r n i n g Tr a c k M o d u l e s Our Learning Tracks feature gives instructors the flexibility to provide in-depth coverage of the topics they choose. There are over 40 Learning Tracks available to instructors and students. A Learning Tracks section at the end of each chap- ter directs students to short essays or additional chapters in myMISlab. This supplementary content takes students deeper into MIS topics, concepts, and debates; reviews basic technology concepts in hardware, software, database design, telecommunications, and other areas; and provides additional hands-on software instruction. The 12th edition includes new Learning Tracks on cloud computing, managing knowledge and collaboration, creating a pivot table with Microsoft Excel PowerPivot, the mobile digital platform, and business process management. Case study questions and MIS in Action projects encourage students to learn more about the companies and issues dis- cussed in the case studies. xxviii Preface AUTHOR-CERTIFIED TEST BANK AND SUPPLEMENTS • Author-Certified Test Bank. The authors have worked closely with skilled test item writers to ensure that higher level cognitive skills are tested. The test bank includes multiple-choice questions on content, but also includes many questions that require analysis, synthesis, and evaluation skills. • New Annotated Interactive PowerPoint Lecture Slides. The authors have prepared a comprehensive collection of 500 PowerPoint slides to be used in lectures. Ken Laudon uses many of these slides in his MIS classes and execu- tive education presentations. Each of the slides is annotated with teaching suggestions for asking students questions, developing in-class lists that illus- trate 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. 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. MYMISLAB MyMISlab is a Web-based assessment and tutorial tool that provides practice and testing while personalizing course content and providing student and class assessment and reporting. Your course is not the same as the course taught down the hall. Now, all the resources that instructors and students need for course success are in one place—flexible and easily organized and adapted for an individual course experience. Visit www.mymislab.com to see how you can teach, learn, and experience MIS. CAREER RESOURCES MyMISlab also provides extensive 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 acquired from using the text. Students can use the portfolio in a resume or job application; instructors can use it as a learning assessment tool. INSTRUCTIONAL SUPPORT MATERIALS I n s t r u c t o r R e s o u r c e C e n t e r Most of the support materials described in the following sections are conve- niently available for adopters on the online Instructor Resource Center (IRC). The IRC includes the Image Library (a very helpful lecture tool), Instructor's Manual, Lecture Notes, Test Item File and TestGen, and PowerPoint slides. I m a g e L i b r a r y The Image Library is an impressive resource to help instructors create vibrant lecture presentations. Almost every figure and photo in the text is provided and www.mymislab.com Preface xxix organized by chapter for convenience. These images and lecture notes can be imported easily into PowerPoint to create new presentations or to add to exist- ing ones. I n s t r u c t o r ’ s M a n u a l The Instructor's Manual features not only answers to review, discussion, case study, and group project questions, but also in-depth lecture outlines, teaching objectives, key terms, teaching suggestions, and Internet resources. Te s t I t e m F i l e The Test Item File is a comprehensive collection of true-false, multiple-choice, fill-in-the-blank, and essay questions. The questions are rated by difficulty level and the answers are referenced by section. The Test Item File also contains questions tagged to the AACSB learning standards. An electronic version of the Test Item File is available in TestGen, and TestGen conversions are available for BlackBoard or WebCT course management systems. All TestGen files are avail- able for download at the IRC. A n n o t a t e d P o w e r P o i n t S l i d e s Electronic color slides created by the authors are available in PowerPoint. The slides illuminate and build on key concepts in the text. V i d e o C a s e s a n d I n s t r u c t i o n a l V i d e o s Instructors can download step-by-step instructions for accessing the video cases from the Instructor Resources page at www.pearsonhighered.com/laudon. The following page contains a list of video cases and instructional videos. www.pearsonhighered.com/laudon xxx Preface V i d e o C a s e s a n d I n s t r u c t i o n a l V i d e o s Chapter Video Chapter 1: Information Systems Case 1: UPS Global Operations with the DIAD IV In Global Business Today Case 2: IBM, Cisco, Google: Global Warming by Computer Chapter 2: Global E-business Case 1: How FedEx Works: Enterprise Systems and Collaboration Case 2: Oracle's Austin Data Center Instructional Video 1: FedEx Improves Customer Experience with Integrated Mapping, Location Data Chapter 3: Information Systems, Case 1: National Basketball Association: Competing on Global Delivery with Akamai OS Streaming Organizations, and Strategy Case 2: Customer Relationship Management for San Francisco's City Government Chapter 4: Ethical and Social Issues Case 1: Net Neutrality: Neutral Networks Work in Information Systems Case 2: Data Mining for Terrorists and Innocents Instructional Video 1: Big Brother Is Copying Everything on the Internet Instructional Video 2: Delete: The Virtue of Forgetting in a Digital Age Chapter 5: IT Infrastructure: Case 1: Hudson's Bay Company and IBM: Virtual Blade Platform and Emerging Technologies Case 2: Salesforce.com: SFA on the iPhone and iPod Touch Instructional Video 1: Google and IBM Produce Cloud Computing Instructional Video 2: IBM Blue Cloud Is Ready-to-Use Computing Instructional Video 3: What the Hell Is Cloud Computing? Instructional Video 4: What Is Ajax and How Does It Work? Instructional Video 5: Yahoo's FireEagle Geolocation Service Chapter 6: Foundations of Business Case 1: Maruti Suzuki Business Intelligence and Enterprise Databases Intelligence: Databases and Case 2: Data Warehousing at REI: Understanding the Customer Information Management Chapter 7: Telecommunications, Case 1: Cisco Telepresence: Meeting Without Traveling the Internet, and Wireless Technology Case 2: Unified Communications Systems with Virtual Collaboration: IBM and Forterra Instructional Video 1: AT&T Launches Managed Cisco Telepresence Solution Instructional Video 2: CNN Telepresence Chapter 8: Securing Information Case 1: IBM Zone Trusted Information Channel (ZTIC) Systems Case 2: Open ID and Web Security Instructional Video 1: The Quest for Identity 2.0 Instructional Video 2: Identity 2.0 Chapter 9: Achieving Operational Case 1: Sinosteel Strengthens Business Management with ERP Applications Excellence and Customer Intimacy: Case 2: Ingram Micro and H&R Block Get Close to Their Customers Enterprise Applications Instructional Video 1: Zara's: Wearing Today's Fashions with Supply Chain Management Chapter 10: E-commerce: Digital Case 1: M-commerce: The Past, Present, and Future Markets, Digital Goods Case 2: Ford AutoXchange B2B Marketplace Chapter 11: Managing Knowledge Case 1: L'Oréal: Knowledge Management Using Microsoft SharePoint Case 2: IdeaScale Crowdsourcing: Where Ideas Come to Life Chapter 12: Enhancing Decision Case 1: Antivia: Community-based Collaborative Business Intelligence Making Case 2: IBM and Cognos: Business Intelligence and Analytics for Improved Decision Making Chapter 13: Building Information Case 1: IBM: Business Process Management in a Service-Oriented Architecture Systems Case 2: Rapid Application Development With Appcelerator Instructional Video 1: Salesforce and Google: Developing Sales Support Systems with Online Apps Chapter 14: Managing Projects Case 1: Mastering the Hype Cycle: How to Adopt the Right Innovation at the Right Time Case 2: NASA: Project Management Challenges Instructional Video 1: Software Project Management in 15 Minutes Chapter 15: Managing Global Systems Case 1: Daum Runs Oracle Apps on Linux Case 2: Monsanto Uses Cisco and Microsoft to Manage Globally Preface xxxi ACKNOWLEDGEMENTS 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 Bob Horan for guiding the devel- opment of this edition and Kelly Loftus for her role in managing the project. We also praise Karalyn Holland for overseeing production for this project. Our special thanks go to our supplement authors for their work. We are indebted to William Anderson for his assistance in the writing and production of the text and to Megan Miller for her help during production. We thank Diana R. Craig for her assistance with database and software topics. Special thanks to colleagues at the Stern School of Business at New York University; to Professor Edward Stohr of Stevens Institute of Technology; to Professors Al Croker and Michael Palley of Baruch College and New York University; to Professor Lawrence Andrew of Western Illinois University; 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; to Professor Donald Marchand of the International Institute for Management Development; and to Professor Daniel Botha of Stellenbosch University who provided additional 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's long dis- cussion of information systems and organizations. And a special remembrance and dedication to Professor Rob Kling, University of Indiana, for being my friend and colleague over so many years. We also want to especially thank all our reviewers whose suggestions helped improve our texts. Reviewers for this edition include the following: Edward J. Cherian, George Washington University Sherry L. Fowler, North Carolina State University Richard Grenci, John Carroll University Dorest Harvey, University of Nebraska Omaha Shohreh Hashemi, University of Houston—Downtown Duke Hutchings, Elon University Ingyu Lee, Troy University Jeffrey Livermore, Walsh College Sue McDaniel, Bellevue University Michelle Parker, Indiana University—Purdue University Fort Wayne Peter A. Rosen, University of Evansville Donna M. Schaeffer, Marymount University Werner Schenk, University of Rochester Jon C. Tomlinson, University of Northwestern Ohio Marie A. Wright, Western Connecticut State University James H. Yu, Santa Clara University Fan Zhao, Florida Gulf Coast University K.C.L. J.P.L. !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% P A R T O N E Organizations, Management, and the Networked Enterprise 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 Part One introduces the major themes of this book, raising a series of important ques- tions: 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 systems for collaboration and teamwork so important? How can information systems help businesses become more competitive? What broader ethi- cal and social issues are raised by widespread use of information systems? LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. How are information systems trans- forming business and what is their relationship to globalization? 2. Why are information systems so essential for running and managing a business today? 3. What exactly is an information system? How does it work? What are its management, organization, and technology components? 4. What are complementary assets? Why are complementary assets essential for ensuring that informa- tion systems provide genuine value for an organization? 5. What academic disciplines are used to study information systems? How does each contribute to an under- standing of information systems? What is a sociotechnical systems perspective? CHAPTER OUTLINE 1.1 THE ROLE OF INFORMATION SYSTEMS IN BUSINESS TODAY How Information Systems Are Transforming Business What’s New in Management Information Systems? Globalization Challenges and Opportunities: A Flattened World The Emerging Digital Firm Strategic Business Objectives of Information Systems 1.2 PERSPECTIVES ON INFORMATION SYSTEMS What Is an Information System? Dimensions of Information Systems It Isn’t Just Technology: A Business Perspective on Information Systems Complementary Assets: Organizational Capital and the Right Business Model 1.3 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS Technical Approach Behavioral Approach Approach of This Text: Sociotechnical Systems 1.4 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using Databases to Analyze Sales Trends Improving Decision Making: Using the Internet to Locate Jobs Requiring Information Systems Knowledge LEARNING TRACKS MODULES How Much Does IT Matter? Information Systems and Your Career The Emerging Mobile Digital Platform Chapter 1 Information Systems in Global Business Today Interactive Sessions: MIS in Your Pocket UPS Competes Globally with Information Technology 3 lthough baseball is a sport, it’s also big business, requiring revenue from tickets to games, television broadcasts, and other sources to pay for teams. Salaries for top play- ers have ballooned, as have ticket prices. Many fans now watch games on television rather than attending them in person or choose other forms of entertainment, such as electronic games. One way to keep stadiums full of fans, and to keep fans at home happy as well, is to enrich the fan experience by offering more video and services based on technology. When the New York Yankees built the new Yankee Stadium, they did just that. The new Yankee Stadium, which opened on April 2, 2009, isn’t just another ballpark: It’s the sta- dium of the future. It is the most wired, connected, and video-enabled stadium in all of baseball. Although the new stadium is similar in design to the original Yankee Stadium, built in 1923, the interior has more space and amenities, including more intensive use of video and computer tech- nology. Baseball fans love video. According to Ron Ricci, co-chairman of Cisco Systems’ sports and entertainment division, “It’s what fans want to see, to see more angles and do it on their terms.” Cisco Systems supplied the computer and networking technology for the new stadium. Throughout the stadium, including the Great Hall, the Yankees Museum, and in-stadium restaurants and concession areas, 1,200 flat-panel high-definition HDTV monitors display live game coverage, up-to-date sports scores, archival and highlight video, promotional messages, news, weather, and traffic updates. There is also a huge monitor in center field that is 101 feet wide and 59 feet high. At the conclusion of games, the monitors provide up-to-the moment traffic information and directions to the nearest stadium exits. The monitors are designed to surround fans visually from the moment they enter the stadium, especially when they stray from a direct view of the ball field. The pervasiveness of this technol- ogy ensures that while fans are buying a hamburger or a soda, they will never miss a play. The Yankees team controls all the monitors centrally and is able to offer different content on each one. Monitors are located at concession stands, around restaurants and bars, in restrooms, and inside 59 luxury and party suites. If a Yankee player wants to review a game to see how he played, monitors in the team’s video room will display what he did from any angle. Each Yankee player also has a computer at his locker. The luxury suites have special touch-screen phones for well-heeled fans to use when ordering food and merchandise. At the stadium business center, Cisco interactive videoconferencing technol- ogy will link to a library in the Bronx and to other New York City locations, such as hospitals. Players THE NEW YANKEE STADIUM LOOKS TO THE FUTURE A and executives will be able to videoconference and talk to fans before or after the games. Eventually data and video from the stadium will be delivered to fans’ home televisions and mobile devices. Inside the sta- dium, fans in each seat will be able to use their mobile phones to order from the concessions or view instant replays. If they have an iPhone, an application called Venuing lets them communicate with other fans at the game, find nearby facilities, obtain reviews of concessions, play pub-style trivia games, and check for news updates. 4 Part One Organizations, Management, and the Networked Enterprise The Yankees also have their own Web site, Yankees.com, where fans can watch in-market Yankees games live online, check game scores, find out more about their favorite players, purchase tickets to games, and shop for caps, baseball cards and memorabilia. The site also features fantasy baseball games, where fans compete with each other by managing “fantasy teams” based on real players’ statistics. Sources: www.mlb.com, accessed May 5, 2010; Rena Bhattacharyya, Courtney Munroe, and Melanie Posey, “Yankee Stadium Implements State-of-the-Art Technology from AT&T,” www.forbescustom.com, April 13, 2010; “Venuing: An iPhone App Tailor-Made for Yankee Stadium Insiders,” NYY Stadium Insider, March 30, 2010; Dean Meminger, “Yankees’ New Stadium Is More than a Ballpark,” NY1.com, April 2, 2009. The challenges facing the New York Yankees and other baseball teams showwhy information systems are so essential today. Major league baseball is a business as well as a sport, and teams such as the Yankees need to take in revenue from games in order to stay in business. Ticket prices have risen, stadium atten- dance is dwindling for some teams, and the sport must also compete with other forms of entertainment, including electronic games and the Internet. The chapter-opening diagram calls attention to important points raised by this case and this chapter. To increase stadium attendance and revenue, the New York Yankees chose to modernize Yankee Stadium and rely on information technology to provide new interactive services to fans inside and outside the stadium. These services include high-density television monitors displaying live game coverage; up-to-date sports scores, video, promotional messages, news, weather, and traffic information; touch screens for ordering food and merchandise; interactive videoconferencing technology for connecting to fans and the community; mobile social networking applications; and, eventually, data and video broadcast to fans’ home television sets and mobile handhelds. The Yankees’ Web site provides a new channel for interacting with fans, selling tickets to games, and selling other team-related products. It is also important to note that these technologies changed the way the Yankees run their business. Yankee Stadium’s systems for delivering game coverage, information, and interactive services changed the flow of work for ticketing, seating, crowd management, and ordering food and other items from concessions. These changes had to be carefully planned to make sure they enhanced service, efficiency, and profitability. www.mlb.com www.forbescustom.com Chapter 1 Information Systems in Global Business Today 5 1.1 THE ROLE OF INFORMATION SYSTEMS IN BUSINESS TODAY t’s not business as usual in America anymore, or the rest of the global economy. In 2010, American businesses will spend over $562 billion on information systems hardware, software, and telecommunications equipment. In addition, they will spend another $800 billion on business and management consulting and services—much of which involves redesigning firms’ business operations to take advantage of these new technologies. Figure 1-1 shows that between 1980 and 2009, private business investment in information technology consisting of hardware, software, and communications equipment grew from 32 percent to 52 percent of all invested capital. 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 helping you make wise decisions about information technology and informa- tion systems. HOW INFORMATION SYSTEMS ARE TRANSFORMING BUSINESS You can see the results of this massive spending around you every day by observing how people conduct business. More wireless cell phone accounts were opened in 2009 than telephone land lines installed. Cell phones, BlackBerrys, iPhones, e-mail, and online conferencing over the Internet have all become essential tools of business. Eighty-nine million people in the United States access the Internet using mobile devices in 2010, nearly half the total I FIGURE 1-1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT Information technology capital investment, defined as hardware, software, and communications equipment, grew from 32 percent to 52 percent of all invested capital between 1980 and 2009. Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, 2009. 6 Part One Organizations, Management, and the Networked Enterprise Internet user population (eMarketer, 2010). There are 285 million cell phone subscribers in the United States, and nearly 5 billion worldwide (Dataxis, 2010). By June 2010, more than 99 million businesses worldwide had dot-com Internet sites registered (Verisign, 2010). Today, 162 million Americans shop online, and 133 million have purchased online. Every day about 41 million Americans go online to research a product or service. In 2009, FedEx moved over 3.4 million packages daily in the United States, mostly overnight, and the United Parcel Service (UPS) moved over 15 million packages daily worldwide. Businesses sought to sense and respond to rapidly changing customer demand, reduce inventories to the lowest possible levels, and achieve higher levels of operational efficiency. Supply chains have become more fast-paced, with companies of all sizes depending on just-in-time inven- tory to reduce their overhead costs and get to market faster. As newspaper readership continues to decline, more than 78 million people receive their news online. About 39 million people watch a video online every- day, 66 million read a blog, and 16 million post to blogs, creating an explosion of new writers and new forms of customer feedback that did not exist five years ago (Pew, 2010). Social networking site Facebook attracted 134 million monthly visitors in 2010 in the United States, and over 500 million worldwide. Businesses are starting to use social networking tools to connect their employees, customers, and managers worldwide. Many Fortune 500 companies now have Facebook pages. Despite the recession, e-commerce and Internet advertising continue to expand. Google’s online ad revenues surpassed $25 billion in 2009, and Internet advertising continues to grow at more than 10 percent a year, reaching more than $25 billion in revenues in 2010. 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 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? Lots! What makes management information systems the most exciting topic in business is the continual change in technology, management use of the tech- nology, and the impact on business success. New businesses and industries appear, old ones decline, and successful firms are those who learn how to use the new technologies. Table 1-1 summarizes the major new themes in business uses of information systems. These themes will appear throughout the book in all the chapters, so it might be a good idea to take some time now and discuss these with your professor and other students. In the technology area there are three interrelated changes: (1) the emerg- ing mobile digital platform, (2) the growth of online software as a service, and (3) the growth in “cloud computing” where more and more business software runs over the Internet. IPhones, iPads, BlackBerrys, and Web-surfing netbooks are not just gadgets or entertainment outlets. They represent new emerging computing platforms based on an array of new hardware and software technologies. More and more business computing is moving from PCs and desktop machines to these mobile devices. Managers are increasingly using these devices to coordinate Chapter 1 Information Systems in Global Business Today 7 TABLE 1-1 WHAT’S NEW IN MIS CHANGE BUSINESS IMPACT TECHNOLOGY Cloud computing platform emerges as a major business A flexible collection of computers on the Internet begins to perform area of innovation tasks traditionally performed on corporate computers. Growth in software as a service (SaaS) Major business applications are now delivered online as an Internet service rather than as boxed software or custom systems. A mobile digital platform emerges to compete with the PC as a Apple opens its iPhone software to developers, and then opens an business system Applications Store on iTunes where business users can download hundreds of applications to support collaboration, location-based services, and communication with colleagues. Small portable lightweight, low-cost, net-centric subnotebook computers are a major segment of the laptop marketplace. The iPad is the first successful tablet- sized computing device with tools for both entertainment and business productivity. MANAGEMENT Managers adopt online collaboration and social networking software Google Apps, Google Sites, Microsoft’s Windows SharePoint Services, to improve coordination, collaboration, and knowledge sharing and IBM’s Lotus Connections are used by over 100 million business professionals worldwide to support blogs, project management, online meetings, personal profiles, social bookmarks, and online communities. Business intelligence applications accelerate More powerful data analytics and interactive dashboards provide real- time performance information to managers to enhance decision making. Virtual meetings proliferate Managers adopt telepresence video conferencing and Web conferencing technologies to reduce travel time, and cost, while improving collaboration and decision making. ORGANIZATIONS Web 2.0 applications are widely adopted by firms Web-based services enable employees to interact as online communities using blogs, wikis, e-mail, and instant messaging services. Facebook and MySpace create new opportunities for business to collaborate with customers and vendors. Telework gains momentum in the workplace The Internet, netbooks, iPads, iPhones, and BlackBerrys make it possible for growing numbers of people to work away from the traditional office; 55 percent of U.S. businesses have some form of remote work program. Co-creation of business value Sources of business value shift from products to solutions and experiences and from internal sources to networks of suppliers and collaboration with customers. Supply chains and product development are more global and collaborative than in the past; customers help firms define new products and services. work, communicate with employees, and provide information for decision making. We call these developments the “emerging mobile digital platform.” Managers routinely use so-called “Web 2.0” technologies like social networking, collaboration tools, and wikis in order to make better, faster decisions. As management behavior changes, how work gets organized, coordinated, and measured also changes. By connecting employees working on teams and projects, the social network is where works gets done, where plans are executed, and where managers manage. Collaboration spaces are 8 Part One Organizations, Management, and the Networked Enterprise where employees meet one another—even when they are separated by continents and time zones. The strength of cloud computing and the growth of the mobile digital platform allow organizations to rely more on telework, remote work, and dis- tributed decision making. This same platform means firms can outsource more work, and rely on markets (rather than employees) to build value. It also means that firms can collaborate with suppliers and customers to create new products, or make existing products more efficiently. You can see some of these trends at work in the Interactive Session on Management. 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. As you read this case, note how the emerging mobile platform greatly enhances the accuracy, speed, and richness of decision making. 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 world-wide phenomenon energized by expansion of trade among nations. In 2005, journalist Thomas Friedman wrote an influential book declaring the world was now “flat,” by which he meant that the Internet and global communications had greatly reduced the economic and cultural advantages of developed countries. Friedman argued that the U.S. 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 growing percentage of the economy of the United States and other advanced industrial countries in Europe and Asia depends on imports and exports. In 2010, more than 33 percent of the 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 half their revenues from foreign operations. For instance, more than half of Intel’s revenues in 2010 came from overseas sales of its microprocessors. Eighty percent of the toys sold in the U.S. are manufactured in China, while about 90 percent of the PCs manufactured in China use American-made Intel or Advanced Micro Design (AMD) chips. 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 several million manufacturing jobs to offshore, low-wage producers. But manufacturing is now a very small part of U.S. employment (less than 12 percent and declining). In a normal year, about 300,000 service jobs move offshore to lower wage countries, many of them in less-skilled information system occupations, but also including “tradable service” jobs in architecture, financial services, customer call centers, consulting, engineering, and even radi- ology. Chapter 1 Information Systems in Global Business Today 9 Can you run your company out of your pocket? Perhaps not entirely, but there are many functions today that can be performed using an iPhone, BlackBerry, or other mobile handheld device. The smartphone has been called the “Swiss Army knife of the digital age.” A flick of the finger turns it into a Web browser, a telephone, a camera, a music or video player, an e-mail and messaging machine, and for some, a gateway into corporate systems. New software applications for social networking and salesforce management (CRM) make these devices even more versatile business tools. The BlackBerry has been the favored mobile handheld for business because it was optimized for e-mail and messaging, with strong security and tools for accessing internal corporate systems. Now that’s changing. Companies large and small are starting to deploy Apple’s iPhone to conduct more of their work. For some, these handhelds have become necessities. Doylestown Hospital, a community medical center near Philadelphia, has a mobile workforce of 360 independent physicians treating thousands of patients. The physicians use the iPhone 3G to stay connected around the clock to hospital staff, colleagues, and patient information. Doylestown doctors use iPhone features such as e-mail, calen- dar, and contacts from Microsoft Exchange ActiveSync. The iPhone allows them to receive time-sensitive e-mail alerts from the hospital. Voice communication is important as well, and the iPhone allows the doctors to be on call wherever they are. Doylestown Hospital customized the iPhone to provide doctors with secure mobile access from any location in the world to the hospital’s MEDITECH electronic medical records system. MEDITECH delivers information on vital signs, medications, lab results, allergies, nurses’ notes, therapy results, and even patient diets to the iPhone screen. “Every radiographic image a patient has had, every dictated report from a specialist is available on the iPhone,” notes Dr. Scott Levy, Doylestown Hospital’s vice president and chief medical officer. Doylestown doctors also use the iPhone at the patient’s bedside to access medical reference applications such as Epocrates Essentials to help them interpret lab results and obtain medication information. MIS IN YOUR POCKET Doylestown’s information systems department was able to establish the same high level of security for authenticating users of the system and tracking user activity as it maintains with all the hospital’s Web-based medical records applications. Information is stored securely on the hospital’s own server computer. D.W. Morgan, headquartered in Pleasanton, California, serves as a supply chain consultant and transportation and logistics service provider to companies such as AT&T, Apple Computer, Johnson & Johnson, Lockheed Martin, and Chevron. It has operations in more than 85 countries on four continents, moving critical inventory to factories that use a just-in-time (JIT) strategy. In JIT, retailers and manufacturers main- tain almost no excess on-hand inventory, relying upon suppliers to deliver raw materials, compo- nents, or products shortly before they are needed. In this type of production environment, it’s absolutely critical to know the exact moment when delivery trucks will arrive. In the past, it took many phone calls and a great deal of manual effort to provide customers with such precise up-to-the- minute information. The company was able to develop an application called ChainLinq Mobile for its 30 drivers that updates shipment information, collects signatures, and provides global positioning system (GPS) tracking on each box it delivers. As Morgan’s drivers make their shipments, they use ChainLinq to record pickups and status updates. When they reach their destination, they collect a signature on the iPhone screen. Data collected at each point along the way, including a date- and time-stamped GPS location pinpointed on a Google map, are uploaded to the company’s servers. The servers make the data available to cus- tomers on the company’s Web site. Morgan’s com- petitors take about 20 minutes to half a day to pro- vide proof of delivery; Morgan can do it immediately. TCHO is a start-up that uses custom-developed machinery to create unique chocolate flavors. Owner Timothy Childs developed an iPhone app that enables him to remotely log into each choco- late-making machine, control time and temperature, turn the machines on and off, and receive alerts about when to make temperature changes. The iPhone app also enables him to remotely view sev- eral video cameras that show how the TCHO I N T E R A C T I V E S E S S I O N : M A N A G E M E N T 10 Part One Organizations, Management, and the Networked Enterprise 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 businesses in this case study solved by using mobile digital devices. 3. What kinds of businesses are most likely to benefit from equipping their employees with mobile digi- tal devices such as iPhones, iPads, and BlackBerrys? 4. D.W. Morgan’s CEO 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. FlavorLab is doing. TCHO employees also use the iPhone to exchange photos, e-mail, and text mes- sages. The Apple iPad is also emerging as a business tool for Web-based note-taking, file sharing, word processing, and number-crunching. Hundreds of business productivity applications are being devel- oped, including tools for Web conferencing, word processing, spreadsheets, and electronic presenta- Explore the Web site for the Apple iPhone, the Apple iPad, the BlackBerry, and the Motorola Droid, then answer the following questions: 1. List and describe the capabilities of each of these devices and give examples of how they could be used by businesses. 2. List and describe three downloadable business applications for each device and describe their business benefits. tions. Properly configured, the iPad is able to connect to corporate networks to obtain e-mail messages, calendar events, and contacts securely over the air. Sources: “Apple iPhone in Business Profiles, www.apple.com, accessed May 10, 2010; Steve Lohr, Cisco Cheng, “The Ipad Has Business Potential,” PC World, April 26, 2010; and “Smartphone Rises Fast from Gadget to Necessity,” The New York Times, June 10, 2009. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N Whether it’s attending an online meeting, checking orders, working with files and documents, or obtaining business intelligence, Apple’s iPhone and iPad offer unlim- ited possibilities for business users. Both devices have stunning multitouch display, full Internet browsing, capa- bilities for messaging, video and audio transmission, and document management. These features make each an all-purpose platform for mobile computing. iPhone and iPad Applications Used in Business: 1. Salesforce.com 2. FedEx Mobile 3. iTimeSheet 4. QuickOffice Connect 5. Documents to Go 6. GoodReader 7. Evernote 8. WebEx www.apple.com Chapter 1 Information Systems in Global Business Today 11 On the plus side, in a normal, non-recessionary year, the U.S. economy cre- ates over 3.5 million new jobs. Employment in information systems and the other service occupations is expanding, and wages are stable. Outsourcing has actually accelerated the development of new systems in the United States and worldwide. 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. 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. You will find throughout this book examples of companies and individuals 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 international 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 Falls, South Dakota, is now instant and virtually free. Customers now can shop in a worldwide marketplace, obtaining price and quality information reliably 24 hours a day. Firms producing goods and services on a global scale achieve extraordinary cost reductions by finding low-cost suppliers and managing production facilities in other countries. Internet service firms, such as Google and eBay, are able to replicate their business models and services in multiple countries without having to redesign their expensive fixed-cost information systems infrastruc- ture. Half of the revenue of eBay (as well as General Motors) in 2011 will origi- nate outside the United States. Briefly, information systems enable globaliza- tion. THE EMERGING DIGITAL FIRM All of the changes we have just described, coupled with equally significant organizational 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 processes are accomplished through digital networks spanning the entire organization 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. Developing 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. Digital firms offer extraordinary opportunities for more flexible global organiza- tion and management. In digital firms, both time shifting and space shifting are 12 Part One Organizations, Management, and the Networked Enterprise 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 IBM, are close to becoming dig- ital 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 inte- gration with suppliers, customers, and employees. Many firms, for example, are replacing traditional face-to-face meetings with “virtual” meetings using video- conferencing and Web conferencing technology. (See Chapter 2.) STRATEGIC BUSINESS OBJECTIVES OF INFORMATION SYSTEMS What makes information systems so essential today? Why are businesses investing so much in information systems and technologies? In the United States, more than 23 million managers and 113 million 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 substantial 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 Sears and manufacturing firms such as General Motors and General Electric 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 century, infor- mation technology is a foundation for business in the twenty-first century. There is a growing interdependence between a firm’s ability to use information 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 quality 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, and business models; customer and supplier intimacy; improved decision making; competitive advantage; and survival. O p e r a t i o n a l E x c e l l e n c e 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 information systems coupled with brilliant business practices and supportive management Chapter 1 Information Systems in Global Business Today 13 to achieve world-class operational efficiency. In fiscal year 2010, Walmart achieved $408 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 purchases 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 $28 per square foot, compared to its closest competitor, Target, at $23 a square foot, with other retail firms producing less than $12 a square foot. N e w P r o d u c t s , S e r v i c e s , a n d B u s i n e s s M o d e l s 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 product 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 iPod innovations, including the iPod, the iTunes music service, the iPad, and the iPhone. C u s t o m e r a n d S u p p l i e r I n t i m a c y When a business really knows its customers, and serves them well, the customers generally respond by returning and purchasing more. This raises revenues and profits. Likewise with suppliers: the more a business engages its suppliers, 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 intimacy. These hotels use computers to keep track of guests’ preferences, such as their preferred 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. 14 Part One Organizations, Management, and the Networked Enterprise room temperature, check-in time, frequently dialed telephone numbers, and television programs., and store these data in a large data repository. Individual rooms in the hotels are networked to a central network server computer so that they can be remotely monitored or 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 supplier intimacy. Every time a dress shirt is bought at a JCPenney store in the United States, the record of the sale appears immediately on computers in Hong Kong at the TAL Apparel Ltd. supplier, a contract manufacturer that produces 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 replacement 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. I m p r o v e d D e c i s i o n M a k i n g 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 underproduction 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 telecommunication 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. C o m p e t i t i v e A d v a n t a g e 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. S u r v i v a l 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 Chapter 1 Information Systems in Global Business Today 15 networks, such as CIRRUS. Providing ATM services to retail banking customers 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 companies to retain audit working papers and records, including all e-mails, for five 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 PERSPECTIVES ON INFORMATION SYSTEMS So far we’ve used information systems and technologies informally without defining 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 sys- tems, the Microsoft Office desktop productivity suite, and the many thousands of computer programs that can be found in a typical large firm. “Information systems” are more complex and can be best be 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 supporting 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 meaningful and useful to human beings. Data, in contrast, are streams of raw facts representing events occurring in organizations or the physical environ- ment 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. Supermarket 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 organizations need to make decisions, control operations, analyze problems, and create new products or services. These activities are input, processing, and output (see Figure 1-4). Input captures or collects raw data from within the organization 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 the Yankees’ system for selling tickets through its Web site, the raw input consists of order data for tickets, such as the purchaser’s name, address, credit card number, number of tickets ordered, and the date of the game for which the ticket is being purchased. Computers store these data and process them to calculate order totals, to track ticket purchases, and to send requests for payment to credit card companies. The output consists of tickets to print out, receipts for orders, and reports on online ticket orders. The system provides meaningful information, such as the number of tickets sold for a particular game, the total number of tickets sold each year, and frequent customers. 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 information system on the other. Electronic 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. Computer 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 computers are only part of an information system. 16 Part One Organizations, Management, and the Networked Enterprise 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. 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, landscaping, 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 information a particular organization needs. To understand information systems, you must understand the problems they are designed to solve, their architectural and design elements, and the organizational processes that lead to these solutions. DIMENSIONS OF INFORMATION SYSTEMS To fully understand information systems, you must understand the broader organization, 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 Chapter 1 Information Systems in Global Business Today 17 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. 18 Part One Organizations, Management, and the Networked Enterprise as technical issues surrounding the development, use, and impact of informa- tion systems used by managers and employees in the firm. Let’s examine each of the dimensions of information systems—organizations, management, and information technology. O r g a n i z a t i o n s Information systems are an integral part of organizations. Indeed, for some companies, such as credit reporting firms, there would be no business without an information system. The key elements of an organization are its people, structure, 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 specialties. 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, professional, and technical employees, whereas the lower levels consist of operational 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 commu- nications at all levels of the firm. Production or service workers actually pro- duce 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, 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. Chapter 1 Information Systems in Global Business Today 19 finance and accounting, and human resources (see Table 1-2). Chapter 2 provides more detail on these business functions and the ways in which they are supported by information systems. An organization coordinates work through its hierarchy and through its business processes, which are logically related tasks and behaviors for accomplishing work. Developing a new product, fulfilling an order, and hiring a new employee are examples of 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 responding 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 co-workers or customers, that are not formally documented. Information systems automate many business processes. For instance, how a customer receives credit or how a customer is billed is often determined by an information system that incorporates a set of formal business processes. 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. TABLE 1-2 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 20 Part One Organizations, Management, and the Networked Enterprise 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, the reasons 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 information systems. For instance, UPS’s concern with placing service to the customer first is an aspect of its organizational culture that can be found in the company’s package tracking systems, which we describe later 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 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. M a n a g e m e n t Management’s job is to make sense out of the many situations faced by organizations, make decisions, and formulate action plans to solve organiza- tional 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 information 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 powerful 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. I n f o r m a t i o n Te c h n o l o g y 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: computers 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 informa- tion 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 organization 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 physical devices and software, links the various pieces of hardware and transfers Chapter 1 Information Systems in Global Business Today 21 data from one physical location to another. Computers and communications equipment 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 Internet is a global “network of networks” that uses universal standards (described in Chapter 7) to connect millions of different networks with more than 1.4 billion users in over 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 technology platform has internal uses, providing the connectivity to link differ- ent systems and networks within the firm. Internal corporate networks based on Internet technology are called intranets. Private intranets extended to authorized 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 firms today, using Internet technology is both a business neces- sity and a competitive advantage. The World Wide Web is a service provided by the Internet that uses universally accepted standards for storing, retrieving, formatting, and displaying 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 following Interactive Session. All of these technologies, along with the people required to run and manage them, represent resources that can be shared throughout the organi- zation and constitute the firm’s information technology (IT) infrastruc- ture. 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 infor- mation systems. Chapters 5 through 8 of this book examine each major tech- nology component of information 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 technologies used in computer-based information systems today. UPS invests heavily 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, handheld computers, the Internet, and many different pieces of software for tracking packages, calculating fees, maintaining customer accounts, and man- aging 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 specifies 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. 22 Part One Organizations, Management, and the Networked Enterprise I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y 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 100 years to become the world’s largest ground and air package delivery company. It’s a global enterprise with over 408,000 employees, 96,000 vehicles, and the world’s ninth largest airline. Today, UPS delivers more than 15 million pack- ages and documents each day in the United States and more than 200 other countries and territories. The firm has been able to maintain leadership in small-package delivery services despite stiff competi- tion from FedEx and Airborne Express by investing 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 provided by UPS or by accessing the UPS Web site. 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, Georgia, and sent to the distribution center nearest its final destination. Dispatchers at this center download the label data and use special software to create the most efficient delivery route for each driver that considers traffic, weather conditions, and the location of each stop. UPS estimates its delivery trucks save 28 million miles and burn 3 million fewer gallons of fuel each year as a result of using this technology. To further increase cost savings and safety, drivers are trained to use “340 Methods” developed by industrial engineers to optimize the performance of every task from lifting and loading boxes to selecting a package from a shelf in the truck. The first thing a UPS driver picks up each day is a handheld computer called a Delivery Information Acquisition Device (DIAD), which can access one of the wireless networks cell phones rely on. As soon as the driver logs on, his or her day’s route is down- loaded onto the handheld. The DIAD also automati- UPS COMPETES GLOBALLY WITH INFORMATION TECHNOLOGY cally 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 usually takes less than 60 seconds from the time a driver presses “complete” on a DIAD for the new information to be available on the Web. Through its automated package tracking system, UPS can monitor and even re-route packages throughout 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 central computer. Customer service representatives are able to check the status of any package from desktop computers linked to the central computers and respond immediately to inquiries from customers. UPS customers can also access this information from the company’s Web site using their own computers or mobile phones. Anyone with a package to ship can access the UPS Web site to check delivery routes, calculate shipping rates, determine time in transit, print labels, sched- ule a pickup, and track packages. The data collected at the UPS Web site are transmitted to the UPS cen- tral computer and then back to the customer after processing. UPS also provides tools that enable cus- tomers, such Cisco Systems, to embed UPS functions, such as tracking and cost calculations, into their own Web sites so that they can track shipments without visiting the UPS site. In June 2009, UPS launched a new Web-based Post-Sales Order Management System (OMS) that manages global service orders and inventory for critical parts fulfillment. The system enables high- tech electronics, aerospace, medical equipment, and other companies anywhere in the world that ship critical parts to quickly assess their critical parts inventory, determine the most optimal routing strategy to meet customer needs, place orders online, and track parts from the warehouse to the end user. An automated e-mail or fax feature keeps customers informed of each shipping milestone and can provide notification of any changes to flight schedules for commercial airlines carrying their parts. Once orders Chapter 1 Information Systems in Global Business Today 23 C A S E S T U D Y Q U E S T I O N S 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? 3. What strategic business objectives do UPS’s information systems address? 4. What would happen if UPS’s information systems were not available? are complete, companies can print documents such as labels and bills of lading in multiple languages. UPS is now leveraging its decades of expertise managing its own global delivery network to manage logistics and supply chain activities for other compa- nies. 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 brokerage, mail services, multimodal transportation, and financial services, in addition to logistics services. Servalite, an East Moline, Illinois, manufacturer of fasteners, sells 40,000 different products to hardware stores and larger home improvement stores. The company had used multiple warehouses to provide two-day delivery nationwide. UPS created a new logistics plan for the company that helped it reduce freight time in transit and consolidate inven- tory. Thanks to these improvements, Servalite has been able to keep its two-day delivery guarantee while lowering warehousing and inventory costs. Sources: Jennifer Levitz, “UPS Thinks Out of the Box on Driver Training,” The Wall Street Journal, April 6, 2010; United Parcel Service, “In a Tighter Economy, a Manufacturer Fastens Down Its Logistics,” UPS Compass, accessed May 5, 2010; Agam Shah, “UPS Invests $1 Billion in Technology to Cut Costs,” Bloomberg Businessweek, March 25, 2010; UPS, “UPS Delivers New App for Google’s Android,” April 12, 2010; Chris Murphy, “In for the Long Haul,” Information Week, January 19, 2009; United Parcel Service, “ UPS Unveils Global Technology for Critical Parts Fulfillment,” June 16, 2009; and www.ups.com, accessed May 5, 2010. Explore the UPS Web site (www.ups.com) and answer the following questions: 1. What kind of information and services does the Web site provide for individuals, small businesses, and large businesses? List these services. 2. Go to the Business Solutions portion of the UPS Web site. Browse the UPS Business Solutions by category (such as shipment delivery, returns, or international trade) and write a description of all the services UPS provides for one of these categories. Explain how a business would benefit from these services. 3. Explain how the Web site helps UPS achieve some or all of the strategic business objectives we described earlier in this chapter. What would be the impact on UPS’s business if this Web site were not available? M I S I N A C T I O N 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 Web site. UPS’s management is responsible for monitoring service levels and costs and for promoting the company’s strategy of combining low cost and superior service. Management decided to use computer systems to increase the ease of sending a package using UPS and of checking its delivery status, thereby reducing delivery costs and increasing sales revenues. www.ups.com www.ups.com 24 Part One Organizations, Management, and the Networked Enterprise The technology supporting this system consists of handheld computers, bar code scanners, wired and wireless communications networks, desktop comput- ers, 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 of pro- viding 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 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 supermarket checkout data illustrated in Figure 1-3 can increase firm profitability by helping managers make better decisions on 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 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 Using a handheld computer called a Delivery Information Acquisition Device (DIAD), UPS drivers automatically capture customers’ signatures along with pickup, delivery, and time card information. UPS information systems use these data to track packages while they are being transported. Chapter 1 Information Systems in Global Business Today 25 processes, and higher firm profitability. Although there are other reasons why systems are built, their primary purpose is to contribute to corporate value. 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. 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 the Yankees’ systems solved the business problem presented by declin- ing interest in baseball games and competition from television and other media. These systems provide a solution that takes advantage of new inter- active digital technology and opportunities created by the Internet. They opened up new channels for selling tickets and interacting with customers that improved business performance. The diagram also illustrates how 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. 26 Part One Organizations, Management, and the Networked Enterprise 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: Based on Brynjolfsson and Hitt (2000). management, technology, and organizational elements work together to cre- ate the systems. 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 information systems than others. Studies of returns from information technology investments 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 technology investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior patterns 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. Some firms fail to adopt the right business model that suits the new technol- ogy, or seek to preserve an old business model that is doomed by new technology. For instance, recording label companies refused to change their old business model, which was based on physical music stores for distribution rather than adopt a new online distribution model. As a result, online legal Chapter 1 Information Systems in Global Business Today 27 music sales are dominated not by record companies but by a technology company called Apple Computer. Complementary assets are those assets required to derive value from a primary investment (Teece, 1988). For instance, to realize value from automo- biles requires substantial complementary investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory structure to set standards and control drivers. Research on business information technology investment 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 complementary investments receive less or no returns on their information technology investments (Brynjolfsson, 2003; Brynjolfsson and Hitt, 2000; Davern and Kauffman, 2000; Laudon, 1974). These investments in organization and management are also known as organizational and management capital. Table 1-3 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 organi- zation. 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 innovation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge. TABLE 1-3 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 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 computing standards, regulations and laws, and the presence of technology and service firms. Throughout the book we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Perhaps the single most important theme in the book, reflected in case studies 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 information technology investments. As you will see throughout the text, firms that can address these related dimensions of the IT investment are, on average, richly rewarded. 1.3 CONTEMPORARY APPROACHES TO 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 contribute 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 substantial social, organizational, and intellectual investments to make them work properly. FIGURE 1-9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS The study of information systems deals with issues and insights contributed from technical and behavioral disciplines. Chapter 1 Information Systems in Global Business Today 29 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. Management science emphasizes the development of models for decision- making and management practices. Operations research focuses on mathemat- ical techniques for optimizing selected parameters of organizations, such as transportation, inventory control, and transaction costs. 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 information 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: suppliers of hardware and software (the technologists); business firms making invest- ments and seeking to obtain value from the technology; managers and employ- ees seeking to achieve business value (and other goals); and the contemporary legal, social, and cultural context (the firm’s environment). 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 gov- ernment agencies. MIS combines the work of computer science, manage- ment science, and operations research with a practical orientation toward developing system solutions to real-world problems and managing informa- tion technology resources. It is also concerned with behavioral issues surrounding the development, use, and impact of information sys- tems, which are typically discussed in the fields of sociology, economics, and psychology. 30 Part One Organizations, Management, and the Networked Enterprise 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 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 systems field is that it requires an appreciation and tolerance of many different approaches. The view we adopt in this book is best characterized as the sociotechnical 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 information technology is rapidly declining in cost and growing in power does not necessarily or easily translate into productivity enhancement or bottom- line profits. The fact that a firm has recently installed an enterprise-wide financial 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 with user expectations. Organizations and individuals must also be changed through training, learn- ing, 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. 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. Chapter 1 Information Systems in Global Business Today 31 1.4 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience in analyzing financial reporting and inventory management problems, using data management software to improve management decision making about increasing sales, and using Internet software for developing shipping budgets. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. Snyders of Hanover, which sells more than 78 million bags of pretzels, snack chips, and organic snack items each year, had its financial depart- ment use spreadsheets and manual processes for much of its data gathering and reporting. Hanover’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 re-enter all the data into another spreadsheet, which would serve as the company’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 and wait for the department to re-submit 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. 2. Dollar General Corporation operates deep discount stores offering house- wares, 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. Although the company uses information systems (such as a point-of-sale system to track sales at the register), it deploys them very sparingly to keep expenditures to the minimum. 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 over 3 percent of total sales. What decisions have to be made before investing in an information system solution? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g D a t a b a s e s t o A n a l y z e S a l e s Tr e n d s Software skills: Database querying and reporting Business skills: Sales trend analysis Effective information systems transform data into meaningful information for decisions that improve business performance. In MyMISLab, you can find a Store and Regional Sales Database with raw data on weekly store sales of computer equipment in various sales regions. A sample is shown below, but MyMISLab may have a more recent version of this database for this exercise. The database includes fields for store identification number, sales region number, item number, item description, unit price, units sold, and the weekly sales period when the sales were made. Develop some reports and queries to make this information more useful for running the business. Try to use the information in the database to support decisions on which prod- ucts to restock, which stores and sales regions would benefit from additional marketing and promotional campaigns, which times of the year products 32 Part One Organizations, Management, and the Networked Enterprise should be offered at full price, and which times of the year products should be discounted. Modify the database table, if necessary, to provide all of the information you require. Print your reports and results of queries. I m p r o v i n g D e c i s i o n M a k i n g : U s i n g t h e I n t e r n e t t o L o c a t e J o b s R e q u i r i n g I n f o r m a t i o n S y s t e m s K n o w l e d g e Software skills: Internet-based software Business skills: Job searching Visit job-posting Web sites such as Monster.com or CareerBuilder.com. Spend some time at the sites examining jobs for accounting, finance, sales, market- ing, 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. LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter: 1. How Much Does IT Matter? 2. Information Systems and Your Career 3. The Emerging Mobile Digital Platform Chapter 1 Information Systems in Global Business Today 33 Review Summary 1. How are information systems transforming business and what is their relationship to globalization? E-mail, online conferencing, and cell phones 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, online software as a service, and cloud computing. 2. Why are information systems so essential for running and managing a business today? 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 excellence; new products, services, and business models; customer/supplier intimacy; improved decision making; competitive advantage; and day-to-day survival. 3. What exactly is an information system? How does it work? What are its management, organization, and technology components? 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 systems 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 management 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. 4. What are complementary assets? Why are complementary assets essential for ensuring that information systems provide genuine value for an organization? In order to obtain meaningful value from information systems, organizations must support their technology investments with appropriate complementary investments in organizations and management. These complementary assets include new business models and business processes, supportive organizational culture and management behavior, appropriate technology standards, regulations, and laws. New information technology investments are unlikely to produce high returns unless businesses make the appropriate managerial and organizational changes to support the technology. 5. What academic disciplines are used to study information systems? How does each contribute to an understanding of information systems? What is a sociotechnical systems perspective? 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 models and capabilities of systems are computer science, management science, and operations research. The disciplines contributing to the behavioral approach focusing on the design, implementa- tion, management, 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. 34 Part One Organizations, Management, and the Networked Enterprise Review Questions 1. How are information systems transforming busi- ness and what is their relationship to globalization? • 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. 2. Why are information systems so essential for running and managing a business today? • List and describe six reasons why information systems are so important for business today. 3. What exactly is an information system? How does it work? What are its management, organization, and technology components? • Define an information system and describe the activities it performs. • List and describe the organizational, manage- ment, and technology dimensions of informa- tion 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 components of information systems. 4. What are complementary assets? Why are complementary assets essential for ensuring that information systems provide genuine value for an organization? • Define complementary assets and describe their relationship to information technology. • Describe the complementary social, manage- rial, and organizational assets required to optimize returns from information technol- ogy investments. 5. What academic disciplines are used to study information systems? How does each contribute to an understanding of information systems? What is a sociotechnical systems perspective? • List and describe each discipline that contributes to a technical approach to informa- tion systems. • List and describe each discipline that con- tributes to a behavioral approach to information systems. • Describe the sociotechnical perspective on information systems. Key Terms Business functions, 18 Business model, 13 Business processes, 11 Complementary assets, 27 Computer hardware, 20 Computer literacy, 17 Computer software, 20 Culture, 20 Data, 15 Data management technology, 20 Data workers, 18 Digital firm, 11 Extranets, 21 Feedback, 16 Information, 15 Information system, 15 Information systems literacy, 17 Information technology (IT), 15 Information technology (IT) infrastructure, 21 Input, 16 Internet, 21 Intranets, 21 Knowledge workers, 18 Management information systems (MIS), 17 Middle management, 18 Network, 21 Networking and telecommunications technology, 20 Operational management, 18 Organizational and management capital, 27 Output, 16 Processing, 16 Production or service workers, 18 Senior management, 18 Sociotechnical view, 30 World Wide Web, 21 Chapter 1 Information Systems in Global Business Today 35 Collaboration and Teamwork: Creating a Web Site for Team Collaboration Form a team with three or four classmates. Then use the tools at Google Sites to create a Web site for your team. You will need to a create a Google account for the site and specify the collaborators (your team members) who are allowed to access the site and make contributions. Specify your professor as the viewer of the site so that person can evaluate your work. Assign a name to the site. Select a theme for the site and make any changes you wish to colors and fonts. Add features for project announcements and a repository for team documents, source materials, illustrations, electronic presentations, and Web pages of interest. You can add other features if you wish. Use Google to create a calendar for your team. After you complete this exercise, you can use this Web site and calendar for your other team projects. Discussion Questions 1. Information systems are too important to be left to computer specialists. Do you agree? Why or why not? 2. If you were setting up the Web site for another Major League Baseball team, what management, organization, and technology issues might you encounter? 3. What are some of the organizational, managerial, and social complementary assets that help make UPS’s information systems so successful? Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. 36 Part One Organizations, Management, and the Networked Enterprise W h a t ’ s t h e B u z z o n S m a r t G r i d s ? CASE STUDY he existing electricity infrastructure in the United States is outdated and inefficient. Energy companies provide power to consumers, but the grid provides no information about how the consumers are using that energy, making it difficult to develop more efficient approaches to distribution. Also, the current electric- ity grid offers few ways to handle power provided by alternative energy sources, which are critical compo- nents of most efforts to go “green.” Enter the smart grid. A smart grid delivers electricity from suppliers to consumers using digital technology to save energy, reduce costs, and increase reliability and trans- parency. The smart grid enables information to flow back and forth between electric power providers and individual households to allow both consumers and energy companies to make more intelligent decisions regarding energy consumption and production. Information from smart grids would show utilities when to raise prices when demand is high and lower them when demand lessens. Smart grids would also help consumers program high-use electrical appliances like heating and air condition- ing systems to reduce consumption during times of peak usage. If implemented nationwide, proponents believe, smart grids would lead to a 5 to 15 percent decrease in energy consumption. Electricity grids are sized to meet the maximum electricity need, so a drop in peak demand would enable utilities to operate with fewer expensive power plants, thereby lowering costs and pollution. Another advantage of smart grids is their ability to detect sources of power outages more quickly and precisely at the individual household level. With such precise information, utilities will be able to respond to service problems more rapidly and efficiently. Managing the information flowing in these smart grids requires technology: networks and switches for power management; sensor and monitoring devices to track energy usage and distribution trends; systems to provide energy suppliers and consumers with usage data; communications systems to relay data along the entire energy supply system; and systems linked to programmable appliances to run them when energy is least costly. If consumers had in-home displays showing how much energy they are consuming at any moment and the price of that energy, they are more likely to curb their consumption to cut costs. Home thermostats and appliances could adjust on their own automatically, depending on the cost of power, and even obtain that power from nontraditional sources, such as a neighbor’s rooftop solar panel. Instead of power flowing from a small number of power plants, the smart grid will make it possible to have a distributed energy system. Electricity will flow from homes and businesses into the grid, and they will use power from local and faraway sources. Besides increasing energy efficiency, converting to smart grids along with other related energy initiatives could create up to 370,000 jobs. That’s why pioneering smart grid projects such as SmartGridCity in Boulder, Colorado, are attracting attention. SmartGridCity represents a collaboration by Xcel Energy Inc. and residents of Boulder to test the viability of smart grids on a smaller scale. Participants can check their power consumption levels and costs online, and will soon be able to program home appliances over the Web. Customers access this information and set goals and guidelines for their home’s energy usage through a Web portal. They also have the option of allowing Xcel to remotely adjust their thermostats during periods of high demand. SmartGridCity is also attempting to turn homes into “miniature power plants” using solar-powered battery packs that “TiVo electricity,” or stash it away to use at a later time. This serves as backup power for homes using the packs, but Xcel can also tap into that power during times of peak energy consumption to lessen the overall energy load. Xcel will be able to remotely adjust thermostats and water heaters and will have much better information about the power consumption of their consumers. Bud Peterson, chancellor of the University of Colorado at Boulder, and his wife Val have worked with Xcel to turn their home into the prototype residence for the SmartGridCity project. Their house was supplied with a six-kilowatt photovoltaic system on two roofs, four thermostats controlled via the Web, a plug-in hybrid electric vehicle (PHEV) Ford Escape, and other high-tech, smart grid-compatible features. Xcel employees are able to monitor periods T Chapter 1 Information Systems in Global Business Today 37 of high power consumption and how much energy the Petersons’ Escape is using on the road. A digital dashboard in the Petersons’ house displays power usage information in dozens of different ways—live household consumption and production, stored backup power, and carbon emis- sion reductions translated into gallons of gasoline and acres of trees saved each year. The dashboard also allows the Petersons to program their home thermostats to adjust the temperature by room, time of day, and season. Since the project began in the spring of 2008, the Petersons have been able to reduce their electricity use by one-third. Xcel is not alone. Hundreds of technology compa- nies and almost every major electric utility company see smart grids as the wave of the future. Heightening interest is $3.4 billion in federal economic recovery money for smart grid technology. Duke Energy spent $35 million on smart grid ini- tiatives, installing 80,000 smart meters as part of a pilot project in Charlotte, North Carolina, to provide business and residential customers with up-to-the- minute information on their energy use, as well as data on how much their appliances cost to operate. This helps them save money by curbing usage during peak times when rates are high or by replac- ing inefficient appliances. Duke now plans to spend $1 billion on sensors, intelligent meters, and other upgrades for a smart grid serving 700,000 customers in Cincinnati. Florida Power and Light is budgeting $200 million for smart meters covering 1 million homes and busi- nesses in the Miami area over the next two years. Center Point Energy, which services 2.2 million cus- tomers in the metropolitan Houston area, is planning to spend $1 billion over the next five years on a smart grid. Although residential customers’ monthly electric bills will be $3.24 higher, the company says this amount will be more than offset by energy sav- ings. Pacific Gas & Electric, which distributes power to Northern and Central California, is in the process of installing 10 million smart meters by mid-2012. Google has developed a free Web service called PowerMeter for tracking energy use online in houses or businesses as power is consumed. It expects other companies to build the devices that will supply data to PowerMeter. There are a number of challenges facing the efforts to implement smart grids. Changing the infrastructure of our electricity grids is a daunting task. Two-way meters that allow information to flow both to and from homes need to be installed at any home or building that uses electric power–in other words, essentially everywhere. Another challenge is creating an intuitive end-user interface. Some SmartGridCity participants reported that the dash- board they used to manage their appliances was too confusing and high-tech. Even Val Peterson admitted that, at first, managing the information about her power usage supplied through the Xcel Web portal was an intimidating process. The smart grid won’t be cheap, with estimated costs running as high as $75 billion. Meters run $250 to $500 each when they are accompanied by new utility billing systems. Who is going to pay the bill? Is the average consumer willing to pay the upfront costs for a smart grid system and then respond appropriately to price signals? Will consumers and utility companies get the promised payback if they buy into smart grid technology? Might “smart meters” be too intrusive? Would consumers really want to entrust energy companies with regulating the energy usage inside their homes? Would a highly computerized grid increase the risk of cyberattacks? Jack Oliphant, a retiree living north of Houston in Spring, Texas, believes that the $444 he will pay Center Point for a smart meter won’t justify the expense. “There’s no mystery about how you save energy,” he says. “You turn down the air condi- tioner and shut off some lights. I don’t need an expensive meter to do that.” Others have pointed out other less-expensive methods of reducing energy consumption. Marcel Hawiger, an attorney for The Utility Reform Network, a San Francisco consumer advocacy group, favors expanding existing air conditioner-cycling programs, where utilities are able to control air conditioners so they take turns coming on and off, thereby reducing demands on the electric system. He believes air conditioner controllers, which control temperature settings and compressors to reduce overall energy costs, provide much of the benefit of smart meters at a fraction of their cost. Consumer advocates have vowed to fight smart grids if they boost rates for customers who are unable or unwilling to use Web portals and allow energy companies to control aspects of their appliances. Advocates also argue that smart grids represent an Orwellian intrusion of people’s right to use their appliances as they see fit without disclosing facts about their usage to others. A proposal by officials in California to require all new homes to have remotely adjustable thermostats was soundly defeated after critics worried about the privacy implications. 38 Part One Organizations, Management, and the Networked Enterprise Energy companies stand to lose money as individuals conserve more electricity, creating a disincentive for them to cooperate with conservation efforts like smart grids. Patience will be critical as energy companies and local communities work to set up new technologies and pricing plans. Sources: Rebecca Smith, “What Utilities Have Learned from Smart- Meter Tests,” The Wall Street Journal, February 22, 2010; “Smart Grid: & Reasons Why IT Matters,” CIO Insight, March 24, 2010; Yuliya Chernova, “Getting Smart About Smart Meters,” The Wall Street Journal, May 10, 2010; Bob Evans, “IT’s Dark-Side Potential Seenin SmartGridCity Project,” Information Week, March 24, 2009; Bob Violino, “No More Grid-Lock,” Information Week, November 16, 2009; K.C. Jones, “Smart Grids to Get Jolt from IT,” Information Week, March 23, 2009; Rebecca Smith, “Smart Meter, Dumb Idea?” The Wall Street Journal, April 27, 2009; Stephanie Simon, “The More Your Know…” The Wall Street Journal, February 9, 2009; and Matthew Wald and Miguel Helft, “Google Taking a Step into Power Metering,” The New York Times, February 10, 2009. CASE STUDY QUESTIONS 1. How do smart grids differ from the current electricity infrastructure in the United States? 2. What management, organization, and technology issues should be considered when developing a smart grid? 3. What challenge to the development of smart grids do you think is most likely to hamper their development? 4. What other areas of our infrastructure could benefit from “smart” technologies? Describe one example not listed in the case. 5. Would you like your home and your community to be part of a smart grid? Why or why not? Explain. !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What are business processes? How are they related to informa- tion systems? 2. How do systems serve the different management groups in a business? 3. How do systems that link the enterprise improve organizational performance? 4. Why are systems for collaboration and teamwork so important and what technologies do they use? 5. What is the role of the information systems function in a business? CHAPTER OUTLINE 2.1 BUSINESS PROCESSES AND INFORMATION SYSTEMS Business Processes How Information Technology Improves Business Processes 2.2 TYPES OF INFORMATION SYSTEMS Systems for Different Management Groups Systems for Linking the Enterprise E-business, E-commerce, and E-government 2.3 SYSTEMS FOR COLLABORATION AND TEAMWORK What Is Collaboration? Business Benefits of Collaboration and Teamwork Building a Collaborative Culture and Business Processes Tools and Technologies for Collaboration and Teamwork 2.4 THE INFORMATION SYSTEMS FUNCTION IN BUSINESS The Information Systems Department Organizing the Information Systems Function 2.5 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using a Spreadsheet to Select Suppliers Achieving Operational Excellence: Using Internet Software to Plan Efficient Transportation Routes LEARNING TRACK MODULES Systems from a Functional Perspective IT Enables Collaboration and Teamwork Challenges of Using Business Information Systems Organizing the Information Systems Function Chapter 2 Global E-business and Collaboration Interactive Sessions: Domino’s Sizzles with Pizza Tracker Virtual Meetings: Smart Management 41 he BMW Oracle Racing organization won the 33rd America’s Cup yacht race in Valencia, Spain on February 18, 2010. The BMW Oracle boat USA, backed by software billionaire Larry Ellison, beat Alinghi, the Swiss boat backed by Ernesto Bertarelli, a Swiss billionaire. It’s always a spectacle when two billionaires go head to head for the prize. Lots and lots of money, world-class talent, and in this case, the best technologies and information systems in the world. In the end, the 114-foot USA won handily the first two races of a best-of-three series, reaching speeds over 35 miles an hour, three times faster than the wind. As far as experts can figure, USA is the fastest sailboat in history. So what kind of technology can you get for a $300 million sailboat? Start with the physical structure: a three hulled trimaran, 114 feet long, fashioned from carbon fiber shaped into a form descended from Polynesian outrigger boats over a thousand years old. The hull is so light it only extends six inches into the water. Forget about a traditional mast (that’s the pole that holds up the sails) and forget about sails too. Think about a 233-foot airplane wing also made from carbon fiber that sticks up from the boat deck 20 stories high. Instead of cloth sails, think about a stretchy aeronautical fabric over a carbon fiber frame that is hydraulically controlled to assume any shape you want, sort of like a stretchy garment hugs the body’s bones. The result is a wing, not a sail, whose shape can be changed from pretty near flat to quite curved just like an aircraft wing. Controlling this wickedly sleek sailboat requires a lightning-fast collection of massive amounts of data, powerful data management, rapid real-time data analysis, quick decision making, and immediate measurement of the results. In short, all the information technologies needed by a modern business firm. When you can perform all these tasks thousands of times in an hour, you can incrementally improve your performance and have an overwhelming advantage over less IT-savvy opponents on race day. For USA, this meant using 250 sensors on the wing, hull, and rudder to gather real-time data on pressure, angles, loads, and strains to monitor the effectiveness of each adjustment. The sensors track 4,000 variables, 10 times a second, producing 90 million data points an hour. Managing all these data is Oracle Database 11g data management software. The data are wirelessly transferred to a tender ship running Oracle 11g for near real-time analysis using a family of formulas (called velocity prediction formulas) geared to understanding what makes the boat go fast. Oracle’s Application Express presentation graphics summarize the millions of AMERICA’S CUP 2010: USA WINS WITH INFORMATION TECHNOLOGY T data points and present the boat managers with charts that make sense of the information. The data are also sent to Oracle’s Austin data center for more in- depth analysis. Using powerful data analysis tools, USA managers were able to find relationships they had never thought about before. Over several years of practice, from day one to the day before the race, the crew of USA could chart a steady improvement in performance. All this meant “sailing” had changed, perhaps been trans- 42 Part One Organizations, Management, and the Networked Enterprise formed by IT. Each crew member wore a small mobile handheld computer on his wrist to display data on the key performance variables customized for that person’s responsibilities, such as the load balance on a specific rope or the current aerodynamic performance of the wing sail. Rather than stare at the sails or the sea, the crew had to be trained to sail like pilots looking at instruments. The helmsman turned into a pilot looking at data displayed on his sunglasses with an occasional glance at the deck crew, sea state, and competitors. Professional and amateur sailors across the world wondered if the technology had transformed sailing into something else. The billionaire winner Larry Ellison sets the rules for the next race, and the blogs are speculating that he will seek a return to simpler more traditional boats that need to be sailed, not flown like air- planes. Yet few really believe Ellison will give up a key IT advantage in data col- lection, analysis, presentation, and performance-based decision making. Sources: Jeff Erickson, “Sailing Home with the Prize,” Oracle Magazine, May/June 2010; www.america’s cup.com, accessed May 21,2010; and www.bmworacleracing.com, accessed May 21, 2010. The experience of BMW Oracle’s USA in the 2010 America’s Cup competi-tion illustrates how much organizations today, even those in traditional sports such as sailing, rely on information systems to improve their perfor- mance and remain competitive. It also shows how much information systems make a difference in an organization’s ability to innovate, execute, and in the case of business firms, grow profits. The chapter-opening diagram calls attention to important points raised by this case and this chapter. The America’s Cup contenders were confronted with both a challenge and opportunity. Both were locked in the world’s most competitive sailing race. They staffed their crews with the best sailors in the world. But sailing ability was not enough. There were opportunities for improv- ing sailing performance by changing and refining the design of the competing vessels using information systems intensively for this purpose. Because Oracle is one of the world’s leading information technology providers, the company was a natural for using the most advanced information technology to continually improve USA’s design and performance. But informa- tion technology alone would not have produced a winning boat. The Oracle team had to revise many of the processes and procedures used in sailing to take advantage of the technology, including training experienced sailors to work more like pilots with high-tech instruments and sensors. Oracle won the America’s Cup because it had learned how to apply new technology to improve the processes of designing and sailing a competitive sailboat. www.america%E2%80%99scup.com www.bmworacleracing.com Chapter 2 Global E-business and Collaboration 43 2.1 BUSINESS PROCESSES AND INFORMATION SYSTEMS n order to operate, businesses must deal with many different pieces of information about suppliers, customers, employees, invoices and pay- ments, 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 pos- sible for firms to manage all their information, 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 prod- uct or service. Business processes are the collection of activities required to pro- duce a product or service. These activities are supported by flows of material, information, and knowledge among the participants in business processes. Business processes also refer to the unique ways in which organizations coordi- nate 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 processes 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 outdated ways of working that impede organizational responsiveness and efficiency. The chapter-opening case describing the processes used to sail the 2010 winning America’s Cup boat clearly illustrates these points, as do many of the other cases in this text. Every business can be seen as a collection of business processes, some of which are part of larger encompassing processes. For instance, designing a new sailboat model, manufacturing components, assembling the finished boat, and revising the design and construction are all part of the overall production process. Many busi- ness processes are tied to a specific functional area. For example, the sales and marketing function is responsible for identifying customers, 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. I 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 44 Part One Organizations, Management, and the Networked Enterprise 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 established, the production department pulls the product from inventory or produces the product. Then the product is shipped (and this may require work- ing 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 prepares 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 both within the firm from one deci- sion 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 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. with tasks that can be performed simultaneously, and eliminating delays in decision making. New information technology frequently changes the way a business works and supports entirely new business models. Downloading a Kindle e-book from Amazon, buying a computer online at Best Buy, and down- loading 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 business actually works. Moreover, by conducting a business process analysis, you will also begin to understand how to change the business by improving its processes 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 TYPES OF INFORMATION SYSTEMS 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. A typical business organization has systems supporting processes for each of the major business functions—systems for sales and marketing, manufacturing and production, finance and accounting, and human resources. You can find examples 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 information to support cross-functional business processes. Many have been replaced with large-scale cross-functional systems that integrate the activities of related busi- ness 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, management information systems, decision-support systems, and systems for business intel- ligence. Tr a n s a c t i o n P r o c e s s i n g S y s t e m s Operational managers need systems that keep track of the elementary activities and transactions of the organization, such as sales, receipts, cash deposits, payroll, credit decisions, and the flow of materials in a factory. Transaction Chapter 2 Global E-business and Collaboration 45 46 Part One Organizations, Management, and the Networked Enterprise processing systems (TPS) provide this kind of information. A transaction processing 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 employee’s name, social security number, and number of hours worked per week represents 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 organiza- tion. 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, 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. Chapter 2 Global E-business and Collaboration 47 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 reports such as income statements and balance sheets. It also supplies employee payment history data for insurance, pension, and other benefits cal- culations 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 were not working! What would the airlines do without their computer- ized reservation systems? B u s i n e s s I n t e l l i g e n c e S y s t e m s f o r D e c i s i o n S u p p o r t Middle management needs systems to help with monitoring, controlling, decision-making, and administrative activities. The principal question addressed by such systems is this: Are things working well? In Chapter 1, we define 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 management. MIS provide middle managers with reports on the organization’s current performance. This information is used to monitor and control the business 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 order process- 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. 48 Part One Organizations, Management, and the Networked Enterprise ing, production, and accounting into MIS files that are used to provide man- agers with reports. Figure 2-4 shows a sample report from this system. MIS serve managers primarily interested in weekly, monthly, and yearly results. These systems 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 rou- tines, such as summaries and comparisons, as opposed to sophisticated mathe- matical models or statistical techniques. In contrast, decision-support systems (DSS) support more non-routine decision making. They focus on problems that are unique and rapidly chang- ing, for which the procedure for arriving at a solution may not be fully prede- fined 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 investment if a factory sched- ule 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 use a variety of models to analyze the data and are designed so that users can work with them directly. An interesting, small, but powerful, DSS is the voyage-estimating system of a subsidiary of a large American metals company that exists primarily to carry bulk cargoes of coal, oil, ores, and finished products for its parent company. 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 a myriad of factors, such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading pat- terns (location of cargo for different ports). 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 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 maximize 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 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 systems supporting non-routine decision making are more data-driven, focusing instead on extracting useful information from large quantities of data. For example, Intrawest—the largest ski operator in North America—collects and stores large amounts of customer data from its Web site, call center, lodging reservations, ski schools, and ski equipment rental stores. It uses special software to analyze these data to determine the value, revenue potential, and loyalty of each customer so managers can make better decisions on how to target their marketing programs. The system segments customers into seven categories based on needs, attitudes, and behaviors, ranging from “passionate experts” to “value-minded family vacationers.” The company then e-mails video clips that would appeal to each segment to encourage more visits to its resorts. All of the management systems we have just described are systems for busi- ness intelligence. Business intelligence is a contemporary term for data and software tools for organizing, analyzing, and providing access to data to help managers and other enterprise users make more informed decisions. You’ll learn more about business intelligence in Chapters 6 and 12. Business intelligence applications are not limited to middle managers, and can be found at all levels of the organization, including systems for senior management. Senior managers need systems that address strategic issues and long-term trends, both in the firm and in the external environment. They are 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. 50 Part One Organizations, Management, and the Networked Enterprise concerned with questions such as these: What will employment levels be in five years? What are the long-term industry cost trends, and where does our firm fit in? What products should we be making in five years? What new acquisitions would protect us from cyclical business swings? Executive support systems (ESS) help senior management make these decisions. They address non-routine 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. You will learn more about other applications of portals in Chapter 11. 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 CEO of Leiner Health Products, one of the largest manufac- turers of private-label vitamins and supplements in the United States, has an ESS that provides on his desktop a minute-to-minute view of the firm’s financial performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory. The information is presented in the form of a digital dashboard, which displays on a single screen graphs and charts of key performance indicators for managing a company. Digital dashboards are becoming an increasingly popular tool for management decision makers. Dundas Data Visualization’s digital dashboard delivers comprehensive and accurate information for decision making. The graphical overview of key performance indicators helps managers quickly spot areas that need attention. Chapter 2 Global E-business and Collaboration 51 The Interactive Session on Organizations describes real-world examples of several types of systems we have just described that are used by a successful fast-food chain. Note the types of systems illustrated in this case and the role they play in improving business performance and competitiveness. 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 systems. 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 information and how managers and employees are able to coordinate their work. In fact, these are all important questions for businesses today. E n t e r p r i s e A p p l i c a t i o n s 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 business firm, and include all levels of management. Enterprise applications help businesses 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 performance of the organization as a whole. Figure 2-6 shows that the architec- ture 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 manufacturing and production, finance and accounting, sales and marketing, and human resources into a single software system. Information that was previously 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 automati- cally to other parts of the company that are affected by them. The order trans- action 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 invoice. 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 firm-wide information to make more precise and timely decisions about daily operations and longer-term planning. 52 Part One Organizations, Management, and the Networked Enterprise I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S When it comes to pizza, everyone has an opinion. Some of us think that our current pizza is just fine the way it is. Others have a favorite pizza joint that makes it like no one else. And many pizza lovers in America agreed up until recently that Domino’s home-delivered pizza was among the worst. The home-delivery market for pizza chains in the United States is approximately $15 billion per year. Domino’s, which owns the largest home-delivery market share of any U.S. pizza chain, is finding ways to innovate by overhauling its in-store transaction processing systems and by providing other useful services to customers, such as its Pizza Tracker. And more important, Domino’s is trying very hard to overcome its reputation for poor quality by radically improving ingredients and freshness. Critics believe the company significantly improved the quality of its pizza and customer service in 2010. Domino’s was founded in 1960 by Tom Monaghan and his brother James when they purchased a single pizza store in Ypsilanti, Michigan. The company slowly began to grow, and by 1978, Domino’s had 200 stores. Today, the company is headquartered in Ann Arbor, Michigan, and operates almost 9,000 stores located in all 50 U.S. states and across the world in 60 international markets. In 2009, Domino’s had $1.5 billion in sales and earned $80 million in profit. Domino’s is part of a heated battle among promi- nent pizza chains, including Pizza Hut, Papa John’s, and Little Caesar. Pizza Hut is the only chain larger than Domino’s in the U.S., but each of the four has significant market share. Domino’s also competes with local pizza stores throughout the U.S. To gain a competitive advantage Domino’s needs to deliver excellent customer service, and most importantly, good pizza. But it also benefits from highly effective information systems. Domino’s proprietary point-of-sale system, Pulse, is an important asset in maintaining consistent and efficient management functions in each of its restau- rants. A point-of-sale system captures purchase and payment data at a physical location where goods or services are bought and sold using computers, auto- mated cash registers, scanners, or other digital devices. In 2003, Domino’s implemented Pulse in a large portion of its stores, and those stores reported improved customer service, reduced mistakes, and DOMINO’S SIZZLES WITH PIZZA TRACKER shorter training times. Since then, Pulse has become a staple of all Domino’s franchises. Some of the func- tions Pulse performs at Domino’s franchises are tak- ing and customizing orders using a touch-screen interface, maintaining sales figures, and compiling customer information. Domino’s prefers not to disclose the specific dollar amounts that it has saved from Pulse, but it’s clear from industry analysts that the technology is working to cut costs and increase customer satisfaction. More recently, Domino’s released a new hardware and software platform called Pulse Evolution, which is now in use in a majority of Domino’s more than 5,000 U.S. branches. Pulse Evolution improves on the older technology in several ways. First, the older software used a ‘thick-client’ model, which required all machines using the software to be fully equipped personal computers running Windows. Pulse Evolution, on the other hand, uses ‘thin-client’ archi- tecture in which networked workstations with little independent processing power collect data and send them over the Internet to powerful Lenovo PCs for processing. These workstations lack hard drives, fans, and other moving parts, making them less expensive and easier to maintain. Also, Pulse Evolution is easier to update and more secure, since there’s only one machine in the store which needs to be updated. Along with Pulse Evolution, Domino’s rolled out its state-of-the-art online ordering system, which includes Pizza Tracker. The system allows customers to watch a simulated photographic version of their pizza as they customize its size, sauces, and toppings. The image changes with each change a customer makes. Then, once customers place an order, they are able to view its progress online with Pizza Tracker. Pizza Tracker displays a horizontal bar that tracks an order’s progress graphically. As a Domino’s store completes each step of the order fulfillment process, a section of the bar becomes red. Even customers that place their orders via telephone can monitor their progress on the Web using Pizza Tracker at stores using Pulse Evolution. In 2010, Domino’s introduced an online polling system to continuously upload information from local stores. As with most instances of organizational change of this magnitude, Domino’s experienced some resis- tance. Domino’s originally wanted its franchises to Chapter 2 Global E-business and Collaboration 53 C A S E S T U D Y Q U E S T I O N S 1. What kinds of systems are described in this case? Identify and describe the business processes each supports. Describe the inputs, processes, and out- puts of these systems. 2. How do these systems help Domino’s improve its business performance? 3. How did the online pizza ordering system improve the process of ordering a Domino’s pizza? 4. How effective are these systems in giving Domino’s a competitive edge? Explain your answer. select Pulse to comply with its requirements for data security, but some franchises have resisted switching to Pulse and sought alternative systems. After Domino’s tried to compel those franchises to use Pulse, the U.S. District Court for Minnesota sided with franchisees who claimed that Domino’s could not force them to use this system. Now, Domino’s continues to make improvements to Pulse in an effort to make it overwhelmingly appealing to all franchisees. Pizza Hut and Papa John’s also have online order- ing capability, but lack the Pizza Tracker and the sim- ulated pizza features that Domino’s has successfully implemented. Today, online orders account for almost 20 percent of all of Domino’s orders, which is up from less than 15 percent in 2008. But the battle Visit Domino’s Web site and examine the order place- ment and Pizza Tracker features. Then answer the following questions: 1. What steps does Pizza Tracker display for the user? How does the Pizza Tracker improve the customer experience? 2. Would the Pizza Tracker service influence you to order pizza from Domino’s instead of a competing chain? Why or why not? 3. What improvements would you make to the order placement feature? to sell pizza with technology rages on. Pizza Hut cus- tomers can now use their iPhones to place orders, and Papa John’s customers can place orders by tex- ting. With many billions of dollars at stake, all the large national pizza chains will be developing innova- tive new ways of ordering pizza and participating in its creation. Sources: PRN Newswire, “Servant Systems Releases Domino’s Store Polling Software,” PRN Newswire, April 14, 2010; Julie Jargon, “Domino’s IT Staff Delivers Slick Site, Ordering System,” The Wall Street Journal, November 24, 2009; www.dominosbiz.com, accessed May 17, 2010; Paul McDougall, “Interop: Domino’s Eyes Microsoft Cloud,” Information Week, April 26, 2010; “Domino’s Builds New Foundation Under Proprietary Store Tech,” Nation’s Restaurant News, February 25, 2009; “and “Inside Domino’s ‘Pizza Tracker.’ What It Does, Why, and How,” Nation’s Restaurant News, February 27, 2008. M I S I N A C T I O N Supply Chain Management Systems Firms use supply chain management (SCM) systems to help manage relationships with their suppliers. These systems help suppliers, purchasing firms, dis- tributors, and logistics companies share information about orders, production, inventory levels, and delivery of products and services so that they can source, produce, and deliver goods and services effi- ciently. 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 information systems throughout this text because such systems make it possible for firms to link electronically to customers and to outsource their work to other companies. Customer Relationship Management Systems Firms use customer relationship management (CRM) systems to help manage their relationships with their customers. CRM systems provide infor- mation to coordinate all of the business processes that deal with customers in sales, marketing, and service to optimize revenue, customer satisfaction, and customer retention. This information helps firms identify, attract, and retain the most profitable customers; provide better service to existing cus- tomers; and increase sales. www.dominosbiz.com 54 Part One Organizations, Management, and the Networked Enterprise Knowledge Management Systems Some firms perform better than others because they have better knowledge about how to create, produce, and deliver products and services. This firm knowledge is difficult to imitate, unique, and can be leveraged into long-term strategic benefits. Knowledge management systems (KMS) enable organizations to better manage processes for capturing and applying knowledge and expertise. These systems collect all relevant knowledge and experience in the firm, and make it available wherever and whenever it is needed to improve business processes and management decisions. They also link the firm to external sources of knowledge. We examine enterprise systems and systems for supply chain management and customer relationship management in greater detail in Chapter 9. We discuss collaboration systems that support knowledge management in this chapter and cover other types of knowledge management applications in Chapter 11. I n t r a n e t s a n d E x t r a n e t s Enterprise applications create deep-seated changes in the way the firm conducts its business, offering many opportunities to integrate important busi- ness data into a single system. They are often costly and difficult to implement. Intranets and extranets deserve mention here as alternative tools for increasing integration and expediting the flow of information within the firm, and with customers ad suppliers. Intranets are simply internal company Web sites that are accessible only by employees. The term “intranet” refers to the fact that it is an internal network, in contrast to the Internet, which is a public network linking organizations and FIGURE 2-6 ENTERPRISE APPLICATION ARCHITECTURE Enterprise applications automate processes that span multiple business functions and organizational levels and may extend outside the organization. Chapter 2 Global E-business and Collaboration 55 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 Web site. Likewise with extranets. Extranets are company Web sites that are accessible to authorized vendors and suppliers, and often used to coordinate the movement of supplies to the firm’s production apparatus. For example, Six Flags, which operates 19 theme parks throughout North America, maintains an intranet for its 2,500 full-time employees that provides company-related news and information on each park’s day-to-day operations, including weather forecasts, performance schedules, and details about groups and celebrities visiting the parks. The company also uses an extranet to broad- cast information about schedule changes and park events to its 30,000 seasonal employees. 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 business” 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 similar changes in the public sector. Governments on all levels are using Internet technology to deliver information and services to citizens, employees, and businesses with which they work. E-government refers to the application of the Internet and networking technologies to digitally enable government and public 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 fund-raising. 2.3 SYSTEMS FOR COLLABORATION AND TEAMWORK With all these systems and information, you might wonder how is it possible to make sense out of them? How do people working in firms pull it all together, work towards common goals, and coordinate plans and actions? Information systems can’t make decisions, hire or fire people, sign contracts, agree on deals, 56 Part One Organizations, Management, and the Networked Enterprise or adjust the price of goods to the marketplace. In addition to the types of sys- tems 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 collab- orate with a colleague in Tokyo having 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, depending 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 for- mal teams. Teams are part of the organization’s business structure for getting things done. Teams have a specific mission that someone in the business assigned to them. They have a job to complete. The members of the team 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%,” or “prevent insulating foam from falling off a space shuttle.” 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 variety 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, the kinds of jobs we have require much closer coordination and interaction among the parties involved in producing the service or product. A recent report from the consulting firm McKinsey and Company argued that 41 percent of the U.S. labor force is now composed of jobs where interaction (talking, e-mailing, presenting, and persuading) is the primary value-adding activity. 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 groups and teams, who are expected to develop their own methods for accomplishing the task. Senior managers observe and measure results, but are much less likely to issue detailed orders or operating procedures. In part Chapter 2 Global E-business and Collaboration 57 this is because expertise has been pushed down in the organization, as have decision-making powers. • 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 nation, or even around the globe. For instance, Henry Ford developed the first mass-production automobile plant at a single Dearborn, Michigan fac- tory. In 2010, Ford expected to produce about 3 million automobiles and employ over 200,000 employees at 90 plants and facilities worldwide. With this kind of global presence, the need for close coordination of design, pro- duction, marketing, distribution, and service obviously takes on new impor- tance 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, and all have been preceded by a long line of earlier innovators and innovations. 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 collaboration among individuals in a lab, a business, or government agencies. Strong col- laborative practices and technologies are believed to increase the rate and quality of innovation. • Changing culture of work and business. Most research on collaboration supports the notion that diverse teams produce better outputs, faster, than individuals working on their own. Popular notions of the crowd (“crowdsourcing,” and the “wisdom of crowds”) also provide cultural support for collaboration and teamwork. BUSINESS BENEFITS OF COLLABORATION AND TEAMWORK There are many articles and books that have been written about collaboration, some of them by business executives and consultants, and a great many by aca- demic researchers in a variety of businesses. Nearly all of this research is anec- dotal. Nevertheless, among both business and academic communities there is a general belief that the more a business firm is “collaborative,” the more suc- cessful it will be, and that collaboration within and among firms is more essen- tial than in the past. A recent global survey of business and information systems managers found that investments in collaboration technology produced organizational improve- ments that returned over four times the amount of the investment, with the greatest benefits for sales, marketing, and research and development functions (Frost and White, 2009). Another study of the value of collaboration also found that the overall economic benefit of collaboration was significant: for every word seen by an employee in e-mails from others, $70 of additional revenue was generated (Aral, Brynjolfsson, and Van Alstyne, 2007). Table 2-2 summarizes some of the benefits of collaboration identified by previous writers and scholars. Figure 2-7 graphically illustrates how collabora- tion is believed to impact business performance. While there are many presumed benefits to collaboration, you really need a supportive business firm culture and the right business processes before you can achieve meaningful collaboration. You also need a healthy investment in collaborative technologies. We now examine these requirements. 58 Part One Organizations, Management, and the Networked Enterprise TABLE 2-2 BUSINESS BENEFITS OF COLLABORATION BENEFIT RATIONALE Productivity People working together can complete a complex task faster 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 correct actions faster, when they work together than if they work in isolation. Can lead to a reduction in buffers and time delay among production units. Innovation People working collaboratively in groups can come up with more innovative ideas for products, services, and administration than the same number working in isolation from one another. Customer service People working together in teams can solve customer complaints and issues faster and more effectively than if they were working in isolation from one another. Financial performance (profitability, As a result of all of the above, collaborative firms have sales, and sales growth) superior sales growth and financial performance. FIGURE 2-7 REQUIREMENTS FOR COLLABORATION Successful collaboration requires an appropriate organizational structure and culture, along with appropriate collaboration technology. BUILDING A COLLABORATIVE CULTURE AND BUSINESS PROCESSES Collaboration won’t take place spontaneously in a business firm, especially if there is no supportive culture or business processes. Business firms, especially large firms, had in the past a reputation for being “command and control” Chapter 2 Global E-business and Collaboration 59 organizations where the top leaders thought up all the really important matters, 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 workgroup needed help from another work group, that was something for the bosses to figure out. You never communicated horizontally, always vertically, so management could control the process. As long as employees showed up for work, and performed the job satisfactorily, that’s all that was required. Together, the expectations of management and employees formed a culture, a set of assumptions about common goals and how people should behave. Many busi- ness firms still operate 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 products and services. 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. In a collabora- tive culture, senior management 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 TEAMWORK A collaborative, team-oriented culture won’t produce benefits if there are no information systems in place to enable collaboration. Currently there are hun- dreds of tools designed to deal with the fact that, in order to succeed in our jobs, we are all dependent on one another, our fellow employees, customers, suppli- ers, and managers. Table 2-3 lists the most important types of collaboration soft- ware tools. Some high-end tools like IBM Lotus Notes are expensive, but power- ful enough for global firms. Others are available online for free (or with premium versions for a modest fee) and are suitable for small businesses. Let’s look more closely at some of these tools. TABLE 2-3 FIFTEEN CATEGORIES OF COLLABORATIVE SOFTWARE TOOLS E-mail and instant messaging White boarding Collaborative writing Web presenting Collaborative reviewing/editing Work scheduling Event scheduling Document sharing (including wikis) File sharing Mind mapping Screen sharing Large audience Webinars Audio conferencing Co-browsing Video conferencing Source: mindmeister.com, 2009. 60 Part One Organizations, Management, and the Networked Enterprise E - m a i l a n d I n s t a n t M e s s a g i n g ( I M ) E-mail and instant messaging have been embraced by corporations as a major communication and collaboration tool supporting interaction jobs. Their soft- ware operates on computers, cell phones, and other wireless handheld 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. Gartner technology consultants predict that within a few years, instant messaging will be the “de facto tool” for voice, video, and text chat for 95 percent of employees in big companies. S o c i a l N e t w o r k i n g We’ve all visited social networking sites such as MySpace and Facebook, which feature tools to help people share their interests and interact. Social networking tools are quickly becoming a corporate tool for sharing ideas and collaborating among interaction-based jobs in the firm. Social networking sites such as Linkedin.com provide networking services to business professionals, while other niche sites have sprung up to serve lawyers, doctors, engineers, and even dentists. IBM built a Community Tools component into its Lotus Notes collabo- ration software to add social networking features. Users are able to submit ques- tions to others in the company and receive answers via instant messaging. W i k i s Wikis are a type of Web site 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 ideal tools for storing and sharing company 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. At Intel Corporation, employees built their own internal wiki, and it has been edited over 100,000 times and viewed more than 27 million times by Intel employees. The most common search is for the meaning of Intel acronyms such as EASE for “employee access support environment” and POR for “plan of record.” Other popular resources include a page about software engineering processes at the company. Wikis are destined to become the major repository for unstructured corporate knowledge in the next five years in part because they are so much less costly than formal knowledge management systems and they can be much more dynamic and current. V i r t u a l W o r l d s Virtual worlds, such as Second Life, are online 3-D environments populated by “residents” who have built graphical representations of themselves known as avatars. Organizations such as IBM and INSEAD, an international business school with campuses in France and Singapore, are using this virtual world to house online meetings, training sessions, and “lounges.” Real-world people rep- resented by avatars meet, interact, and exchange ideas at these virtual loca- tions. Communication takes place in the form of text messages similar to instant messages. Chapter 2 Global E-business and Collaboration 61 I n t e r n e t - B a s e d C o l l a b o r a t i o n E n v i r o n m e n t s There are now suites of software products providing multi-function platforms for workgroup collaboration among teams of employees who work together from many different locations. Numerous collaboration tools are available, but the most widely used are Internet-based audio conferencing and video conferencing systems, online software services such as Google Apps/Google Sites, and corpo- rate collaboration systems such as Lotus Notes and Microsoft SharePoint. Virtual Meeting Systems For many businesses, including investment bank- ing, accounting, law, technology services, and management consulting, exten- sive travel is a fact of life. The expenses incurred by business travel have been steadily rising in recent years, primarily due to increasing energy costs. In an effort to reduce travel expenses, many companies, both large and small, are adopting videoconferencing and Web conferencing technologies. Companies such as Heinz, General Electric, Pepsico, and Wachovia are using virtual meeting systems for product briefings, training courses, strategy ses- sions, and even inspirational chats. An important feature of leading-edge high-end videoconferencing systems is telepresence technology, an integrated audio and visual environment that allows a person to give the appearance of being present at a location other than his or her true physical location. The Interactive Session on Management describes telepresence and other technologies for hosting these “virtual” meet- ings. You can also find video cases on this topic. Google Apps/Google Sites One of the most widely used “free” online ser- vices for collaboration is Google Apps/Google Sites. Google Sites allows users to quickly create online, group-editable Web sites. Google Sites is one part of the larger Google Apps suite of tools. Google Sites users can design and populate Web sites in minutes and, without any advanced technical skills, post a variety of files including calendars, text, spreadsheets, and videos for private, group, or public viewing and editing. Google Apps works with Google Sites and includes the typical desktop pro- ductivity office software tools (word processing, spreadsheets, presentation, contact management, messaging, and mail). A Premier edition charging busi- nesses $50 per year for each user offers 25 gigabytes of mail storage, a 99.9-per- cent uptime guarantee for e-mail, tools to integrate with the firm’s existing infrastructure, and 24/7 phone support. Table 2-4 describes some of the capa- bilities of Google Apps/Google Sites. TABLE 2-4 GOOGLE APPS/GOOGLE SITES COLLABORATION FEATURES GOOGLE APPS/GOOGLE SITES CAPABILITY DESCRIPTION Google Calendar Private and shared calendars; multiple calendars Google Gmail Google’s free online e-mail service, with mobile access capabilities Google Talk Instant messaging, text and voice chat Google Docs Online word processing, presentation, spreadsheet, and drawing software; online editing and sharing Google Sites Team collaboration sites for sharing documents, schedules, calendars; searching documents and creating group wikis Google Video Private hosted video sharing Google Groups User-created groups with mailing lists, shared calendars, documents, sites, and video; searchable archives 62 Part One Organizations, Management, and the Networked Enterprise Instead of taking that 6:30 A.M. plane to make a round of meetings in Dallas, wouldn’t it be great if you could attend these events without leaving your desktop? Today you can, thanks to technologies for videoconferencing and for hosting online meetings over the Web. A June 2008 report issued by the Global e-Sustainability Initiative and the Climate Group estimated that up to 20 percent of business travel could be replaced by virtual meeting technology. A videoconference allows individuals at two or more locations to communicate simultaneously through two-way video and audio transmissions. The critical feature of videoconferencing is the digital compression of audio and video streams by a device called a codec. Those streams are then divided into packets and transmitted over a network or the Internet. Until recently, the technology was plagued by poor audio and video performance, and its cost was prohibitively high for all but the largest and most powerful corporations. Most companies deemed videoconferencing a poor substitute for face-to-face meetings. However, vast improvements in videoconferenc- ing and associated technologies have renewed inter- est in this way of working. Videoconferencing is now growing at an annual rate of 30 percent. Proponents of the technology claim that it does more than sim- ply reduce costs. It allows for “better” meetings as well: it’s easier to meet with partners, suppliers, sub- sidiaries, and colleagues from within the office or around the world on a more frequent basis, which in most cases simply cannot be reasonably accom- plished through travel. You can also meet with con- tacts that you wouldn’t be able to meet at all without videoconferencing technology. For example, Rip Curl, a Costa Mesa, California, producer of surfing equipment, uses videoconferenc- ing to help its designers, marketers, and manufactur- ers collaborate on new products. Executive recruit- ing firm Korn/Ferry International uses video interviews to screen potential candidates before presenting them to clients. Today’s state-of-the-art videoconferencing systems display sharp high-definition TV images. The top-of- the-line videoconferencing technology is known as telepresence. Telepresence strives to make users feel as if they are actually present in a location different VIRTUAL MEETINGS: SMART MANAGEMENT from their own. You can sit across a table from a large screen showing someone who looks quite real and life-size, but may be in Brussels or Hong Kong. Only the handshake and exchange of business cards are missing. Telepresence products provide the high- est-quality videoconferencing available on the mar- ket to date. Cisco Systems has installed telepresence systems in more than 500 organizations around the world. Prices for fully equipped telepresence rooms can run to $500,000. Companies able to afford this technology report large savings. For example, technology consulting firm Accenture reports that it eliminated expendi- tures for 240 international trips and 120 domestic flights in a single month. The ability to reach cus- tomers and partners is also dramatically increased. Other business travelers report tenfold increases in the number of customers and partners they are able to reach for a fraction of the previous price per person. MetLife, which installed Cisco Telepresence in three dedicated conference rooms in Chicago, New York, and New Jersey, claims that the technol- ogy not only saved time and expense but also helped the company meet its “green” environmental goals of reducing carbon emissions by 20 percent in 2010. Videoconferencing products have not traditionally been feasible for small businesses, but another com- pany, LifeSize, has introduced an affordable line of products as low as $5,000. Overall, the product is easy to use and will allow many smaller companies to use a high-quality videoconferencing product. There are even some free Internet-based options like Skype videoconferencing and ooVoo. These products are of lower quality than traditional video- conferencing products, and they are proprietary, meaning they can only talk to others using that very same system. Most videoconferencing and telepres- ence products are able to interact with a variety of other devices. Higher-end systems include features like multi-party conferencing, video mail with unlimited storage, no long-distance fees, and a detailed call history. Companies of all sizes are finding Web-based online meeting tools such as WebEx, Microsoft Office Live Meeting, and Adobe Acrobat Connect especially helpful for training and sales presenta- tions. These products enable participants to share I N T E R A C T I V E S E S S I O N : M A N A G E M E N T Chapter 2 Global E-business and Collaboration 63 1. One consulting firm has predicted that video and Web conferencing will make business travel extinct. Do you agree? Why or why not? 2. What is the distinction between videoconferencing and telepresence? 3. What are the ways in which videoconferencing provides value to a business? Would you consider it smart management? Explain your answer. 4. If you were in charge of a small business, would you choose to implement videoconferencing? What factors would you consider in your decision? documents and presentations in conjunction with audioconferencing and live video via Webcam. Cornerstone Information Systems, a Bloomington, Indiana, business software company with 60 employ- ees, cut its travel costs by 60 percent and the average time to close a new sale by 30 percent by performing many product demonstrations online. Before setting up videoconferencing or telepres- ence, it’s important for a company to make sure it really needs the technology to ensure that it will be a profitable venture. Companies should determine how their employees conduct meetings, how they com- municate and with what technologies, how much travel they do, and their network’s capabilities. There are still plenty of times when face-to-face interaction is more desirable, and often traveling to meet a client is essential for cultivating clients and closing sales. Explore the WebEx Web site (www.webex.com) and answer the following questions: 1. List and describe its capabilities for small-medium and large businesses. How useful is WebEx? How can it help companies save time and money? 2. Compare WebEx video capabilities with the video- conferencing capabilities described in this case. 3. Describe the steps you would take to prepare for a Web conference as opposed to a face-to-face conference. Videoconferencing figures to have an impact on the business world in other ways, as well. More employees may be able to work closer to home and balance their work and personal lives more effi- ciently; traditional office environments and corpo- rate headquarters may shrink or disappear; and freelancers, contractors, and workers from other countries will become a larger portion of the global economy. Sources: Joe Sharkey, “Setbacks in the Air Add to Lure of Virtual Meetings, The New York Times, April 26, 2010; Bob Evans, “Pepsi Picks Cisco for Huge TelePresence Deal,” February 2, 2010; Esther Schein, “Telepresence Catching On, But Hold On to Your Wallet,” Computerworld, January 22, 2010; Christopher Musico, “Web Conferencing: Calling Your Conference to Order,” Customer Relationship Management, February 2009; and Brian Nadel, “3 Videoconferencing Services Pick Up Where Your Travel Budget Leaves Off,” Computerworld, January 6, 2009; Johna Till Johnson, “Videoconferencing Hits the Big Times…. For Real,” Computerworld, May 28, 2009. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N Google has developed an additional Web-based platform for real-time collab- oration and communication called Google Wave. “Waves” are “equal parts con- versation and document,” in which any participant of a wave can reply any- where in the message, edit the content, and add or remove participants at any point in the process. Users are able to see responses from other participants on their “wave” while typing occurs, accelerating the pace of discussion. For example, Clear Channel Radio in Greensboro, North Carolina, used Google Wave for an on air and online promotion that required input from sales people, the sales manager, the station program director, the station promotions director, the online content coordinator, and the Web manager. Without Google Wave, these people would have used numerous back and forth e-mails, sent graphics files to each other for approval, and spent large amounts of time track- ing people down by phone. Wave helped them complete the entire project in just a fraction of time it would normally have taken (Boulton, 2010). www.webex.com 64 Part One Organizations, Management, and the Networked Enterprise Microsoft SharePoint Microsoft SharePoint is the most widely adopted col- laboration system for small and medium-sized firms that use Microsoft server and networking products. Some larger firms have adopted it as well. SharePoint is a browser-based collaboration and document management platform, com- bined with a powerful search engine that is installed on corporate servers. SharePoint has a Web-based interface and close integration with everyday tools such as Microsoft Office desktop software products. Microsoft’s strategy is to take advantage of its “ownership” of the desktop through its Microsoft Office and Windows products. For Microsoft, the path towards enterprise-wide collab- oration starts with the Office desktop and Microsoft network servers. SharePoint software makes it possible for employees to share their Office docu- ments and collaborate on projects using Office documents as the foundation. SharePoint products and technologies provide a platform for Web-based collaboration at the enterprise level. SharePoint can be used to host Web sites that organize and store information in one central location to enable teams to coordinate work activities, collaborate on and publish documents, maintain task lists, implement workflows, and share information via wikis, blogs, and Twitter-style status updates. Because SharePoint stores and organizes informa- tion in one place, users can find relevant information quickly and efficiently while working together closely on tasks, projects, and documents. Here is a list of SharePoint’s major capabilities: • Provides a single workspace for teams to coordinate schedules, organize documents, and participate in discussions, within the organization or over an extranet. • Facilitates creation and management of documents with the ability to control versions, view past revisions, enforce document-specific security, and main- tain document libraries. • Provides announcements, alerts, and discussion boards to inform users when actions are required or changes are made to existing documentation or information. • Supports personalized content and both personal and public views of documents and applications. • Provides templates for blogs and wikis to help teams share information and brainstorm. • Provides tools to manage document libraries, lists, calendars, tasks, and discussion boards offline, and to synchronize changes when reconnected to the network. • Provides enterprise search tools for locating people, expertise, and content. Sony Electronics, a leading provider of consumer and professional electron- ics products with more 170,000 employees around the world, uses Microsoft Office SharePoint Server 2010 to improve information access, enhance collabo- ration, and make better use of experts inside the company. Sony uses SharePoint’s wiki tools to capture and organize employees’ insights and com- ments into a company-wide body of knowledge, and its people search feature to identify employees with expertise about specific projects and research areas. The company also used SharePoint to create a central file-sharing repository. This helps employees collaboratively write, edit, and exchange documents and eliminates the need to e-mail documents back and forth. All of these improve- ments have cut development time on key projects from three to six months to three to six weeks. (Microsoft, 2010). Chapter 2 Global E-business and Collaboration 65 Lotus Notes For very large firms (Fortune 1000 and Russell 2000 firms), the most widely used collaboration tool is IBM’s Lotus Notes. Lotus Notes was an early example of groupware, a collaborative software system with capabilities for sharing calendars, collective writing and editing, shared database access, and electronic meetings, with each participant able to see and display informa- tion from others and other activities. Notes is now Web-enabled with enhance- ments for social networking (Lotus Connections) and a scripting and applica- tion development environment so that users can build custom applications to suit their unique needs. IBM Software Group defines Lotus Notes as an “integrated desktop client option for accessing business e-mail, calendars, and applications on an IBM Lotus Domino server.” The Notes software installed on the user’s client com- puter allows the machine to be used as a platform for e-mail, instant messaging (working with Lotus Sametime), Web browsing, and calendar/resource reserva- tion work, as well as for interacting with collaborative applications. Today, Notes also provides blogs, wikis, RSS aggregators, CRM, and help desk systems. Thousands of employees at hundreds of large firms such as Toshiba, Air France, and Global Hyatt Corporation use IBM Lotus Notes as their primary col- laboration and teamwork tools. Firmwide installations of Lotus Notes at a large Fortune 1000 firm may cost millions of dollars a year and require extensive sup- port from the corporate information systems department. Although online tools like the Google collaboration services described earlier do not require installation on corporate servers or much support from the corporate IS staff, they are not as powerful as those found in Lotus Notes. It is unclear whether they could scale to the size of a global firm (at least for now). Very large firms adopt IBM Lotus Notes because Notes promises higher levels of security and reliability, and the ability to retain control over sensitive corporate information. For example, EuroChem, the largest agrochemical company in Russia and one of Europe’s top three fertilizer producers, used Lotus Notes to create a sin- gle standard platform for collaboration and document management. The soft- ware facilitates cooperation and collaboration among geographically dispersed regional production centers and provides a secure automated platform for doc- ument exchange. With Lotus Notes, EuroChem is able to register and control all documents, to establish routing paths for document approval, and to maintain a full history of all movements and changes. Security features allow the company to create a personalized work environment for each user and to prevent unau- thorized users from accessing sensitive information (IBM, 2009). Large firms in general do not feel secure using popular online software services for “strategic” applications because of the implicit security concerns. However, most experts believe that these concerns will diminish as experience with online tools grows, and the sophistication of online software service suppliers increases to protect security and reduce vulnerability. Table 2-5 describes additional online collaboration tools. C h e c k l i s t f o r M a n a g e r s : E v a l u a t i n g a n d S e l e c t i n g C o l l a b o r a t i o n S o f t w a r e To o l s With so many collaboration 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 matrix developed in the early 1990s by a number of collaborative work scholars (Figure 2-8). 66 Part One Organizations, Management, and the Networked Enterprise Socialtext's enterprise social networking products-includ- ing microblogging, blogs, wikis, profiles and social spreadsheets-enable employ- ees to share vital informa- tion and work together in real-time. Built on a flexi- ble, Web-oriented architec- ture, Socialtext integrates with virtually any traditional system of record, such as CRM and ERP, enabling companies to discuss, collab- orate, and take action on key business processes. TABLE 2-5 OTHER POPULAR ONLINE COLLABORATION TOOLS TOOL DESCRIPTION Socialtext An enterprise server-based collaboration environment which provides social networking, Twitter-like micro-blogging , wiki workspaces, with integrated weblogs, distributed spreadsheets, and a personal home page for every user. Delivered in a variety of hosted cloud services, as well as on-site appliances to provide enterprise customers with flexible deployment options that meet their security requirements. Zoho Collecting and collaborating on text, line drawings, images, Web pages, video, RSS feeds. Project management (includes task management, work flow, reports, time tracking, forums, and file sharing). Free or monthly charge for premium service. BlueTie Online collaboration with e-mail, scheduling, to-do lists, contact management, file sharing. $4.99 per user per month. Basecamp Sharing to-do lists, files, message boards, milestone tracking. Free for a single project, $24/month for 15 projects with 5 gigabytes of storage. Onehub Sharing documents, calendars, Web bookmarks; e-mail integration and IM. Manage hub resources; bulletin board. WorkZone Collaboration with file sharing; project management; customization; security. Chapter 2 Global E-business and Collaboration 67 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 Bombay, so this makes it difficult to have a video-conference (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 technologies we have just described are ways of overcom- ing the limitations of time and space. Using this time/space framework 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 sce- nario. For example, Internet collaboration suites such as Lotus Notes have capa- bilities for both synchronous (instant messaging, electronic meeting tools) and asynchronous (e-mail, wikis, document editing) interactions. 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 their 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. FIGURE 2-8 THE TIME/SPACE COLLABORATION TOOL MATRIX Collaboration technologies can be classified in terms of whether they support interactions at the same or different time or place, and whether these interactions are remote or co-located. 68 Part One Organizations, Management, and the Networked Enterprise 4. Identify the risks to security and vulnerability involved with each of the prod- ucts. Is your firm willing to put proprietary information into the hands of exter- nal service providers over the Internet? Is your firm willing to risk 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 presen- tations. 2.4 THE INFORMATION SYSTEMS FUNCTION IN 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. 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 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 facil- ity 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 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 integrating technology into the firm’s business strategy. Large firms today also have positions for a chief security officer, chief knowledge 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 Chapter 2 Global E-business and Collaboration 69 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 responsible 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. End users are representatives of departments outside of the information systems group for whom applications are developed. These users are playing an increasingly large role in the design and development of information sys- tems. 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. 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 respon- sible for keeping its networks and applications running, or it might use consul- tants for these services. Larger companies will have a separate information sys- tems 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 (Weill and Ross, 2004). 70 Part One Organizations, Management, and the Networked Enterprise 2.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience analyzing opportuni- ties 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. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. Don’s Lumber Company on the Hudson River is one of the oldest retail lum- beryards in New York State. It features a large selection of materials for floor- ing, 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 pre-finished 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. Who would make those decisions? 2. Henry’s Hardware is a small family business in Sacramento, California. The owners must use every square foot of store space as profitably as possi- ble. 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 the owners run their business? What data should these systems capture? What decisions could the systems improve? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g a S p r e a d s h e e t t o S e l e c t S u p p l i e r s Software skills: Spreadsheet date functions, data filtering, DAVERAGE function Business skills: Analyzing supplier performance and pricing In this exercise, you will learn how to use spreadsheet software to improve management decisions about selecting suppliers. You will start with raw trans- actional data about suppliers organized as a large spreadsheet list. You will use the spreadsheet software to filter the data 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 myMISlab, 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. A sample is shown below, but the Web site may have a more recent version of this spreadsheet for this exercise. The fields in the spreadsheet file include vendor name, vendor identification number, purchaser’s order number, item identification number and item description (for each item ordered from the vendor), cost per item, number of units of the item ordered (quantity), total cost of each Chapter 2 Global E-business and Collaboration 71 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 offering lower pricing when the same item can be provided by multi- ple suppliers. Use your spreadsheet software to prepare reports to support your recommendations. A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : U s i n g I n t e r n e t S o f t w a r e t o P l a n E f f i c i e n t Tr a n s p o r t a t i o n R o u t e s In this exercise, you will use the same online software tool that businesses use to map out their transportation routes and select the most efficient route. The MapQuest (www.mapquest.com) Web site includes interactive capabili- ties for planning a trip. The software on this Web site can calculate the distance between two points and provide itemized driving directions to any location. You have just started working as a dispatcher for Cross-Country Transport, a new trucking and delivery service based in Cleveland, Ohio. Your first assign- ment is to plan a delivery of office equipment and furniture from Elkhart, Indiana (at the corner of E. Indiana Ave. and Prairie Street) to Hagerstown, Maryland (corner of Eastern Blvd. N. and Potomac Ave.). To guide your trucker, you need to know the most efficient route between the two cities. Use MapQuest to find the route that is the shortest distance between the two cities. Use MapQuest again to find the route that takes the least time. Compare the results. Which route should Cross-Country use? www.mapquest.com 72 Part One Organizations, Management, and the Networked Enterprise LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter: 1. Systems from a Functional Perspective 2. IT Enables Collaboration and Teamwork 3. Challenges of Using Business Information Systems 4. Organizing the Information Systems Function Review Summary 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. How do systems serve the different management groups in a business? Systems serving operational management are transaction processing systems (TPS), such as pay- roll 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 analyti- cal models. All of these types of systems provide business intelligence that helps managers and enterprise employees 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. 3. How do systems that link the enterprise improve organizational performance? Enterprise applications are designed to coordinate multiple functions and business processes. Enterprise systems integrate the key internal business processes of a firm into a single software sys- tem 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 deliv- ery of products and services. Customer relationship management (CRM) systems coordinate the business processes 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. 4. Why are systems for collaboration and teamwork so important and what technologies do they use? Collaboration is working with others to achieve shared and explicit goals. Collaboration and team- work have become increasingly important in business because of globalization, the decentralization of decision making, and growth in jobs where interaction is the primary value-adding activity. Collaboration is believed to enhance innovation, productivity, quality, and customer service. Effective collaboration today requires a supportive organizational culture as well as information systems and tools for collaborative work. Collaboration tools include e-mail and instant messaging, wikis, videoconferencing systems, virtual worlds, social networking systems, cell phones, and Internet collaboration platforms such as Google Apps/Sites, Microsoft SharePoint, and Lotus Notes. 5. 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 networks that comprise the firm’s IT infrastructure. The department consists of specialists, such as programmers, systems analysts, project leaders, and information systems managers, and is often headed by a CIO. Key Terms Business intelligence, 49 Chief information officer (CIO), 68 Chief knowledge officer (CKO), 69 Chief privacy officer (CPO), 69 Chief security officer (CSO), 68 Collaboration, 56 Customer relationship management (CRM) systems, 53 Decision-support systems (DSS), 48 Digital dashboard, 50 Electronic business (e-business), 55 Electronic commerce (e-commerce), 55 E-government, 55 End users, 69 Enterprise applications, 51 Enterprise systems, 51 Executive support systems (ESS), 50 Information systems department, 68 Information systems managers, 68 Interorganizational system, 53 IT governance, 69 Knowledge management systems (KMS), 54 Management information systems (MIS), 47 Portal, 50 Programmers, 68 Supply chain management (SCM) systems, 53 Systems analysts, 68 Teams, 56 Telepresence, 61 Transaction processing systems (TPS), 45 Review Questions 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. How do systems serve the various levels of man- agement in a business? • 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-sup- port systems (DSS) and how they benefit businesses. • Describe the characteristics of executive sup- port systems (ESS) and explain how these sys- tems differ from DSS. 3. How do systems that link the enterprise improve organizational performance? • Explain how enterprise applications improve organizational performance. • Define enterprise systems, supply chain management systems, customer relationship management systems, and knowledge man- agement systems and describe their business benefits. • Explain how intranets and extranets help firms integrate information and business processes. 4. Why are systems for collaboration and teamwork so important and what technologies do they use? Chapter 2 Global E-business and Collaboration 73 74 Part One Organizations, Management, and the Networked Enterprise Collaboration and Teamwork: Describing Management Decisions and Systems Discussion Questions 1. How could information systems be used to sup- port 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. Identify the steps that are performed in the process of selecting and checking out a book from your college library and the information that flows among these activities. Diagram the Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. With a team of three or four other students, find a description of a manager in a corporation in BusinessWeek, Fortune, The Wall Street Journal, or another business publication or do your research on the Web. Gather information about what the man- ager’s company 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 Sites to post links to Web pages, team communication announcements, and work assignments. Try to use Google Docs to develop a presentation of your find- ings for the class. process. Are there any ways this process could be improved to improve the performance of your library or your school? Diagram the improved process. 3. How might the BMW Oracle team have used col- laboration systems to improve the design and per- formance of the America’s Cup sailboat USA? Which system features would be the most impor- tant for these tasks? • Define collaboration and teamwork and explain why they have become so important in business today. • List and describe the business benefits of collaboration. • Describe a supportive organizational culture and business processes for collaboration. • List and describe the various types of collab- oration and communication systems. 5. What is the role of the information systems function in a business? • Describe how the information systems func- tion supports a business. • Compare the roles played by programmers, systems analysts, information systems man- agers, the chief information officer (CIO), chief security officer (CSO), and chief knowl- edge officer (CKO). Chapter 2 Global E-Business and Collaboration 75 C o l l a b o r a t i o n a n d I n n o v a t i o n a t P r o c t e r & G a m b l e CASE STUDY ook in your medicine cabinet. No matter where you live in the world, odds are that you’ll find many Procter & Gamble products that you use every day. P&G is the largest manufacturer of consumer products in the world, and one of the top 10 largest companies in the world by market capitalization. The company is known for its successful brands, as well as its ability to develop new brands and maintain its brands’ popularity with unique business innovations. Popular P&G brands include Pampers, Tide, Bounty, Folgers, Pringles, Charmin, Swiffer, Crest, and many more. The com- pany has approximately 140,000 employees in more than 80 countries, and its leading competitor is Britain-based Unilever. Founded in 1837 and head- quartered in Cincinnati, Ohio, P&G has been a main- stay in the American business landscape for well over 150 years. In 2009, it had $79 billion in revenue and earned a $13.2 billion profit. P&G’s business operations are divided into three main units: Beauty Care, Household Care, and Health and Well-Being, each of which are further subdivided into more specific units. In each of these divisions, P&G has three main focuses as a business. It needs to maintain the popularity of its existing brands, via advertising and marketing; it must extend its brands to related products by developing new products under those brands; and it must innovate and create new brands entirely from scratch. Because so much of P&G’s business is built around brand creation and management, it’s critical that the company facilitate collaboration between researchers, marketers, and managers. And because P&G is such a big company, and makes such a wide array of products, achieving these goals is a daunting task. P&G spends 3.4 percent of revenue on innovation, which is more than twice the industry average of 1.6 percent. Its research and development teams consist of 8,000 scientists spread across 30 sites globally. Though the company has an 80 percent “hit” rate on ideas that lead to products, making truly innovative and groundbreaking new products is very difficult in an extremely competitive field like consumer prod- ucts. What’s more, the creativity of bigger companies like P&G has been on the decline, with the top con- sumer goods companies accounting for only 5 per- cent of patents filed on home care products in the early 2000s. Finding better ways to innovate and develop new ideas is critical in a marketplace like consumer goods, and for any company as large as P&G, finding methods of collaboration that are effective across the enterprise can be difficult. That’s why P&G has been active in implementing information systems that fos- ter effective collaboration and innovation. The social networking and collaborative tools popularized by Web 2.0 have been especially attractive to P&G man- agement, starting at the top with former CEO A.G. Lafley. Lafley was succeeded by Robert McDonald in 2010, but has been a major force in revitalizing the company. When Lafley became P&G’s CEO in 2000, he immediately asserted that by the end of the decade, the company would generate half of its new product ideas using sources from outside the company, both as a way to develop groundbreaking innovations more quickly and to reduce research and develop- ment costs. At the time, Lafley’s proclamation was considered to be visionary, but in the past 10 years, P&G has made good on his promise. The first order of business for P&G was to develop alternatives to business practices that were not suffi- ciently collaborative. The biggest culprit, says Joe Schueller, Innovation Manager for P&G’s Global Business Services division, was perhaps an unlikely one: e-mail. Though it’s ostensibly a tool for commu- nication, e-mail is not a sufficiently collaborative way to share information; senders control the flow of information, but may fail to send mail to colleagues who most need to see it, and colleagues that don’t need to see certain e-mails will receive mailings long after they’ve lost interest. Blogs and other collabora- tive tools, on the other hand, are open to anyone interested in their content, and attract comments from interested users. However, getting P&G employees to actually use these newer products in place of e-mail has been a struggle for Schueller. Employees have resisted the changes, insisting that newer collaborative tools represent more work on top of e-mail, as opposed to a better alternative. People are accustomed to e-mail, and there’s significant organizational inertia against switching to a new way of doing things. Some P&G L 76 Part One Organizations, Management, and the Networked Enterprise processes for sharing knowledge were notoriously inefficient. For instance, some researchers used to write up their experiments using Microsoft Office applications, then print them out and glue them page by page into notebooks. P&G was determined to implement more efficient and collaborative methods of communication to supplant some of these out- dated processes. To that end, P&G launched a total overhaul of its collaboration systems, led by a suite of Microsoft products. The services provided include unified com- munications (which integrates services for voice transmission, data transmission, instant messaging, e-mail, and electronic conferencing), Microsoft Live Communications Server functionality, Web confer- encing with Live Meeting, and content management with SharePoint. According to P&G, over 80,000 employees use instant messaging, and 20,000 use Microsoft Outlook, which provides tools for e-mail, calendaring, task management, contact manage- ment, note taking, and Web browsing. Outlook works with Microsoft Office SharePoint Server to support multiple users with shared mailboxes and calendars, SharePoint lists, and meeting schedules. The presence of these tools suggests more collabo- rative approaches are taking hold. Researchers use the tools to share the data they’ve collected on vari- ous brands; marketers can more effectively access the data they need to create more highly targeted ad campaigns; and managers are more easily able to find the people and data they need to make critical business decisions. Companies like P&G are finding that one vendor simply isn’t enough to satisfy their diverse needs. That introduces a new challenges: managing infor- mation and applications across multiple platforms. For example, P&G found that Google search was inadequate because it doesn’t always link informa- tion from within the company, and its reliance on keywords for its searches isn’t ideal for all of the top- ics for which employees might search. P&G decided to implement a new search product from start-up Connectbeam, which allows employees to share bookmarks and tag content with descriptive words that appear in future searches, and facilitates social networks of coworkers to help them find and share information more effectively. The results of the initiative have been immediate. For example, when P&G executives traveled to meet with regional managers, there was no way to inte- grate all the reports and discussions into a single doc- ument. One executive glued the results of experi- ments into Word documents and passed them out at a conference. Another executive manually entered his data and speech into PowerPoint slides, and then e-mailed the file to his colleagues. One result was that the same file ended up in countless individual mailboxes. Now, P&G’s IT department can create a Microsoft SharePoint page where that executive can post all of his presentations. Using SharePoint, the presentations are stored in a single location, but are still accessible to employees and colleagues in other parts of the company. Another collaborative tool, InnovationNet, contains over 5 million research- related documents in digital format accessible via a browser-based portal. That’s a far cry from experi- ments glued in notebooks. One concern P&G had when implementing these collaborative tools was that if enough employees did- n’t use them, the tools would be much less useful for those that did use them. Collaboration tools are like business and social networks–the more people con- nect to the network, the greater the value to all par- ticipants. Collaborative tools grow in usefulness as more and more workers contribute their information and insights. They also allow employees quicker access to the experts within the company that have needed information and knowledge. But these bene- fits are contingent on the lion’s share of company employees using the tools. Another major innovation for P&G was its large- scale adoption of Cisco TelePresence conference rooms at many locations across the globe. For a com- pany as large as P&G, telepresence is an excellent way to foster collaboration between employees across not just countries, but continents. In the past, telepresence technologies were prohibitively expen- sive and overly prone to malfunction. Today, the technology makes it possible to hold high-definition meetings over long distances. P&G boasts the world’s largest rollout of Cisco TelePresence technology. P&G’s biggest challenge in adopting the technol- ogy was to ensure that the studios were built to par- ticular specifications in each of the geographically diverse locations where they were installed. Cisco accomplished this, and now P&G’s estimates that 35 percent of its employees use telepresence regularly. In some locations, usage is as high as 70 percent. Benefits of telepresence include significant travel savings, more efficient flow of ideas, and quicker decision making. Decisions that once took days now take minutes. Laurie Heltsley, P&G’s director of global business services, noted that the company has saved $4 for every $1 invested in the 70 high-end telepresence systems it has installed over the past few years. Chapter 2 Global E-Business and Collaboration 77 These high-definition systems are used four times as often as the company’s earlier versions of videocon- ferencing systems. Sources: Joe Sharkey, “Setbacks in the Air Add to Lure of Virtual Meetings,” The New York Times, April 26, 2010; Matt Hamblen, “Firms Use Collaboration Tools to Tap the Ultimate IP-Worker Ideas,” Computerworld, September 2, 2009; “Computerworld Honors Program: P&G”, 2008; www.pg.com, accessed May 18, 2010; “Procter & Gamble Revolutionizes Collaboration with Cisco TelePresence,” www.cisco.com, accessed May 18, 2010; “IT’s Role in Collaboration at Procter &Gamble,” Information Week, February 1, 2007. CASE STUDY QUESTIONS 1. What is Procter & Gamble’s business strategy? What is the relationship of collaboration and innovation to that business strategy? 2. How is P&G using collaboration systems to exe- cute its business model and business strategy? List and describe the collaboration systems and technologies it is using and the benefits of each. 3. Why were some collaborative technologies slow to catch on at P&G? 4. Compare P&G’s old and new processes for writing up and distributing the results of a research experiment. 5. Why is telepresence such a useful collaborative tool for a company like P&G? 6. Can you think of other ways P&G could use collaboration to foster innovation? www.pg.com www.cisco.com LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. Which features of organizations do managers need to know about to build and use information systems successfully? What is the impact of information systems on organiza- tions? 2. How does Porter’s competitive forces model help companies develop competitive strategies using information systems? 3. How do the value chain and value web models help businesses iden- tify opportunities for strategic information system applications? 4. How do information systems help businesses use synergies, core competencies, and network-based strategies to achieve competitive advantage? 5. What are the challenges posed by strategic information systems and how should they be addressed? CHAPTER OUTLINE 3.1 ORGANIZATIONS AND INFORMATION SYSTEMS What Is an Organization? Features of Organizations 3.2 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Economic Impacts Organizational and Behavioral Impacts The Internet and Organizations Implications for the Design and Understanding of Information Systems 3.3 USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE Porter’s Competitive Forces Model Information System Strategies for Dealing with Competitive Forces The Internet’s Impact on Competitive Advantage The Business Value Chain Model Synergies, Core Competencies, and Network-Based Strategies 3.4 USING SYSTEMS FOR COMPETITIVE ADVANTAGE: MANAGEMENT ISSUES Sustaining Competitive Advantage Aligning IT with Business Objectives Managing Strategic Transitions 3.5 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using a Database to Clarify Business Strategy Improving Decision Making: Using Web Tools to Configure and Price an Automobile LEARNING TRACK MODULE The Changing Business Environment for Information Technology Chapter 3 Information Systems, Organizations, and Strategy Interactive Sessions: How Much Do Credit Card Companies Know About You? Is the iPad a Disruptive Technology? 79 erizon and AT&T are the two largest telecommunications companies in the United States. In addition to voice communication, their customers use their networks to surf the Internet; send e-mail, text, and video messages; share photos; watch videos and high-definition TV; and conduct videoconferences around the globe. All of these products and services are digital. Competition in this industry is exceptionally intense and fast-changing. Both companies are trying to outflank one another by refining their wireless, landline, and high-speed Internet networks and expanding the range of products, applications, and services available to customers. Wireless services are the most profitable. AT&T is staking its growth on the wireless market by aggressively marketing leading-edge high-end devices such as the iPhone. Verizon has bet on the reliability, power, and range of its wireless and landline networks and its renowned customer service. For a number of years, Verizon has tried to blunt competition by making heavy technol- ogy investments in both its landline and wireless networks. Its wireless network is consid- ered the most far-reaching and reliable in the United States. Verizon is now pouring billions of dollars into a rollout of fourth-generation (4G) cellular technology capable of supporting highly data-intensive applications such as downloading large streams of video and music through smart phones and other network appliances. Returns from Verizon’s 4G investment are still uncertain. Verizon’s moves appear more risky financially than AT&T’s, because its up-front costs are so high. AT&T’s strategy is more conservative. Why not partner with other companies to capitalize on their technology innovations? That was the rationale for AT&T contracting with Apple Computer to be the exclusive network for its iPhone. Even though AT&T subsidizes some of the iPhone’s cost to consumers, the iPhone’s streamlined design, touch screen, exclusive access to the iTunes music service, and over 250,000 downloadable applications have made it an instant hit. AT&T has also sought to provide cellular services for other network appliances such as Amazon’s Kindle e-book reader and netbooks. The iPhone has been AT&T’s primary growth engine, and the Apple relationship made the carrier the U.S. leader in the smartphone carrier marketspace. AT&T has over 43 percent of U.S. smartphone customers, compared with 23 percent for Verizon. Smart-phone customers are VERIZON OR AT&T—WHICH COMPANY HAS THE BEST DIGITAL STRATEGY? V highly desirable because they typically pay higher monthly rates for wireless data service plans. The iPhone became so wildly popular that users overstrained AT&T’s networks, leaving many in dense urban areas such as New York and San Francisco with sluggish service or dropped calls. To handle the surging demand, AT&T could upgrade its wire- less network, but that would cripple profits. Experts con- tend that AT&T would have to spend $5 billion to $7 billion to bring its network up to 80 Part One Organizations, Management, and the Networked Enterprise Verizon’s quality. To curb excessive use, AT&T moved to a tiered pricing model for new iPhone users, with data charges based on how much data customers actually use. Adding to AT&T’s woes, its monopoly on the iPhone may be ending. Apple reached an agreement with Verizon in 2010 to make an iPhone that is com- patible with Verizon's network. Allowing Verizon to offer iPhone service will more than double Apple’s market for this device, but will undoubtedly drive some AT&T iPhone customers to Verizon in the hope of finding better net- work service. Verizon is further hedging its bets by offering leading-edge smartphones based on Google’s Android operating system that compete well against the iPhone. With or without the iPhone, if Verizon’s Android phone sales continue to accelerate, the competitive balance will shift again. Sources: Roger Cheng, “For Telecom Firms, Smartphones Rule,” The Wall Street Journal, July 19, 2010; Brad Stone and Jenna Wortham, “Even Without iPhone, Verizon Is Gaining,” The New York Times, July 15, 2010; Roben Farzad, “AT&T’s iPhone Mess,” Bloomberg Businessweek, April 25, 2010; Niraj Sheth, “AT&T Prepares Network for Battle,” The Wall Street Journal, March 31, 2010; and Amol Sharma, “AT&T, Verizon Make Different Calls,” The Wall Street Journal, January 28, 2009. The story of Verizon and AT&T illustrates some of the ways that informa-tion systems help businesses compete—and also the challenges of sustaining a competitive advantage. The telecommunications industry in which both companies operate is extremely crowded and competitive, with telecom- munications companies vying with cable companies, new upstarts, and each other to provide a wide array of digital services as well as voice transmission. To meet the challenges of surviving and prospering in this environment, each of these companies focused on a different competitive strategy using informa- tion technology. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Both companies identified opportunities to use information technology to offer new products and services. AT&T offered enhanced wireless services for the iPhone, while Verizon initially focused on high-capacity, high-quality network services. AT&T’s strategy emphasized keeping costs low while capitalizing on innovations from other technology vendors. Verizon’s strategy involved high up-front costs to build a high-capacity network infrastructure, and it also focused on providing a high level of network reliability and customer service. This case study clearly shows how difficult it is to sustain a competitive advantage. Exclusive rights to use the highly popular iPhone on its network brought AT&T millions of new customers and enhanced its competitive position. But its competitive advantage is likely to erode if it is forced to invest heavily to upgrade its networks, if Apple allows Verizon to offer a version of the iPhone, or if Verizon smartphones are competitive with the iPhone. Changes in service pricing plans may also affect the competitive balance among the various wireless carriers. Chapter 3 Information Systems, Organizations, and Strategy 81 3.1 ORGANIZATIONS AND INFORMATION SYSTEMS nformation systems and organizations influence one another. Information systems 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 complex and is influenced by many mediating factors, including the organiza- tion’s structure, business processes, politics, culture, surrounding environment, and management decisions (see Figure 3-1). You will need to understand how information systems can change social and work life in your firm. You will not be able to design new systems successfully or understand existing systems without understanding your own business organization. I 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. 82 Part One Organizations, Management, and the Networked Enterprise 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 anticipate 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 fifteen years ago, for instance, that e-mail and instant messaging 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 definition focuses on three elements of an organization. Capital and labor are primary production factors provided by the environment. The organization (the firm) 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 routineness. Organizations are formal legal entities with internal rules and procedures that must abide by laws. Organizations are also social structures because they are a collection of social elements, much as a machine has a structure—a particular arrangement of valves, cams, shafts, and other parts. This definition of organizations is powerful and simple, but it is not very descriptive or even predictive of real-world organizations. A more realistic behavioral definition of an organization is that it is a collection of rights, privileges, obligations, and responsibilities that is 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 develop customary ways of working; they gain attachments to existing relationships; and they make arrangements with subordinates and superiors about how work will be done, the amount of work that will be done, and under FIGURE 3-2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE ORGANIZATION In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production 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. what conditions work will be done. Most of these arrangements and feelings are not discussed in any formal rulebook. How do these definitions of organizations relate to information systems technology? A technical view of organizations encourages us to focus on how inputs 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 organizational 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 effectively a new information system is much longer than usually anticipated simply because there is a lag between implementing a technical system and teaching employees and managers how to use the system. Technological change requires changes in who owns and controls informa- tion, 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 workings. Section 3.2 describes how each of these definitions of organizations can help explain the relationships between information systems and organiza- tions. Chapter 3 Information Systems, Organizations, and Strategy 83 FIGURE 3-3 THE BEHAVIORAL VIEW OF ORGANIZATIONS The behavioral view of organizations emphasizes group relationships, values, and structures. 84 Part One Organizations, Management, and the Networked Enterprise FEATURES OF ORGANIZATIONS All modern organizations have certain characteristics. They are bureaucra- cies with clear-cut divisions of labor and specialization. Organizations arrange specialists in a hierarchy of authority in which everyone is account- able to someone and authority is limited to specific actions governed by abstract rules or procedures. These rules create a system of impartial and universal decision making. Organizations try to hire and promote employees on the basis of technical qualifications 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 poli- tics, surrounding environments, structure, goals, constituencies, and leader- ship styles. All of these features affect the kinds of information systems used by organizations. R o u t i n e s a n d B u s i n e s s P r o c e s s e s All organizations, including business firms, become very efficient over time because 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 productive and efficient, and the firm is able to reduce its costs over time as efficiency 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 routines. A business firm in turn is a collection of business processes (Figure 3-4). O r g a n i z a t i o n a l P o l i t i c s People in organizations occupy different positions with different specialties, concerns, and perspectives. As a result, they naturally have divergent viewpoints about how resources, rewards, and punishments should be distributed. These differences matter to both managers and employees, and they result in political struggle for resources, competition, and conflict within every organization. Political resistance is one of the great difficulties of bringing about organizational change—especially the development of new information systems. 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 that 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 of where internal politics defeated the best-laid plans for an information system. O r g a n i z a t i o n a l C u l t u r e 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 organization should produce, how it should produce them, where, and for whom. Generally, these cultural assumptions are taken totally for granted Chapter 3 Information Systems, Organizations, and Strategy 85 and are rarely publicly announced or spoken about. Business processes—the actual way business firms produce value—are usually ensconced in the organization’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 professors 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 understanding, 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 organizational culture. When this occurs, the technology is often stalled while the culture slowly adjusts. 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. 86 Part One Organizations, Management, and the Networked Enterprise O r g a n i z a t i o n a l E n v i r o n m e n t s 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 example, 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 technologies, new products, and changing public tastes and values (many of which result in new government regulations) put strains on any organization’s culture, 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 threat to closely held cultural values inhibit organizations from making significant 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. 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 technology plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment. Chapter 3 Information Systems, Organizations, and Strategy 87 Disruptive Technologies: Riding the Wave. Sometimes a technology and resulting business innovation comes along to radically change the business landscape and environment. These innovations are loosely called “disruptive.” (Christensen, 2003). What makes a technology disruptive? In some cases, dis- ruptive technologies are substitute products that perform as well 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 for portable CD players; digital photography for process film photography. In these cases, entire industries are put out of business. In other cases, disruptive technologies simply extend the market, usually with less functional- ity 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. Some firms are able to create these technologies and ride the wave to profits; 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). Table 3-1 describes just a few disruptive technologies from the past. Disruptive technologies are tricky. Firms that invent disruptive technologies as “first movers” do not always benefit if they lack the resources to exploit the TABLE 3-1 DISRUPTIVE TECHNOLOGIES: WINNERS AND LOSERS TECHNOLOGY DESCRIPTION WINNERS AND LOSERS Microprocessor chips Thousands and eventually millions of Microprocessor firms win (Intel, Texas Instruments) (1971) transistors on a silicon chip while transistor firms (GE) decline. Personal computers Small, inexpensive, but fully functional desktop PC manufacturers (HP, Apple, IBM), and chip (1975) computers manufacturers prosper (Intel), while mainframe (IBM) and minicomputer (DEC) firms lose. PC word processing Inexpensive, limited but functional text editing PC and software manufacturers (Microsoft, HP, Apple) software (1979) and formatting for personal computers prosper, while the typewriter industry disappears. World Wide Web A global database of digital files and “pages” Owners of online content and news benefit, while traditional (1989) instantly available publishers (newspapers, magazines, broadcast television) lose. Internet music services Repositories of downloadable music on the Owners of online music collections (MP3.com, iTunes), (1998) Web with acceptable fidelity telecommunications providers who own Internet backbone (AT&T, Verizon), local Internet service providers win, while record label firms and music retailers lose (Tower Records). PageRank algorithm A method for ranking Web pages in terms of Google is the winner (they own the patent), while their popularity to supplement Web search traditional key word search engines (Alta Vista) lose. by key terms Software as Web service Using the Internet to provide remote access Online software services companies (Salesforce.com) to online software win, while traditional “boxed” software companies (Microsoft, SAP, Oracle) lose. 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 rewards. 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. Google was not a first mover in search, but an innovative follower that was able to maintain rights to a powerful new search algorithm called PageRank. So far it has been able to hold onto its lead while most other search engines have faded down to small market shares. O r g a n i z a t i o n a l S t r u c t u r e Organizations all have a structure or shape. Mintzberg’s classification, described in Table 3-2, identifies five basic kinds of organizational structure (Mintzberg, 1979). The kind of information systems you find in a business firm—and the nature of problems with these systems—often reflects the type of organizational structure. For instance, in a professional bureaucracy such as a hospital 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 often outgrow their usefulness quickly. In huge multidivisional firms operating in hundreds of locations you will often find there is not a single integrating information system, but instead each locale or each division has its set of information systems. O t h e r O r g a n i z a t i o n a l Fe a t u r e s Organizations have goals and use different means to achieve them. Some organizations have coercive goals (e.g., prisons); others have utilitarian goals (e.g., businesses). Still others have normative goals (universities, religious 88 Part One Organizations, Management, and the Networked Enterprise TABLE 3-2 ORGANIZATIONAL STRUCTURES ORGANIZATIONAL TYPE DESCRIPTION EXAMPLES Entrepreneurial structure Young, small firm in a fast-changing environment. It has a Small start-up business simple structure and is managed by an entrepreneur serving as its single chief executive officer. Machine bureaucracy Large bureaucracy existing in a slowly changing environment, Midsize manufacturing firm producing standard products. It is dominated by a centralized management team and centralized decision making. Divisionalized bureaucracy Combination of multiple machine bureaucracies, each Fortune 500 firms, such as General producing a different product or service, all topped by one Motors central headquarters. Professional bureaucracy Knowledge-based organization where goods and services Law firms, school systems, hospitals depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority. Adhocracy Task force organization that must respond to rapidly changing Consulting firms, such as the Rand environments. Consists of large groups of specialists organized Corporation into short-lived multidisciplinary teams and has weak central management. Chapter 3 Information Systems, Organizations, and Strategy 89 groups). Organizations also serve different groups or have different constituen- cies, some primarily benefiting their members, others benefiting clients, stockholders, or the public. The nature of leadership differs greatly from one organization 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 manufacturing auto parts), whereas others (such as consulting firms) work primarily with nonroutine tasks. 3.2 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Information systems have become integral, online, interactive tools deeply involved in the minute-to-minute operations and decision making of large organizations. Over the last 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 workers as information technology substitutes for their labor (Laudon, 1990). As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain relatively expensive. Hence, over time we should expect managers to increase their invest- ments in IT because of its declining cost relative to other capital investments. IT also obviously affects the cost and quality of information and changes the economics 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 locating and communicating with distant suppliers, monitoring contract compliance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985). Traditionally, firms have tried to reduce trans- action costs through vertical integration, by getting bigger, hiring more employ- ees, 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 result, firms can shrink in size (numbers of employees) because it is far less expensive to outsource work to a competitive marketplace rather than hire employees. 90 Part One Organizations, Management, and the Networked Enterprise For instance, by using computer links to external suppliers, the Chrysler Corporation can achieve economies by obtaining more than 70 percent of its parts from the outside. Information systems make it possible for companies such as Cisco Systems and Dell Inc. to outsource their production to contract manufacturers such as Flextronics instead of making their products themselves. Figure 3-6 shows that 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 purchase 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 company 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 employees. In 2009, it generated over $5 billion in revenue with only 10,000 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” (employ- ees) to perform work on his or her behalf. However, agents need constant supervision and management; otherwise, they will tend to pursue their own interests 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. Figure 3-7 shows that by reducing overall management costs, information technology enables firms to increase revenues while shrinking the number of middle managers and clerical workers. We have seen examples in earlier chapters where information technology expanded the power and scope of small organi- zations by enabling them to perform coordinating activities such as processing orders or keeping track of inventory with very few clerks and managers. FIGURE 3-6 THE TRANSACTION COST THEORY OF THE IMPACT OF INFORMATION TECHNOLOGY ON THE ORGANIZATION When the costs of participating in markets (transaction costs) were high, it made sense to build large firms and do everything inside the firm. But IT reduces the firm's market transaction costs. This means firms can outsource work using the market, reduce their employee head count, and still grow revenues, relying more on outsourcing firms and external contractors. Chapter 3 Information Systems, Organizations, and Strategy 91 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 increase 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. I T F l a t t e n s O r g a n i z a t i o n s Large, bureaucratic organizations, which primarily developed before the computer age, are often inefficient, slow to change, and less competitive than newly created organizations. Some of these large organizations have downsized, reducing the number of employees and the number of levels in their organiza- tional hierarchies. Behavioral researchers have theorized that information technology facilitates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency (see Figure 3-8). IT pushes decision-making rights lower in the organization because lower-level employees receive the information they need to make decisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees the 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 decline 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 FIGURE 3-7 THE AGENCY COST THEORY OF THE IMPACT OF INFORMATION TECHNOLOGY ON THE ORGANIZATION Agency costs are the costs of managing a firm's employees. IT reduces agency costs making manage- ment more efficient. Fewer managers are needed to manage employees. IT makes it possible to build very large global firms and to run them efficiently without greatly expanding management. Without IT, very large global firms would be difficult to operate because they would be very expensive to manage. 92 Part One Organizations, Management, and the Networked Enterprise spread over greater distances. Many companies have eliminated thousands of middle managers as a result of these changes. P o s t i n d u s t r i a l O r g a n i z a t i o n s 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 professional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more widespread throughout the firm (Drucker, 1988). 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 automobile); once the task is accomplished, the individuals join other task forces. The global consulting service Accenture is an example. It has no opera- tional headquarters and no formal branches. Many of its 190,000 employees move from location to location to work on projects at client locations in 49 different countries. Who makes sure that self-managed teams do not head off in the wrong direction? 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. FIGURE 3-8 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. Chapter 3 Information Systems, Organizations, and Strategy 93 U n d e r s t a n d i n g O r g a n i z a t i o n a l R e s i s t a n c e t o C h a n g e Information systems inevitably become bound up in organizational politics 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 personal, 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. Leavitt (1965) used a diamond shape to illustrate the interrelated and mutually adjusting character of technology and organization (see Figure 3-9). Here, changes in technology are absorbed, 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 simulta- neously. Other authors have spoken about the need to “unfreeze” organizations before introducing an innovation, quickly implementing it, and “refreezing” or institutionalizing the change (Alter and Ginzberg, 1978; Kolb, 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 common reason for failure of large projects to reach their objectives is not the failure of the technology, but organizational and political resistance to change. Chapter 14 treats this issue in detail. Therefore, as a manger 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 FIGURE 3-9 ORGANIZATIONAL RESISTANCE AND THE MUTUALLY ADJUSTING RELATIONSHIP BETWEEN TECHNOLOGY AND THE ORGANIZATION 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. Source: Leavitt (1965). 94 Part One Organizations, Management, and the Networked Enterprise organization of business processes inside a firm. The Internet increases the accessibility, 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, broker- age firms and banks in New York can now deliver their internal operating pro- cedures manuals to their employees at distant locations by posting them on the corporate Web site, saving millions of dollars in distribution costs. A global sales force can receive nearly instant product price information updates using the Web or instructions from management sent by e-mail. Vendors of some large retailers can access retailers’ internal Web sites directly to find up-to-the-minute sales information and to initiate replenishment 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 much 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 understanding of the organization in which they will be used. In our experi- ence, 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 3.3 USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE In almost every industry you examine, you will find that some firms do better than most others. There’s almost always a stand-out firm. In the automotive 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 75 percent of the downloaded music market, and in the related industry of digital music players, the iPod is the leader. 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 Chapter 3 Information Systems, Organizations, and Strategy 95 because of superior knowledge and information assets. In any event, they do better in terms of revenue growth, profitability, or productivity growth (efficiency), all of which ultimately in the long run translate into higher stock market valuations than their competitors. But why do some firms do better than others and how do they achieve competitive 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 answer to that question is Michael Porter’s competitive forces model. PORTER’S COMPETITIVE FORCES MODEL Arguably, the most widely used model for understanding competitive advantage is Michael Porter’s competitive forces model (see Figure 3-10). This model provides a general view of the firm, its competitors, and the firm’s environment. Earlier in this chapter, we described the importance of a firm’s environment and the dependence of firms on environments. Porter’s model is all about the firm’s general business environment. In this model, five competi- tive forces shape the fate of the firm. Tr a d i t i o n a l C o m p e t i t o r s All firms share market space with other competitors who are continuously devising 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. N e w M a r k e t E n t r a n t s In a free economy with mobile labor and financial resources, new companies are always entering the marketplace. In some industries, there are very low barriers 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 business, which has very high capital costs and requires significant exper- tise and knowledge that is hard to obtain. New companies have several possible FIGURE 3-10 PORTER’S COMPETITIVE FORCES MODEL In Porter’s competitive forces model, the strategic position of the firm and its strategies 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. 96 Part One Organizations, Management, and the Networked Enterprise advantages: 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 advantages are also their weakness: 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. S u b s t i t u t e P r o d u c t s a n d S e r v i c e s 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. Even oil has substitutes: 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, the Internet telephone service can substitute for traditional telephone service, and fiber-optic telephone lines to the home can substitute for cable TV lines. And, of course, an Internet music service that allows you to download music tracks to an iPod is a substitute 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. C u s t o m e r s 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 products and services, or if they can force a business and its competitors to compete 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 textbook. In this case, online customers have extraordinary power over used-book firms. S u p p l i e r s 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. 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. L o w - C o s t L e a d e r s h i p 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 Chapter 3 Information Systems, Organizations, and Strategy 97 stocked using a legendary inventory replenishment system, Walmart became the leading retail business in the United States. Walmart’s continuous replen- ishment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale termi- nals record the bar code of each item passing the checkout counter and send a purchase transaction directly to a central computer at Walmart headquarters. The computer collects the orders from all Walmart stores and transmits them to suppliers. 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 consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response. P r o d u c t D i f f e r e n t i a t i o n Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services. For instance, Google continuously introduces new and unique search services on its Web site, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created the iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for $.69 to $1.29 each. Apple has continued to Supermarkets and large retail stores such as Walmart use sales data captured at the checkout counter to determine which items have sold and need to be reordered. Walmart’s continuous 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. 98 Part One Organizations, Management, and the Networked Enterprise innovate with its multimedia iPhone, iPad tablet computer, and iPod video player. The chapter-opening case describes how AT&T’s business strategy is trying to piggyback off such digital innovations. Manufacturers and retailers are using information systems to create products 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 Web site. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to 8 characters. Nike transmits the orders via computers to specially-equipped plants in China and Korea. The sneakers cost only $10 extra and 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 a long time to copy. Fo c u s o n M a r k e t N i c h e Use information systems to enable a specific market focus, and serve this narrow 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 buying patterns, tastes, and preferences closely so that they efficiently pitch advertising 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 and retail stores, and data collected when people access and interact with Web sites. 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 check-outs. Contemporary customer relationship management (CRM) systems feature ana- lytical capabilities for this type of intensive data analysis (see Chapters 2 and 9). 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 iPod The iPod is an integrated handheld player backed up with an online and iTunes library of over 13 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 bill payment: Fifty-two million households pay bills online in 2010. CheckFree.com Online person-to-person PayPal enables the transfer of money between individual bank payment: PayPal.com accounts and between bank accounts and credit card accounts. Chapter 3 Information Systems, Organizations, and Strategy 99 The Interactive Session on Organizations describes how skillfully credit card companies are able to use this strategy to predict their most profitable cardholders. The companies gather vast quantities of data about consumer purchases and other behaviors and mine these data to construct detailed profiles that identify cardholders who might be good or bad credit risks. These practices have enhanced credit card companies’ profitability, but are they in consumers’ best interests? S t r e n g t h e n C u s t o m e r a n d S u p p l i e r I n t i m a c y Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access by suppliers to production schedules, and even permits suppliers to decide how and when to ship supplies to Chrysler factories. This allows suppliers more lead time in producing goods. On the customer side, Amazon.com 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 companies pursuing several of them simultaneously. For example, Dell tries to emphasize low cost as well as the ability to customize its personal computers. 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 potentially negative impacts of the Internet on business firms identified by Porter. TABLE 3-4 FOUR BASIC COMPETITIVE STRATEGIES STRATEGY DESCRIPTION EXAMPLE Low-cost leadership Use information systems to produce products and services at a lower Walmart price than competitors while enhancing quality and level of service Product differentiation Use information systems to differentiate products, and enable new Google, eBay, Apple, Lands’ End services and products Focus on market niche Use information systems to enable a focused strategy on a single Hilton Hotels, Harrah’s market niche; specialize Customer and supplier Use information systems to develop strong ties and loyalty with Chrysler Corporation intimacy customers and suppliers Amazon.com voravut poonpracha eg. walmart and amazon voravut poonpracha When Kevin Johnson returned from his honeymoon, a letter from American Express was waiting for him. The letter informed Johnson that AmEx was slash- ing his credit limit by 60 percent. Why? Not because Johnson missed a payment or had bad credit. The letter stated: “Other customers who have used their card at establishments where you recently shopped, have a poor repayment history with American Express.” Johnson had started shopping at Walmart. Welcome to the new era of credit card profiling. Every time you make a purchase with a credit card, a record of that sale is logged into a massive data repository maintained by the card issuer. Each purchase is assigned a four-digit category code that describes the type of purchase that was made. There are separate codes for grocery stores, fast food restaurants, doctors, bars, bail and bond payments, and dating and escort services. Taken together, these codes allow credit card companies to learn a great deal about each of its customers at a glance. Credit card companies use these data for multiple purposes. First, they use them to target future promotions for additional products more accurately. Users that purchase airline tickets might receive promotions for frequent flyer miles, for example. The data help card issuers guard against credit card fraud by identifying purchases that appear unusual compared to a cardholder’s normal purchase history. The card companies also flag users who frequently charge more than their credit limit or demonstrate erratic spending habits. Lastly, these records are used by law enforcement agencies to track down criminals. Credit card holders with debt, the ones who never fully pay off their balances entirely and thus have to pay monthly interest charges and other fees, have been a major source of profit for credit card issuers. However, the recent financial crisis and credit crunch have turned them into a mounting liability because so many people are defaulting on their payments and even filing for bankruptcy. So the credit card companies are now focusing on mining credit card data to predict cardholders posing the highest risk. Using mathematical formulas and insights from behavioral science, these companies are developing more fine-grained profiles to help them get inside the heads of their customers. The data provide new HOW MUCH DO CREDIT CARD COMPANIES KNOW ABOUT YOU? insights about the relationship of certain types of pur- chases to a customer’s ability or inability to pay off credit card balances and other debt. The card-issuing companies now use this information to deny credit card applications or shrink the amount of credit avail- able to high-risk customers. These companies are generalizing based on certain types of purchases that may unfairly charac- terize responsible cardholders as risky. Purchases of secondhand clothing, bail bond services, massages, or gambling might cause card issuers to identify you as a risk, even if you maintain your balance respon- sibly from month to month. Other behaviors that raise suspicion: using your credit card to get your tires re-treaded, to pay for drinks at a bar, to pay for marriage counseling, or to obtain a cash advance. Charged speeding tickets raise suspicion because they may indicate an irrational or impulsive person- ality. In light of the sub-prime mortgage crisis, credit card companies have even begun to consider indi- viduals from Florida, Nevada, California, and other states hardest hit by foreclosures to be risks simply by virtue of their state of residence. The same fine-grained profiling also identifies the most reliable credit-worthy cardholders. For exam- ple, the credit card companies found that people who buy high-quality bird seed and snow rakes to sweep snow off of their roofs are very likely to pay their debts and never miss payments. Credit card companies are even using their detailed knowledge of cardholder behavior to establish personal connec- tions with the clients that owe them money and convince them to pay off their balances. One 49-year old woman from Missouri in the throes of a divorce owed $40,000 to various credit card companies at one point, including $28,000 to Bank of America. A Bank of America customer ser- vice representative studied the woman’s profile and spoke to her numerous times, even pointing out one instance where she was erroneously charged twice. The representative forged a bond with the card- holder, and as a result she paid back the entire $28,000 she owed, (even though she failed to repay much of the remainder that she owed to other credit card companies.) This example illustrates something the credit card companies now know: when cardholders feel more comfortable with companies, as a result of a good I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S 100 Part One Organizations, Management, and the Networked Enterprise 1. What competitive strategy are the credit card companies pursuing? How do information systems support that strategy? 2. What are the business benefits of analyzing customer purchase data and constructing behavioral profiles? 3. Are these practices by credit card companies ethical? Are they an invasion of privacy? Why or why not? relationship with a customer service rep or for any other reason, they’re more likely to pay their debts. It’s common practice for credit card companies to use this information to get a better idea of consumer trends, but should they be able to use it to preemp- tively deny credit or adjust terms of agreements? Law enforcement is not permitted to profile individu- als, but it appears that credit card companies are doing just that. In June 2008, the FTC filed a lawsuit against CompuCredit, a sub-prime credit card marketer. CompuCredit had been using a sophisticated behav- ioral scoring model to identify customers who they considered to have risky purchasing behaviors and lower these customers’ credit limits. CompuCredit settled the suit by crediting $114 million to the accounts of these supposedly risky customers and paid a $2.5 million penalty. Congress is investigating the extent to which credit card companies use profiling to determine interest rates and policies for their cardholders. The new credit card reform law signed by President 1. If you have a credit card, make a detailed list of all of your purchases for the past six months. Then write a paragraph describing what credit card companies learned about your interests and behavior from these purchases. 2. How would this information benefit the credit card companies? What other companies would be interested? Barack Obama in May 2009 requires federal regula- tors to investigate this. Regulators must also deter- mine whether minority cardholders were adversely profiled by these criteria. The new legislation also bars card companies from raising interest rates at any time and for any reason on their customers. Going forward, you’re likely to receive far fewer credit card solicitations in the mail and fewer offers of interest-free cards with rates that skyrocket after an initial grace period. You’ll also see fewer policies intended to trick or deceive customers, like cash- back rewards for unpaid balances, which actually encourage cardholders not to pay what they owe. But the credit card companies say that to compen- sate for these changes, they’ll need to raise rates across the board, even for good customers. Sources: Betty Schiffman, “Who Knows You Better? Your Credit Card Company or Your Spouse?” Daily Finance, April 13, 2010; Charles Duhigg, “What Does Your Credit-Card Company Know about You?” The New York Times, June 17, 2009; and CreditCards.com, “Can Your Lifestyle Hurt Your Credit?” MSN Money, June 30, 2009.Boudette. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N Chapter 3 Information Systems, Organizations, and Strategy 101 TABLE 3-5 IMPACT OF THE INTERNET ON COMPETITIVE FORCES AND INDUSTRY STRUCTURE COMPETITIVE FORCE IMPACT OF THE INTERNET Substitute products or services Enables new 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 The Internet reduces barriers to entry, such as the need for a sales force, access to channels, and physical assets; it provides a technology for driving business processes that makes other things easier to do Positioning and rivalry among Widens the geographic market, increasing the number of competitors, and reducing differences among existing competitors competitors; makes it more difficult to sustain operational advantages; puts pressure to compete on price 102 Part One Organizations, Management, and the Networked Enterprise The Internet has nearly destroyed some industries and has severely threat- ened more. For instance, the printed encyclopedia industry and the travel 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. The Interactive Session on Technology provides more detail on the transfor- mation of the content and media industries. For most forms of media, the Internet has posed a threat to business models and profitability. Growth in book sales other than textbooks and professional publications has been sluggish, as new forms of entertainment continue to compete for consumers’ time. Newspapers and magazines have been hit even harder, as their readerships diminish, their advertisers shrink, and more people get their news for free online. The television and film industries have been forced to deal with pirates who are robbing them of some of their profits. When Apple announced the launch of its new iPad tablet computer, leaders in all of these media saw not only a threat but also a significant opportunity. In fact, the iPad and similar mobile devices may be the savior—if traditional media can strike the right deal with technology providers like Apple and Google. And the iPad may be a threat for companies that fail to adjust their business models to a new method of providing content to users. 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 competitive 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 information 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 to a firm’s products or services. These activities can be categorized as either primary activities or support activities (see Figure 3-11 on p. 105). 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 materials 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 service activity includes maintenance and repair of the firm’s goods and services. I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y Tablet computers have come and gone several times before, but the iPad looks like it will be different. It has a gorgeous 10-inch color display, a persistent Wi- Fi Internet connection, potential use of high-speed cellular networks, functionality from over 250,000 applications available on Apple’s App Store, and the ability to deliver video, music, text, social networking applications, and video games. Its entry-level price is just $499. The challenge for Apple is to convince potential users that they need a new, expensive gad- get with the functionality that the iPad provides. This is the same challenge faced by the iPhone when it was first announced. As it turned out, the iPhone was a smashing success that decimated the sales of traditional cell phones throughout the world. Will the iPad do likewise as a disruptive technology for the media and content industries? It looks like it is on its way. The iPad has some appeal to mobile business users, but most experts believe it will not supplant laptops or netbooks. It is in the publishing and media industries where its disruptive impact will first be felt. The iPad and similar devices (including the Kindle Reader) will force many existing media businesses to change their business models significantly. These companies may need to stop investing in their traditional delivery platforms (like newsprint) and increase their investments in the new digital platform. The iPad will spur people to watch TV on the go, rather than their television set at home, and to read their books, newspapers, and magazines online rather than in print. Publishers are increasingly interested in e-books as a way to revitalize stagnant sales and attract new readers. The success of Amazon’s Kindle has spurred growth in e-book sales to over $91 million wholesale in the first quarter of 2010. Eventually, e-books could account for 25 to 50 percent of all books sold. Amazon, the technology platform provider and the largest distributor of books in the world, has exercised its new power by forcing publishers to sell e-books at $9.95, a price too low for publishers to profit. Publishers are now refusing to supply new books to Amazon unless it raises prices, and Amazon is starting to comply. The iPad enters this marketplace ready to compete with Amazon over e-book pricing and IS THE IPAD A DISRUPTIVE TECHNOLOGY? distribution. Amazon has committed itself to offering the lowest possible prices, but Apple has appealed to publishers by announcing its intention to offer a tiered pricing system, giving publishers the opportu- nity to participate more actively in the pricing of their books. Apple has agreed with publishers to charge $12 to $14 for e-books, and to act as an agent selling books (with a 30% fee on all e-book sales) rather than a book distributor. Publishers like this arrangement, but worry about long-term pricing expectations, hoping to avoid a scenario where readers come to expect $9.99 e-books as the standard. Textbook publishers are also eager to establish themselves on the iPad. Many of the largest textbook publishers have struck deals with software firms like ScrollMotion, Inc. to adapt their books for e-book readers. In fact, Apple CEO Steve Jobs designed the iPad with use in schools in mind, and interest on the part of schools in technology like the iPad has been strong. ScrollMotion already has experience using the Apple application platform for the iPhone, so the company is uniquely qualified to convert existing files provided by publishers into a format readable by the iPad and to add additional features, like a dictio- nary, glossary, quizzes, page numbers, a search func- tion, and high-quality images. Newspapers are also excited about the iPad, which represents a way for them to continue charging for all of the content that they have been forced to make available online. If the iPad becomes as popular as other hit products from Apple, consumers are more likely to pay for content using that device. The successes of the App Store on the iPhone and of the iTunes music store attest to this. But the experience of the music industry with iTunes also gives all print media reason to worry. The iTunes music store changed the consumer perception of albums and music bundles. Music labels used to make more money selling 12 songs on an album than they did selling popular singles. Now consumers have drastically reduced their consumption of albums, preferring to purchase and download one song at a time. A similar fate may await print newpapers, which are bundles of news articles, many of which are unread. Apple has also approached TV networks and movie studios about offering access to some of their top shows and movies for a monthly fee, but as of yet the Chapter 3 Information Systems, Organizations, and Strategy 103 104 Part One Organizations, Management, and the Networked Enterprise C A S E S T U D Y Q U E S T I O N S 1. Evaluate the impact of the iPad using Porter’s competitive forces model. 2. What makes the iPad a disruptive technology? Who are likely to be the winners and losers if the iPad becomes a hit? Why? 3. Describe the effects that the iPad is likely to have on the business models of Apple, content creators, and distributors. bigger media companies have not responded to Apple’s overture. Of course, if the iPad becomes sufficiently popular, that will change, but currently media networks would prefer not to endanger their strong and lucrative partnerships with cable and satel- lite TV providers. (See the chapter-ending case study.) And what about Apple’s own business model? Apple previously believed content was less impor- tant than the popularity of its devices. Now, Apple understands that it needs high-quality content from all the types of media it offers on its devices to be truly successful. The company’s new goal is to make deals with each media industry to distribute the content that users want to watch at a price agreed to by the content owners and the platform owners (Apple). The old attitudes of Apple (“Rip, burn, distribute”), which were designed to sell devices are a thing of the past. In this case of disruptive technol- ogy, even the disruptors have been forced to change their behaviors. Sources: Ken Auletta, “Publish or Perish,” The New Yorker, April 26, 2010; Yukari Iwatani Kane and Sam Schechner, “Apple Races to Strike Content Deals Ahead of IPad Release,” The Wall Street Journal, March 18, 2010; Motoko Rich, “Books on iPad Offer Publishers a Pricing Edge,” The New York Times, January 28, 2010; Jeffrey A. Trachtenberg and Yukari Iwatani Kane, “Textbook Firms Ink Deals for iPad,” The Wall Street Journal, February 2, 2010; Nick Bilton, “Three Reasons Why the IPad Will Kill Amazon’s Kindle,” The New York Times, January 27, 2010; Jeffrey A Trachtenberg, “Apple Tablet Portends Rewrite for Publishers,” The Wall Street Journal, January 26, 2010; Brad Stone and Stephanie Clifford, “With Apple Tablet, Print Media Hope for a Payday,” The New York Times, January 26, 2010; Yukari Iwatani Kane, “Apple Takes Big Gamble on New iPad,” The Wall Street Journal, January 25, 2010; and Anne Eisenberg, “Devices to Take Textbooks Beyond Text,” The New York Times, December 6, 2009. Visit Apple’s site for the iPad and the Amazon.com site for the Kindle. Review the features and specifica- tions of each device. Then answer the following questions: 1. How powerful is the iPad? How useful is it for reading books, newspapers or magazines, for surfing the Web, and for watching video? Can you identify any shortcomings of the device? 2. Compare the capabilities of the Kindle to the iPad. Which is a better device for reading books? Explain your answer. 3. Would you like to use an iPad or Kindle for the books you use in your college courses or read for pleasure instead of traditional print publications? Why or why not? M I S I N A C T I O N 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 (purchas- ing input). Now you can ask at each stage of the value chain, “How can we use informa- tion systems to improve operational efficiency, and improve customer and supplier intimacy?” 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 relationship 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 Chapter 3 Information Systems, Organizations, and Strategy 105 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 benchmarking your business processes against your competitors or others in related industries, and identifying industry best practices. Benchmarking involves 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 compa- nies, research organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective. Once you have analyzed the various stages in the value chain at your business, 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! FIGURE 3-11 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. 106 Part One Organizations, Management, and the Networked Enterprise E x t e n d i n g t h e Va l u e C h a i n : T h e Va l u e W e b Figure 3-11 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. How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use information technology to develop industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industry-wide, IT-supported consortia, symposia, and communications networks to coordinate activities concerning government agencies, foreign competition, and compet- ing 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, strategic 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 industry value chains called value webs. A value web is a collection of independent 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 3-12 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 response 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 organized 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. Chapter 3 Information Systems, Organizations, and Strategy 107 S y n e r g i e s 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 relationships lower costs and generate profits. Recent bank and financial firm mergers, such as the merger of JP Morgan 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 together the operations of disparate business units so that they can act as a whole. For example, acquiring Countrywide Financial enabled Bank of America to extend its mortgage lending business and to tap into a large pool of new cus- tomers who might be interested in its credit card, consumer banking, and other financial products. Information systems would help the merged companies consolidate operations, lower retailing costs, and increase cross-marketing of financial products. E n h a n c i n g C o r e C o m p e t e n c i e s 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 business units develop, or create, a central core of competencies. A core com- petency is an activity for which a firm is a world-class leader. Core competen- cies 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 competency relies on knowledge that is gained over many years of practical FIGURE 3-12 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. 108 Part One Organizations, Management, and the Networked Enterprise field experience with a technology. This practical knowledge is typically sup- plemented 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 existing 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. Some of these systems for collaboration were introduced in the Chapter 2 ending case study. An intranet called InnovationNet helps people working on similar problems share ideas and expertise. InnovationNet connects those working in research and development (R&D), engineering, purchasing, marketing, legal affairs, and business information systems around the world, using a portal to provide browser-based access to documents, reports, charts, videos, and other data from various sources. It includes a directory of subject matter experts who can be tapped to give advice or collaborate on problem solv- ing and product development, and links to outside research scientists and entrepreneurs who are searching for new, innovative products worldwide. N e t w o r k - B a s e d S t r a t e g i e s The availability of Internet and networking technology have inspired strategies that take advantage 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. Business models based on a network may help firms strategically by taking advantage of network economics. In traditional economics—the economics of factories and agriculture—production experiences diminishing returns. The more any given resource is applied 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 diminishing returns, and it is the foundation for most of modern economics. In some situations, the law of diminishing returns does not work. For instance, 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. 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, and iVillage, an online community for women, are examples. Both businesses are based on networks of millions of users, and both companies have used the Web and Internet communication tools to build communities. 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 Chapter 3 Information Systems, Organizations, and Strategy 109 there is a larger installed 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 services without being limited by traditional organizational boundaries or physical locations. One company can use the capabilities of another company without being physically 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 opportunities 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 7,500 suppliers in 37 countries all over the world. Customers place orders to Li & Fung over its private extranet. Li & Fung then sends instructions 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: Keystone and Niche Firms. The Internet and the emergence of digital firms call for some modification of the industry competitive forces model. The traditional Porter model assumes a relatively static industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers, with the focus on industry players in a market environment. Instead of participating in a single industry, some of today’s firms are much more aware that they participate in industry sets—collections of industries that provide related services and products (see Figure 3-13). Business ecosystem is another term for these loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers (Iansiti and Levien, 2004). The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference being that cooperation takes place across many industries rather than many firms. For instance, both Microsoft and Walmart provide platforms composed of information systems, technologies, and services that thousands of other firms in different industries use to enhance their own capabilities. Microsoft has estimated that more than 40,000 firms use its Windows platform to deliver their own products, support Microsoft products, and extend the value of Microsoft’s own firm. Walmart’s order entry and inven- tory management system is a platform used by thousands of suppliers to obtain real-time access to customer demand, track shipments, and control inventories. Business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. Keystone firms in the Microsoft ecosystem include Microsoft and technol- ogy producers such as Intel and IBM. Niche firms include thousands of software 110 Part One Organizations, Management, and the Networked Enterprise application firms, software developers, service firms, networking firms, and consulting firms that both support and rely on the Microsoft products. Information technology plays a powerful role in establishing business ecosystems. Obviously, many firms use information systems to develop into keystone firms by building IT-based platforms that other firms can use. In the digital firm era, we can expect greater emphasis on the use of IT to build industry ecosystems because the costs of participating in such ecosys- tems will fall and the benefits to all firms will increase rapidly as the platform grows. Individual firms should consider how their information systems will enable them to become profitable niche players in larger ecosystems created by keystone firms. For instance, in making decisions about which products to build or which services to offer, a firm should consider the existing business ecosys- tems related to these products and how it might use IT to enable participation in these larger ecosystems. A powerful, current example of a rapidly expanding ecosystem is the mobile Internet platform. In this ecosystem there are four industries: device makers (Apple iPhone, RIM BlackBerry, Motorola, LG, and others), wireless telecom- munication firms (AT&T, Verizon, T-Mobile, Sprint, and others), independent software applications providers (generally small firms selling games, applica- tions, and ring tones), and Internet service providers (who participate as providers of Internet service to the mobile platform). 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 industry we refer to as the mobile digital platform ecosystem. More than other firms, Apple has managed to combine these industries into a system. It is Apple’s mission to sell physical devices (iPhones) that are nearly as powerful as today’s personal computers. These devices work only with a high-speed broadband network supplied by the wireless phone carriers. In order to attract a large customer base, the iPhone had to be more than just a cell phone. Apple differentiated this product by making it a “smart phone,” one FIGURE 3-13 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. Chapter 3 Information Systems, Organizations, and Strategy 111 capable of running thousands of different, useful applications. Apple could not develop all these applications itself. Instead it relies on generally small, independent software developers to provide these applications, which can be purchased at the iTunes store. In the background is the Internet service provider industry, which makes money whenever iPhone users connect to the Internet. 3.4 USING SYSTEMS FOR COMPETITIVE ADVANTAGE: MANAGEMENT ISSUES 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 technology, 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 retaliate and copy strategic systems, competitive advantage is not always sustainable. Markets, customer expectations, and technology change; global- ization has made these changes even more rapid and unpredictable. The Internet can make competitive advantage 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.com was an e-commerce leader but now faces competition from eBay, Yahoo, and Google. Information systems alone cannot provide an enduring business advantage. Systems originally intended to be strategic 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 successfully 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 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 business people 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 performance. 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 revenues and profits. 112 Part One Organizations, Management, and the Networked Enterprise M a n a g e m e n t C h e c k l i s t : P e r f o r m i n g a S t r a t e g i c S y s t e m s A n a l y s i s To align IT with the business and use information systems effectively for competitive 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 manage- ment, 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 and value webs? • 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 suppliers, and business processes. These sociotechnical changes, affecting both 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 processes for coordinating their firms’ activities with those of customers, suppli- ers, and other organizations. The organizational change requirements surround- ing new information systems are so important that they merit attention through- out this text. Chapter 14 examines organizational change issues in more detail. Chapter 3 Information Systems, Organizations, and Strategy 113 3.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience identifying informa- tion systems to support a business strategy, analyzing organizational factors affecting the information systems of merging companies, using a database to improve decision making about business strategy, and using Web tools to configure and price an automobile. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. Macy’s, Inc., through its subsidiaries, operates approximately 800 department stores in the United States. Its retail stores sell a range of merchandise, including adult and children’s apparel, accessories, cosmetics, home furnishings, and housewares. Senior management has decided that Macy’s needs to tailor merchandise more to local tastes, 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. For example, stores in Texas might stock clothing in larger sizes and brighter colors than those in New York, or the Macy’s on Chicago’s State Street might include a greater variety of makeup shades to attract trendier shoppers. 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? 2. Today’s US Airways is the result of a merger between US Airways and America West Airlines. Before the merger, US Airways dated back to 1939 and had very traditional business processes, a lumbering bureaucracy, and a rigid information systems function that had been outsourced to Electronic Data Systems. America West was formed in 1981 and had a younger workforce, a more freewheeling entrepreneurial culture, and managed its own information systems. The merger was designed to create synergies from US Airways’ experience and strong network on the east coast of the United States with America West’s low-cost structure, information systems, and routes in the western United States. What features of organizations should management have considered as it merged the two companies and their information systems? What decisions need to be made to make sure the strategy works? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g a D a t a b a s e t o C l a r i f y B u s i n e s s S t r a t e g y Software skills: Database querying and reporting; database design Business skills: Reservation systems; customer analysis In this exercise, you’ll use database software to analyze the reservation transac- tions for a hotel and use that information to fine-tune the hotel’s business strategy and marketing activities. The Presidents’ Inn is a small three-story hotel on the Atlantic Ocean in Cape May, New Jersey, a popular northeastern U.S. resort. Ten 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 day. Guests staying for seven days or more receive a 10-percent discount on their daily room rates. Business has grown steadily during the past 10 years. Now totally renovated, the inn uses a romantic weekend package to attract couples, a vacation package 114 Part One Organizations, Management, and the Networked Enterprise to attract young families, and a weekday discount package to attract business travelers. The owners currently use a manual reservation and bookkeeping system, which has caused many problems. Sometimes two families have been booked in the same room at the same time. Management does not have immediate data about the hotel’s daily operations and income. In MyMISLab, you will find a database for hotel reservation transactions developed in Microsoft Access. A sample is shown below, but the Web site may have a more recent version of this database for this exercise. Develop some reports that provide information to help management make the business more competitive and profitable. Your reports should answer the following questions: • What is the average length of stay per room type? • What is the average number of visitors per room type? • What is the base income per room (i.e., length of visit multiplied by the daily rate) during a specified period of time? • What is the strongest customer base? After answering these questions, write a brief report describing what the database information reveals about the current business situation. Which specific business strategies might be pursued to increase room occupancy and revenue? How could the database be improved to provide better information for strategic decisions? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g W e b To o l s t o C o n f i g u r e a n d P r i c e a n A u t o m o b i l e Software skills: Internet-based software Business skills: Researching product information and pricing In this exercise, you’ll use software at Web sites for selling cars to find product information about a car of your choice and use that information to make an important purchase decision. You’ll also evaluate two of these sites as selling tools. You are interested in purchasing a new Ford Focus. (If you are personally interested in another car, domestic or foreign, investigate that one instead.) Go to the Web site of CarsDirect (www.carsdirect.com) and begin your investigation. Locate the Ford Focus. Research the various specific automobiles available in that model and determine which you prefer. Explore the full details about the specific car, including pricing, standard features, and options. Locate and read at least two reviews if possible. Investigate the safety of that model www.carsdirect.com Chapter 3 Information Systems, Organizations, and Strategy 115 based on the U.S. government crash tests performed by the National Highway Traffic Safety Administration if those test results are available. Explore the features for locating a vehicle in inventory and purchasing directly. Finally, explore the other capabilities of the CarsDirect site for financing. Having recorded or printed the information you need from CarsDirect for your purchase decision, surf the Web site of the manufacturer, in this case Ford (www.ford.com). Compare the information available on Ford’s Web site with that of CarsDirect for the Ford Focus. Be sure to check the price and any incentives being offered (which may not agree with what you found at CarsDirect). Next, find a local dealer on the Ford site so that you can view the car before making your purchase decision. Explore the other features of Ford’s Web site. Try to locate the lowest price for the car you want in a local dealer’s inventory. Which site would you use to purchase your car? Why? Suggest improvements for the sites of CarsDirect and Ford. LEARNING TRACK MODULE The following Learning Track provides content relevant to topics covered in this chapter. 1. The Changing Business Environment for Information Technology Review Summary 1. Which features of organizations do managers need to know about to build and use information systems successfully? What is the impact of information systems on organizations? All modern organizations are hierarchical, specialized, and impartial, using explicit routines to maximize 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 structure. 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. 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 management. 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. 2. How does Porter’s competitive forces model help companies develop competitive strategies using information systems? In Porter’s competitive forces model, the strategic position of the firm, and its strategies, are determined by competition with its traditional direct competitors, but they are also greatly affected by new market entrants, substitute products and services, suppliers, and customers. Information systems help companies 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. www.ford.com 116 Part One Organizations, Management, and the Networked Enterprise Key Terms Agency theory, 90 Benchmarking, 105 Best practices, 105 Business ecosystem, 109 Competitive forces model, 95 Core competency, 107 Disruptive technologies, 87 Efficient customer response system, 97 Mass customization, 98 Network economics, 108 Organization, 82 Review Questions 1. Which features of organizations do managers need to know about to build and use information systems successfully? What is the impact of information systems on organizations? • Define an organization and compare the technical definition of organizations with the behavioral definition. • Identify and describe the features of organiza- tions that help explain differences in organizations’ use of information systems. • 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. • Explain why there is considerable organiza- tional resistance to the introduction of information systems. Primary activities, 102 Product differentiation, 96 Routines, 84 Strategic transitions, 112 Support activities, 104 Switching costs, 99 Transaction cost theory, 89 Value chain model, 102 Value web, 106 Virtual company, 109 3. How do the value chain and value web models help businesses identify opportunities for strategic information system applications? The value chain model highlights specific activities in the business where competitive strategies and information 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 industry-wide consortia, and by enabling businesses to work more efficiently with their value partners. 4. How do information systems help businesses use synergies, core competencies, and network-based strategies to achieve competitive advantage? 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. 5. 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 painful 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. Chapter 3 Information Systems, Organizations, and Strategy 117 • Describe the impact of the Internet and disruptive technologies on organizations. 2. How does Porter’s competitive forces model 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 strategies enabled by information systems that firms can pursue. • Describe how information systems can support each of these competitive strategies and give examples. • Explain why aligning IT with business objectives is essential for strategic use of sys- tems. 3. How do the value chain and value web models help businesses identify opportunities for strate- gic information system applications? • Define and describe the value chain model. • Explain how the value chain model can be used to identify opportunities for information systems. • Define the value web and show how it is related to the value chain. • Explain how the value web helps businesses identify opportunities for strategic informa- tion systems. • Describe how the Internet has changed competitive forces and competitive advantage. 4. How do information systems help businesses use synergies, core competences, and network- based strategies to achieve 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. • Define and describe a virtual company and the benefits of pursuing a virtual company strategy. 5. What are the challenges posed by strategic infor- mation 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 1. It has been said that there is no such thing as a sustainable strategic advantage. Do you agree? Why or why not? 2. It has been said that the advantage that leading- edge retailers such as Dell and Walmart have over their competition isn’t technology; it’s their man- agement. Do you agree? Why or why not? 3. What are some of the issues to consider in deter- mining whether the Internet would provide your business with a competitive advantage? Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. Collaboration and Teamwork: Identifying Opportunities for Strategic Information Systems business strategy. Suggest strategic information systems appropriate for that particular business, including those based on Internet technology, if appropriate. If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a presentation of your findings for the class. With your team of three or four students, select a company described in The Wall Street Journal, Fortune, Forbes, or another business publication. Visit the company’s Web site 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 W i l l T V S u c c u m b t o t h e I n t e r n e t ? CASE STUDY he Internet has transformed the music industry. Sales of CDs in retail music stores have been steadily declining while sales of songs downloaded through the Internet to iPods and other portable music players are skyrocket- ing. Moreover, the music industry is still contending with millions of people illegally downloading songs for free. Will the television industry experience a similar fate? Widespread use of high-speed Internet access, powerful PCs with high-resolution display screens, iPhones, iPads, other mobile handhelds, and leading- edge file-sharing services have made downloading of video content from movies and television shows faster and easier than ever. Free and often illegal downloads of some TV shows are abundant. But the Internet is also providing new ways for television studios to distribute and sell their content, and they are trying to take advantage of that opportunity. YouTube, which started up in February 2005, quickly became the most popular video-sharing Web site in the world. Even though YouTube’s original mis- sion was to provide an outlet for amateur filmmakers, clips of copyrighted Hollywood movies and television shows soon proliferated on the YouTube Web site. It is difficult to gauge how much proprietary content from TV shows winds up on YouTube without the studios’ permission. Viacom claimed in a 2008 lawsuit that over 150,000 unauthorized clips of its copyrighted television programs had appeared on YouTube. YouTube tries to discourage its users from posting illegal clips by limiting the length of videos to 10 minutes each and by removing videos when requested by their copyright owner. YouTube has also implemented Video ID filtering and digital finger- printing technology that allows copyright owners to compare the digital fingerprints of their videos with material on YouTube and then flag infringing mater- ial. Using this technology, it is able to filter many unauthorized videos before they appear on the YouTube Web site. If infringing videos do make it online, they can be tracked using Video ID. The television industry is also striking back by embracing the Internet as another delivery system for its content. Television broadcast networks such as NBC Universal, Fox, and CNN have put television shows on their own Web sites. In March 2007, NBC Universal, News Corp (the owner of Fox Broadcasting), and ABC Inc. formed Hulu.com, a Web site offering streaming video of television shows and movies from NBC, Fox, ABC, Comedy Central, PBS, USA Network, Bravo, FX, Speed, Sundance, Oxygen, Onion News Network, and other networks. Hulu also syndicates its hosting to other sites, includ- ing AOL, MSN, Facebook, MySpace, Yahoo!, and Fancast.com, and allows users to embed Hulu clips in their Web site. The site is supported by advertising commercials, and much of its content is free to view- ers. CBS’s TV.com and Joost are other popular Web television sites. Content from all of these sites is viewable over iPhones. Hulu has blocked services such as Boxee that try to bring Hulu to TV screens, because that would draw subscribers away from cable and satellite companies, diminishing their revenue. According to Hulu CEO Jason Kilar, Hulu has suc- cessfully brought online TV into the mainstream. It dominates the market for online full-episode TV viewing, with more than 44 million monthly visitors, according to the online measurement firm comScore. Monthly video streams more than tripled in 2009, reaching over 900 million by January 2010. What if there are so many TV shows available for free on the Web that “Hulu households” cancel their cable subscriptions to watch free TV online? Cable service operators have begun worrying, especially when the cable networks posted some of their programming on the Web. By 2010, nearly 800,000 U.S. households had “cut the cord,” dumping their cable, satellite, or high-speed television services from telecom companies such as Verizon’s FiOS or AT&T’s U-verse. In their place, they turned to Web-based videos from services such as Hulu, down- loadable shows from iTunes, by-mail video subscrip- tion services such as Netflix, or even old-style over- the-air broadcast programming. Although the “cord cutters” represent less than 1 percent of the 100 million U.S. households subscribing to a cable/ satellite/telco television service, the number of cord-cutting U.S. households is predicted to double to about 1.6 million. What if this trend continues? In July 2009, cable TV operator Comcast Corporation began a trial program to bring some of Time Warner’s network shows, including TBS’s My Boys and TNT’s The Closer, to the Web. Other cable networks, including A&E and the History Channel, participated in the Comcast test. T 118 Part One Organizations, Management, and the Networked Enterprise By making more television shows available online, but only for cable subscribers, the cable networks hope to preserve and possibly expand the cable TV subscription model in an increasingly digital world. “The vision is you can watch your favorite network’s programming on any screen,” noted Time Warner Chief Executive Jeff Bewkes. The system used in the Comcast-Time Warner trial is interoperable with cable service providers’ systems to authenticate subscribers. The same technology might also allow cable firms to provide demographic data for more targeted ads and perhaps more sophisticated advertising down the road. Cable programmers stand to earn more adver- tising revenue from their online content because viewers can’t skip ads on TV programs streamed from the Web as they do with traditional TV. Web versions of some television shows in the Comcast–Time Warner trial program, including TNT’s The Closer, will carry the same number of ads as seen on traditional TV, which amounts to more than four times the ad load on many Internet sites, including Hulu. Many hour-long shows available online are able to accommodate five or six commer- cial breaks, each with a single 30-second ad. NBC Universal Digital Entertainment has even streamed episodes of series, including The Office, with two ads per break. According to research firm eMarketer, these Web-video ads will generate $1.5 billion in ad revenue in 2010 and $2.1 billion in 2011. For all its early success, Hulu is experiencing growing pains. Although it had generated more than $100 million in advertising revenue within two years, it is still unprofitable. Hulu’s content suppliers receive 50 to 70 percent of the advertising revenue Hulu generates from their videos. Some of these media companies have complained that this revenue is very meager, even though use of Hulu has skyrocketed. One major supplier, Viacom, withdrew its programming from Hulu after failing to reach a satisfactory agreement on revenue-sharing, depriving Hulu viewers of such popular shows as The Daily Show with Jon Stewart and The Colbert Report. Other companies supplying Hulu’s content have pressured the company to earn even more advertis- ing dollars and to set up a subscription service requiring consumers to pay a monthly fee to watch at least some of the shows on the site. On June 29, 2010, Hulu launched such a service, called HuluPlus. For $9.99 per month, paid subscribers get the entire current season of Glee, The Office, House and other shows from broadcasters ABC, Fox, and NBC, as well as all the past seasons of several series. Hulu will continue to show a few recent episodes for free online. Paying subscribers will get the same number of ads as users of the free Web site in order to keep the subscription cost low. Paying subscribers are also able watch shows in high definition and on multiple devices, including mobile phones and videogame consoles as well as television screens. Will all of this work out for the cable industry? It’s still too early to tell. Although the cable program- ming companies want an online presence to extend their brands, they don’t want to cannibalize TV subscriptions or viewership ratings that generate advertising revenue. Customers accustomed to YouTube and Hulu may rebel if too many ads are shown online. According to Oppenheimer analyst Tim Horan, cable companies will start feeling the impact of customers canceling subscriptions to view online video and TV by 2012. Edward Woo, an Internet and digital media analyst for Wedbush Morgan Securities in Los Angeles, predicts that in a few years, “it should get extremely interesting.” Hulu and other Web TV and video sites will have much deeper content, and the technology to deliver that content to home viewers will be more advanced. Sources: Ryan Nakashima, “Hulu Launches $10 Video Subscription Service,” Associated Press, June 29, 2010; Ben Patterson, “Nearly 800,000 U.S. TV Households ‘Cut the Cord,’ Report Says,” Yahoo! News, April 13, 2010; Brian Stelter and Brad Stone, “Successes (and Some Growing Pains) at Hulu, “ The New York Times, March 31, 2010; Brian Stelter, “Viacom and Hulu Part Ways,” The New York Times, March 2, 2010; Reinhardt Krause, “Cable TV Leaders Plot Strategy Vs. Free Programs on the Web,” Investors Business Daily, August 18, 2009; Sam Schechner and Vishesh Kumar, “TV Shows Bring Ads Online,” The Wall Street Journal, July 16, 2009; and Kevin Hunt, “The Coming TV-Delivery War: Cable vs. Internet,” The Montana Standard, July 18, 2009. CASE STUDY QUESTIONS 1. What competitive forces have challenged the television industry? What problems have these forces created? 2. Describe the impact of disruptive technology on the companies discussed in this case. 3. How have the cable programming and delivery companies responded to the Internet? 4. What management, organization, and technology issues must be addressed to solve the cable industry’s problems? 5. Have the cable companies found a successful new business model to compete with the Internet? Why or why not? 6. If more television programs were available online, would you cancel your cable subscription? Why or why not? Chapter 3 Information Systems, Organizations, and Strategy 119 LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What ethical, social, and political issues are raised by information systems? 2. What specific principles for conduct can be used to guide ethical decisions? 3. Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property? 4. How have information systems affected everyday life? CHAPTER OUTLINE 4.1 UNDERSTANDING ETHICAL AND SOCIAL ISSUES RELATED TO 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 ETHICS IN AN INFORMATION SOCIETY Basic Concepts: Responsibility, Accountability, and Liability Ethical Analysis Candidate Ethical Principles Professional Codes of Conduct Some Real-World Ethical Dilemmas 4.3 THE MORAL DIMENSIONS OF INFORMATION SYSTEMS Information Rights: Privacy and Freedom in the Internet Age Property Rights: Intellectual Property Accountability, Liability, and Control System Quality: Data Quality and System Errors Quality of Life: Equity, Access, and Boundaries 4.4 HANDS-ON MIS PROJECTS Management Decision Problems Achieving Operational Excellence: Creating a Simple Blog Improving Decision Making: Using Internet Newsgroups for Online Market Research LEARNING TRACK MODULES Developing a Corporate Code of Ethics for Information Systems Creating a Web Page Chapter 4 Ethical and Social Issues in Information Systems Interactive Sessions: The Perils of Texting Too Much Technology? 121 ver get the feeling somebody is trailing you on the Web, watching your every click? Wonder why you start seeing display ads and pop-ups just after you’ve been scouring the Web for a car, a dress, or cosmetic product? Well, you’re right: your behavior is being tracked, and you are being targeted on the Web so that you are exposed to certain ads and not others. The Web sites you visit track the search engine queries you enter, pages visited, Web content viewed, ads clicked, videos watched, content shared, and the products you purchase. Google is the largest Web tracker, monitoring thousands of Web sites. As one wag noted, Google knows more about you than your mother does. In March 2009, Google began displaying ads on thousands of Google-related Web sites based on their previous online activities. To parry a growing public resentment of behavioral targeting, Google said it would give users the ability to see and edit the information that it has compiled about their interests for the purposes of behavioral targeting. Behavioral targeting seeks to increase the efficiency of online ads by using information that Web visitors reveal about themselves online, and if possible, combine this with offline identity and consumption information gathered by companies such as Acxiom. One of the original promises of the Web was that it can deliver a marketing message tailored to each consumer based on this data, and then measure the results in terms of click-throughs and purchases. The technology used to implement online tracking is a combination of cookies, Flash cookies, and Web beacons (also called Web bugs). Web beacons are small programs placed on your computer when you visit any of thousands of Web sites. They report back to servers operated by the bea- con owners the domains and Web pages you visited, what ads you clicked on, and other online behaviors. A recent study of 20 million Web pages published by 2 million domains found Google, Yahoo, Amazon, YouTube, Photobucket, and Flickr among the top 10 Web-bugging sites. Google alone accounts for 20% of all Web bugs. The average home landing page at the top 100 Web domains has over 50 tracking cookies and bugs. And you thought you were surfing alone? Firms are experimenting with more precise targeting methods. Snapple used behavioral targeting methods (with the help of an online ad firm Tacoda) to identify the types of people attracted to Snapple Green Tea. Answer: people who like the arts and literature, travel interna- tionally, and visit health sites. Microsoft offers MSN advertisers access to personal data derived from 270 million worldwide Windows Live users. The goal of Web beacons and bugs is even more granular: these tools can be used to identify your personal interests and behaviors so precisely tar- geted ads can be shown to you. BEHAVIORAL TARGETING AND YOUR PRIVACY: YOU’RE THE TARGET E The growth in the power, reach, and scope of behavioral targeting has drawn the attention of privacy groups and the Federal Trade Commission (FTC). Currently, Web tracking is unregulated. In November 2007, the FTC opened hearings to consider proposals from privacy advo- cates to develop a “do not track list,” to develop visual online cues to alert people to tracking, and to allow people to opt out. In the Senate, hearings on behavioral tar- geting were held throughout 2009 and the first half of 2010 with attention shifting to the privacy of personal location informa- tion. While Google, Microsoft, and Yahoo pleaded for legislation to protect them 122 Part One Organizations, Management, and the Networked Enterprise from consumer lawsuits, the FTC refused to consider new legislation to protect the privacy of Internet users. Instead, the FTC proposed industry self-regulation. In 2009, a consortium of advertising firms (the Network Advertising Initiative) responded positively to FTC-proposed principles to regulate online behavioral advertising. In 2010, Congressional committees pressed leading Internet firms to allow users more opportunities to turn off tracking tools, and to make users aware on entry to a page that they are being tracked. In June 2010, the FTC announced it is examining Facebook Inc.’s efforts to protect user privacy. All of these regulatory efforts emphasize transparency, user control over their information, security, and the temporal stability of privacy promises (unan- nounced and sudden changes in information privacy may not be allowed). Perhaps the central ethical and moral question is understanding what rights individuals have in their own personally identifiable Internet profiles. Are these “ownership” rights, or merely an “interest” in an underlying asset? How much privacy are we willing to give up in order to receive more relevant ads? Surveys suggest that over 70 percent of Americans do not want to receive targeted ads. Sources: “Web Bug Report,” SecuritySpace, July, 2010; Miguel Helft, “Technology Coalition Seeks Stronger Privacy Laws,” New York Times, March 30, 2010; “Study Finds Behaviorally- Targeted Ads More Than Twice As Valuable, Twice as Effective As Non-targerted Online Ads,” Network Advertising Initiative, March 24, 2010; Steve Lohr, “Redrawing the Route to Online Privacy,” New York Times, February 28, 2010; “The Collection and Use of Location Information for Commercial Purposes Hearings,” U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Commerce, Trade and Consumer Protection, February 24, 2010; Tom Krazit, “Groups Call for New Checks on Behavioral Ad Data,” CNET News, September 1, 2009; Robert Mitchell, “What Google Knows About You,” Computerworld, May 11, 2009; Stephanie Clifford, “Many See Privacy on Web as Big Issue, Survey Says,” The New York Times, March 16, 2009; Miguel Helft, “Google to Offer Ads Based on Interests,” The New York Times, March 11, 2009; and David Hallerman, “Behavioral Targeting: Marketing Trends,” eMarketer, June 2008. The growing use of behavioral targeting techniques described in thechapter-opening case shows that technology can be a double-edged sword. It can be the source of many benefits (by showing you ads relevant to your interests) but it can also create new opportunities for invading your privacy, and enabling the reckless use of that information in a variety of decisions about you. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Online advertising titans like Google, Microsoft, and Yahoo are all looking for ways to monetize their huge collections of online behavioral data. While search engine marketing is arguably the most effective form of advertising in history, banner display ad marketing is highly inefficient because it displays ads to everyone regardless of their interests. Hence the search engine marketers cannot charge much for display ad space. However, by tracking the online movements of 200 million U.S. Internet users, they can develop a very clear picture of who you are, and use that information to show you ads that might be of interest to you. This would make the marketing process more efficient, and more profitable for all the parties involved. But this solution also creates an ethical dilemma, pitting the monetary inter- ests of the online advertisers and search engines against the interests of indi- viduals to maintain a sense of control over their personal information and their privacy. Two closely held values are in conflict here. As a manager, you will need to be sensitive to both the negative and positive 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 4.1 UNDERSTANDING ETHICAL AND SOCIAL ISSUES RELATED TO SYSTEMS n the past 10 years, we have witnessed, arguably, one of the most ethically challenging periods for U.S. and global business. Table 4-1 provides a small sample of recent cases demonstrating failed ethical judgment by senior and middle managers. These lapses in management 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 guidelines adopted in 1987 mandate that federal judges impose stiff sentences on business I TABLE 4-1 RECENT EXAMPLES OF FAILED ETHICAL JUDGMENT BY SENIOR MANAGERS Lehman Brothers One of the oldest American investment banks collapses in 2008. Lehman used information systems and (2008–2010) accounting sleight of hand to conceal its bad investments. Lehman also engaged in deceptive tactics to shift investments off its books. WG Trading Co. (2010) Paul Greenwood, hedge fund manager and general partner at WG Trading, pled guilty to defrauding investors of $554 million over 13 years; Greenwood has forfeited $331 million to the government and faces up to 85 years in prison. Minerals Management Managers accused of accepting gifts and other favors from oil companies, letting oil company rig Service (U.S. Department employees write up inspection reports, and failing to enforce existing regulations on offshore Gulf drilling of the Interior) (2010) rigs. Employees systematically falsified information record systems. Pfizer, Eli Lilly, and Major pharmaceutical firms paid billions of dollars to settle U.S. federal charges that executives fixed AstraZeneca (2009) clinical trials for antipsychotic and pain killer drugs, marketed them inappropriately to children, and claimed unsubstantiated benefits while covering up negative outcomes. Firms falsified information in reports and systems. Galleon Group (2009) Founder of the Galleon Group criminally charged with trading on insider information, paying $250 million to Wall Street banks, and in return received market information that other investors did not get. Siemens (2009) The world’s largest engineering firm paid over $4 billion to German and U.S. authorities for a decades-long, world-wide bribery scheme approved by corporate executives to influence potential customers and governments. Payments concealed from normal reporting accounting systems. 124 Part One Organizations, Management, and the Networked Enterprise 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 in the past business firms would often pay for the legal defense of their employees enmeshed in civil charges and criminal investigations, now firms are encouraged to cooperate with prosecutors to reduce charges against the entire firm for obstructing investigations. These developments mean that, more than ever, as a manager or an employee, you will have to decide for yourself what constitutes proper legal and ethical conduct. Although these major instances of failed ethical and legal judgment were not masterminded by information systems departments, 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 decisions from public scrutiny in the vain hope they would never be caught. We deal with the issue of control in information systems in Chapter 8. In this chapter, we 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 behaviors. 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, the telephone, and the radio, 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 technology 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 electronic commerce. Internet and digital firm technologies make it easier than ever to assemble, integrate, and distribute information, unleashing new concerns about the appropriate use of customer information, the protection of personal privacy, and the protection of intellectual property. Other pressing ethical issues raised by information systems include establish- ing accountability for the consequences of information systems, setting stan- dards 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 given in Figure 4-1. Imagine society as a more or less calm pond on a summer 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 developed well-honed rules of behavior, and these are supported by laws developed 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, indi- vidual 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 correct attitudes, or approved rules. Political institutions also require time before develop- ing 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. FIVE MORAL DIMENSIONS OF THE INFORMATION AGE The major ethical, social, and political issues raised by information systems 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? Chapter 4 Ethical and Social Issues in Information Systems 125 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 political levels. These issues have five moral dimensions: information rights and obligations, property rights and obligations, system quality, quality of life, and accountability and control. 126 Part One Organizations, Management, and the Networked Enterprise Property rights and obligations. How will traditional intellectual property rights be protected in a digital society in which tracing and accounting for ownership 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 are supported by the new information technology? 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, informa- tion technology has heightened ethical concerns, taxed existing social arrange- ments, and made some laws obsolete or severely crippled. There are four key technological trends responsible for these ethical stresses and they are summa- rized 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 multiplying databases on individuals—employ- ees, customers, and potential customers—maintained by private and public organizations. These advances in data storage have made the routine violation of individual privacy both cheap and effective. Massive data storage systems are inexpensive enough for regional and even local retailing firms 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 are able to find out highly detailed personal information 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. Data storage costs rapidly declining Organizations can easily maintain detailed databases on individuals. Data analysis advances Companies can analyze vast quantities of data gathered on individuals to develop detailed profiles of individual behavior. Networking advances Copying data from one location to another and accessing personal data from remote locations are much easier. Chapter 4 Ethical and Social Issues in Information Systems 127 about individuals. With contemporary data management tools (see Chapter 5), companies can assemble and combine the myriad pieces of information about you stored on computers much more easily than in the past. Think of all the ways you generate computer 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 Web sites. Put together and mined properly, this information could reveal not only your credit information but also your driving habits, your tastes, your associations, and your political interests. Companies with products to sell purchase relevant information from these sources to help them more finely target their marketing campaigns. Chapters 3 and 6 describe how companies can analyze large pools of data from multiple sources to rapidly identify buying patterns of customers and suggest individ- ual responses. The use of computers to combine data from multiple sources and create electronic dossiers of detailed information on individuals is called profiling. For example, several thousand of the most popular Web sites 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 information DoubleClick gathers. DoubleClick uses this informa- tion 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. 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 electronic dossiers on almost every adult in the United States. The company sells this personal Credit card purchases can make personal information available to market researchers, telemarketers, and direct-mail companies. Advances in information technology facilitate the invasion of privacy. 128 Part One Organizations, Management, and the Networked Enterprise 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. information to businesses and government agencies. Demand for personal data is so enormous that data broker businesses such as ChoicePoint are flourishing. A new data analysis technology called nonobvious relationship aware- ness (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 hidden 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. Finally, advances in networking, including the Internet, promise to greatly reduce the costs of moving and accessing large quantities of data and open the possibility of mining large pools of data remotely using small desktop machines, permitting an invasion of privacy on a scale and with a precision heretofore unimaginable. Chapter 4 Ethical and Social Issues in Information Systems 129 4.2 ETHICS IN AN INFORMATION SOCIETY Ethics is a concern of humans who have freedom of choice. Ethics is about individual 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 responsible action, and who is responsible. Systems and institutions in which it is impossible to find out who took what action are inherently inca- pable of ethical analysis or ethical action. Liability extends the concept of responsibility further to the area of laws. Liability is a feature of political sys- tems in which a body of laws is in place that permits individuals to recover the damages done to them by other actors, systems, or organizations. Due process is a related feature of law-governed societies and is a process in which laws are known and understood, and there is an ability 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 impacts 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 manner 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 clearly the facts. Find out who did what to whom, and where, when, and how. In many instances, you will be surprised at the errors 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. 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, and 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-ending case study illustrates two competing values: the need to improve health care record keeping and the need to protect individual privacy. 130 Part One Organizations, Management, and the Networked Enterprise 3. Identify the stakeholders. Every ethical, social, and political issue has stakehold- ers: 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 ethically correct but disastrous from other points of view. Other options may work in one instance but not in other 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). Putting yourself into 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 (Descartes’ rule of change). 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 slippery 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 automobile accidents). Avoid these high-failure-cost actions, paying greater attention to high-failure-cost potential of moderate to high probability. 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. 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. Chapter 4 Ethical and Social Issues in Information Systems 131 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 profes- sions to regulate themselves in the general interest of society. For example, avoiding harm to others, honoring property rights (including intellectual prop- erty), 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 of the large telephone companies in the United States are using information technology to reduce the sizes of their workforces. Voice recognition software reduces the need for human operators by enabling computers to recognize a customer’s responses to a series of computerized questions. Many companies monitor what their employees are doing on the Internet to prevent them from wasting company resources on non-business activities. 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 infor- mation systems may argue that employers have some responsibility for their welfare. Business owners might feel obligated to monitor employee e-mail 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 THE MORAL DIMENSIONS OF INFORMATION SYSTEMS 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. INFORMATION RIGHTS: PRIVACY AND FREEDOM IN THE INTERNET AGE Privacy is the claim of individuals to be left alone, free from surveillance or interference from other individuals or organizations, including the state. Claims to privacy are also involved at the workplace: Millions of employees are 132 Part One Organizations, Management, and the Networked Enterprise subject to electronic and other forms of high-tech surveillance (Ball, 2001). 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 U.S., Canadian, and German consti- tutions in a variety of different ways and in other countries through various statutes. 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 personal 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 reporting, education, financial records, newspaper records, and electronic communications. The Privacy Act of 1974 has been the most important 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 (U.S. Department of Health, Education, and Welfare, 1973). FIP is a set of principles governing the collec- tion and use of information about individuals. FIP principles are based on the notion of a mutuality of interest between the record holder and the individ- ual. The individual has an interest in engaging in a transaction, and the record keeper—usually a business or government agency-requires informa- tion about the individual to support the transaction. Once information is gathered, the individual maintains an interest in the record, and the record may not be used to support other activities without the individual’s consent. In 1998, the FTC restated and extended the original FIP to provide guidelines for protecting online privacy. Table 4-4 describes the FTC’s Fair Information Practice 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 Web sites to obtain parental permis- sion before collecting information on children under the age of 13. (This law is 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 of 1996 (HIPAA) 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 in danger of being overturned.) The FTC has recommended additional legisla- tion to protect online consumer privacy in advertising networks that collect records of consumer Web activity to develop detailed profiles, which are then used by other companies to target online ads. Other proposed Internet privacy legislation focuses on protecting the online use of personal identification numbers, such as social security numbers; protecting personal information collected on the Internet that deals with individuals not covered by COPPA; and limiting the use of data mining for homeland security. In February 2009, the FTC began the process of extending its fair information practices doctrine to behavioral targeting. The FTC held hearings to discuss its program for voluntary industry principles for regulating behavioral targeting. The online advertising trade group Network Advertising Initiative (discussed later in this section), published its own self-regulatory principles that largely agreed with the FTC. Nevertheless, 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 indus- try opposes these moves and continues to insist on an opt-out capability being the only way to avoid tracking (Federal Trade Commission, 2009). Nevertheless, there is an emerging consensus among all parties that greater transparency and user control (especially making opt-out of tracking the default option) is required to deal with behavioral tracking. 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 insurance companies, includes some privacy protection for consumers of financial services. All financial institutions are required to disclose their policies and practices for protecting the privacy of nonpublic personal informa- tion and to allow customers to opt out of information-sharing arrangements with nonaffiliated 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 maintained by health care providers, hospitals, and health insurers, and the right to authorize how protected information about themselves can be used or disclosed. Doctors, hospitals, and other health care providers must limit the disclosure of personal information about patients to the minimum amount necessary to achieve a given purpose. TABLE 4-4 FEDERAL TRADE COMMISSION FAIR INFORMATION PRACTICE PRINCIPLES 1. Notice/awareness (core principle). Web sites 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. 2. Choice/consent (core principle). There must be a choice regime 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. 3. Access/participation. Consumers should be able to review and contest the accuracy and completeness of data collected about them in a timely, inexpensive process. 4. Security. Data collectors must take responsible steps to assure that consumer information is accurate and secure from unauthorized use. 5. Enforcement. There must be in place a mechanism 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 T h e E u r o p e a n D i r e c t i v e o n D a t a P r o t e c t i o n 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 personally identifiable information without consumers’ prior consent. On October 25, 1998, the European Commission’s Directive on Data Protection went into effect, broadening privacy protection in the European Union (EU) nations. The directive requires companies 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. EU member nations must translate these principles into their own laws and cannot transfer personal data to countries, such as the United States, that do not have similar privacy protection regulations. Working with the European Commission, the U.S. Department of Commerce developed 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 they develop privacy protection policies that meet EU standards. Enforcement would occur in the United States using self-policing, regulation, and government enforcement of fair trade statutes. I n t e r n e t C h a l l e n g e s t o P r i v a c y Internet technology has posed new challenges for the protection of individual privacy. Information sent over this vast network of networks may pass through many different computer systems before it reaches its final destination. Each of these systems is capable of monitoring, capturing, and storing communications that pass through it. It is possible to record many online activities, including what searches have been conducted, which Web sites and Web pages have been visited, the online content a person has accessed, and what items that person has inspected or purchased over the Web. Much of this monitoring and tracking of Web site visitors occurs in the background without the visitor’s knowledge. It is conducted not just by individual Web sites but by advertising networks such as Microsoft Advertising, Yahoo, and DoubleClick that are capable of tracking all browsing behavior at thousands of Web sites. Tools to monitor visits to the World Wide Web have become popular because they help businesses determine who is visiting their Web sites and how to better target their offerings. (Some firms also monitor the Internet usage of their employees to see how they are using company network resources.) The commercial demand for this personal information is virtually insatiable. Web sites can learn the identities of their visitors if the visitors voluntarily register at the site to purchase a product or service or to obtain a free service, such as information. Web sites can also capture information about visitors without their knowledge using cookie technology. Cookies are small text files deposited on a computer hard drive when a user visits Web sites. Cookies identify the visitor’s Web browser software and track visits to the Web site. When the visitor returns to a site that has stored a cookie, the Web site software will search the visitor’s computer, find the cookie, and know 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 Chapter 4 Ethical and Social Issues in Information Systems 135 its contents 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 pur- chases. DoubleClick, described earlier in this chapter, uses cookies to build its dossiers with details of online purchases and to examine the behavior of Web site visitors. Figure 4-3 illustrates how cookies work. Web sites 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. Web site owners can also com- bine the data they have gathered from cookies and other Web site monitoring 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. Marketers use Web beacons as another tool to monitor online behavior. Web beacons, also called Web bugs, are tiny objects invisibly embed- ded in e-mail messages and Web pages that are designed to monitor the behav- ior of the user visiting a Web site or sending e-mail. The Web beacon captures and transmits information such as the IP address of the user’s computer, the time a Web page was viewed and for how long, the type of Web browser that retrieved the beacon, and previously set cookie values. Web beacons are placed on popular Web sites by “third party” firms who pay the Web sites a fee for access to their audience. Typical popular Web sites contain 25–35 Web beacons. Other spyware can secretly install itself on an Internet user’s computer by piggybacking on larger applications. Once installed, the spyware calls out to Web sites to send banner ads and other unsolicited material to the user, and it can also report the user’s movements on the Internet to other computers. More information is available about intrusive software in Chapter 8. About 75 percent of global Internet users use Google search and other 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 FIGURE 4-3 HOW COOKIES IDENTIFY WEB VISITORS Cookies are written by a Web site on a visitor’s hard drive. When the visitor returns to that Web site, 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 Web site can then use these data to display personalized information. 136 Part One Organizations, Management, and the Networked Enterprise believe that Google possesses the largest collection of personal information in the world—more data on more people than any government agency. Table 4-5 lists the major Google services that collect user data and how Google uses these data. For a number of years, Google has been using behavioral targeting to help it display more relevant ads based on users’ search activities. 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 that Google can obtain, such as age, demographics, region, and other Web activities (such as blog- ging). An additional program allows Google to help advertisers select keywords and design ads for various market segments based on search histories, such as helping a clothing Web site create and test ads targeted at teenage females. Google has also been scanning the contents of messages received by users of its free Web-based e-mail service called Gmail. Ads that users see when they read their e-mail are related to the subjects of these messages. Profiles are developed on individual users based on the content in their e-mail. Google now displays targeted ads on YouTube and on Google mobile applications, and its DoubleClick ad network serves up targeted banner ads. In the past, Google refrained from capitalizing too much on the data it collected, considered the best source of data about user interests on the Internet. But with the emergence of rivals such as Facebook who are aggres- sively tracking and selling online user data, Google has decided to do more to profit from its user data. 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. U.S. e-commerce sites are largely content to publish statements on their Web sites informing visitors about how their information will be used. Some have added opt-out selection boxes to these information policy statements. An opt-out model of informed consent permits the collec- tion of personal information until the consumer specifically requests that the TABLE 4-5 HOW GOOGLE USES THE DATA IT COLLECTS GOOGLE FEATURE DATA COLLECTED USE Google Search Google search topics Targeting text ads placed in Users’ Internet addresses search results Gmail Contents of e-mail messages Targeting text ads placed next to the e-mail messages DoubleClick Data about Web sites visited on Targeting banner ads Google’s ad network YouTube Data about videos uploaded and downloaded; Targeting ads for Google display-ad some profile data network Mobile Maps with User’s actual or approximate location Targeting mobile ads based on My Location user’s ZIP code Google Toolbar Web-browsing data and search history No ad use at present Google Buzz Users’ Google profile data and connections No ad use at present Google Chrome Sample of address-bar entries when Google is No ad use at present the default search engine Google Checkout User’s name, address, transaction details No ad use at present Google Analytics Traffic data from Web sites using Google’s Analytics service No ad use at present data not 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 collecting any personal information unless the consumer specifically takes action to approve information collection and use. The online industry has preferred self-regulation to privacy legislation for protecting consumers. In 1998, the online industry formed the Online Privacy Alliance to encourage self-regulation to develop a set of privacy guidelines for its members. The group promotes the use of online seals, such as that of TRUSTe, certifying Web sites adhering to certain privacy principles. Members of the advertising network industry, including Google’s DoubleClick, have created an additional industry association called the Network Advertising Initiative (NAI) to develop its own privacy policies to help consumers opt out of advertis- ing network programs and provide consumers redress from abuses. Individual firms like AOL, Yahoo!, and Google have recently adopted policies on their own in an effort to address public concern about tracking people online. AOL established an opt-out policy that allows users of its site to not be tracked. Yahoo follows NAI guidelines and also 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. Many companies with Web sites do not have privacy policies. Of the companies that do post privacy polices on their Web sites, about half do not monitor their sites to ensure they adhere to these policies. The vast majority of online customers claim they are concerned about online privacy, but less than half read the privacy statements on Web sites (Laudon and Traver, 2010). In one of the more insightful studies of consumer attitudes towards Internet privacy, a group of Berkeley students conducted surveys of online users, and of complaints filed with the Federal Trade Commission involving privacy issues. Here are some of their results. User concerns: people feel they have no control over the information collected about them, and they don’t know who to com- plain to. Web site practices: Web sites collect all this information, but do not let users have access; the policies are unclear; they share data with “affiliates” but never identify who the affiliates are and how many there are. (MySpace, owned by NewsCorp, has over 1,500 affiliates with whom it shares online information.) Web bug trackers: they are ubiquitous and we are not informed they are on the pages we visit. The results of this study and others suggest that consumers are not saying “Take my privacy, I don’t care, send me the service for free.” They are saying “We want access to the information, we want some controls on what can be collected, what is done with the information, the ability to opt out of the entire tracking enterprise, and some clarity on what the policies really are, and we don’t want those policies changed without our participation and permis- sion.” (The full report is available at knowprivacy.org.) Te c h n i c a l S o l u t i o n s In addition to legislation, new technologies are available to protect user privacy during interactions with Web sites. Many of these tools are used for encrypting e-mail, for making e-mail or surfing activities appear anonymous, for prevent- ing client computers from accepting cookies, or for detecting and eliminating spyware. There are now tools to help users determine the kind of personal data that can be extracted by Web sites. The Platform for Privacy Preferences, known as P3P, enables automatic communication of privacy policies between an e-commerce site and its visitors. P3P provides a standard for communicating a Web site’s Chapter 4 Ethical and Social Issues in Information Systems 137 138 Part One Organizations, Management, and the Networked Enterprise privacy policy to Internet users and for comparing that policy to the user’s preferences or to other standards, such as the FTC’s FIP guidelines or the European Directive on Data Protection. Users can use P3P to select the level of privacy they wish to maintain when interacting with the Web site. The P3P standard allows Web sites to publish privacy policies in a form that computers can understand. Once it is codified according to P3P rules, the privacy policy becomes part of the software for individual Web pages (see Figure 4-4). Users of Microsoft Internet Explorer Web browsing software can access and read the P3P site’s privacy policy and a list of all cookies coming from the site. Internet Explorer enables users to adjust their computers to screen out all cookies or let in selected cookies based on specific levels of privacy. For example, the “Medium” level accepts cookies from first-party host sites that have opt-in or opt-out policies but rejects third-party cookies that use personally identifiable information without an opt-in policy. However, P3P only works with Web sites of members of the World Wide Web Consortium who have translated their Web site privacy policies into P3P format. The technology will display cookies from Web sites that are not part of the consortium, but users will not be able to obtain sender information or privacy statements. Many users may also need to be educated about interpreting com- pany privacy statements and P3P levels of privacy. Critics point out that only a small percentage of the most popular Web sites use P3P, most users do not under- stand their browser’s privacy settings, and there is no enforcement of P3P standards—companies can claim anything about their privacy policies. PROPERTY RIGHTS: INTELLECTUAL PROPERTY Contemporary information systems have severely challenged existing laws and social practices that protect private intellectual property. Intellectual property is considered to be intangible property created by individuals or Web sites are posting their privacy policies for visitors to review. The TRUSTe seal designates Web sites that have agreed to adhere to TRUSTe’s established privacy principles of disclo- sure, choice, access, and security. Chapter 4 Ethical and Social Issues in Information Systems 139 corporations. Information technology has made it difficult to protect intellec- tual property because computerized information can be so easily copied or distributed on networks. Intellectual property is subject to a variety of protec- tions under three different legal traditions: trade secrets, copyright, and patent law. Tr a d e S e c r e t s 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 secrets 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 compilations can be included as 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 to prevent the secret from falling into the public domain. The limitation of trade secret protection is that, although virtually all software 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. C o p y r i g h t 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 FIGURE 4-4 THE P3P STANDARD P3P enables Web sites to translate their privacy policies into a standard format that can be read by the user’s Web browser software. The browser software evaluates the Web site’s privacy policy to determine whether it is compatible with the user’s privacy preferences. 140 Part One Organizations, Management, and the Networked Enterprise motion pictures. The intent behind copyright laws has been to encourage creativity and authorship by ensuring that creative people receive the financial and other benefits of their work. Most industrial nations have their own copyright 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 for copies of the original sold in commerce, and sets forth the rights of the purchaser to use the software while the creator retains legal title. Copyright protects against copying of 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 distinction between an idea and its expression. For instance, in the early 1990s, Apple Computer sued Microsoft Corporation and Hewlett-Packard for infringe- ment of the expression of Apple’s Macintosh interface, claiming that the defen- dants 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 vs. Symantec Corp.—in which the court dissected the elements of software alleged to be infringing. The court found that similar concept, function, general functional features (e.g., drop-down menus), and colors are not protectable by copyright law (Brown Bag Software vs. Symantec Corp., 1992). P a t e n t s A patent grants the owner an exclusive monopoly on the ideas behind an inven- tion 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 pos- sible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. The granting of a patent is determined 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 that held that computer programs could be a 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 under- lying 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. C h a l l e n g e s t o I n t e l l e c t u a l P r o p e r t y R i g h t s Contemporary information technologies, especially software, pose severe challenges to existing intellectual property regimes and, therefore, create Chapter 4 Ethical and Social Issues in Information Systems 141 significant ethical, social, and political issues. Digital media differ from books, periodicals, and other media in terms of ease of replication; ease of transmis- sion; ease of alteration; difficulty in classifying a software work as a program, book, or even music; compactness—making theft easy; and difficulties in estab- lishing uniqueness. The proliferation of electronic 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 repro- duced and distributed. The Seventh Annual Global Software Piracy Study conducted by the International Data Corporation and the Business Software Alliance reported that the rate of global software piracy climbed to 43 percent in 2009, representing $51 billion in global losses from software piracy. Worldwide, for every $100 worth of legitimate software sold that year, an additional $75 worth was obtained illegally (Business Software Alliance, 2010). The Internet was designed to transmit information freely around the world, including copyrighted information. With the World Wide Web in particular, you can easily copy and distribute virtually anything to thousands and even millions of people around the world, 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 MP3 music files on the Internet for a number of years. File-sharing services such as Napster, and later Grokster, Kazaa, and Morpheus, sprung up to help users locate and swap digital music files, including those protected by copyright. Illegal file sharing became so widespread that it threatened the viability of the music recording industry. The recording industry won some legal battles for shutting these services down, but has not been able to halt illegal file sharing entirely. As more and more homes adopt high-speed Internet access, illegal file sharing of videos will pose similar threats to the motion picture industry. Mechanisms are being developed to sell and distribute books, articles, and other intellectual property legally on the Internet, and the Digital Millennium Copyright Act (DMCA) of 1998 is providing 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 that they are hosting once they 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 existing 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 com- bat software piracy, and has published guidelines for employee use of software. ACCOUNTABILITY, LIABILITY, AND CONTROL Along with privacy and property laws, new information technologies are challenging 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 public bulletin board or an electronic service, such as America Online, 142 Part One Organizations, Management, and the Networked Enterprise permit the transmission of pornographic or offensive material (as broadcast- ers), or should they be held harmless against any liability for what users trans- mit (as is true of common carriers, such as the telephone system)? What about the Internet? If you outsource your information processing, can you hold the external vendor liable for injuries done to your customers? Some real-world examples may shed light on these questions. C o m p u t e r - R e l a t e d L i a b i l i t y P r o b l e m s During the last week of September 2009, thousands of customers of TD Bank, one of the largest banks in North America, scrambled to find their payroll checks, social security checks, and savings and checking account balances. The bank’s 6.5 million customers were temporarily out of funds because of a computer glitch. The problems were caused by a failed effort to integrate systems of TD Bank and Commerce Bank. A spokesperson for TD Bank, said that “while the overall integration of the systems went well, there have been some speed-bumps in the final stages, as you might expect with a project of this size and complexity.” (Vijayan, 2009). Who is liable for any economic harm caused to individuals or businesses that could not access their full account balances in this period? This case reveals the difficulties faced by information systems executives who ultimately are responsible for any harm done by systems developed by their staffs. In general, insofar as computer software is part of a machine, and the machine injures someone physically or economically, the producer of the soft- ware 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), and hence courts have been wary of holding software authors liable for booklike software. 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, books, and periodicals have not been held liable because of fears that liability claims would interfere with First Amendment rights guaranteeing freedom of expression. What about software as a service? ATM machines are a service provided to bank customers. Should this service fail, customers will be inconvenienced and perhaps harmed economically if they cannot access their funds in a timely man- ner. Should liability protections be extended to software publishers and opera- tors of defective financial, accounting, simulation, or marketing systems? Software is very different from books. Software users may develop expecta- tions of infallibility about software; software is less easily inspected than a book, and it is more difficult to compare with other software products for quality; software claims actually 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 because they are regulated common carriers. In return for their right to provide telephone service, they must provide access to all, at reasonable rates, and achieve acceptable reliability. But broadcasters and cable television stations are subject to a wide variety of federal and local constraints on content and facilities. Organizations can be held liable for offensive content on their Web sites, and online services, such as America Online, might be held liable for postings by their Chapter 4 Ethical and Social Issues in Information Systems 143 users. Although U.S. courts have increasingly exonerated Web sites and ISPs for posting material by third parties, the threat of legal action still has a chilling effect on small companies or individuals who cannot afford to take their cases to trial. SYSTEM QUALITY: DATA QUALITY AND SYSTEM ERRORS The debate over liability and accountability for unintentional consequences of system use raises a related but independent moral dimension: What is an acceptable, technologically feasible level of system quality? At what point should system managers say, “Stop testing, we’ve done all we can to perfect this software. Ship it!” Individuals and organizations may be held responsible for avoidable and foreseeable consequences, which they have a duty to perceive and correct. And the gray area is that some system errors are foreseeable and correctable only at very great expense, an expense so great that pursuing this level of perfection is not feasible economically—no one could afford the product. For example, although software companies try to debug their products before releasing them to the marketplace, they knowingly ship buggy products because the time and cost of fixing all minor errors would prevent these products from ever being released. What if the product was not offered on the marketplace, would social welfare as a whole not advance 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. A 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 technological 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 not perfect performance. 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 quality. 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, these negative consequences 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 information systems, who do we hold responsible for the bad consequences? Next, we briefly examine some of the negative social consequences of systems, considering individual, social, and political responses. 144 Part One Organizations, Management, and the Networked Enterprise B a l a n c i n g P o w e r : C e n t e r Ve r s u s P e r i p h e r y An early fear of the computer age was that huge, centralized mainframe computers would centralize power at corporate headquarters and 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 computing, coupled with an ideology of empowerment of thousands of workers, and the decentral- ization of decision making to lower organizational levels, have reduced the fears of power centralization in institutions. Yet much of the empowerment described in popular business magazines is trivial. Lower-level employees may be empowered to make minor decisions, but the key policy decisions may be as centralized as in the past. R a p i d i t y o f C h a n g e : R e d u c e d R e s p o n s e T i m e t o C o m p e t i t i o n Information systems have helped to create much more efficient national and international markets. The now-more-efficient global marketplace has reduced the normal social buffers that permitted businesses many years to adjust to com- petition. 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. M a i n t a i n i n g B o u n d a r i e s : Fa m i l y, W o r k , a n d L e i s u r e Parts of this book were produced on trains and planes, as well as on vacations and during what otherwise might have been “family” time. The danger to ubiq- uitous computing, telecommuting, nomad 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. Although authors have traditionally worked just about anywhere (typewrit- ers have been portable for nearly a century), the advent of information Although some people enjoy the convenience of working at home, the “do anything anywhere” computing environment can blur the traditional boundaries between work and family time. Chapter 4 Ethical and Social Issues in Information Systems 145 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 umbrella now extends far beyond the eight-hour day. Even leisure time spent on the computer threatens these close social relationships. Extensive Internet 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 anti-social behavior, such as the recent upsurge in cyberbullying. Weakening these institutions poses clear-cut risks. Family and friends histor- ically have provided powerful support mechanisms for individuals, and they act as balance points in a society by preserving private life, providing a place for people to collect their thoughts, allowing people to think in ways contrary to their employer, and dream. D e p e n d e n c e a n d V u l n e r a b i l i t y Today, our businesses, governments, schools, and private associations, such as churches, are incredibly dependent on information systems and are, therefore, highly vulnerable if these systems fail. 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 standards and perhaps regulatory oversight. C o m p u t e r C r i m e a n d A b u s e New technologies, including computers, create new opportunities for committing 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 through the use of a computer or against a computer system. Computers or computer systems can be the object of the crime (destroying a company’s computer center or a company’s computer files), as well as the instrument of a crime (stealing computer lists by illegally gaining access to a computer system using a home computer). Simply accessing a computer system without authorization or with intent to do harm, even by accident, is now a federal crime. Computer abuse is the commission of acts involving a computer that may not be illegal but that are considered unethical. The popularity of the Internet and e-mail has turned one form of computer abuse—spamming—into a serious problem for both individuals and businesses. Spam is junk e-mail sent by an organization or individual to a mass audience of Internet users who have expressed no interest in the product or service being marketed. Spammers tend to market pornography, fraudulent deals and services, outright scams, and other products not widely approved in most civilized societies. Some countries have passed laws to outlaw spamming or to restrict its use. In the United States, it is still legal if it does not involve fraud and the sender and subject of the e-mail are properly identified. Spamming has mushroomed because it only costs a few cents to send thousands of messages advertising wares to Internet users. According to Sophos, a leading vendor of security software, spam accounted for 97 percent of all business e-mail during the second quarter of 2010 (Schwartz, 2010). Spam costs for businesses are very high (estimated at over $50 billion per year) because of the computing and network resources consumed by billions of unwanted e-mail messages and the time required to deal with them. 146 Part One Organizations, Management, and the Networked Enterprise Internet service providers and individuals can combat spam by using spam filtering software to block suspicious e-mail before it enters a recipient’s e-mail inbox. However, spam filters may block legitimate messages. Spammers know how to skirt around filters by continually changing their e-mail accounts, by incorporating spam messages in images, by embedding spam in e-mail attach- ments and electronic greeting cards, and by using other people’s computers that have been hijacked by botnets (see Chapter 7). Many spam messages are sent from one country while another country hosts the spam Web site. Spamming is more tightly regulated in Europe than in the United States. On May 30, 2002, the European Parliament passed a ban on unsolicited commercial messaging. Electronic marketing can be targeted only to people who have given prior consent. The U.S. CAN-SPAM Act of 2003, which went into effect on January 1, 2004, does not outlaw spamming but does ban deceptive e-mail practices by requiring commercial e-mail messages to display accurate subject lines, identify the true senders, and offer recipients an easy way to remove their names from e-mail lists. It also prohibits the use of fake return addresses. A few people have been prosecuted under the law, but it has had a negligible impact on spamming. Although Facebook and MySpace have won judgments against spammers, most critics argue the law has too many loopholes and is not effectively enforced (Associated Press, 2009). Another negative impact of computer technology is the rising danger from people using cell phones to send text messages while driving. Many states have outlawed this behavior, but it has been difficult to eradicate. The Interactive Session on Organizations explores this topic. E m p l o y m e n t : Tr i c k l e - D o w n Te c h n o l o g y a n d R e e n g i n e e r i n g J o b L o s s 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 could potentially cause millions of mid-level managers and clerical workers to lose their jobs. One economist has raised the possibility that we will create a society run by a small “high tech elite of corporate professionals . . . in a nation of the permanently unemployed” (Rifkin, 1993). Other economists are much more sanguine about the potential job losses. They believe relieving bright, educated workers from reengineered jobs will result in these workers moving to better jobs in fast-growth industries. Missing from this equation are unskilled, blue-collar workers and older, less well-edu- cated middle managers. It is not clear that these groups can be retrained easily for high-quality (high-paying) jobs. Careful planning and sensitivity to employee needs can help companies redesign work to minimize job losses. E q u i t y a n d A c c e s s : I n c r e a s i n g R a c i a l a n d S o c i a l C l a s s C l e a v a g e s 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 systems technology on various groups in society has not been thoroughly studied. What is known is that information, knowledge, computers, and access Chapter 4 Ethical and Social Issues in Information Systems 147 Cell phones have become a staple of modern society. Nearly everyone has them, and people carry and use them at all hours of the day. For the most part, this is a good thing: the benefits of staying connected at any time and at any location are considerable. But if you’re like most Americans, you may regularly talk on the phone or even text while at the wheel of a car. This dangerous behavior has resulted in increasing numbers of accidents and fatalities caused by cell phone usage. The trend shows no sign of slowing down. In 2003, a federal study of 10,000 drivers by the National Highway Traffic Safety Administration (NHTSA) set out to determine the effects of using cell phones behind the wheel. The results were conclusive: talking on the phone is equivalent to a 10- point reduction in IQ and a .08 blood alcohol level, which law enforcement considers intoxicated. Hands- free sets were ineffective in eliminating risk, the study found, because the conversation itself is what distracts drivers, not holding the phone. Cell phone use caused 955 fatalities and 240,000 accidents in 2002. Related studies indicated that drivers that talked on the phone while driving increased their crash risk fourfold, and drivers that texted while driving increased their crash risk by a whopping 23 times. Since that study, mobile device usage has grown by an order of magnitude, worsening this already dangerous situation. The number of wireless subscribers in America has increased by around 1,000 percent since 1995 to nearly 300 million overall in 2010, and Americans’ usage of wireless minutes increased by approximately 6,000 percent. This increase in cell phone usage has been accompa- nied by an upsurge in phone-related fatalities and accidents: In 2010, it’s estimated that texting caused 5,870 fatalities and 515,000 accidents, up consider- ably from prior years. These figures are roughly half of equivalent statistics for drunk driving. Studies show that drivers know that using the phone while driving is one of the most dangerous things you can do on the road, but refuse to admit that it’s danger- ous when they themselves do it. Of users that text while driving, the more youthful demographic groups, such as the 18–29 age group, are by far the most frequent texters. About three quarters of Americans in this age group regularly text, compared to just 22 percent of the THE PERILS OF TEXTING 35–44 age group. Correspondingly, the majority of accidents involving mobile device use behind the wheel involve young adults. Among this age group, texting behind the wheel is just one of a litany of problems raised by frequent texting: anxiety, distraction, failing grades, repetitive stress injuries, and sleep deprivation are just some of the other problems brought about by excessive use of mobile devices. Teenagers are particularly prone to using cell phones to text because they want to know what’s happening to their friends and are anxious about being socially isolated. Analysts predict that over 800 billion text messages will be sent in 2010. Texting is clearly here to stay, and in fact has supplanted phone calls as the most commonly used method of mobile communica- tion. People are unwilling to give up their mobile devices because of the pressures of staying connected. Neurologists have found that the neural response to multitasking by texting while driving suggests that people develop addictions to the digital devices they use most, getting quick bursts of adrenaline, without which driving becomes boring. There are interests opposed to legislation prohibiting cell phone use in cars. A number of legislators believe that it’s not state or federal government’s role to prohibit poor decision making. Auto makers, and some safety researchers, are arguing that with the proper technology and under appropriate conditions, communicating from a moving vehicle is a manageable risk. Louis Tijerina, a veteran of the NHTSA and Ford Motor Co. researcher, notes that even as mobile phone sub- scriptions have surged to over 250 million during the past decade, the death rate from accidents on the highways has fallen. Nevertheless, lawmakers are increasingly recog- nizing the need for more powerful legislation barring drivers from texting behind the wheel. Many states have made inroads with laws prohibiting texting while operating vehicles. In Utah, drivers crashing while texting can receive 15 years in prison, by far the toughest sentence for texting while driving in the nation when the legislation was enacted. Utah’s law assumes that drivers understand the risks of texting while driving, whereas in other states, prosecutors must prove that the driver knew about the risks of texting while driving before doing so. I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S 148 Part One Organizations, Management, and the Networked Enterprise 1. Which of the five moral dimensions of informa- tion systems identified in this text is involved in this case? 2. What are the ethical, social, and political issues raised by this case? 3. Which of the ethical principles described in the text are useful for decision making about texting while driving? Utah’s tough law was the result of a horrifying accident in which a speeding college student, texting at the wheel, rear-ended a car in front. The car lost control, entered the opposite side of the road, and was hit head-on by a pickup truck hauling a trailer, killing the driver instantly. In September 2008, a train engineer in California was texting within a minute prior to the most fatal train accident in almost two decades. Californian authorities responded by banning the use of cell phones by train workers while on duty. In total, 31 states have banned texting while driving in some form, and most of those states have a full ban for phone users of all ages. The remain- ing states are likely to follow suit in coming years as well. President Obama also banned texting while 1. Many people at state and local levels are calling for a federal law against texting while driving. Use a search engine to explore what steps the federal government has taken to discourage tex- ting while driving. 2. Most people are not aware of the widespread impact of texting while driving across the United States. Do a search on “texting while driving.” Examine all the search results for the first two pages. Enter the information into a two-column table. In the left column put the locality of the report and year. In the right column give a brief description of the search result, e.g., accident, report, court judgment, etc. What can you conclude from these search results and table? driving for all federal government employees in October 2009. Still, there’s more work to be done to combat this dangerous and life-threatening practice. Sources: Paulo Salazar, “Banning Texting While Driving,” WCBI.com, August 7, 2010; Jerry Hirsch, “Teen Drivers Dangerously Divide Their Attention,” Los Angeles Times, August 3, 2010; www.dri- vinglaws.org, accessed July 2010; www.drivinglaws.org, accessed July 7, 2010; Matt Richtel, “Driver Texting Now an Issue in the Back Seat,” The New York Times, September 9, 2009; Matt Richtel, “Utah Gets Tough With Texting Drivers,” The New York Times, August 29, 2009; Matt Richtel, “In Study, Texting Lifts Crash Risk by Large Margin,” The New York Times, July 28, 2009; Matt Richtel, “Drivers and Legislators Dismiss Cellphone Risks,” The New York Times, July 19, 2009; Tom Regan, “Some Sobering Stats on Texting While Driving,” The Christian Science Monitor, May 28, 2009; Katie Hafner, “Texting May be Taking a Toll on Teenagers,” The New York Times, May 26, 2009; and Tara Parker-Pope, “Texting Until Their Thumbs Hurt,” The New York Times, May 26, 2009. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N to these resources through educational institutions and public libraries are inequitably distributed along ethnic and social class lines, as are many other information resources. Several studies have found that certain ethnic and income groups in the United States are less likely to have computers or online Internet access even though computer ownership and Internet access have soared in the past five years. Although the gap is narrowing, higher-income families in each ethnic group are still more likely to have home computers and Internet access than lower-income families in the same group. A similar digital divide exists in U.S. schools, with schools in high-poverty areas less likely to have computers, high-quality educational technology programs, or Internet access availability for their students. Left uncorrected, the digital divide could lead to a society of information haves, computer literate and skilled, versus a large group of information have-nots, computer illiterate www.drivinglaws.org www.drivinglaws.org www.drivinglaws.org Chapter 4 Ethical and Social Issues in Information Systems 149 and unskilled. Public interest groups want to narrow this digital divide by making digital information services—including the Internet—available to virtu- ally everyone, just as basic telephone service is now. H e a l t h R i s k s : R S I , C V S , a n d Te c h n o s t r e s s The most 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 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 repetition of keystrokes: in a single shift, a word processor may perform 23,000 keystrokes. Symptoms of carpal tunnel syndrome include numbness, shooting pain, inabil- ity to grasp objects, and tingling. Millions of workers have been diagnosed with carpal tunnel syndrome. RSI is avoidable. Designing workstations for a neutral wrist position (using a wrist rest to support the wrist), proper monitor stands, and footrests all contribute 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 condition related to display screen use in desktop computers, laptops, e-readers, smart- phones, and hand-held video games. CVS affects about 90 percent of people who spend three hours or more per day at a computer (Beck, 2010). Its symp- toms, which are usually temporary, include headaches, blurred vision, and dry and irritated eyes. The newest computer-related malady is technostress, which is stress induced by computer use. Its symptoms include aggravation, hostility toward humans, impatience, and fatigue. According to experts, humans working continuously with computers come to expect other humans and human institu- tions to behave like computers, providing instant responses, attentiveness, and Repetitive stress injury (RSI) is the leading occupational disease today. The single largest cause of RSI is computer keyboard work. 150 Part One Organizations, Management, and the Networked Enterprise an absence of emotion. Technostress is thought to be related to high levels of job turnover in the computer industry, high levels of early retirement from computer-intense occupations, and elevated levels of drug and alcohol abuse. The incidence of technostress is not known but is thought to be in the mil- lions and growing rapidly in the United States. Computer-related jobs now top the list of stressful occupations based on health statistics in several industrial- ized countries. To date, the role of radiation from computer display screens in occupational disease has not been proved. Video display terminals (VDTs) emit nonionizing electric and magnetic fields at low frequencies. These rays enter the body and have unknown effects on enzymes, molecules, chromosomes, and cell mem- branes. Long-term studies are investigating low-level electromagnetic fields and birth defects, stress, low birth weight, and other diseases. All manufacturers have reduced display screen emissions since the early 1980s, and European countries, such as Sweden, have adopted stiff radiation emission standards. In addition to these maladies, computer technology may be harming our cognitive functions. 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. The Interactive Session on Technology highlights the debate that has emerged about this problem. The computer has become a part of our lives—personally as well as socially, culturally, and politically. It is unlikely that the issues and our choices will become easier as information technology continues to transform our world. The growth of the Internet and the information economy suggests that all the ethical and social issues we have described will be heightened further as we move into the first digital century. I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y Do you think that the more information managers receive, the better their decisions? Well, think again. Most of us can no longer imagine the world without the Internet and without our favorite gadgets, whether they’re iPads, smartphones, laptops, or cell phones. However, although these devices have brought about a new era of collaboration and communication, they also have introduced new concerns about our relationship with technology. Some researchers suggest that the Internet and other digital technologies are fundamentally changing the way we think—and not for the better. Is the Internet actually making us “dumber,” and have we reached a point where we have too much technology? Or does the Internet offer so many new opportunities to discover information that it’s actually making us “smarter.” And, by the way, how do we define “dumber” and “smarter” in an Internet age? Wait a second, you’re saying. How could this be? The Internet is an unprecedented source for acquiring and sharing all types of information. Creating and disseminating media has never been easier. Resources like Wikipedia and Google have helped to organize knowledge and make that knowledge accessible to the world, and they would not have been possible without the Internet. And other digital media technologies have become indispensable parts of our lives. At first glance, it’s not clear how such advancements could do anything but make us smarter. In response to this argument, several authorities claim that making it possible for millions of people to create media—written blogs, photos, videos—has understandably lowered the quality of media. Bloggers very rarely do original reporting or research but instead copy it from professional resources. YouTube videos contributed by newbies to video come nowhere near the quality of professional videos. Newspapers struggle to stay in business while bloggers provide free content of inconsistent quality. But similar warnings were issued in response to the development of the printing press. As Gutenberg’s invention spread throughout Europe, contemporary literature exploded in popularity, and much of it was considered mediocre by intellectuals of the era. But rather than being destroyed, it was simply in the early stages of fundamental change. As people came to grips with the new technology and TOO MUCH TECHNOLOGY? the new norms governing it, literature, newspapers, scientific journals, fiction, and non-fiction all began to contribute to the intellectual climate instead of detracting from it. Today, we can’t imagine a world without print media. Advocates of digital media argue that history is bound to repeat itself as we gain familiarity with the Internet and other newer technologies. The scientific revolution was galvanized by peer review and collaboration enabled by the printing press. According to many digital media supporters, the Internet will usher in a similar revolution in publishing capability and collaboration, and it will be a resounding success for society as a whole. This may all be true, but from a cognitive standpoint, the effects of the Internet and other digital devices might not be so positive. New studies suggest that digital technologies are damaging our ability to think clearly and focus. Digital technology users develop an inevitable desire to multitask, doing several things at once while using their devices. Although TV, the Internet, and video games are effective at developing our visual processing ability, research suggests that they detract from our ability to think deeply and retain information. It’s true that the Internet grants users easy access to the world’s information, but the medium through which that information is delivered is hurting our ability to think deeply and critically about what we read and hear. You’d be “smarter” (in the sense of being able to give an account of the content) by reading a book rather than viewing a video on the same topic while texting with your friends. Using the Internet lends itself to multitasking. Pages are littered with hyperlinks to other sites; tabbed browsing allows us to switch rapidly between two windows; and we can surf the Web while watching TV, instant messaging friends, or talking on the phone. But the constant distractions and disruptions that are central to online experiences prevent our brains from creating the neural connections that constitute full understanding of a topic. Traditional print media, by contrast, makes it easier to fully concentrate on the content with fewer interruptions. A recent study conducted by a team of researchers at Stanford found that multitaskers are not only more easily distracted, but were also surprisingly poor at Chapter 4 Ethical and Social Issues in Information Systems 151 C A S E S T U D Y Q U E S T I O N S 1. What are some of the arguments for and against the use of digital media? 2. How might the brain affected by constant digital media usage? 3. Do you think these arguments outweigh the positives of digital media usage? Why or why not? 4. What additional concerns are there for children using digital media? Should children under 8 use computers and cellphones? Why or why not? multitasking compared to people who rarely do so themselves. The team also found that multitaskers receive a jolt of excitement when confronted with a new piece of information or a new call, message, or e-mail. The cellular structure of the brain is highly adaptable and adjusts to the tools we use, so multitaskers quickly become dependent on the excitement they experience when confronted with something new. This means that multitaskers continue to be easily distracted, even if they’re totally unplugged from the devices they most often use. Eyal Ophir, a cognitive scientist on the research team at Stanford, devised a test to measure this phe- nomenon. Subjects self-identifying as multitaskers were asked to keep track of red rectangles in series of images. When blue rectangles were introduced, multi- taskers struggled to recognize whether or not the red rectangles had changed position from image to image. Normal testers significantly outperformed the multi- taskers. Less than three percent of multitaskers (called “supertaskers”) are able to manage multiple information streams at once; for the vast majority of us, multitasking does not result in greater productiv- ity. Neuroscientist Michael Merzenich argues that our brains are being ‘massively remodeled’ by our constant and ever-growing usage of the Web. And it’s not just the Web that’s contributing to this trend. Our ability to focus is also being undermined by the constant distractions provided by smart phones and other digital technology. Television and video games are no exception. Another study showed that when presented with two identical TV shows, one of which had a news crawl at the bottom, viewers retained much more information about the show without the news crawl. The impact of these technologies on children may be even greater than the impact on adults, because their brains are still developing, and they already struggle to set proper priorities and resist impulses. The implications of recent research on the impact of Web 2.0 “social” technologies for management decision making are significant. As it turns out, the “always-connected” harried executive scurrying through airports and train stations, holding multiple voice and text conversations with clients and co-workers on sometimes several mobile devices, might not be a very good decision maker. In fact, the quality of decision making most likely falls as the quantity of digital information increases through multiple channels, and managers lose their critical thinking capabilities. Likewise, in terms of manage- ment productivity, studies of Internet use in the workplace suggest that Web 2.0 social technologies offer managers new opportunities to waste time rather than focus on their responsibilities. Checked your Facebook page today? Clearly we need to find out more about the impacts of mobile and social technologies on management work. Sources: Randall Stross, “Computers at Home: Educational Hope vs. Teenage Reality,” The New York Times, July 9, 2010; Matt Richtel, “Hooked on Gadgets, and Paying a Mental Price,” The New York Times, June 6, 2010; Clay Shirky, “Does the Internet Make you Smarter?” The Wall Street Journal, June 4, 2010; Nicholas Carr, “Does the Internet Make you Dumber?” The Wall Street Journal, June 5, 2010; Ofer Malamud and Christian Pop-Echeles, “Home Computer Use and the Development of Human Capital,” January 2010; and “Is Technology Producing a Decline in Critical Thinking and Analysis?” Science Daily, January 29, 2009. 1. Make a daily log for 1 week of all the activities you perform each day using digital technology (such as cell phones, computers, television, etc.) and the amount of time you spend on each. Note the occasions when you are multitasking. On average, how much time each day do you spend using digital technology? How much of this time do you spend multitasking? Do you think your life is too technology-intense? Justify your response. M I S I N A C T I O N 152 Part One Organizations, Management, and the Networked Enterprise Chapter 4 Ethical and Social Issues in Information Systems 153 WEB USAGE REPORT FOR THE WEEK ENDING JANUARY 9, 2010. USER NAME MINUTES ONLINE WEB SITE VISITED Kelleher, Claire 45 www.doubleclick.net Kelleher, Claire 107 www.yahoo.com Kelleher, Claire 96 www.insweb.com McMahon, Patricia 83 www.itunes.com McMahon, Patricia 44 www.insweb.com Milligan, Robert 112 www.youtube.com Milligan, Robert 43 www.travelocity.com Olivera, Ernesto 40 www.CNN.com Talbot, Helen 125 www.etrade.com Talbot, Helen 27 www.nordstrom.com Talbot, Helen 35 www.yahoo.com Talbot, Helen 73 www.ebay.com Wright, Steven 23 www.facebook.com Wright, Steven 15 www.autobytel.com 4.4 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 using Internet newsgroups for market research. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. USAData’s Web site is linked to massive databases that consolidate personal data on millions of people. Anyone with a credit card can purchase marketing lists of consumers broken down by location, age, income level, and interests. If you click on Consumer Leads to order a consumer mailing list, you can find the names, addresses, and sometimes phone numbers of potential sales leads residing in a specific location and purchase the list of those names. 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 USAData 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 in order to preserve your privacy? Consider the following data users: government agencies, your employer, private business firms, other individuals. 2. 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 work load 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. You requested the preceding weekly report of employee Web usage from your information systems department. • 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. www.doubleclick.net www.yahoo.com www.insweb.com www.itunes.com www.insweb.com www.youtube.com www.travelocity.com www.CNN.com www.etrade.com www.nordstrom.com www.yahoo.com www.ebay.com www.facebook.com www.autobytel.com 154 Part One Organizations, Management, and the Networked Enterprise • 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. A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : C r e a t i n g a S i m p l e B l o g Software skills: Blog creation Business skills: Blog and Web page design 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 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 hard drive or the Web to your blog. (Google recommends Open Photo, Flickr: Creative Commons, or Creative Commons Search as sources for photos. Be sure to credit the source for your image.) 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 (including Gadgets) 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. I m p r o v i n g D e c i s i o n M a k i n g : U s i n g I n t e r n e t N e w s g r o u p s f o r O n l i n e M a r k e t R e s e a r c h Software Skills: Web browser software and Internet newsgroups Business Skills: Using Internet newsgroups to identify potential customers This project will help develop your Internet skills in using newsgroups for marketing. It will also ask you to think about the ethical implications of using information in online discussion groups for business purposes. You are producing hiking boots that you sell through a few stores at this time. You think your boots are more comfortable than those of your competition. You believe you can undersell many of your competitors if you can significantly increase your production and sales. You would like to use Internet discussion groups interested in hiking, climbing, and camping both to sell your boots and to make them well known. Visit groups.google.com, which stores discussion postings from many thousands of newsgroups. Through this site you can locate all relevant newsgroups and search them by keyword, author’s name, forum, date, and subject. Choose a message and examine it carefully, noting all the information you can obtain, including information about the author. • How could you use these newsgroups to market your boots? • What ethical principles might you be violating if you use these messages to sell your boots? Do you think there are ethical problems in using newsgroups this way? Explain your answer. • Next use Google or Yahoo.com to search the hiking boots industry and locate sites that will help you develop other new ideas for contacting potential customers. • Given what you have learned in this and previous chapters, prepare a plan to use newsgroups and other alternative methods to begin attracting visitors to your site. Chapter 4 Ethical and Social Issues in Information Systems 155 LEARNING TRACK MODULES The following Learning Tracks provide content relevant to the topics covered in this chapter: 1. Developing a Corporate Code of Ethics for Information Systems 2. Creating a Web Page Review Summary 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 raised by information systems center around information rights and obligations, property rights and obligations, accountability and control, system quality, and quality of life. 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, Descartes’ rule of change, 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. 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 enables companies to easily gather personal data about individuals from many different sources and analyze these data to create detailed electronic 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 Web site visitors. Not all Web sites 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 different locations simultaneously over the Internet. 4. How have information systems affected everyday life? 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 socioeconomic disparities among different racial groups and social classes. Widespread use of computers increases opportunities for computer crime and computer abuse. Computers can also create health problems, such as RSI, computer vision syndrome, and technostress. Key Terms Accountability, 129 Carpal tunnel syndrome (CTS), 149 Computer abuse, 145 Computer crime, 145 Computer vision syndrome (CVS), 149 Cookies, 134 Copyright, 139 Descartes’ rule of change, 130 Digital divide, 148 Digital Millennium Copyright Act (DMCA), 141 Due process, 129 Ethical “no free lunch” rule, 130 Ethics, 124 Fair Information Practices (FIP), 132 Golden Rule, 130 Immanuel Kant’s Categorical Imperative, 130 Information rights, 125 Informed consent, 134 Intellectual property, 138 Liability, 129 Nonobvious relationship awareness (NORA), 128 Opt-in, 137 Opt-out, 136 156 Part One Organizations, Management, and the Networked Enterprise P3P, 137 Patent, 140 Privacy, 131 Profiling, 127 Repetitive stress injury (RSI), 149 Responsibility, 129 Risk Aversion Principle, 130 Safe harbor, 134 Spam, 145 Spyware, 135 Technostress, 149 Trade secret, 139 Utilitarian Principle, 130 Web beacons, 135 Collaboration and Teamwork: Developing a Corporate Ethics Code Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. Review Questions 1. What ethical, social, and political issues are raised by information systems? • Explain how ethical, social, and political issues are connected and give some examples. • List and describe the key technological trends that heighten ethical concerns. • Differentiate between responsibility, accountability, and liability. 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. 3. Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellec- tual property? • Define privacy and fair information practices. • Explain how the Internet challenges the protection of individual privacy and intellec- tual 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 different regimes that protect intellectual property rights. 4. How have information systems affected every- day life? • Explain why it is so difficult to hold software 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 technostress and RSI and explain their relationship to information technology. Discussion Questions 1. Should producers of software-based services, such as ATMs, be held liable for economic injuries suffered when their systems fail? 2. Should companies be responsible for unemploy- ment caused by their information systems? Why or why not? 3. Discuss the pros and cons of allowing companies to amass personal data for behavioral targeting. With three or four of your classmates, develop a cor- porate ethics code that addresses both employee privacy and the privacy of customers and users of the corporate Web site. Be sure to consider e-mail privacy and employer monitoring of worksites, as well as corporate use of information about employ- ees concerning their off-the-job behavior (e.g., lifestyle, marital arrangements, and so forth). If pos- sible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop your solution and presenta- tion for the class. Chapter 4 Ethical and Social Issues in Information Systems 157 W h e n Ra d i a t i o n T h e r a p y K i l l s CASE STUDY hen new expensive medical therapies come along, promising to cure people of illness, one would think that the manufacturers, doctors, and technicians, along with the hospitals and state oversight agencies, would take extreme caution in their application and use. Often this is not the case. Contemporary radiation therapy offers a good example of society failing to anticipate and control the negative impacts of a technology powerful enough to kill people. For individuals and their families suffering through a battle with cancer, technical advancements in radiation treatment represent hope and a chance for a healthy, cancer-free life. But when these highly complex machines used to treat cancers go awry or when medical technicians and doctors fail to follow proper safety procedures, it results in suffering worse than the ailments radiation aims to cure. A litany of horror stories underscores the consequences when hospitals fail to provide safe radiation treatment to cancer patients. In many of these horror stories, poor software design, poor human-machine interfaces, and lack of proper training are root causes of the problems. The deaths of Scott Jerome-Parks and Alexandra Jn-Charles, both patients of New York City hospitals, are prime examples of radiation treatments going awry. Jerome-Parks worked in southern Manhattan near the site of the World Trade Center attacks, and suspected that the tongue cancer he developed later was related to toxic dust that he came in contact with after the attacks. His prognosis was uncertain at first, but he had some reason to be optimistic, given the quality of the treatment provided by state-of-the-art linear accelerators at St. Vincent’s Hospital, which he selected for his treatment. But after receiving erroneous dosages of radiation several times, his condition drastically worsened. For the most part, state-of-the-art linear accelera- tors do in fact provide effective and safe care for cancer patients, and Americans safely receive an increasing amount of medical radiation each year. Radiation helps to diagnose and treat all sorts of cancers, saving many patients’ lives in the process, and is administered safely to over half of all cancer patients. Whereas older machines were only capable of imaging a tumor in two dimensions and projecting straight beams of radiation, newer linear accelerators are capable of modeling cancerous tumors in three dimensions and shaping beams of radiation to conform to those shapes. One of the most common issues with radiation therapy is finding ways to destroy cancerous cells while preserving healthy cells. Using this beam- shaping technique, radiation doesn’t pass through as much healthy tissue to reach the cancerous areas. Hospitals advertised their new accelerators as being able to treat previously untreatable cancers because of the precision of the beam-shaping method. Using older machinery, cancers that were too close to important bodily structures were considered too dangerous to treat with radiation due to the imprecision of the equipment. How, then, are radiation-related accidents increasing in frequency, given the advances in linear acceleration technology? In the cases of Jerome- Parks and Jn-Charles, a combination of machine malfunctions and user error led to these frightening mistakes. Jerome-Parks’s brain stem and neck were exposed to excessive dosages of radiation on three separate occasions because of a computer error. The linear accelerator used to treat Jerome-Parks is known as a multi-leaf collimator, a newer, more powerful model that uses over a hundred metal “leaves” to adjust the shape and strength of the beam. The St. Vincent’s hospital collimator was made by Varian Medical Systems, a leading supplier of radiation equipment. Dr. Anthony M. Berson, St. Vincent’s chief radiation oncologist, reworked Mr. Jerome Parks’s radiation treatment plan to give more protection to his teeth. Nina Kalach, the medical physicist in charge of implementing Jerome-Parks’s radiation treatment plan, used Varian software to revise the plan. State records show that as Ms. Kalach was trying to save her work, the computer began seizing up, displaying an error message. The error message asked if Ms. Kalach wanted to save her changes before the program aborted and she responded that she did. Dr. Berson approved the plan. Six minutes after another computer crash, the first of several radioactive beams was turned on, followed by several additional rounds of radiation the next few days. After the third treatment, Ms. Kalach ran a test to verify that the treatment plan was carried out as prescribed, and found that the multileaf collimator, W 158 Part One Organizations, Management, and the Networked Enterprise which was supposed to focus the beam precisely on Mr. Jerome Parks’s tumor, was wide open. The patient’s entire neck had been exposed and Mr. Jerome-Parks had seven times the prescribed dose of radiation. As a result of the radiation overdose, Mr. Jerome- Parks’s experienced deafness and near-blindness, ulcers in his mouth and throat, persistent nausea, and severe pain. His teeth were falling out, he couldn’t swallow, and he was eventually unable to breathe. He died soon after, at the age of 43. Jn-Charles’s case was similarly tragic. A 32-year old mother of two from Brooklyn, she was diagnosed with an aggressive form of breast cancer, but her outlook seemed good after breast surgery and chemotherapy, with only 28 days of radiation treatments left to perform. However, the linear accelerator used at the Brooklyn hospital where Jn-Charles was treated was not a multi-leaf collima- tor, but instead a slightly older model, which uses a device known as a “wedge” to prevent radiation from reaching unintended areas of the body. On the day of her 28th and final session, techni- cians realized that something had gone wrong. Jn- Charles’s skin had slowly begun to peel and seemed to resist healing. When the hospital looked into the treatment to see why this could have happened, they discovered that the linear accelerator lacked the cru- cial command to insert the wedge, which must be programmed by the user. Technicians had failed to notice error messages on their screens indicating the missing wedge during each of the 27 sessions. This meant that Jn-Charles had been exposed to almost quadruple the normal amount of radiation during each of those 27 visits. Ms. Jn-Charles’s radiation overdose created a wound that would not heal despite numerous sessions in a hyperbaric chamber and multiple surgeries. Although the wound closed up over a year later, she died shortly afterwards. It might seem that the carelessness or laziness of the medical technicians who administered treatment is primarily to blame in these cases, but other factors have contributed just as much. The complexity of new linear accelerator technology has not been accompanied with appropriate updates in software, training, safety procedures, and staffing. St. Vincent’s hospital stated that system crashes similar to those involved in the improper therapy for Mr. Jerome- Parks “are not uncommon with the Varian software, and these issues have been communicated to Varian on numerous occasions.” Manufacturers of these machines boast that they can safely administer radiation treatment to more and more patients each day, but hospitals are rarely able to adjust their staffing to handle those workloads or increase the amount of training technicians receive before using newer machines. Medical technicians incorrectly assume that the new systems and software are going to work correctly, but in reality they have not been tested over long periods of time. Many of these errors could have been detected if the machine operators were paying attention. In fact, many of the reported errors involve mistakes as simple and as egregious as treating patients for the wrong cancers; in one example, a brain cancer patient received radiation intended for breast cancer. Today’s linear accelerators also lack some of the necessary safeguards given the amounts of radiation that they can deliver. For example, many linear accelerators are unable to alert users when a dosage of radiation far exceeds the necessary amount to effectively damage a cancerous tumor. Though responsibility ultimately rests with the technician, software programmers may not have designed their product with the technician’s needs in mind. Though the complexity of newer machines has exposed the inadequacy of the safety procedures hospitals employ for radiation treatments, the increasing number of patients receiving radiation due to the speed and increased capability of these machines has created other problems. Technicians at many of the hospitals reporting radiation-related errors reported being chronically overworked, often dealing with over a hundred patients per day. These already swamped medical technicians are not forced to check over the settings of the linear accelerators that they are handling, and errors that are introduced to the computer systems early on are difficult to detect. As a result, the same erroneous treatment may be administered repeatedly, until the techni- cians and doctors have a reason to check it. Often, the reason is a seriously injured patient. Further complicating the issue is the fact that the total number of radiation-related accidents each year is essentially unknown. No single agency exists to collect data across the country on these accidents, and many states don’t even require that accidents be reported. Even in states that do, hospitals are often reluctant to report errors that they’ve made, fearful that it will scare potential patients away, affecting their bottom lines. Some instances of hospital error are difficult to detect, since radiation-related cancer may appear a long while after the faulty treatment, Chapter 4 Ethical and Social Issues in Information Systems 159 and under-radiation doesn’t result in any observable injury. Even in New York, which has one of the strictest accident reporting requirements in place and keeps reporting hospitals anonymous to encourage them to share their data, a significant portion of errors go unreported—perhaps even a majority of errors. The problem is certainly not unique to New York. In New Jersey, 36 patients were over-radiated at a single hospital by an inexperienced team of technicians, and the mistakes continued for months in the absence of a system that detected treatment errors. Patients in Louisiana, Texas, and California repeatedly received incorrect dosages that led to other crippling ailments. Nor is the issue unique to the United States. In Panama, 28 patients at the National Cancer Institute received overdoses of radi- ation for various types of cancers. Doctors had ordered medical physicists to add a fifth “block,” or metal sheet similar to the “leaves” in a multi-leaf collimator, to their linear accelerators, which were only designed to support four blocks. When the staff attempted to get the machine software to work with the extra block, the results were miscalculated dosages and over-radiated patients. The lack of a central U.S. reporting and regulatory agency for radiation therapy means that in the event of a radiation-related mistake, all of the groups involved are able to avoid ultimate responsibility. Medical machinery and software manufacturers claim that it’s the doctors and medical technicians’ responsibility to properly use the machines, and the hospitals’ responsibility to properly budget time and resources for training. Technicians claim that they are understaffed and overworked, and that there are no procedures in place to check their work and no time to do so even if there were. Hospitals claim that the newer machinery lacks the proper fail-safe mechanisms and that there is no room on already limited budgets for the training that equipment manufacturers claim is required. Currently, the responsibility for regulating these incidents falls upon the states, which vary widely in their enforcement of reporting. Many states require no reporting at all, but even in a state like Ohio, which requires reporting of medical mistakes within 15 days of the incident, these rules are routinely bro- ken. Moreover, radiation technicians do not require a license in Ohio, as they do in many other states. Dr. Fred A. Mettler, Jr., a radiation expert who has investigated radiation accidents worldwide, notes that “while there are accidents, you wouldn’t want to scare people to death where they don’t get needed radiation therapy.” And it bears repeating that the vast majority of the time, radiation works, and saves some people from terminal cancer. But technicians, hospitals, equipment and software manufacturers, and regulators all need to collaborate to create a common set of safety procedures, software features, reporting standards, and certification requirements for technicians in order to reduce the number of radiation accidents. Sources: Walt Bogdanich, “Medical Group Urges New Rules on Radiation,” The New York Times, February 4, 2010; “As Technology Surges, Radiation Safeguards Lag,” The New York Times, January 27, 2010; “Radiation Offers New Cures, and Ways to Do Harm,” The New York Times, January 24, 2010; and “Case Studies: When Medical Radiation Goes Awry,” The New York Times, January 21, 2010. CASE STUDY QUESTIONS 1. What concepts in the chapter are illustrated in this case? What ethical issues are raised by radiation technology? 2. What management, organization, and technology factors were responsible for the problems detailed in this case? Explain the role of each. 3. Do you feel that any of the groups involved with this issue (hospital administrators, technicians, medical equipment and software manufacturers) should accept the majority of the blame for these incidents? Why or why not? 4. How would a central reporting agency that gathered data on radiation-related accidents help reduce the number of radiation therapy errors in the future? 5. If you were in charge of designing electronic software for a linear accelerator, what are some features you would include? Are there any features you would avoid? !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% P A R T T W O Information Technology Infrastructure 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 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 technologies likely to change in the future? What tech- nologies and procedures are required to ensure that systems are reliable and secure? LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What is IT infrastructure and what are its components? 2. What are the stages and technology drivers of IT infrastructure evolution? 3. What are the current trends in computer hardware platforms? 4. What are the current trends in software platforms? 5. What are the challenges of managing IT infrastructure and management solutions? CHAPTER OUTLINE 5.1 IT INFRASTRUCTURE Defining IT Infrastructure Evolution of IT Infrastructure Technology Drivers of Infrastructure Evolution 5.2 INFRASTRUCTURE COMPONENTS 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 CONTEMPORARY HARDWARE PLATFORM TRENDS The Emerging Mobile Digital Platform Grid Computing Virtualization Cloud Computing Green Computing Autonomic Computing High-Performance and Power-Saving Processors 5.4 CONTEMPORARY SOFTWARE PLATFORM TRENDS Linux and Open Source Software Software for the Web: Java and Ajax Web Services and Service-Oriented Architecture Software Outsourcing and Cloud Services 5.5 MANAGEMENT ISSUES Dealing with Platform and Infrastructure Change Management and Governance Making Wise Infrastructure Investments 5.6 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using a Spreadsheet to Evaluate Hardware and Software Options Improving Decision Making: Using Web Research to Budget for a Sales Conference LEARNING TRACK MODULES How Computer Hardware and Software Work Service Level Agreements The Open Source Software Initiative Comparing Stages in IT Infrastructure Evolution Cloud Computing Chapter 5 IT Infrastructure and Emerging Technologies Interactive Sessions: New to the Touch Is Green Computing Good for Business? 163 he Bay Area Rapid Transit (BART) is a heavy-rail public transit system that connects San Francisco to Oakland, California, and other neighboring cities to the east and south. BART has provided fast, reliable transportation for more than 35 years and now carries more than 346,000 passengers each day over 104 miles of track and 43 stations. It provides an alternative to driving on bridges and highways, decreasing travel time and the number of cars on the Bay Area’s congested roads. It is the fifth busiest rapid transit system in the United States. BART recently embarked on an ambitious modernization effort to overhaul stations, deploy new rail cars, and extend routes. This modernization effort also encompassed BART’s information technology infrastructure. BART’s information systems were no longer state-of-the art, and they were starting to affect its ability to provide good service. Aging homegrown financial and human resources systems could no longer provide information rapidly enough for making timely decisions, and they were too unreliable to support its 24/7 operations. BART upgraded both its hardware and software. It replaced old legacy mainframe applica- tions with Oracle’s PeopleSoft Enterprise applications running on HP Integrity blade servers and the Oracle Enterprise Linux operating system. This configuration provides more flexibil- ity and room to grow because BART is able to run the PeopleSoft software in conjunction with new applications it could not previously run. BART wanted to create a high-availability IT infrastructure using grid computing where it could match computing and storage capacity more closely to actual demand. BART chose to run its applications on a cluster of servers using a grid architecture. Multiple operating environments share capacity and computing resources that can be provisioned, distributed, and redistributed as needed over the grid. In most data centers, a distinct server is deployed for each application, and each server typically uses only a fraction of its capacity. BART uses virtualization to run multiple applica- tions on the same server, increasing server capacity utilization to 50 percent or higher. This means fewer servers can be used to accomplish the same amount of work. With blade servers, if BART needs more capacity, it can add another server to the main system. Energy usage is minimized because BART does not have to purchase computing BART SPEEDS UP WITH A NEW IT INFRASTRUCTURE T capacity it doesn’t need and the blade servers’ stripped down modular design mini- mizes the use of physical space and energy. By using less hardware and using existing computing resources more efficiently, BART’s grid environment saves power and cooling costs. Consolidating applications onto a shared grid of server capacity is expected to reduce energy usage by about 20 per- cent. 164 Part Two Information Technology Infrastructure Sources: David Baum, “Speeding into the Modern Age,” Profit, February 2010; www.bart.gov, accessed June 5, 2010; and Steve Clouther, “The San Francisco Bay Area Rapid Transit Uses IBM Technology to Improve Safety and Reliability,” ARC Advisory Group, October 7, 2009. BART has been widely praised as a successful modern rapid transitsystem, but its operations and ability to grow where needed were hampered by an outdated IT infrastructure. BART’s management felt the best solution was to invest in new hardware and software technologies that were more cost-effective, efficient, and energy-saving. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Management realized that in order to keep provid- ing the level of service expected by Bay Area residents, it had to modernize its operations, including the hardware and software used for running the organization. The IT infrastructure investments it made had to support BART’s business goals and contribute to improving its performance. Other goals included reducing costs and also “green” goals of reducing power and materials consumption. By replacing its legacy software and computers with blade servers on a grid and more modern business software, BART was able to reduce wasted computer resources not used for processing, use existing resources more efficiently, and cut costs and power consumption. New software tools make it much easier to develop new applications and services. BART’s IT infrastuc- ture is easier to manage and capable of scaling to accommodate growing processing loads and new business opportunities. This case shows that the right hardware and software investments not only improve business perfor- mance but can also contribute to important social goals, such as conservation of power and materials. www.bart.gov Chapter 5 IT Infrastructure and Emerging Technologies 165 5.1 IT INFRASTRUCTURE n Chapter 1, we defined information technology (IT) infrastructure as the shared technology resources that provide the platform for the firm’s specific information system applications. IT infrastructure includes investment in hardware, 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 foun- dation for serving customers, working with vendors, and managing internal firm business processes (see Figure 5-1). Supplying U.S. firms with IT infrastructure (hardware and software) in 2010 is estimated to be a $1 trillion industry when telecommunications, networking equipment, and telecommunications services (Internet, telephone, and data transmission) are included. This does not include IT and related business process consulting services, which would add another $800 billion. Investments in infrastructure account for between 25 and 50 percent of information technology expenditures in large firms, led by financial services firms where IT investment is well over half of all capital investment (Weill et al., 2002). DEFINING IT INFRASTRUCTURE IT infrastructure consists of a set of physical devices and software applications that are required to operate the entire enterprise. But IT infrastructure is also a set of firmwide services budgeted by management and comprising both human and technical capabilities. These services include the following: I 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. 166 Part Two Information Technology Infrastructure • 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 computers, and mobile handheld devices. • 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 that provide enterprise-wide capabilities such as enterprise resource planning, customer relationship management, supply chain management, and knowledge management systems that are shared by all business units. • Physical facilities management services that develop and manage the physical installations required for computing, telecommunications, and data management services. • IT management services that plan and develop the infrastructure, coordinate with the business units for IT services, manage accounting for the IT expenditure, 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 employees and offer managers training in how to plan for and manage IT investments. • IT research and development services that provide the firm with research on potential future IT projects and investments that could help the firm differentiate itself in the marketplace. This “service platform” perspective makes it easier to understand the business value provided by infrastructure investments. For instance, the real business value of a fully loaded personal computer operating at 3 gigahertz that costs about $1,000 or a high-speed Internet connection is hard to under- stand 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 making $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 one 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 over 50 years of evolution in computing platforms. There have been five stages in this evo- lution, each representing a different configuration of computing power and infrastructure elements (see Figure 5-2). The five eras are general-purpose mainframe and minicomputer computing, personal computers, 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 massive servers supporting large Web sites and corporate enterprise applications. Chapter 5 IT Infrastructure and Emerging Technologies 167 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. 168 Part Two Information Technology Infrastructure G e n e r a l - P u r p o s e M a i n f r a m e a n d M i n i c o m p u t e r E r a : ( 1 9 5 9 t o P r e s e n t ) The introduction of the IBM 1401 and 7090 transistorized machines in 1959 marked the beginning of widespread commercial use of mainframe computers. In 1965, the mainframe computer truly came into its own with the introduction of the IBM 360 series. The 360 was the first commercial computer with a power- ful operating system that could provide time sharing, multitasking, and virtual memory in more advanced 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 corpo- rate 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 produced by Digital Equipment Corporation (DEC) in 1965. DEC minicomput- ers (PDP-11 and later the VAX machines) offered powerful machines at far lower prices than IBM mainframes, making possible decentralized computing, customized to the specific needs of individual departments or business units rather than time sharing on a single huge mainframe. In recent years, the minicomputer has evolved into a midrange computer or midrange server and is part of a network. P e r s o n a l C o m p u t e r E r a : ( 1 9 8 1 t o P r e s e n t ) 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 American busi- nesses. At first using the DOS operating system, a text-based command lan- guage, and later the Microsoft Windows operating system, the Wintel PC com- puter (Windows operating system software on a computer with an Intel microprocessor) became the standard desktop personal computer. Today, 95 percent of the world’s estimated 1.5 billion computers use the Wintel standard. 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 standalone systems until PC operating system software in the 1990s made it possible to link them into networks. C l i e n t / S e r v e r E r a ( 1 9 8 3 t o P r e s e n t ) 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 software application and the physical computer on which the network software runs. The server could be a mainframe, but today, server computers typically are more powerful versions of personal computers, based on inexpensive chips and often using multiple processors in a single computer box. Chapter 5 IT Infrastructure and Emerging Technologies 169 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 complex, multitiered (often called N-tier) client/server architec- tures 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 client 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. Client/server computing enables businesses to distribute computing work across a series of smaller, inexpensive machines that cost much less than minicomputers or centralized 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 7, Windows Vista, and Windows XP). E n t e r p r i s e C o m p u t i n g E r a ( 1 9 9 2 t o P r e s e n t ) 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 seriously using the Transmission Control Protocol/Internet Protocol (TCP/IP) networking FIGURE 5-3 A MULTITIERED CLIENT/SERVER NETWORK (N-TIER) In a multitiered client/server network, client requests for service are handled by different levels of servers. 170 Part Two Information Technology Infrastructure 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 hardware and smaller networks into an enterprise-wide network so that information can flow freely across the organization and between the firm and other organiza- tions. It can link different types of computer hardware, including mainframes, servers, PCs, mobile phones, and other handheld devices, and it includes public infrastructures 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 business, such as enterprise applications (see Chapters 2 and 9) and Web services (discussed in Section 5.4). C l o u d a n d M o b i l e C o m p u t i n g E r a ( 2 0 0 0 t o P r e s e n t ) The growing bandwidth power of the Internet has pushed the client/server model one step further, towards 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 services), over a network, often the Internet. These “clouds” of computing resources can be accessed on an as-needed basis from any connected device and location. Currently, cloud computing is the fastest growing form of computing, with global revenue expected to reach close to $89 billion in 2011 and nearly $149 billion by 2014 according to Gartner Inc. technology consul- tants (Cheng and Borzo, 2010; Veverka, 2010). Thousands or even hundreds of thousands computers are located in cloud data centers, where they can be accessed by desktop computers, laptop computers, netbooks, entertainment centers, mobile devices, and other client machines linked to the Internet, with both personal and corporate computing increasingly moving to mobile platforms. IBM, HP, Dell, and Amazon operate huge, scalable cloud computing centers that provide computing power, data storage, and high-speed Internet connections to firms that want to maintain their IT infrastructures remotely. Software firms such as Google, Microsoft, SAP, Oracle, and Salesforce.com sell software applications as services delivered over the Internet. We discuss cloud computing in more detail in Section 5.3. The Learning Tracks include a table on 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, telecommunications and networking hardware and software, and software design that have exponentially increased computing power while exponentially reducing costs. Let’s look at the most important developments. M o o r e ’ s L a w a n d M i c r o p r o c e s s i n g P o w e r In 1965, Gordon Moore, the directory of Fairchild Semiconductor’s Research and Development Laboratories, an early manufacturer of integrated circuits, wrote in Electronics magazine that since the first microprocessor chip was introduced in 1959, the number of components on a chip with the smallest Chapter 5 IT Infrastructure and Emerging Technologies 171 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. This law would later be interpreted in multiple ways. 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) computing 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 microprocessor and millions of instructions per second (MIPS), a common measure of processor power. Figure 5-5 shows the exponential decline in the cost of transistors and rise in computing power. In 2010 for instance, and Intel 8-Core Xeon processor contains 2.3 billion transistors. Exponential growth in the number of transistors and the power of processors coupled with an exponential decline in computing costs is likely to continue. Chip manufacturers continue to miniaturize components. Today’s transistors should no longer be compared to the size of a human hair but rather to the size of a virus. By using nanotechnology, chip manufacturers can even shrink the size of transistors down to the width of several atoms. Nanotechnology uses individ- ual 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 that could produce nanotube processors economically (Figure 5-6). IBM has just started making microprocessors in a production setting using this technology. T h e L a w o f M a s s D i g i t a l S t o r a g e A second technology driver of IT infrastructure change is the Law of Mass Digital Storage. The world produces as much as 5 exabytes of unique informa- tion per year (an exabyte is a billion gigabytes, or 1018 bytes). The amount of digital information is roughly doubling every year (Lyman and Varian, 2003). Fortunately, the cost of storing digital information is falling at an exponential FIGURE 5-4 MOORE’S LAW AND MICROPROCESSOR PERFORMANCE Packing over 2 billion transistors into a tiny microprocessor has exponentially increased processing power. Processing power has increased to over 500,000 MIPS (millions of instructions per second). Sources: Intel, 2010; authors’ estimate. 172 Part Two Information Technology Infrastructure FIGURE 5-6 EXAMPLES OF NANOTUBES Nanotubes are tiny tubes about 10,000 times thinner than a human hair. They consist of rolled up sheets of carbon hexagons and have the potential uses as minuscule wires or in ultrasmall electronic devices and are very powerful conductors of electrical current. FIGURE 5-5 FALLING COST OF CHIPS Packing more transistors into less space has driven down transistor cost dramatically as well as the cost of the products in which they are used. Source: Intel, 2010; authors’ estimates. Chapter 5 IT Infrastructure and Emerging Technologies 173 rate of 100 percent a year. Figure 5-7 shows that the number of kilobytes that can be stored on magnetic media for $1 from 1950 to the present roughly dou- bled every 15 months. M e t c a l f e ’ s L a w a n d N e t w o r k E c o n o m i c s Moore’s Law and the Law of Mass Storage help us understand why computing resources are now so readily available. But why do people want more comput- ing 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 linearly, the value of the entire system grows exponentially and continues to grow forever 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. D e c l i n i n g C o m m u n i c a t i o n s C o s t s a n d t h e I n t e r n e t A fourth technology driver transforming IT infrastructure is the rapid decline in the costs of communication and the exponential growth in the size of the FIGURE 5-7 THE COST OF STORING DATA DECLINES EXPONENTIALLY 1950–2010 Since the first magnetic storage device was used in 1955, the cost of storing a kilobyte of data has fallen exponentially, doubling the amount of digital storage for each dollar expended every 15 months on average. Sources: Kurzweil 2003; authors’ estimates. 174 Part Two Information Technology Infrastructure Internet. An estimated 1.8 billion people worldwide now have Internet access (Internet World Stats, 2010). Figure 5-8 illustrates the exponentially declining 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 0, utilization of communication and computing facilities explodes. 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 clients, and mobile computing devices. There is every reason to believe these trends will continue. S t a n d a r d s a n d N e t w o r k E f f e c t s Today’s enterprise infrastructure and Internet computing would be impossible— both now and in the future—without agreements among manufacturers and widespread consumer acceptance of technology standards. Technology standards are specifications that establish the compatibility of products and the ability to communicate in a network (Stango, 2004). 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 expensive than is currently the case. Table 5-1 describes important standards that have shaped IT infrastructure. Beginning in the 1990s, corporations started moving toward standard comput- ing and communications platforms. The Wintel PC with the Windows operating system and Microsoft Office desktop productivity applications became the stan- dard desktop and mobile client computing platform. Widespread adoption of Unix as the enterprise server operating system of choice made possible the replace- ment of proprietary and expensive mainframe infrastructures. In telecommunica- tions, 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 firm-wide networks, and ultimately, to the Internet. FIGURE 5-8 EXPONENTIAL DECLINES IN INTERNET COMMUNICATIONS COSTS One reason for the growth in the Internet population is the rapid decline in Internet connection and overall communication costs. The cost per kilobit of Internet access has fallen exponentially since 1995. Digital subscriber line (DSL) and cable modems now deliver a kilobit of communication for a retail price of around 2 cents. Source: Authors. Chapter 5 IT Infrastructure and Emerging Technologies 175 TABLE 5-1 SOME IMPORTANT STANDARDS IN COMPUTING STANDARD SIGNIFICANCE American Standard Code for Information Made it possible for computer machines from different manufacturers to exchange Interchange (ASCII) (1958) 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 An easy-to-use software language that greatly expanded the ability of programmers to (COBOL) (1959) 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. Transmission Control Protocol/Internet Suite of communications protocols and a common addressing scheme that enables Protocol (TCP/IP) (1974) 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. 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. IBM/Microsoft/Intel Personal The standard Wintel design for personal desktop computing based on standard Intel Computer (1981) 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. 5.2 INFRASTRUCTURE COMPONENTS IT infrastructure today is composed of seven major components. Figure 5-9 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. In the past, technology vendors supplying these components were often in competition with one another, offering purchasing firms a mixture of incompati- ble, proprietary, partial solutions. But increasingly the vendor firms have been forced by large customers to cooperate in strategic partnerships with one another. 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 database products its client firms wish to use (even though it sells its own database management software called DB2). COMPUTER HARDWARE PLATFORMS U.S. firms will spend about $109 billion in 2010 on computer hardware. This component includes client machines (desktop PCs, mobile computing devices such as netbooks and laptops but not including iPhones or BlackBerrys) and 176 Part Two Information Technology Infrastructure server machines. The client machines use primarily Intel or AMD micro- processors. In 2010, there will be about 90 million PCs sold to U.S. customers (400 million worldwide) (Gartner, 2010). The server market uses mostly Intel or AMD processors in the form of blade servers in racks, but also includes Sun SPARC microprocessors and IBM POWER chips specially designed for server use. Blade servers, which we discussed in the chapter-opening case, are ultrathin computers consisting of a circuit board with processors, memory, and network connections that are stored in racks. They take up less space than traditional box-based servers. Secondary storage may be provided by a hard drive in each blade server or by external mass-stor- age drives. The marketplace for computer hardware has increasingly become concen- trated in top firms such as IBM, HP, Dell, and Sun Microsystems (acquired by Oracle), and three chip producers: Intel, AMD, and IBM. The industry has collectively settled on Intel as the standard processor, with major exceptions in the server market for Unix and Linux machines, which might use Sun or IBM Unix processors. FIGURE 5-9 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. Chapter 5 IT Infrastructure and Emerging Technologies 177 Mainframes have not disappeared. The mainframe market has actually grown steadily over the last decade, although the number of providers has dwindled to one: IBM. IBM has also repurposed its mainframe systems so they can be used as giant servers for massive enterprise networks and corporate Web sites. A single IBM mainframe can run up to 17,000 instances of Linux or Windows server software and is capable of replacing thousands of smaller blade servers (see the discussion of virtualization in Section 5.3). OPERATING SYSTEM PLATFORMS In 2010, Microsoft Windows comprises about 75 percent of the server operating system market, with 25 percent of corporate servers using some form of the Unix operating system or Linux, an inexpensive and robust open source rela- tive of Unix. Microsoft Windows Server is capable of providing enterprise-wide operating system and network services, and appeals to organizations seeking Windows-based IT infrastructures (IDC, 2010). Unix and Linux are scalable, reliable, and much less expensive than main- frame operating systems. They can also run on many different types of proces- sors. The major providers of Unix operating systems are IBM, HP, and Sun, each with slightly different and partially incompatible versions. At the client level, 90 percent of PCs use some form of Microsoft Windows operating system (such as Windows 7, Windows Vista, or Windows XP) to man- age the resources and activities of the computer. However, there is now a much greater variety of 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 com- puting using netbooks. Programs are not stored on the user’s PC but are used over the Internet and accessed through the Chrome Web browser. User data resides on servers across the Internet. Microsoft has introduced the Windows Azure operating system for its cloud services and platform. Android is a mobile operating system developed by Android, Inc. (purchased by Google) and later the Open Handset Alliance as a flexible, upgradeable mobile device platform. Conventional client operating system software is designed around the mouse and keyboard, but increasingly becoming more natural and intuitive by using touch technology. IPhone OS, the operating system for the phenomenally popu- lar Apple iPad, iPhone, and iPod Touch, features a multitouch interface, where users use their fingers to manipulate objects on the screen. The Interactive Session on Technology explores the implications of using multitouch to interact with the computer. ENTERPRISE SOFTWARE APPLICATIONS In addition to software for applications used by specific groups or business units, U.S. firms will spend about $165 billion in 2010 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 pro- vides a more detailed discussion of each. The largest providers of enterprise application software are SAP and Oracle (which acquired PeopleSoft). Also included in this category is middleware software supplied by vendors such as BEA for achieving firmwide integration by 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 that have not yet implemented enterprise applications. I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y When Steve Jobs first demonstrated “the pinch”—the two-finger gesture for zooming in and out of photos and Web pages on the iPhone, he not only shook up the mobile phone industry—the entire digital world took notice. The Apple iPhone’s multitouch features dramatized new ways of using touch to interact with software and devices. Touch interfaces are not new. People use them every day to get money from ATMs or to check into flights at airport kiosks. Academic and commercial researchers have been working on multitouch technology for years. What Apple did was to make multitouch more exciting and relevant, popularizing it just as it did in the 1980s with the mouse and the graphical user interface. (These had also been invented elsewhere.) Multitouch interfaces are potentially more versatile than single-touch interfaces. They allow you to use one or more fingers to perform special gestures that manipulate lists or objects on a screen without moving a mouse, pressing buttons, turning scroll wheels, or striking keys. They take different actions depending on how many fingers they detect and which gestures a user performs. Multitouch gestures are easier to remember than commands because they are based on ingrained human move- ments that do not have to be learned, scientists say. The iPhone’s Multi-Touch display and software lets you control everything using only your fingers. A panel underneath the display’s glass cover senses your touch using electrical fields. It then transmits that information to a LCD screen below it. Special software recognizes multiple simultaneous touch points, (as opposed to the single-touch screen, which recognizes only one touch point.) You can quickly move back and forth through a series of Web pages or photos by “swiping,” or placing three fingers on the screen and moving them rapidly sideways. By pinching the image, you can shrink or expand a photo. Apple has made a concerted effort to provide multitouch features in all of its product categories, but many other consumer technology companies have adopted multitouch for some of their products. Synaptics, a leading supplier of touchpads for laptop makers who compete with Apple, has announced that it is incorporating several multitouch features into its touchpads. NEW TO THE TOUCH Microsoft’s Windows 7 operating system sports multitouch features: When you pair Windows 7 with a touch-screen PC, you can browse online newspa- pers, flick through photo albums, and shuffle files and folders using nothing but your fingers. To zoom in on something on the screen of a multitouch-com- patible PC, you would place two fingers on the screen and spread them apart. To right-click a file, touch it with one finger and tap the screen with a second. A number of Microsoft Windows PCs have touch screens, with a few Windows laptops emulating some of the multitouch features of Apple computers and handhelds. Microsoft’s Surface computer runs on Windows 7 and lets its business customers use multitouch in a table-top display. Customers of hotels, casinos, and retail stores will be able to use multitouch finger gestures to move around digital objects such as photos, to play games, and to browse through product options. The Dell Latitude XT tablet PC uses multitouch, which is helpful to people who can’t grasp a mouse and want the functionality of a traditional PC. They can use a finger or a stylus instead. The Android operating system for smartphones has native support for multi-touch, and handsets such as the HTC Desire, Nexus One, and the Motorola Droid have this capability. Hewlett-Packard (HP) now has laptops and desktops that use touch technology. Its TouchSmart computer lets you use two fingers at once to manipu- late images on the screen or to make on-screen gestures designating specific commands without using cursors or scroll bars. To move an object, you touch it with a finger and drag it to its new location. Sliding your finger up and down or sideways smoothly scrolls the display. The TouchSmart makes it possible for home users to engage in a new type of casual computing— putting on music while preparing dinner, quickly searching for directions before leaving the house, or leaving written, video, or audio memos for family members. Both consumers and businesses have found other uses as well. According to Alan Reed, HP’s vice president and general manager for Business Desktops, “There is untapped potential for touch technology in the business marketplace to engage users in a way that has never been done before.” 178 Part Two Information Technology Infrastructure C A S E S T U D Y Q U E S T I O N S 1. What problems does multitouch technology solve? 2. What are the advantages and disadvantages of a multitouch interface? How useful is it? Explain. 3. Describe three business applications that would benefit from a multitouch interface. 4. What management, organization, and technology issues must be addressed if you or your business was considering systems and computers with multitouch interfaces? Chicago’s O’Hare Airport integrated a group of TouchSmart PCs into “Explore Chicago” tourist kiosks, allowing visitors to check out a virtual Visitor’s Center. TouchSmart computing helped an autistic student to speak to and communicate with others for the first time in the 14 years of his life. Without using the TouchSmart PC’s wireless keyboard and mouse, users can hold video chats with remote workers through a built-in Webcam and microphone, access e-mail and the Internet, and manage contacts, calendar items, and photos. Touch-enabled PCs could also appeal to elemen- tary schools seeking an easy-to-use computer for students in early grades, or a wall-mountable infor- mation kiosk-type device for parents and visitors. Customers might use touch to place orders with a retailer, conduct virtual video service calls, or to teach or utilize social networking for business. 1. Describe what you would do differently on your PC if it had multitouch capabilities. How much difference would multitouch make in the way you use your computer? It’s too early to know if the new multitouch inter- face will ever be as popular as the mouse-driven graph- ical user interface. Although putting ones fingers on the screen is the ultimate measure of “cool” in the cell phone market, a “killer application” for touch on the PC has not yet emerged. But it’s already evident that touch has real advantages on devices where a mouse isn’t possible or convenient to use, or the decades-old interface of menus and folders is too cumbersome. Sources: Claire Cain Miller, “To Win Over Today’s Users, Gadgets Have to be Touchable,” The New York Times, September 1, 2010; Katherine Boehret, “Apple Adds Touches to Its Mac Desktops,” The Wall Street Journal, August 4, 2010; Ashlee Vance, “ Tech Industry Catches Its Breath,” The New York Times, February 17, 2010; Kathy Sandler, “The Future of Touch,” The Wall Street Journal, June 2, 2009; Suzanne Robitaille, “Multitouch to the Rescue?” Suite101.com, January 22, 2009; and Eric Lai, “HP Aims TouchSmart Desktop PC at Businesses,” Computerworld, August 1, 2009. M I S I N A C T I O N Chapter 5 IT Infrastructure and Emerging Technologies 179 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 Sybase (Adaptive Server Enterprise), which supply more than 90 percent of the U.S. database software marketplace. MySQL is a Linux open source relational database product now owned by Oracle Corporation. The physical data storage market is dominated by EMC Corporation for large- scale systems, and a small number of PC hard disk manufacturers led by Seagate, Maxtor, and Western Digital. Digital information is estimated to be growing at 1.2 zettabytes a year. All the tweets, blogs, videos, e-mails, and Facebook postings as well as traditional cor- porate data add up in 2010 to several thousand Libraries of Congress (EMC Corporation, 2010). With the amount of new digital information in the world growing so rapidly, the market for digital data storage devices has been growing at more than 15 percent annually over the last five years. In addition to traditional 180 Part Two Information Technology Infrastructure disk arrays and tape libraries, large firms are turning to network-based storage technologies. Storage area networks (SANs) connect multiple storage devices on a separate high-speed network dedicated to storage. The SAN creates a large central pool of storage that can be rapidly accessed and shared by multiple servers. NETWORKING/TELECOMMUNICATIONS PLATFORMS U.S. firms spend $100 billon a year on networking and telecommunications hardware and a huge $700 billion on networking services (consisting mainly of telecommunications and telephone company charges for voice lines and Internet access; these are not included in this discussion). Chapter 7 is devoted to an in-depth description of the enterprise networking environment, including the Internet. Windows Server is predominantly used as a local area network operating system, followed by Linux and Unix. Large enterprise wide area networks primarily 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). The leading networking hardware providers are Cisco, Alcatel-Lucent, Nortel, and Juniper Networks. 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 telecommunications service vendors include AT&T and Verizon (see the Chapter 3 opening case). This market is exploding with new providers of cellular wireless, high-speed Internet, and Internet telephone services. INTERNET PLATFORMS Internet platforms overlap with, and must relate to, the firm’s general network- ing infrastructure and hardware and software platforms. U.S. firms spent an estimated $40 billion annually on Internet-related infrastructure. These expen- ditures were for hardware, software, and management services to support a firm’s Web site, including Web hosting services, routers, and cabling or wireless equipment. A Web hosting service maintains a large Web server, or series of servers, and provides fee-paying subscribers with space to maintain their Web sites. The Internet revolution created a veritable explosion in server computers, with many firms collecting thousands of small servers to run their Internet operations. Since then there has been a steady push toward server consolida- tion, reducing the number of server computers by increasing the size and power of each. The Internet hardware server market has become increasingly concentrated in the hands of IBM, Dell, and HP/Compaq, as prices have fallen dramatically. The major Web software application development tools and suites are supplied by Microsoft (Microsoft Expression Web, SharePoint Designer, and the Microsoft .NET family of development tools); Oracle-Sun (Sun’s Java is the most widely used tool for developing interactive Web applications on both the server and client sides); and a host of independent software developers, includ- ing Adobe (Flash and text tools like Acrobat), and Real Media (media software). Chapter 7 describes the components of the firm’s Internet platform in greater detail. Chapter 5 IT Infrastructure and Emerging Technologies 181 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 3 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 Global Services, HP Enterprise Services, Infosys, and Wipro Technologies. Software integration means ensuring the new infrastructure works with the firm’s older, so-called legacy systems and ensuring the new elements of the infrastructure work with one another. Legacy systems are generally older transaction 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 CONTEMPORARY HARDWARE PLATFORM TRENDS 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. We look at seven hardware trends: the emerging mobile digital platform, grid computing, virtualization, cloud computing, green computing, high-performance/power- saving processors, and autonomic computing. THE EMERGING MOBILE DIGITAL PLATFORM Chapter 1 pointed out that new mobile digital computing platforms have emerged as alternatives to PCs and larger computers. Cell phones and smartphones such as the BlackBerry and iPhone have taken on many func- tions of handheld computers, including transmission of 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 low-cost lightweight subnotebooks called netbooks optimized for wireless communication and Internet access, with core computing functions such as word processing; tablet computers such as the iPad; and digital e-book readers such as Amazon’s Kindle with some Web access capabilities. In a few years, smartphones, netbooks, and tablet computers will be the primary means of accessing the Internet, with business computing moving increasingly from PCs and desktop machines to these mobile devices. For example, senior executives at General Motors are using smartphone applica- tions that drill down into vehicle sales information, financial performance, manufacturing metrics, and project management status. At medical device maker Astra Tech, sales reps use their smartphones to access Salesforce.com customer relationship management (CRM) applications and sales data, checking data on sold and returned products and overall revenue trends before meeting with customers. 182 Part Two Information Technology Infrastructure GRID COMPUTING Grid computing, involves connecting geographically remote computers into a single network to create a virtual supercomputer by combining the computa- tional power of all computers on the grid. Grid computing takes advantage of the fact that most computers use their central processing units on average only 25 percent of the time for the work they have been assigned, leaving these idle resources available for other processing tasks. Grid computing was impossible until high-speed Internet connections enabled firms to connect remote machines economically and move enormous quantities of data. Grid computing requires software programs to control and allocate resources on the grid. Client software communicates with a server software application. The server software breaks data and application code into chunks that are then parceled out to the grid’s machines. The client machines perform their traditional tasks while running grid applications in the background. The business case for using grid computing involves cost savings, speed of computation, and agility, as noted in the chapter-opening case. The chapter- opening case shows that by running its applications on clustered servers on a grid, BART eliminated unused computer resources, used existing resources more efficiently, and reduced costs and power consumption. 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 so that it acts like many different machines. Virtualization also enables multiple physical resources (such as storage devices or servers) to appear as a single logical resource, as would be the case with storage area net- works or grid computing. Virtualization makes it possible for a company to handle its computer processing and storage using computing resources housed in remote locations. VMware is the leading virtualization software vendor for Windows and Linux servers. Microsoft offers its own Virtual Server product and has built virtualization capabilities into the newest version of Windows Server. B u s i n e s s B e n e f i t s o f V i r t u a l i z a t i o n By providing the ability to host multiple systems on a single physical machine, virtualization helps organizations increase equipment utilization rates, conserv- ing data center space and energy usage. Most servers run at just 15-20 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, as illustrated by BART’s experience with vir- tualization in the chapter-opening case. In addition to reducing hardware and power expenditures, virtualization allows businesses to run their legacy applications on older versions of an operating system on the same server as newer applications. Virtualization also facilitates centralization and consolidation of hardware administration. It is now possible for companies and individuals to perform all of their computing work using a virtualized IT infrastructure, as is the case with cloud computing. We now turn to this topic. Chapter 5 IT Infrastructure and Emerging Technologies 183 CLOUD COMPUTING Earlier in this chapter, we introduced cloud computing, in which firms and individuals obtain computer processing, storage, software, and other services as a pool of virtualized resources over a network, primarily the Internet. These resources are made available to users, based on their needs, irrespective of their physical location or the location of the users themselves. 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: Individuals can obtain computing capabilities such as server time or network storage on their own. • Ubiquitous network access: Individuals can use standard network and Internet devices, including mobile platforms, to access cloud resources. • 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, increased, or decreased to meet changing user demand. • Measured service: Charges for cloud resources are based on amount of resources actually used. Cloud computing consists of three different types of services: • Cloud infrastructure as a service: Customers use processing, storage, networking, and other computing resources from cloud service providers to run their information systems. For example, Amazon uses the spare capacity 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 computing and storage capacity they actually use. • Cloud platform as a service: Customers use infrastructure and program- ming tools hosted by the service provider to develop their own applications. For example, IBM offers a Smart Business Application Development & Test service for software development and testing on the IBM Cloud. Another example is Salesforce.com’s Force.com, described in the chapter-ending case study, which allows developers to build applications that are hosted on its servers as a service. • Cloud software as a service: Customers use software hosted by the vendor on the vendor’s hardware and delivered over a network. Leading examples are Google Apps, which provides common business applications online and Salesforce.com, which also leases CRM and related software services over the Internet. Both charge users an annual subscription fee, although Google Apps also has a pared-down free version. Users access these applications from a Web browser, and the data and software are maintained on the providers’ remote servers. A cloud can be private or public. A public cloud is maintained by an exter- nal service provider, such as Amazon Web Services, accessed through the Internet, and available to the general public. A private cloud is 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. Like public clouds, private clouds are able to allocate storage, computing power, or other resources seamlessly to provide computing resources on an as-needed basis. Financial institutions and health care 184 Part Two Information Technology Infrastructure providers are likely to gravitate toward private clouds because these organiza- tions handle so much sensitive financial and personal data. We discuss cloud security issues in Chapter 8. Since organizations using cloud computing generally do not own the infra- structure, they do not have to make large investments in their own hardware and software. 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. For example, Envoy Media Group, a direct-marketing firm that offers highly- targeted media campaigns across multiple channels, including TV, radio, and Internet, hosts its entire Web presence on Azimuth Web Services. The “pay as you go” pricing structure allows the company to quickly and painlessly add servers where they are needed without large investments in hardware. Cloud computing reduced costs about 20 percent because Envoy no longer had to maintain its own hardware or IT personnel. 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 related to entrusting their critical data and systems to an outside vendor that also works with other companies. There are also questions of system reliability. Companies expect their systems to be available 24/7 and do not want to suffer any loss of business capability if their IT infrastructures malfunction. When Amazon’s cloud went down in December 2009, subscribers on the U.S. east coast were unable to use their systems for several hours. Another limitation of cloud computing is the possibility of making users dependent on the cloud computing provider. There are some who believe that cloud computing represents a sea change in the way computing will be performed by corporations as business computing shifts out of private data centers into cloud services (Carr, 2008). This remains a matter of debate. Cloud computing is more immediately appealing to small and medium-sized businesses that lack resources to purchase and own their own hardware and software. However, large corporations have huge investments in complex proprietary systems supporting unique business processes, some of which give them strategic advantages. For them, the most likely scenario is a hybrid computing model where firms use their own infrastructure for their most essential core activities and adopt public cloud computing for less-critical systems or for additional processing capacity during peak business periods. 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 hard- ware vendors. 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 technolo- gies for designing, manufacturing, using, and disposing of computers, servers, and associated devices such as monitors, printers, storage devices, Chapter 5 IT Infrastructure and Emerging Technologies 185 and networking and communications systems to minimize impact on the environment. Reducing computer power consumption has been a very high “green” priority. As companies deploy hundreds or thousands of servers, many are spending almost as much on electricity to power and cool their systems as they did on purchasing the hardware. The U.S. Environmental Protection Agency estimates that data centers will use more than 2 percent of all U.S. electrical power by 2011. Information technology is believed to contribute about 2 percent of the world’s greenhouse gases. Cutting power consumption in data centers has become both a serious business and environmental challenge. The Interactive Session on Organizations examines this problem. AUTONOMIC COMPUTING With large systems encompassing many thousands of networked devices, computer systems have become so complex today that some experts believe they may not be manageable in the future. One approach to dealing with this problem is to employ autonomic computing. Autonomic computing is an industry-wide effort to develop systems that can configure themselves, optimize and tune themselves, heal themselves when broken, and protect themselves from outside intruders and self-destruction. You can glimpse a few of these capabilities in desktop systems. For instance, virus and firewall protection software are able to detect viruses on PCs, automatically defeat the viruses, and alert operators. These programs can be updated automatically as the need arises by connecting to an online virus protection service such as McAfee. IBM and other vendors are starting to build autonomic features into products for large systems. 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 execution 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 simultaneous processing of multiple tasks. This technology enables two or more processing engines with reduced power requirements and heat dissipa- tion to perform tasks faster than a resource-hungry chip with a single process- ing core. Today you’ll find dual-core and quad-core processors in PCs and servers with 8-, 10-, 12-, and 16-core processors. Intel and other chip manufacturers have also developed microprocessors that minimize power consumption. Low power consumption is essential for prolonging battery life in smartphones, netbooks, and other mobile digital devices. You will now find highly power-efficient microprocessors, such as ARM, Apple’s A4 processor, and Intel’s Atom in netbooks, digital media players, and smartphones. The A4 processor used in the latest version of the iPhone and the iPad consumes approximately 500–800 milliwatts of power, about 1/50 to 1/30 the power consumption of a laptop dual-core processor. 186 Part Two Information Technology Infrastructure Computer rooms are becoming too hot to handle. Data-hungry tasks such as video on demand, down- loading music, exchanging photos, and maintaining Web sites require more and more power-hungry machines. Power and cooling costs for data centers have skyrocketed by more than 800 percent since 1996, with U.S. enterprise data centers predicted to spend twice as much on energy costs as on hardware over the next five years. The heat generated from rooms full of servers is causing equipment to fail. Some organizations spend more money to keep their data centers cool than they spend to lease the property itself. It’s a vicious cycle, as companies must pay to power their servers, and then pay again to keep them cool and opera- tional. Cooling a server requires roughly the same number of kilowatts of energy as running one. All this additional power consumption has a negative impact on the environment and as well as corporate operating costs. Some of the world’s most prominent firms are tackling their power consumption issues with one eye toward saving the environment and the other toward saving dollars. Google and Microsoft are building data centers that take advantage of hydroelectric power. Hewlett-Packard is working on a series of technologies to reduce the carbon footprint of data centers by 75 percent and, with new software and services, to measure energy use and carbon emissions. It reduced its power costs by 20 to 25 percent through consolidation of servers and data centers. Microsoft’s San Antonio data center deploys sensors that measure nearly all power consumption, recycles water used in cooling, and uses internally- developed power management software. Microsoft is also trying to encourage energy-saving software practices by charging business units by the amount of power they consume in the data enter rather than the space they take up on the floor. None of these companies claim that their efforts will save the world, but they do demonstrate recognition of a growing problem and the commencement of the green computing era. And since these companies’ technology and processes are more efficient than most other companies, using their online software services in place of in-house software may also count as a green investment. IS GREEN COMPUTING GOOD FOR BUSINESS? PCs typically stay on more than twice the amount of time they are actually being used each day. According to a report by the Alliance to Save Energy, a company with 10,000 personal computer desktops will spend more than $165,000 per year in electricity bills if these machines are left on all night. The group estimates that this practice is wasting around $1.7 billion each year in the United States alone. Although many companies establish default PC power management settings, about 70 percent of employees turn these settings off. PC power management software from BigFix, 1E NightWatchman, and Verdiem locks PC power settings and automatically powers PCs up right before employees arrive for work in the morning. Miami-Dade County public schools cut the time its PCs were on from 21 hours to 10.3 hours daily by using BigFix to centrally control PC power settings. City University of New York adopted Verdiem’s Surveyor software to turn off its 20,000 PCs when they are inactive at night. Surveyor has trimmed 10 percent from CUNY’s power bills, creating an annual savings of around $320,000. Virtualization is a highly effective tool for cost-effective green computing because it reduces the number of servers and storage resources in the firm’s IT infrastructure. Fulton County, Georgia, which provides services for 988,000 citizens, scrutinizes energy usage when purchasing new information technology. It used VMWare virtualiza- tion software and a new Fujitsu blade server platform to consolidate underutilized legacy servers so that one machine performs the work that was formerly performed by eight, saving $44,000 per year in power costs. These efforts also created a more up-to-date IT infrastructure. Experts note that it’s important for companies to measure their energy use and inventory and track their information technology assets both before and after they start their green initiatives. Commonly used metrics used by Microsoft and other companies include Power Usage Effectiveness, Data Center Infrastructure Efficiency, and Average Data Efficiency. It isn’t always necessary to purchase new technologies to achieve “green” goals. Organizations can achieve sizable efficiencies by better managing the computing resources they already have. I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S 1. What business and social problems does data center power consumption cause? 2. What solutions are available for these problems? Which are environment-friendly? 3. What are the business benefits and costs of these solutions? 4. Should all firms move toward green computing? Why or why not? Health insurer Highmark initially wanted to increase its CPU utilization by 10 percent while reducing power use by 5 percent and eventually by 10 percent. When the company inventoried all of its information technology assets, it found that its information systems staff was hanging onto “dead” servers that served no function but continued to consume power. Unfortunately, many information systems departments still aren’t deploying their existing technology resources efficiently or using green measurement tools. Programs to educate employees in energy conser- vation may also be necessary. In addition to using Perform an Internet search on the phrase “green computing” and then answer the following questions: 1. Who are some of the leaders of the green comput- ing movement? Which corporations are leading the way? Which environmental organizations are playing an important role? 2. What are the latest trends in green computing? What kind of impact are they having? 3. What can individuals do to contribute to the green computing movement? Is the movement worth- while? energy-monitoring tools, Honda Motor Corporation trains its data center administrators how to be more energy efficient. For example, it taught them to decommission unused equipment quickly and to use management tools to ensure servers are being optimized. Sources: Kathleen Lao, “The Green Issue,” Computerworld Canada, April 2010; Matthew Sarrell, “Greening Your Data Center: The Real Deal,” eWeek, January 15, 2010; Robert L. Mitchell, “Data Center Density Hits the Wall,” Computerworld, January 21, 2010; Jim Carlton, “The PC Goes on an Energy Diet,” The Wall Street Journal, September 8, 2009; and Ronan Kavanagh, “IT Virtualization Helps to Go Green,” Information Management Magazine, March 2009. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N Chapter 5 IT Infrastructure and Emerging Technologies 187 5.4 CONTEMPORARY SOFTWARE PLATFORM TRENDS There are four major themes in contemporary software platform evolution: • Linux and open source software • Java and Ajax • 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 hundred 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, and the software can be redistributed by the user without additional licensing. Open source software is by definition not restricted to any 188 Part Two Information Technology Infrastructure specific operating system or hardware technology, although most open source software is currently based on a Linux or Unix operating system. The open source movement has been evolving for more than 30 years and has demonstrated that it can produce commercially acceptable, high-quality software. Popular open source software tools include the Linux operating system, the Apache HTTP Web server, the Mozilla Firefox Web browser, and the Oracle Open Office desktop productivity suite. Open source tools are being used on netbooks as inexpensive alternatives to Microsoft Office. Major hard- ware and software vendors, including IBM, HP, Dell, Oracle, and SAP, now offer Linux-compatible versions of their products. You can find out more out more about the Open Source Definition from the Open Source Initiative and the history of open source software at the Learning Tracks for this chapter. L i n u x Perhaps the most well known open source software is Linux, an operating system related to Unix. Linux was created by the Finnish programmer Linus Torvalds and first posted on the Internet in August 1991. Linux applications are embedded in cell phones, smartphones, netbooks, and consumer electronics. Linux is avail- able 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 major force in local area networks, Web servers, and high-performance computing work, with over 20 percent of the server operating system market. IBM, HP, Intel, Dell, and Oracle-Sun have made Linux a central part of their offerings to corporations. The rise of open source software, particularly Linux and the applications it supports, has profound implications for corporate software platforms: cost reduction, reliability and resilience, and integration, because Linux works on all the major hardware platforms from mainframes to servers to clients. SOFTWARE FOR THE WEB: JAVA AND AJAX Java is an operating system-independent, processor-independent, object- oriented programming language that has become the leading interactive environment for the Web. Java was created by James Gosling and the Green Team at Sun Microsystems in 1992. In November 13, 2006, Sun released much of Java as open source software under the terms of the GNU General Public License (GPL), completing the process on May 8, 2007. The Java platform has migrated into cellular phones, smartphones, automo- biles, music players, game machines, and finally, into 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 operating system the device uses. For each of the computing environments in which Java is used, Sun created a Java Virtual Machine that 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, and Google Chrome browser are examples. At the enterprise level, Java is being used for more complex e-commerce and Chapter 5 IT Infrastructure and Emerging Technologies 189 e-business applications that require communication with an organization’s back-end transaction processing systems. A j a x Have you ever filled out a Web order form, made a mistake, and then had to start all over gain after a long wait for a new order form page to appear on your computer screen? Or visited a map site, clicked the North arrow once, and waited some time for an entire new page to load? Ajax (Asynchronous JavaScript and XML) is another Web development technique for creating inter- active Web applications that prevents all of this inconvenience. Ajax allows a client and server to exchange small pieces of data behind the scene so that an entire Web page does not have to be reloaded each time the user requests a change. So if you click North on a map site, such as Google Maps, the server downloads just that part of the application that changes with no wait for an entirely new map. You can also grab maps in map applications and move the map in any direction without forcing a reload of the entire page. Ajax uses JavaScript programs downloaded to your client to maintain a near-continuous conversation with the server you are using, making the user experience more seamless. WEB SERVICES AND SERVICE-ORIENTED ARCHITECTURE Web services refer to a set of loosely coupled software components that exchange information with each other using universal Web communication stan- dards and languages. They can exchange information between two different 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 single company. Web services are not tied to any one operating system or program- ming language, and different applications can use them 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 devel- opment of the Web) as a more powerful and flexible markup language than hyper- text markup language (HTML) for Web pages. Hypertext Markup Language (HTML) is a page description language for specifying how text, graphics, video, and sound are placed on a Web page document. 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 5-2 illustrates some sample XML statements. TABLE 5-2 EXAMPLES OF XML PLAIN ENGLISH XML Subcompact
4 passenger 4
$16,800 $16,800

190 Part Two Information Technology Infrastructure
By tagging selected elements of the content of documents for their
meanings, XML makes it possible for computers to manipulate and interpret
their data automatically and perform operations on the data without human
intervention. Web browsers and computer programs, such as order process-
ing or enterprise resource planning (ERP) software, can follow programmed
rules for applying and displaying the data. XML provides a standard format
for data exchange, enabling Web services to pass data from one process to
another.
Web services communicate through XML messages over standard Web
protocols. SOAP, which stands for Simple Object Access Protocol, is a set of
rules for structuring messages that enables applications to pass data and
instructions to one another. WSDL stands for Web Services Description
Language; it is a common framework for describing the tasks performed by a
Web service and the commands and data it will accept so that it can be used
by other applications. UDDI, which stands for Universal Description,
Discovery, and Integration, enables a Web service to be listed in a directory of
Web services so that it can be easily located. Companies discover and locate
Web services through this directory much as they would locate services in
the yellow pages of a telephone book. Using these protocols, a software appli-
cation 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
communicate with each other to create a working software application. Business
tasks are accomplished by executing a series of these services. Software develop-
ers 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. IBM includes
Web service tools in its WebSphere e-business software platform, and Microsoft
has incorporated Web services tools in its Microsoft .NET platform.
Dollar Rent A Car’s systems use Web services for its online booking system
with Southwest Airlines’ Web site. 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 Web site. Instead of
struggling to get Dollar’s reservation system to share data with Southwest’s
information 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’ Web sites before. But without Web services, these connec-
tions had to be built one at a time. Web services provide a standard way for
Dollar’s computers 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 Web site for cell
phones and smartphones. It does not have to write new software code for
each new partner’s information systems or each new wireless device (see
Figure 5-10).

Chapter 5 IT Infrastructure and Emerging Technologies 191
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 5-11 illustrates the rapid growth in external sources of software
for U.S. firms.
There are three external sources for software: software packages from a
commercial software vendor, outsourcing custom application development to
an external vendor, and cloud-based software services and tools.
S o f t w a r e P a c k a g e s a n d E n t e r p r i s e S o f t w a r e
We have already described software packages for enterprise applications as
one of the major types of software components in contemporary IT infra-
structures. A software package is a prewritten commercially available set of
software programs 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-PeopleSoft
have developed powerful software packages that can support the primary
business processes of a firm worldwide from warehousing, customer relation-
ship management, supply chain management, and finance to 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.
FIGURE 5-10 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.

192 Part Two Information Technology Infrastructure
S o f t w a r e O u t s o u r c i n g
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. According to the indus-
try analysts, 2010 offshore outsourcing revenues in the United States will be
approximately $50 billion, and domestic outsourcing revenues will be $106
billion (Lohr, 2009). The largest expenditure here is paid to domestic U.S.
firms providing middleware, integration services, and other software support
that are often required to operate larger enterprise systems.
For example, in March 2008, Royal Dutch Shell PLC, the world’s third largest
oil producer, signed a five-year, $4 billion outsourcing deal with T-Systems
International GmbH, AT&T, and Electronic Data Systems (EDS). The agree-
ment assigned AT&T responsibility for networking and telecommunications,
T-Systems for hosting and storage, and EDS for end-user computing services
and for integration of the infrastructure services. Outsourcing this work has
helped Shell cut costs and focus on systems that improve its competitive posi-
tion in the oil and gas market.
Offshore outsourcing firms have primarily provided lower-level mainte-
nance, data entry, and call center operations. However, with the growing
sophistication and experience of offshore firms, particularly in India, more and
more new-program development is taking place offshore. Chapter 13 discusses
offshore software outsourcing in greater detail.
FIGURE 5-11 CHANGING SOURCES OF FIRM SOFTWARE
In 2010, U.S. firms will spend over $291 billion on software. About 40 percent of that ($116 billion) will
originate outside the firm, either from enterprise software vendors selling firmwide applications or indi-
vidual application service providers leasing or selling software modules. Another 10 percent ($29 billion)
will be provided by SaaS vendors as an online cloud-based service.
Sources: BEA National Income and Product Accounts, 2010; Gartner Group, 2010; author estimates.

Chapter 5 IT Infrastructure and Emerging Technologies 193
C l o u d – B a s e d S o f t w a r e S e r v i c e s a n d To o l s
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 Web site, or to use the software as a
cloud service delivered over the Internet.
Cloud-based software and the data it uses are hosted on powerful servers in
massive 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 businesses provided by Google or Yahoo!, enterprise software and other
complex business functions are available as services from the major commercial
software vendors. Instead of buying and installing software programs, subscrib-
ing companies rent the same functions from these services, with users paying
either on a subscription or per-transaction basis. Services for delivering and
providing access to software remotely as a Web-based service are now referred to
as software as a service (SaaS). A leading example is Salesforce.com,
described in the chapter-ending case study, which provides on-demand software
services for customer relationship management.
In order to manage their relationship with an outsourcer or technology
service provider, firms need a contract that includes a service level agreement
(SLA). The SLA is a formal contract between customers and their service
providers 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 terminat-
ing the agreement. We provide a Learning Track on this topic.
M a s h u p s a n d A p p s
The software you use for both personal and business tasks may consist of large
self-contained programs, or it may be composed of interchangeable compo-
nents that integrate freely with other applications on the Internet. Individual
users and entire companies mix and match these software components to
create their own customized applications and to share information with others.
The resulting software applications are called mashups. The idea is to take dif-
ferent 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, EveryBlock Chicago combines Google Maps with
crime data for the city of Chicago. Users can search by location, police beat, or
type of crime, and the results are displayed as color-coded map points on a
Google Map. Amazon uses mashup technologies to aggregate product descrip-
tions with partner sites and user profiles.
Apps are small pieces of software that run on the Internet, on your com-
puter, or on your cell phone and are generally delivered over the Internet.
Google refers to its online services as apps, including the Google Apps suite of
desktop productivity tools. 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 apps that turn smartphones and other mobile handheld
devices into general-purpose computing tools.
Most of these apps are for the iPhone, Android, and BlackBerry operating
system platforms. Many are free or purchased for a small charge, much less

194 Part Two Information Technology Infrastructure
than conventional software. There are already over 250,000 apps for the
Apple iPhone and iPad platform and over 80,000 that run on smartphones
using Google’s Android operating system. The success of these mobile plat-
forms 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 (65%),
followed by news and weather (56%), maps/navigation (55%), social net-
working (54%), music (46%), and video/movies (25%). But there are also seri-
ous apps for business users that make it possible to create and edit docu-
ments, connect to corporate systems, schedule and participate in meetings,
track shipments, and dictate voice messages (see the Chapter 1 Interactive
Session on Management). There are also a huge number of e-commerce apps
for researching and buying goods and services online.
5.5 MANAGEMENT ISSUES
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 when most of the investments in IT infrastructure
are fixed-cost purchases 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 number of users without breaking down. New applications, merg-
ers and acquisitions, and changes in business volume all impact computer
workload and must be considered when planning hardware capacity.
Firms using mobile computing and cloud computing platforms will require
new policies and procedures for managing these platforms. They will need to
inventory all of their mobile devices in business use and develop policies and
tools for tracking, updating, and securing them and for controlling the data and
applications that run on them. Firms using cloud computing and SaaS will
need to fashion new contractual arrangements with remote vendors to make
sure that the hardware and software for critical applications are always avail-
able when needed and that they meet corporate standards for information
security. It is up to business management to determine acceptable levels of
computer response time and availability for the firm’s mission-critical systems
to maintain the level of business performance they expect.
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

Chapter 5 IT Infrastructure and Emerging Technologies 195
it addresses. Other important questions about IT governance are: Should
departments and divisions have the responsibility of making their own infor-
mation 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 firm financial performance.
If too little is spent, important business services cannot be delivered and the
firm’s competitors (who spent just 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, including
those offering cloud services. The decision either to purchase your own IT
assets or rent them from external providers is typically called the rent-versus-
buy decision.
Cloud computing may be a low-cost way to increase scalability and flexibil-
ity, but firms should evaluate this option carefully in light of security require-
ments and impact on business processes and work flows. In some instances,
the cost of renting software adds up to more than purchasing and maintaining
an application in-house. Yet there may be benefits to using SaaS if it allows the
company to focus on core business issues instead of technology challenges.
To t a l C o s t o f O w n e r s h i p o f Te c h n o l o g y A s s e t s
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 support,
training, and even utility and real estate costs for running and housing 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 5-3 describes the most important TCO
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. Although the
purchase price of a wireless handheld for a corporate employee may run
several hundred dollars, the TCO for each device is much higher, ranging from
$1,000 to $3,000, according to various consultant estimates. Gains in
productivity and efficiency from equipping employees with mobile computing
devices 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 understand
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

196 Part Two Information Technology Infrastructure
saddled with redundant, incompatible hardware and software because their
departments and divisions have been allowed to make their own technology
purchases.
In addition to switching to cloud services, these firms could reduce their
TCO through greater centralization and standardization of their hardware and
software 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 allowed to use. In a centralized infrastructure, systems can be adminis-
tered from a central location and troubleshooting can be performed from that
location.
C o m p e t i t i v e Fo r c e s M o d e l f o r I T I n f r a s t r u c t u r e
I n v e s t m e n t
Figure 5-12 illustrates a competitive forces model you can use to address the
question of how much your firm should spend on IT infrastructure.
Market demand for your firm’s services. Make an inventory of the services
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 complaining 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 strategy
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 infor-
mation 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 technolo-
TABLE 5-3 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 197
gies that are still experimental, often expensive, and sometimes unreliable. You
want to spend on technologies for which standards have been established and
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.
Competitor firm services. Try to assess what technology services competitors
offer to customers, suppliers, and employees. Establish quantitative and qualita-
tive measures to compare them to those of your firm. If your firm’s service lev-
els 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 expendi-
tures 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 information in
public companies’ SEC Form 10-K annual reports to the federal government
when those expenditures impact 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.
FIGURE 5-12 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?”

198 Part Two Information Technology Infrastructure
5.6 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 spread-
sheet software to evaluate alternative desktop systems, and using Web research
to budget for a sales conference.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. 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 HP,
Sun Microsystems, Microsoft, and IBM. Assess the impact of this situation on
business performance. What factors and management decisions must be consid-
ered when developing a solution to this problem?
2. 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. Should Qantas outsource to a cloud computing vendor? 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.
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g a S p r e a d s h e e t t o
E v a l u a t e H a r d w a r e a n d S o f t w a r e O p t i o n s
Software skills: Spreadsheet formulas
Business skills: Technology pricing
In this exercise, you will use spreadsheet software to calculate the cost of desk-
top systems, printers, and software.
You have been asked to obtain pricing information on hardware and software
for an office of 30 people. Using the Internet, get pricing for 30 PC desktop
systems (monitors, computers, and keyboards) manufactured by Lenovo, Dell,
and HP/Compaq as listed at their respective corporate Web sites. (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 Dell. Each desktop system must satisfy the
minimum specifications shown in the following table:
MINIMUM DESKTOP SPECIFICATIONS
Processor speed 3 GHz
Hard drive 350 GB
RAM 3 GB
DVD-ROM drive 16 x
Monitor (diagonal measurement) 18 inches
Each desktop printer must satisfy the minimum specifications shown in the
following table:

Chapter 5 IT Infrastructure and Emerging Technologies 199
MINIMUM MONOCHROME PRINTER SPECIFICATIONS
Print speed (black and white) 20 pages per minute
Print resolution 600 ! 600
Network ready? Yes
Maximum price/unit $700
After pricing the desktop systems and printers, obtain pricing on 30 copies of
the most recent versions of Microsoft Office, Lotus SmartSuite, and Oracle
Open Office desktop productivity packages, and on 30 copies of Microsoft
Windows 7 Professional. The application software suite packages come in
various versions, so be sure that each package contains programs for word
processing, spreadsheets, database, and presentations.
Prepare a spreadsheet showing your research results for the desktop
systems, for the printers, and for the software. Use your spreadsheet software to
determine the desktop system, printer, and software combination that will offer
both the best performance and pricing per worker. Because every two workers
will share one printer (15 printers/30 systems), assume only half a printer cost
per worker in the spreadsheet. Assume that your company will take the
standard warranty and service contract offered by each product’s manufacturer.
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g W e b R e s e a r c h t o
B u d g e t f o r a S a l e s C o n f e r e n c e
Software skills: Internet-based software
Business skills: Researching transportation and lodging costs
The Foremost Composite Materials Company is planning a two-day sales
conference for October 15–16, starting with a reception on the evening of
October 14. The conference consists of all-day meetings that the entire sales
force, numbering 125 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 visitors (200 total) and the other able to hold half the force.
Management has set a budget of $120,000 for the representatives’ room rentals.
The hotel must also have such services as overhead and computer projectors as
well as business center and banquet facilities. It also should have facilities for
the company reps to be able to work in their rooms and to enjoy themselves in
a swimming pool or gym facility. The company would like to hold the confer-
ence in either Miami or Marco Island, Florida.
Foremost usually likes to hold such meetings in Hilton- or Marriott-owned
hotels. Use the Hilton and Marriott Web sites to select a hotel in whichever of
these cities that would enable the company to hold its sales conference within
its budget.
Visit the two sites’ homepages, and search them to find a hotel that meets
Foremost’s sales conference requirements. Once you have selected the hotel,
locate flights arriving the afternoon prior to the conference because the
attendees will need to check in the day before and attend your reception the
evening prior to the conference. Your attendees will be coming from Los
Angeles (54), San Francisco (32), 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
airline ticket, the room cost, and $60 per attendee per day for food.
• What was your final budget?
• Which did you select as the best hotel for the sales conference and why?

200 Part Two Information Technology Infrastructure
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. How Computer Hardware and Software Work
2. Service Level Agreements
3. The Open Source Software Initiative
4. Comparing Stages in IT Infrastructure Evolution
5. Cloud Computing
Review Summary
1. What is IT infrastructure and what are its components?
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. Major IT infrastructure components include computer
hardware platforms, operating system platforms, enterprise software platforms, networking and
telecommunications platforms, database management software, Internet platforms, and consulting
services and systems integrators.
2. What are the stages and technology drivers of IT infrastructure evolution?
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 com-
puter technology, 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 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 helps shows that a network’s value to partic-
ipants grows exponentially as the network takes on more members. Also driving exploding computer
use is the rapid decline in costs of communication and growing agreement in the technology indus-
try to use computing and communications standards.
3. What are the current trends in computer hardware platforms?
Increasingly, computing is taking place on a mobile digital platform. Grid computing involves
connecting geographically remote computers into a single network to create a computational grid
that combines the computing power of all the computers on the network. Virtualization organizes
computing resources so that their use is not restricted by physical configuration or geographic loca-
tion. In cloud computing, firms and individuals obtain computing power and software as services
over a network, including the Internet, rather than purchasing and installing the hardware and
software on their own computers. A multicore processor is a microprocessor to which two or more
processing cores have been attached for enhanced performance. Green computing includes practices
and technologies for producing, using, and disposing of information technology hardware to
minimize negative impact on the environment. In autonomic computing, computer systems have
capabilities for automatically configuring and repairing themselves. Power-saving processors dramat-
ically reduce power consumption in mobile digital devices.
4. What are the current trends in software platforms?
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
environment for the Web. 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 devel-
opment 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 small pieces of
software that run on the Internet, on a computer, or on a mobile phone and are
generally delivered over the Internet.
5. What are the challenges of managing IT infrastructure and management
solutions?
Major challenges include dealing with platform and infrastructure change,
infrastructure management 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 strate-
gic 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.
Key Terms
Ajax, 189
Android, 177
Application server, 169
Apps, 193
Autonomic computing, 185
Blade servers, 176
Chrome OS, 177
Clients, 168
Client/server computing, 168
Cloud computing, 170
Extensible Markup Language (XML), 189
Green computing, 184
Grid computing, 182
Hypertext Markup Language (HTML), 189
Java, 188
Legacy systems, 181
Linux, 177
Mainframe, 168
Mashup, 193
Minicomputers, 168
Moore’s Law, 171
Multicore processor, 185
Multitiered (N-tier) client/server architecture, 169
Multitouch, 177
Nanotechnology, 171
Netbook, 181
On-demand computing, 184
Open source software, 187
Operating system, 177
Outsourcing, 192
Private cloud, 183
Public cloud, 183
SaaS (Software as a Service), 193
Scalability, 194
Service level agreement (SLA),193
Server, 168
Service-oriented architecture (SOA), 190
Software package, 191
Storage area network (SAN), 180
Technology standards, 174
Total cost of ownership (TCO), 195
Unix, 177
Utility computing, 184
Virtualization, 182
Web browser, 188
Web hosting service, 180
Web server, 169
Web services, 189
Windows, 169
Wintel PC, 168
Chapter 5 IT Infrastructure and Emerging Technologies 201

202 Part Two Information Technology Infrastructure
Discussion Questions
1. 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?
2. Should organizations use software service
providers for all their software needs? Why or
why not? What management, organization, and
technology factors should be considered when
making this decision?
3.What are the advantages and disadvantages of
cloud computing?
Review Questions
1. What is IT infrastructure and what are its com-
ponents?
• Define IT infrastructure from both a
technology and a services perspective.
• List and describe the components of
IT infrastructure that firms need to man-
age.
2. What are the stages and technology drivers of
IT infrastructure evolution?
• List each of the eras in IT infrastructure
evolution and describe its distinguishing
characteristics.
• Define and describe the following: Web
server, application server, multitiered
client/server architecture.
• Describe Moore’s Law and the Law of
Mass Digital Storage.
• Describe how network economics,
declining communications costs, and
technology standards affect IT infrastruc-
ture.
3. What are the current trends in computer
hardware platforms?
• Describe the evolving mobile platform,
grid computing, and cloud computing.
• Explain how businesses can benefit from
autonomic computing, virtualization,
green computing, and multicore proces-
sors.
4. What are the current trends in software
platforms?
• Define and describe open source software
and Linux and explain their business
benefits.
• Define Java and Ajax 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. What are the challenges of managing IT
infrastructure and management solutions?
• Name and describe the management
challenges posed by IT infrastructure.
• Explain how using a competitive forces
model and calculating the TCO of tech-
nology assets help firms make good
infrastructure investments.
Collaboration and Teamwork: Evaluating Server and Mobile Operating
Systems
of the iPhone operating system (iOS). If possible, use
Google Sites to post links to Web pages, team commu-
nication announcements, and work assignments; to
brainstorm; and to work collaboratively on project
documents. Try to use Google Docs to develop a pre-
sentation of your findings for the class.
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
Form a group with three or four of your classmates.
Choose server or mobile operating systems to evalu-
ate. You might research and compare the capabilities
and costs of Linux versus the most recent version of
the Windows operating system or Unix. Alternatively,
you could compare the capabilities of the Android
mobile operating system with the most recent version

Chapter 5 IT Infrastructure and Emerging Technologies 203
S a l e s f o r c e . C o m : C l o u d S e r v i c e s G o M a i n s t r e a m
CASE STUDY
alesforce.com, one of the most disruptive
technology companies of the past few years,
has single-handedly shaken up the software
industry with its innovative business model
and resounding success. Salesforce provides
customer relationship management (CRM) and other
application software solutions in the form of
software as a service leased over the Internet, as
opposed to software bought and installed on
machines locally.
The company was founded in 1999 by former
Oracle executive Marc Benioff, and has since grown
to over 3,900 employees, 82,400 corporate customers,
and 2.1 million subscribers. It earned $1.3 billion in
revenue in 2009, making it one of the top 50 software
companies in the world. Salesforce attributes its suc-
cess to the many benefits of its on-demand model of
software distribution.
The on-demand model eliminates the need for
large up-front hardware and software investments in
systems and lengthy implementations on corporate
computers. Subscriptions start as low as $9 per user
per month for the pared-down Group version for
small sales and marketing teams, with monthly
subscriptions for more advanced versions for large
enterprises starting around $65 per user.
For example, the Minneapolis-based Haagen-Dazs
Shoppe owned by Nestle USA calculated it would
have had to spend $65,000 for a custom-designed
database to help management stay in contact with
the company’s retail franchises. The company only
had to pay $20,000 to establish service with
Salesforce, plus a monthly charge of $125 per month
for 20 users to use wireless handhelds or the Web to
remotely monitor all the Haagen-Dazs franchises
across the United States.
Salesforce.com implementations take three
months at the longest, and usually less than a
month. There is no hardware for subscribers to
purchase, scale, and maintain. There are no operat-
ing systems, database servers, or application servers
to install, no consultants and staff, and no expensive
licensing and maintenance fees. The system is acces-
sible via a standard Web browser, with some func-
tions accessible by mobile handheld devices.
Salesforce.com continually updates its software
behind the scenes. There are tools for customizing
some features of the software to support a company’s
unique business processes. Subscribers can leave if
business turns sour or a better system comes along.
If they lay people off, they can cut down on the
number of Salesforce subscriptions they buy.
Salesforce faces significant challenges as it
continues to grow and refine its business. The first
challenge comes from increased competition, both
from traditional industry leaders and new chal-
lengers hoping to replicate Salesforce’s success.
Microsoft, SAP, and Oracle have rolled out
subscription-based versions of their CRM products in
response to Salesforce. Smaller competitors like
NetSuite, Salesboom.com, and RightNow also have
made some inroads against Salesforce’s market share.
Salesforce still has plenty of catching up to do to
reach the size and market share of its larger
competitors. As recently as 2007, SAP’s market share
was nearly four times as large as Salesforce’s, and
IBM’s customer base includes 9,000 software compa-
nies that run their applications on their software and
that are likelier to choose a solution offered by IBM
over Salesforce.
Salesforce needs to continually prove to customers
that it is reliable and secure enough to remotely
handle their corporate data and applications. The
company has experienced a number of service
outages. For example, on January 6, 2009, a core net-
work device failed and prevented data in Europe,
Japan, and North America from being processed for
38 minutes. Over 177 million transactions were
affected. While most of Salesforce’s customers accept
that IT services provided through the cloud are going
to be available slightly less than full time, some cus-
tomers and critics used the outage as an opportunity
to question the soundness of the entire concept of
cloud computing. In February 2009, a similar outage
occurred, affecting Europe and as well as North
America a few hours later.
Thus far, Salesforce has experienced only one
security breach. In November 2007, a Salesforce
employee was tricked into divulging his corporate
password to scammers, exposing Salesforce’s
customer list. Salesforce clients were subjected to a
barrage of highly targeted scams and hacking
attempts that appeared authentic. Although this
incident raised a red flag, many customers reported
that Salesforce’s handling of the situation was
satisfactory. All of Salesforce’s major customers
S
Chapter 5 IT Infrastructure and Emerging Technologies 203

204 Part Two Information Technology Infrastructure
regularly send auditors to Salesforce to check
security.
Another challenge for Salesforce is to expand its
business model into other areas. Salesforce is
currently used mostly by sales staff needing to keep
track of leads and customer lists. One way the
company is trying to provide additional functionality
is through a partnership with Google and more
specifically Google Apps. Salesforce is combining its
services with Gmail, Google Docs, Google Talk, and
Google Calendar to allow its customers to accomplish
more tasks via the Web. Salesforce and Google both
hope that their Salesforce.com for Google Apps initia-
tive will galvanize further growth in on-demand soft-
ware.
Salesforce has also partnered with Apple to
distribute its applications for use on the iPhone.
The company hopes that it can tap into the large
market of iPhone users, pitching the ability to use
Salesforce applications any time, anywhere. And
Salesforce introduced a development tool for
integrating with Facebook’s social network to enable
customers to build applications that call functions at
the Facebook site. (In early 2010, Salesforce intro-
duced its own social networking application called
Chatter, which enables employees to create profiles
and make status updates that appear in colleagues’
news feeds, similar to Facebook and Twitter.)
In order to grow its revenues to the levels that
industry observers and Wall Street eventually expects
Salesforce is changing its focus from selling a suite of
software applications to providing a broader cloud
computing “platform” on which many software com-
panies deliver applications. As CEO Marc Benioff put
it, over the past decade, “we focused on software as a
service…In the next decade, Salesforce.com will
really be focused on the platform as a service.”
The company has intensified its efforts to provide
cloud computing offerings to its customers. The new
Salesforce.com Web site places much more emphasis
on cloud computing, grouping products into three
types of clouds: the Sales Cloud, the Service Cloud,
and the Custom Cloud. The Sales and Service clouds
consist of applications meant to improve sales and
customer service, respectively, but the Custom Cloud
is another name for the Force.com application
development platform, where customers can develop
their own applications for use within the broader
Salesforce network.
Force.com provides a set of development tools and
IT services that enable users to customize their
Salesforce customer relationship management appli-
cations or to build entirely new applications and run
them “in the cloud” on Salesforce’s data center infra-
structure. Salesforce opened up Force.com to other
independent software developers and listed their
programs on its AppExchange.
Using AppExchange, small businesses can go
online and easily download over 950 software
applications, some add-ons to Salesforce.com and
others that are unrelated, even in non-customer-
facing functions such as human resources. Force.com
Sites, based on the Force.com development environ-
ment, enables users to develop Web pages and regis-
ter domain names. Pricing is based on site traffic.
Salesforce’s cloud infrastructure includes two data
centers in the United States and a third in Singapore,
with others in Europe and Japan planned for the
future. Salesforce has additionally partnered with
Amazon to enable Force.com customers to tap into
Amazon’s cloud computing services (Elastic
Compute Cloud and Simple Storage Service.)
Amazon’s services would handle the “cloudburst
computing” tasks of Force.com applications that
require extra processing power or storage capacity.
An International Data Center (IDC) report esti-
mated that the Force.com platform enables users to
build and run business applications and Web sites
five times faster and at half the cost of non-cloud
alternatives. For instance, RehabCare, a national
provider of medical rehabilitation services, used
Force.com to build a mobile iPhone patient
admission application for clinicians. RehabCare’s
information systems team built a prototype applica-
tion within four days that runs on the Force.com
platform. It would have taken six months to build a
similar mobile application using Microsoft develop-
ment tools. About 400 clinicians now use the app.
Author Solutions, a self-publishing company based
in Bloomington, Minnesota, uses the Force.com
platform to host the applications driving its
operations. It reports saving up to 75 percent from
not having to maintain and manage its own data
center, e-commerce, and workflow applications, and
the ability to scale as it business mushroomed.
Workflow modifications that once took 30 to 120
hours are accomplished in one-fourth the time. The
time and cost for adding a new product, which used
to take 120 to 240 hours (and cost $6,000 to $12,000)
has been reduced by 75 percent. The new platform is
able to handle 30 percent more work volume than
the old systems with the same number of employees.
The question is whether the audience for
Salesforce’s AppExchange and Force.com platforms
will prove large enough to deliver the level of growth
Salesforce wants. It still isn’t clear whether the

Chapter 5 IT Infrastructure and Emerging Technologies 205
company will generate the revenue it needs to
provide cloud computing services on the same scale
as Google or Amazon and also make its cloud com-
puting investments pay off.
Some analysts believe the platform may not be
attractive to larger companies for their application
needs. Yet another challenge is providing constant
availability. Salesforce.com subscribers depend on the
service being available 24/7. But thanks to the
previously described outages, many companies have
rethought their dependency on software as a service.
Salesforce.com provides tools to assure customers
about its system reliability and also offers PC
applications that tie into their services so users can
work offline.
Still, a number of companies are reluctant to jump
on the SaaS and cloud computing bandwagon.
Moreover, it is still not clear whether software
delivered over the Web will cost less in the long run.
According to Gartner consultants analyst Rob DiSisto,
it may be cheaper to subscribe to Salesforce.com’s
software services for the first few years, but what
happens after that? Will the expense of upgrading
and managing on-demand software become higher
than the fees companies are paying to own and host
their own software?
Sources: “How Salesforce.com Brings Success to the Cloud,” IT
BusinessEdge.com, accessed June 10, 2010; Lauren McKay,
“Salesforce.com Extends Chatter Across the Cloud,” CRM Magazine,
April 14, 2010; Jeff Cogswell, “Salesforce.com Assembles an Array
of Development Tools for Force.com,” eWeek, February 15, 2010;
Mary Hayes Weier, “Why Force.com Is Important to Cloud
Computing,” Information Week, November 23, 2009; Jessi Hempel,
“Salesforce Hits Stride,” CNN Money.com, March 2, 2009; Clint
Boulton, “Salesforce.com Network Device Failure Shuts Thousands
Out of SaaS Apps,” eWeek, January 7, 2009; J. Nicholas Hoover,
“Service Outages Force Cloud Adopters to Rethink Tactics,”
Information Week, August 18/25, 2008; and Charles Babcock,
“Salesforce Ascends Beyond Software As Service,” Information Week,
November 10, 2008.
CASE STUDY QUESTIONS
1. How does Salesforce.com use cloud computing?
2. What are some of the challenges facing Salesforce
as it continues its growth? How well will it be able
to meet those challenges?
3. What kinds of businesses could benefit from
switching to Salesforce and why?
4. What factors would you take into account in decid-
ing whether to use Saleforce.com for your business?
5. Could a company run its entire business using
Salesforce.com, Force.com, and App Exchange?
Explain your answer.

LEARNING OBJECTIVESS
After reading this chapter, you
will be able to answer the
following questions:
1. What are the problems of managing
data resources in a traditional file
environment and how are they
solved by a database management
system?
2. What are the major capabilities of
database management systems
(DBMS) and why is a relational
DBMS so powerful?
3. What are some important principles
of database design?
4. What are the principal tools and
technologies for accessing informa-
tion from databases to improve
business performance and decision
making?
5. Why are information policy, data
administration, and data quality
assurance essential for managing
the firm’s data resources?
CHAPTER OUTLINE
6.1 ORGANIZING DATA IN A TRADITIONAL FILE
ENVIRONMENT
File Organization Terms and Concepts
Problems with the Traditional File Environment
6.2 THE DATABASE APPROACH TO DATA
MANAGEMENT
Database Management Systems
Capabilities of Database Management Systems
Designing Databases
6.3 USING DATABASES TO IMPROVE BUSINESS
PERFORMANCE AND DECISION MAKING
Data Warehouses
Tools for Business Intelligence: Multidimensional
Data Analysis and Data Mining
Databases and the Web
6.4 MANAGING DATA RESOURCES
Establishing an Information Policy
Ensuring Data Quality
6.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Achieving Operational Excellence: Building a
Relational Database for Inventory Management
Improving Decision Making: Searching Online
Databases for Overseas Business Resources
LEARNING TRACK MODULES
Database Design, Normalization, and
Entity-Relationship Diagramming
Introduction to SQL
Hierarchical and Network Data Models
Chapter 6
Foundations of Business
Intelligence: Databases and
Information Management
Interactive Sessions:
What Can Businesses Learn
from Text Mining?
Credit Bureau Errors—Big
People Problems

207
ight now you are most likely using an RR Donnelley product. Chicago-based RR
Donnelley is a giant commercial printing and service company providing printing
services, forms and labels, direct mail, and other services. This textbook probably
came off its presses. The company’s recent expansion has been fueled by a series of acquisi-
tions, including commercial printer Moore Wallace in 2005 and printing and supply chain
management company Banta in January 2007. RR Donnelley’s revenue has jumped from $2.4
billion in 2003 to over $9.8 billion today.
However, all that growth created information management challenges. Each acquired
company had its own systems and its own set of customer, vendor, and product data. Coming
from so many different sources, the data were often inconsistent, duplicated, or incomplete.
For example, different units of the business might each have a different meaning for the entity
“customer.” One might define “customer” as a specific billing location, while another might
define “customer” as the legal parent entity of a company. Donnelley had to use time-
consuming manual processes to reconcile the data stored in multiple systems in order to get a
clear enterprise-wide picture of each of its customers, since they might be doing business with
several different units of the company. These conditions heightened inefficiencies and costs.
RR Donnelley had become so big that it was impractical to store the information from all of
its units in a single system. But Donnelley still needed a clear single set of data that was accu-
rate and consistent for the entire enterprise. To solve this problem, RR Donnelley turned to
master data management (MDM). MDM seeks to ensure that an organization does not use
multiple versions of the same piece of data in different parts of its operations by merging
disparate records into a single authenticated master file. Once the master file is in place,
employees and applications access a single consolidated view of the company’s data. It is
especially useful for companies such as Donnelley that have data integration problems as a
result of mergers and acquisitions.
Implementing MDM is a multi-step process that includes business process analysis, data
cleansing, data consolidation and reconciliation, and data migration into a master file of all the
company’s data. Companies must identify what group in the company “owns” each piece of
RR DONNELLEY TRIES TO MASTER ITS DATA
data and is responsible for
resolving inconsistent defini-
tions of data and other discrep-
ancies. Donnelley launched its
MDM program in late 2005 and
began creating a single set of
identifiers for its customer and
vendor data. The company
opted for a registry model using
Purisma’s Data Hub in which
customer data continue to
reside in the system where they
originate but are registered in a
master “hub” and cross-refer-
enced so applications can find
the data. The data in their
source system are not touched.
Nearly a year later,
Donnelley brought up its
R

208 Part Two Information Technology Infrastructure
Customer Master Data Store, which integrates the data from numerous systems
from Donnelley acquisitions. Data that are outdated, incomplete, or incorrectly
formatted are corrected or eliminated. A registry points to where the source
data are stored. By having a single consistent enterprise-wide set of data with
common definitions and standards, management is able to easily find out what
kind of business and how much business it has with a particular customer to
identify top customers and sales opportunities. And when Donelley acquires a
company, it can quickly see a list of overlapping customers.
Sources: John McCormick, “Mastering Data at R.R. Donnelley,” Information Management
Magazine, March 2009; www.rrdonnelley.com, accessed June 10, 2010; and
www.purisma.com, accessed June 10, 2010.
RR Donnelley’s experience illustrates the importance of data managementfor businesses. Donnelley has experienced phenomenal growth, primar-
ily through acquisitions. But its business performance depends on what it can
or cannot do with its data. How businesses store, organize, and manage their
data has a tremendous impact on organizational effectiveness.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Management decided that the company needed to
centralize the management of the company’s data. Data about customers,
vendors, products, and other important entities had been stored in a number of
different systems and files where they could not be easily retrieved and
analyzed. They were often redundant and inconsistent, limiting their useful-
ness. Management was unable to obtain an enterprise-wide view of all of its
customers at all of its acquisitions to market its products and services and
provide better service and support.
In the past, RR Donnelley had used heavily manual paper processes to
reconcile its inconsistent and redundant data and manage its information from
an enterprise-wide perspective. This solution was no longer viable as the
organization grew larger. A more appropriate solution was to identify, consoli-
date, cleanse, and standardize customer and other data in a single master data
management registry. In addition to using appropriate technology, Donnelley
had to correct and reorganize the data into a standard format and establish
rules, responsibilities, and procedures for updating and using the data.
A master data management system helps RR Donnelley boost profitability by
making it easier to identify customers and sales opportunities. It also improves
operational efficiency and decision making by having more accurate and com-
plete customer data available and reducing the time required to reconcile
redundant and inconsistent data.

www.rrdonnelley.com

www.purisma.com

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 209
6.1 ORGANIZING DATA IN A TRADITIONAL FILE
ENVIRONMENT
n 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,
accurate, 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 represents 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
A
FIGURE 6-1 THE DATA HIERARCHY
A computer system organizes data in a hierarchy that starts with the bit, which represents 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.

210 Part Two Information Technology Infrastructure
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.
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.
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
values that these attributes can have are found in the fields of the record
describing the entity COURSE.
PROBLEMS WITH THE TRADITIONAL FILE
ENVIRONMENT
In most organizations, systems tended to grow independently without a
company-wide plan. Accounting, finance, manufacturing, human resources,
and sales and marketing all developed their own systems and data files.
Figure 6-2 illustrates the traditional approach to information processing.

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 pension
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.
D a t a R e d u n d a n c y a n d I n c o n s i s t e n c y
Data redundancy is the presence of duplicate data in multiple data files so
that the same data are stored in more than place or location. Data
redundancy occurs when different groups in an organization independently
collect the same piece of data and store it independently of each other. Data
redundancy 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 systems but not in others. The same attribute, Student_ID,
may also have different names in different systems throughout the organiza-
tion. Some systems might use Student_ID and others might use ID, for
example.
Additional confusion might result from using different coding systems to
represent values for an attribute. For instance, the sales, inventory, and manu-
facturing systems of a clothing retailer might use different codes to represent
clothing size. 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.
P r o g r a m – D a t a D e p e n d e n c e
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
millions of dollars to implement properly.
L a c k o f F l e x i b i l i t y
A traditional file system can deliver routine scheduled reports after extensive
programming efforts, but it cannot deliver ad hoc reports or respond to
unanticipated information requirements in a timely fashion. The information
required by ad hoc requests is somewhere in the system but may be too expen-
sive to retrieve. Several programmers might have to work for weeks to put
together the required data items in a new file.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 211

212 Part Two Information Technology Infrastructure
P o o r S e c u r i t y
Because there is little control or management of data, access to and dissemi-
nation of information may be out of control. Management may have no way
of knowing who is accessing or even making changes to the organization’s
data.
L a c k o f D a t a S h a r i n g a n d A v a i l a b i l i t y
Because pieces of information in different files and different parts of the
organization 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 organiza-
tion. If users find different values of 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 THE DATABASE APPROACH TO DATA
MANAGEMENT
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 are stored so as to 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.
DATABASE MANAGEMENT SYSTEMS
A database management system (DBMS) is software that permits an
organization 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 applica-
tion 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 programmer 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 under-
standing 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
resources 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

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 213
all these views are stored in a single database, where they can be more easily
managed by the organization.
H o w a D B M S S o l v e s t h e P r o b l e m s o f t h e Tr a d i t i o n a l
F i l e E n v i r o n m e n t
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 inconsistency because the DBMS can help the
organization ensure that every occurrence of redundant data has the same
values. The DBMS uncouples programs and data, enabling data to stand on
their own. 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 data in the database.
The DBMS enables the organization to centrally manage data, their use, and
security.
R e l a t i o n a l D B M S
Contemporary DBMS use different database models to keep track of entities,
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, and Oracle Database Lite is a DBMS for small
handheld computing devices.
FIGURE 6-3 HUMAN RESOURCES DATABASE WITH MULTIPLE VIEWS
A single human resources database provides many different views of data, depending on the informa-
tion 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.

214 Part Two Information Technology Infrastructure
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 supplier identification number, name, street, city, state, and ZIP
code are stored as separate fields within the SUPPLIER table and each field rep-
resents 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 and 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.
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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 215
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.
O p e r a t i o n s o f a R e l a t i o n a l D B M S
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
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
criteria. 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
relational 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,
permitting 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.
O b j e c t – O r i e n t e d D B M S
Many applications today and in the future require databases that can store and
retrieve not only structured numbers and characters but also drawings, images,
photographs, voice, and full-motion video. DBMS designed for organizing
structured data into rows and columns are not well suited to handling graphics-
based or multimedia applications. Object-oriented databases are better suited
for this purpose.
An object-oriented DBMS stores the data and procedures that act on those
data as objects that can be automatically retrieved and shared. Object-oriented
database management systems (OODBMS) are becoming popular because they
can be used to manage the various multimedia components or Java applets used
in Web applications, which typically integrate pieces of information from a variety
of sources.
Although object-oriented databases can store more complex types of informa-
tion than relational DBMS, they are relatively slow compared with relational
DBMS for processing large numbers of transactions. Hybrid object-relational
DBMS systems are now available to provide capabilities of both object-oriented
and relational DBMS.
D a t a b a s e s i n t h e C l o u d
Suppose your company wants to use cloud computing services. Is there a way
to manage data in the cloud? The answer is a qualified “Yes.” Cloud computing
providers offer database management services, but these services typically
have less functionality than their on-premises counterparts. At the moment,

216
P
art Tw
o
Inform
ation 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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 217
the primary customer base for cloud-based data management consists of Web-
focused start-ups or small to medium-sized businesses looking for database
capabilities at a lower price than a standard relational DBMS.
Amazon Web Services has both a simple non-relational database called
SimpleDB and a Relational Database Service, which is based on an online
implementation of the MySQL open source DBMS. Amazon Relational Database
Service (Amazon RDS) offers the full range of capabilities of MySQL. Pricing is
based on usage. (Charges run from 11 cents per hour for a small database using
1.7 GB of server memory to $3.10 per hour for a large database using 68 GB of
server memory.) There are also charges for the volume of data stored, the num-
ber of input-output requests, the amount of data written to the database, and
the amount of data read from the database.
Amazon Web Services additionally offers Oracle customers the option to
license Oracle Database 11g, Oracle Enterprise Manager, and Oracle Fusion
Middleware to run on the Amazon EC2 (Elastic Cloud Compute) platform.
Microsoft SQL Azure Database is a cloud-based relational database service
based on Microsoft’s SQL Server DBMS. It provides a highly available, scalable
database service hosted by Microsoft in the cloud. SQL Azure Database helps
reduce costs by integrating with existing software tools and providing symme-
try with on-premises and cloud databases.
TicketDirect, which sells tickets to concerts, sporting events, theater perfor-
mances, and movies in Australia and New Zealand, adopted the SQL Azure
Database cloud platform in order to improve management of peak system loads
during major ticket sales. It migrated its data to the SQL Azure database. By
moving to a cloud solution, TicketDirect is able to scale its computing resources
in response to real-time demand while keeping costs low.
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.
DBMS have a data definition capability to specify the structure of the content
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
information about the name, description, size, type, format, and other proper-
ties 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 organization is responsible for maintaining the data), authorization;
security, and the individuals, business functions, programs, and reports that
use each data element.
Q u e r y i n g a n d R e p o r t i n g
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
specialists to extract data from the database to satisfy information requests and
develop applications. The most prominent data manipulation language today is
Structured Query Language, or SQL. Figure 6-7 illustrates the SQL query that

218 Part Two Information Technology Infrastructure
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.
FIGURE 6-6 MICROSOFT 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.
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

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 219
the same query as the SQL query to select parts and suppliers would be
constructed using the Microsoft 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
company-wide 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.
N o r m a l i z a t i o n a n d E n t i t y – R e l a t i o n s h i p D i a g r a m s
The conceptual database design describes how the data elements in the
database 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
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.

220 Part Two Information Technology Infrastructure
application 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 repeating
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
diagramming, and database design in the Learning Tracks for this chapter.
Relational database systems try to enforce referential integrity rules to
ensure 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
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.
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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 221
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
between the entities SUPPLIER, PART, LINE_ITEM, and ORDER. The boxes
represent 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
systems 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 perhaps the most important lesson you can learn from this course.
For example, Famous Footwear, a shoe store chain with more than 800
locations 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 an IBM AS/400 midrange computer, but
the database was designed 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.
6.3 USING DATABASES TO IMPROVE BUSINESS
PERFORMANCE AND DECISION MAKING
Businesses use their databases to keep track of basic transactions, such as paying
suppliers, processing orders, keeping track of customers, and paying employees.
But they also need databases to provide information that will help the company
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.

222 Part Two Information Technology Infrastructure
run the business more efficiently, and help managers and employees make bet-
ter 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.
For example, by analyzing data from customer credit card purchases,
Louise’s Trattoria, a Los Angeles restaurant chain, learned that quality was
more important than price for most of its customers, who were college-
educated and liked fine wine. Acting on this information, the chain introduced
vegetarian dishes, more seafood selections, and more expensive wines, raising
sales by more than 10 percent.
In a large company, with large databases or large systems for separate
functions, such as manufacturing, sales, and accounting, special capabilities
and tools are required for analyzing vast quantities of data and for accessing
data from multiple systems. These capabilities include data warehousing, data
mining, and tools for accessing internal databases through the Web.
DATA WAREHOUSES
Suppose you want concise, reliable information about current operations,
trends, and changes across the entire company If you worked in a large
company, obtaining this might be difficult because data are often maintained in
separate systems, such as sales, manufacturing, or accounting. Some of the data
you need might be found in the sales system, and other pieces in the
manufacturing system. Many of these systems are older legacy systems that
use outdated data management technologies or file systems where information
is difficult for users to access.
You might have to spend an inordinate amount of time locating and
gathering the data you need, or you would be forced to make your decision
based on incomplete knowledge. If you want information about trends, you
might also have trouble finding data about past events because most firms only
make their current data immediately available. Data warehousing addresses
these problems.
W h a t I s a D a t a W a r e h o u s e ?
A data warehouse is a database that stores current and historical data of
potential interest to decision makers throughout the company. The data
originate in many core operational transaction systems, such as systems
for sales, customer accounts, and manufacturing, and may include data
from Web site transactions. The data warehouse consolidates and standardizes
information from different operational databases so that the information can be
used across the enterprise for management analysis and decision making.
Figure 6-12 illustrates how a data warehouse works. The data warehouse
makes the data available for anyone to access as needed, but it cannot be
altered. A data warehouse system also provides a range of ad hoc and
standardized query tools, analytical tools, and graphical reporting facilities.
Many firms use intranet portals to make the data warehouse information
widely available throughout the firm.
Catalina Marketing, a global marketing firm for major consumer packaged
goods companies and retailers, operates a gigantic data warehouse that includes
three years of purchase history for 195 million U.S. customer loyalty program
members at supermarkets, pharmacies, and other retailers. It is the largest
loyalty database in the world. Catalina’s retail store customers analyze this
database of customer purchase histories to determine individual customers’
buying preferences. When a shopper checks out at the cash register of one of

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 223
Catalina’s retail customers, the purchase is instantly analyzed along with that
customer’s buying history in the data warehouse to determine what coupons
that customer will receive at checkout along with a receipt.
The U.S. Internal Revenue Service (IRS) maintains a Compliance Data
Warehouse that consolidates taxpayer data that had been fragmented among
many different legacy systems, including personal information about taxpay-
ers and archived tax returns. These systems had been designed to process tax
return forms efficiently but their data were very difficult to query and
analyze. The Compliance Data Warehouse integrates taxpayer data from
many disparate sources into a relational structure, which makes querying
and analysis much easier. With a complete and comprehensive picture of
taxpayers, the warehouse helps IRS analysts and staff identify people who
are most likely to cheat on their income tax payments and respond rapidly to
taxpayer queries.
D a t a M a r t s
Companies often build enterprise-wide data warehouses, where a central data
warehouse serves the entire organization, or they create smaller, decentral-
ized 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
example, a company might develop marketing and sales data marts to deal
with customer information. Before implementing an enterprise-wide data
warehouse, bookseller Barnes & Noble maintained a series of data marts—one
for point-of-sale data in retail stores, another for college bookstore sales, and a
third for online sales. A data mart typically focuses on a single subject area or
line of business, so it usually can be constructed more rapidly and at lower
cost than an enterprise-wide data warehouse.
FIGURE 6-12 COMPONENTS OF A DATA WAREHOUSE
The data warehouse extracts current and historical data from multiple operational systems inside the
organization. These data are combined with data from external sources and reorganized into a central
database designed for management reporting and analysis. The information directory provides users
with information about the data available in the warehouse.

224 Part Two Information Technology Infrastructure
TOOLS FOR BUSINESS INTELLIGENCE:
MULTIDIMENSIONAL DATA ANALYSIS AND DATA
MINING
Once data have been captured and organized in data warehouses and data marts,
they are available for further analysis using tools for business intelligence,
which we introduced briefly in Chapter 2. Business intelligence tools enable
users to analyze data to see new patterns, relationships, and insights that are
useful for guiding decision making.
Principal tools for business intelligence include software for database querying
and reporting, tools for multidimensional data analysis (online analytical
processing), and tools for data mining. This section will introduce you to these
tools, with more detail about business intelligence analytics and applications in
the Chapter 12 discussion of decision making.
O n l i n e A n a l y t i c a l P r o c e s s i n g ( O L A P )
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 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
different 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 compares
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 6-13 shows a multidimensional model that could be created to
represent 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 product 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. 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.
D a t a M i n i n g
Traditional database queries answer such questions as, “How many units of
product number 403 were shipped in February 2010?” 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

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 225
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
purchased, 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
inferring 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 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 mining
FIGURE 6-13 MULTIDIMENSIONAL DATA MODEL
The view that is showing is product versus region. If you rotate the cube 90 degrees, the face will
show 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.

226 Part Two Information Technology Infrastructure
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
identifying profitable customers.
For example, Harrah’s Entertainment, the second-largest gambling company
in its industry, uses data mining to identify its most profitable customers and
generate more revenue from them. The company continually analyzes data
about its customers gathered when people play its slot machines or use
Harrah’s casinos and hotels. Harrah’s marketing department uses this informa-
tion to build a detailed gambling profile, based on a particular customer’s
ongoing value to the company. For instance, data mining lets Harrah’s know
the favorite gaming experience of a regular customer at one of its Midwest
riverboat casinos, along with that person’s preferences for room accomodations,
restaurants, and entertainment. This information guides management deci-
sions about how to cultivate the most profitable customers, encourage those
customers to spend more, and attract more customers with high revenue-gen-
erating potential. Business intelligence has improved Harrah’s profits so much
that it has become the centerpiece of the firm’s business strategy.
Predictive analytics use data mining techniques, historical data, and assump-
tions about future conditions to predict outcomes of events, such as the probabil-
ity a customer will respond to an offer or purchase a specific product. For exam-
ple, the U.S. division of The Body Shop International plc used predictive analytics
with its database of catalog, Web, and retail store customers to identify customers
who were more likely to make catalog purchases. That information helped the
company build a more precise and targeted mailing list for its catalogs, improving
the response rate for catalog mailings and catalog revenues.
Te x t M i n i n g a n d W e b M i n i n g
Business intelligence tools deal primarily with data that have been structured in
databases and files. However, unstructured data, most in the form of text files,
is believed to account for over 80 percent of an organization’s useful informa-
tion. E-mail, memos, call center transcripts, 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 businesses analyze these data. These tools are
able to extract key elements from large unstructured data sets, discover
patterns and relationships, and summarize the information. Businesses might
turn to text mining to analyze transcripts of calls to customer service centers to
identify major service and repair issues.
Text mining is a relatively new technology, but what’s really new are the
myriad ways in which unstructured data are being generated by consumers and
the business uses for these data. The Interactive Session on Technology
explores some of these business applications of text mining.
The Web is another rich source of valuable information, some of which can
now be mined for patterns, trends, and insights into customer behavior.
The discovery and analysis of useful patterns and information from the World
Wide Web is called Web mining. Businesses might turn to Web mining to help
them understand customer behavior, evaluate the effectiveness of a particular
Web site, or quantify the success of a marketing campaign. For instance,
marketers use Google Trends and Google Insights for Search services, which
track 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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 227
I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y
Text mining is the discovery of patterns and relation-
ships from large sets of unstructured data—the kind
of data we generate in e-mails, phone conversations,
blog postings, online customer surveys, and tweets.
The mobile digital platform has amplified the
explosion in digital information, with hundreds of
millions of people calling, texting, searching,
“apping” (using applications), buying goods, and
writing billions of e-mails on the go.
Consumers today are more than just consumers:
they have more ways to collaborate, share informa-
tion, and influence the opinions of their friends and
peers, and the data they create in doing so have
significant value to businesses. Unlike structured
data, which are generated from events such as
completing a purchase transaction, unstructured data
have no distinct form. Nevertheless, managers
believe such data may offer unique insights into cus-
tomer behavior and attitudes that were much more
difficult to determine years ago.
For example, in 2007, JetBlue experienced
unprecedented levels of customer discontent in the
wake of a February ice storm that resulted in
widespread flight cancellations and planes stranded
on Kennedy Airport runways. The airline received
15,000 e-mails per day from customers during the
storm and immediately afterwards, up from its usual
daily volume of 400. The volume was so much larger
than usual that JetBlue had no simple way to read
everything its customers were saying.
Fortunately, the company had recently contracted
with Attensity, a leading vendor of text analytics
software, and was able to use the software to analyze
all of the e-mail it had received within two days.
According to JetBlue research analyst Bryan
Jeppsen, Attensity Analyze for Voice of the Customer
(VoC) enabled JetBlue to rapidly extract customer
sentiments, preferences, and requests it couldn’t find
any other way. This tool uses a proprietary technol-
ogy to automatically identify facts, opinions,
requests, trends, and trouble spots from the unstruc-
tured text of survey responses, service notes, e-mail
messages, Web forums, blog entries, news articles,
and other customer communications. The technol-
ogy is able to accurately and automatically identify
the many different “voices” customers use to express
their feedback (such as a negative voice, positive
voice, or conditional voice), which helps organiza-
WHAT CAN BUSINESSES LEARN FROM TEXT MINING?
tions pinpoint key events and relationships, such as
intent to buy, intent to leave, or customer “wish”
events. It can reveal specific product and service
issues, reactions to marketing and public relations
efforts, and even buying signals.
Attensity’s software integrated with JetBlue’s other
customer analysis tools, such as Satmetrix’s Net
Promoter metrics, which classifies customers into
groups that are generating positive, negative, or no
feedback about the company. Using Attensity’s text
analytics in tandem with these tools, JetBlue devel-
oped a customer bill of rights that addressed the
major issues customers had with the company.
Hotel chains like Gaylord Hotels and Choice
Hotels are using text mining software to glean
insights from thousands of customer satisfaction
surveys provided by their guests. Gaylord Hotels is
using Clarabridge’s text analytics solution delivered
via the Internet as a hosted software service to
gather and analyze customer feedback from surveys,
e-mail, chat messaging, staffed call centers, and
online forums associated with guests’ and meeting
planners’ experiences at the company’s convention
resorts. The Clarabridge software sorts through the
hotel chain’s customer surveys and gathers positive
and negative comments, organizing them into a
variety of categories to reveal less obvious insights.
For example, guests complained about many things
more frequently than noisy rooms, but complaints of
noisy rooms were most frequently correlated with
surveys indicating an unwillingness to return to the
hotel for another stay.
Analyzing customer surveys used to take weeks,
but now takes only days, thanks to the Clarabridge
software. Location managers and corporate execu-
tives have also used findings from text mining to
influence decisions on building improvements.
Wendy’s International adopted Clarabridge software
to analyze nearly 500,000 messages it collects each
year from its Web-based feedback forum, call center
notes, e-mail messages, receipt-based surveys, and
social media. The chain’s customer satisfaction team
had previously used spreadsheets and keyword
searches to review customer comments, a very slow
manual approach. Wendy’s management was looking
for a better tool to speed analysis, detect emerging
issues, and pinpoint troubled areas of the business at
the store, regional, or corporate level.

C A S E S T U D Y Q U E S T I O N S
1. What challenges does the increase in unstruc-
tured data present for businesses?
2. How does text-mining improve decision-making?
3. What kinds of companies are most likely to benefit
from text mining software? Explain your answer.
4. In what ways could text mining potentially lead to
the erosion of personal information privacy?
Explain.
The Clarabridge technology enables Wendy’s to
track customer experiences down to the store level
within minutes. This timely information helps store,
regional, and corporate managers spot and address
problems related to meal quality, cleanliness, and
speed of service.
Text analytics software caught on first with
government agencies and larger companies with
information systems departments that had the
means to properly use the complicated software, but
Clarabridge is now offering a version of its product
geared towards small businesses. The technology has
already caught on with law enforcement, search tool
interfaces, and “listening platforms” like Nielsen
Online. Listening platforms are text mining tools that
focus on brand management, allowing companies to
Visit a Web site such as QVC.com or TripAdvisor.com
detailing products or services that have customer
reviews. Pick a product, hotel, or other service with
at least 15 customer reviews and read those reviews,
both positive and negative. How could Web content
mining help the offering company improve or better
market this product or service? What pieces of
information should highlighted?
determine how consumers feel about their brand and
take steps to respond to negative sentiment.
Structured data analysis won’t be rendered obso-
lete by text analytics, but companies that are able to
use both methods to develop a clearer picture of
their customers’ attitudes will have an easier time
establishing and building their brand and gleaning
insights that will enhance profitability.
Sources: Doug Henschen, “Wendy’s Taps Text Analytics to Mine
Customer Feedback,” Information Week, March 23, 2010; David
Stodder,” How Text Analytics Drive Customer Insight” Information
Week, February 1, 2010; Nancy David Kho, “Customer Experience
and Sentiment Analysis,” KMWorld, February 1, 2010; Siobhan
Gorman, “Details of Einstein Cyber-Shield Disclosed by White
House,” The Wall Street Journal, March 2, 2010; www.attensity.com,
accessed June 16, 2010; and www.clarabridge.com, accessed
June 17, 2010.
M I S I N A C T I O N
228 Part Two Information Technology Infrastructure
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 extracts useful information from the links
embedded in Web documents. 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 whenever
requests for a Web site’s resources are received. The usage data records the user’s
behavior when the user browses or makes transactions on the Web site and col-
lects 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.
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 probably using a Web site 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.

www.attensity.com

www.clarabridge.com

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 229
Suppose, for example, a customer with a Web browser wants to search an online
retailer’s database for pricing information. Figure 6-14 illustrates how that cus-
tomer might access the retailer’s internal database over the Web. The user
accesses the retailer’s Web site over the Internet using Web browser software on
his or her client PC. The user’s Web browser software requests data from the orga-
nization’s database, using HTML commands to communicate with the Web server.
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 that they can be processed by the DBMS 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. The 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 6-14 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
computers and a company’s back-end business applications or databases. The
application 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 600,000 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 Web site
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 site MySpace,
which helps users stay connected with each other or meet new people.
FIGURE 6-14 LINKING INTERNAL DATABASES TO THE WEB
Users access an organization’s internal database through the Web using their desktop PCs and Web
browser software.

230 Part Two Information Technology Infrastructure
MySpace features music, comedy, videos, and “profiles” with information
supplied by 122 million users about their age, hometown, dating preferences,
marital status, and interests. It maintains a massive database to house and
manage all of this content. Facebook uses a similar database.
6.4 MANAGING 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 it,
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.
An information policy specifies the organization’s rules for sharing,
disseminating, 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 updating 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 depart-
ments 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, managing and
planning for information as a corporate resource often requires a formal data
administration function. Data administration is responsible for the specific
policies and procedures through which data can be managed as an organizational
resource. These responsibilities include developing 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 security of the
data employed in an enterprise, with special emphasis on promoting 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
defining and organizing the structure and content of the database, and
maintaining 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
ensuring that the business has the information it needs. However, additional

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 231
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, prod-
uct recalls, and financial losses. Inaccurate data in criminal justice and national
security databases might even subject you to unnecessarily surveillance or
detention, as described in the chapter-ending case study.
According to Forrester Research, 20 percent of U.S. mail and commercial
package deliveries were returned because of incorrect names or addresses.
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 descriptions, faulty inventory descriptions,
erroneous financial data, incorrect supplier information, and incorrect
employee data. (Gartner, 2007).
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 infor-
mation 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
established, duplicate or inconsistent data elements should be minimal. Most
data quality problems, however, such as misspelled names, transposed
numbers, or incorrect or missing codes, stem from errors during data input.
The incidence of such errors is rising as companies move their businesses to
the Web and allow customers and suppliers to enter data into their Web sites
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
database 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
detecting and correcting data in a database that are incorrect, incomplete,
improperly 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 automatically survey data files, correct errors in the data, and integrate the
data in a consistent company-wide format.
Data quality problems are not just business problems. They also pose serious
problems for individuals, affecting their financial condition and even their jobs.
The Interactive Session on Organizations describes some of these impacts, as it
details the data quality problems found in the companies that collect and report
consumer credit data. As you read this case, look for the management, organi-
zation, and technology factors behind this problem, and whether existing
solutions are adequate.

You’ve found the car of your dreams. You have a
good job and enough money for a down payment.
All you need is an auto loan for $14,000. You have
a few credit card bills, which you diligently pay off
each month. But when you apply for the loan
you’re turned down. When you ask why, you’re
told you have an overdue loan from a bank you’ve
never heard of. You’ve just become one of the
millions of people who have been victimized by
inaccurate or outdated data in credit bureaus’
information systems.
Most data on U.S. consumers’ credit histories are
collected and maintained by three national credit
reporting agencies: Experian, Equifax, and
TransUnion. These organizations collect data from
various sources to create a detailed dossier of an
individual’s borrowing and bill paying habits. This
information helps lenders assess a person’s credit
worthiness, the ability to pay back a loan, and can
affect the interest rate and other terms of a loan,
including whether a loan will be granted in the
first place. It can even affect the chances of finding
or keeping a job: At least one-third of employers
check credit reports when making hiring, firing, or
promotion decisions.
U.S. credit bureaus collect personal information
and financial data from a variety of sources,
including creditors, lenders, utilities, debt
collection agencies, and the courts. These data are
aggregated and stored in massive databases
maintained by the credit bureaus. The credit
bureaus then sell this information to other
companies to use for credit assessment.
The credit bureaus claim they know which
credit cards are in each consumer’s wallet, how
much is due on the mortgage, and whether the
electric bill is paid on time. But if the wrong
information gets into their systems, whether
through identity theft or errors transmitted by
creditors, watch out! Untangling the mess can be
almost impossible.
The bureaus understand the importance of
providing accurate information to both lenders and
consumers. But they also recognize that their own
systems are responsible for many credit-report
errors. Some mistakes occur because of the
procedures for matching loans to individual credit
reports.
CREDIT BUREAU ERRORS—BIG PEOPLE PROBLEMS
The sheer volume of information being
transmitted from creditors to credit bureaus
increases the likelihood of mistakes. Experian, for
example, updates 30 million credit reports each
day and roughly 2 billion credit reports each
month. It matches the identifying personal
information in a credit application or credit
account with the identifying personal information
in a consumer credit file. Identifying personal
information includes items such as name (first
name, last name and middle initial), full current
address and ZIP code, full previous address and
ZIP code, and social security number. The new
credit information goes into the consumer credit
file that it best matches.
The credit bureaus rarely receive information
that matches in all the fields in credit files, so they
have to determine how much variation to allow
and still call it a match. Imperfect data lead to
imperfect matches. A consumer might provide
incomplete or inaccurate information on a credit
application. A creditor might submit incomplete or
inaccurate information to the credit bureaus. If the
wrong person matches better than anyone else, the
data could unfortunately go into the wrong
account.
Perhaps the consumer didn’t write clearly on
the account application. Name variations on
different credit accounts can also result in less-
than-perfect matches. Take the name Edward
Jeffrey Johnson. One account may say Edward
Johnson. Another may say Ed Johnson. Another
might say Edward J. Johnson. Suppose the last two
digits of Edward’s social security number get
transposed—more chance for mismatches.
If the name or social security number on
another person’s account partially matches the
data in your file, the computer might attach that
person’s data to your record. Your record might
likewise be corrupted if workers in companies
supplying tax and bankruptcy data from court and
government records accidentally transpose a digit
or misread a document.
The credit bureaus claim it is impossible for
them to monitor the accuracy of the 3.5 billion
pieces of credit account information they receive
each month. They must continually contend with
bogus claims from consumers who falsify lender
I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S
232 Part Two Information Technology Infrastructure

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 233
1. Assess the business impact of credit bureaus’ data
quality problems for the credit bureaus, for lenders,
for individuals.
2. Are any ethical issues raised by credit bureaus’
data quality problems? Explain your answer.
3. Analyze the management, organization, and tech-
nology factors responsible for credit bureaus’ data
quality problems.
4. What can be done to solve these problems?
information or use shady credit-repair companies
that challenge all the negative information on a
credit report regardless of its validity. To separate
the good from the bad, the credit bureaus use an
automated e-OSCAR (Electronic Online Solution for
Complete and Accurate Reporting) system to
forward consumer disputes to lenders for
verification.
If your credit report showed an error, the
bureaus usually do not contact the lender directly
to correct the information. To save money, the
bureaus send consumer protests and evidence to a
data processing center run by a third-party contrac-
tor. These contractors rapidly summarize every
complaint with a short comment and 2-digit code
from a menu of 26 options. For example, the code
A3 designates “belongs to another individual with a
similar name.” These summaries are often too brief
Go to the Experian Web site (www.experian.com)
and explore the site, with special attention to its
services for businesses and small businesses.
Then answer the following questions:
1. List and describe five services for businesses and
explain how each uses consumer data. Describe
the kinds of businesses that would use these
services.
2. Explain how each of these services is affected by
inaccurate consumer data.
to include the background banks need to under-
stand a complaint.
Although this system fixes large numbers of
errors (data are updated or corrected for 72 percent
of disputes), consumers have few options if the
system fails. Consumers who file a second dispute
without providing new information might have their
dispute dismissed as “frivolous.” If the consumer
tries to contact the lender that made the error on
their own, banks have no obligation to investigate
the dispute—unless it’s sent by a credit bureau.
Sources: Dennis McCafferty, “Bad Credit Could Cost You a Job,”
Baseline, June 7, 2010; Kristen McNamara, “Bad Credit Derails Job
Seekers,” The Wall Street Journal, March 16, 2010; Anne Kadet, Lucy
Lazarony, “Your Name Can Mess Up Your Credit Report,
Bankrate.com, accessed July 1, 2009; “Credit Report Fix a
Headache,” Atlanta Journal-Constitution, June 14, 2009; and “Why
Credit Bureaus Can’t Get It Right,” Smart Money, March 2009.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N

www.experian.com

234 Part Two Information Technology Infrastructure
MECHANICAL PARTS DIVISION SALES SYSTEM
PROD_NO PRODUCT_ DESCRIPTION COST_PER_UNIT UNITS_SOLD SALES_REGION CUSTOMER_ID
60231 4” Steel bearing 5.28 900,245 N.E. Anderson
85773 SS assembly unit 12.45 992,111 M.W. Kelly Industries
CORPORATE SALES SYSTEM
PRODUCT_ID PRODUCT_ DESCRIPTION UNIT_COST UNITS_SOLD SALES_TERRITORY DIVISION
60231 Bearing, 4” 5.28 900,245 Northeast Parts
85773 SS assembly unit 12.45 992,111 Midwest Parts
The following are sample files from the two systems that would supply the
data for the data warehouse:
PRODUCT _ID PRODUCT_ DESCRIPTION COST_PER_ UNIT UNITS_ SOLD SALES_REGION DIVISION CUSTOMER_ID
6.5 HANDS-ON MIS PROJECTS
The projects in this section give you hands-on experience in analyzing data
quality problems, establishing company-wide data standards, creating a
database for inventory management, and using the Web to search online
databases for overseas business resources.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. 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 that 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, regardless of their location.
In fact, cultural differences combined with complications from absorbing
companies that Emerson had acquired led to multiple ways of entering
quotes, 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?
2. 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 best-selling products in specific geographic areas, key
customers, and sales trends. Your sales and product information are stored in
several 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.
The following format has been proposed.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 235
• 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 company-wide format for this
information in the data warehouse?
A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : B u i l d i n g a
R e l a t i o n a l D a t a b a s e f o r I n v e n t o r y M a n a g e m e n t
Software skills: Database design, querying, and reporting
Business skills: Inventory management
Businesses today depend on databases to provide reliable information about
items in inventory, items that need restocking, and inventory costs. In this
exercise, you’ll use database software to design a database for managing inven-
tory for a small business.
Sylvester’s Bike Shop, located in San Francisco, California, sells road, moun-
tain, hybrid, leisure, and children’s bicycles. Currently, Sylvester’s purchases
bikes from three suppliers but plans to add new suppliers in the near
future. This rapidly growing business needs a database system to manage this
information.
Initially, the database should house information about suppliers and
products. The database will contain two tables: a supplier table and a product
table. The reorder level refers to the number of items in inventory that
triggers a decision to order more items to prevent a stockout. (In other words,
if the number of units of a particular item in inventory falls below the reorder
level, the item should be reordered.) The user should be able to perform
several queries and produce several managerial reports based on the data
contained in the two tables.
Using the information found in the tables in MyMISLab, build a simple rela-
tional database for Sylvester’s. 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. Within each supplier category, the products should be sorted
alphabetically.
• 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?

236 Part Two Information Technology Infrastructure
I m p r o v i n g D e c i s i o n M a k i n g : S e a r c h i n g O n l i n e
D a t a b a s e s f o r O v e r s e a s B u s i n e s s R e s o u r c e s
Software skills: Online databases
Business skills: Researching services for overseas operations
Internet users have access to many thousands of Web-enabled databases with
information on services and products in faraway locations. This project
develops skills in searching these online databases.
Your company is located in Greensboro, North Carolina, and manufactures
office furniture of various types. You have recently acquired several new
customers in Australia, and a study you commissioned indicates that, with a
presence there, you could greatly increase your sales. Moreover, your study
indicates that you could do even better if you actually manufactured many of
your products locally (in Australia). First, you need to set up an office in
Melbourne to establish a presence, and then you need to begin importing from
the United States. You then can plan to start producing locally.
You will soon be traveling to the area to make plans to actually set up an
office, and you want to meet with organizations that can help you with your
operation. You will need to engage people or organizations that offer many
services necessary for you to open your office, including lawyers, accountants,
import-export experts, telecommunications equipment and support, and even
trainers who can help you to prepare your future employees to work for you.
Start by searching for U.S. Department of Commerce advice on doing business
in Australia. Then try the following online databases to locate companies that
you would like to meet with during your coming trip: Australian Business
Register (abr.business.gov.au/), Australia Trade Now (australiatradenow.com/),
and the Nationwide Business Directory of Australia (www.nationwide.com.au).
If necessary, you could also try search engines such as Yahoo and Google. Then
perform the following activities:
• List the companies you would contact to interview on your trip to determine
whether they can help you with these and any other functions you think
vital to establishing your office.
• Rate the databases you used for accuracy of name, completeness, ease of use,
and general helpfulness.
• What does this exercise tell you about the design of databases?
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. Database Design, Normalization, and Entity-Relationship Diagramming
2. Introduction to SQL
3. Hierarchical and Network Data Models

www.nationwide.com.au

Review Summary
1. What are the problems of managing data resources in a traditional file environment and how are
they solved by a database management system?
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
accessed. Different functional areas and groups were allowed to develop their own files indepen-
dently. 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.
2. What are the major capabilities of DBMS and why is a relational DBMS so powerful?
The principal capabilities of a DBMS includes a data definition capability, a data dictionary
capability, and a data manipulation language. The data definition capability specifies the structure and
content of the 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 ele-
ments. The data manipulation language, such as SQL, is a specialized language for accessing and
manipulating the data in the database.
The relational database is the primary method for organizing and maintaining data today in
information 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 contains 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.
3. What are some important database design principles?
Designing a database requires both a logical design and a physical design. The logical design
models the database from a business perspective. The organization’s data model should reflect its key
business 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 relation-
ships, 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.
4. What are the principal tools and technologies for accessing information from databases to
improve business performance and decision making?
Powerful tools are available to analyze and access the information in databases. A data warehouse
consolidates current and historical data from many different operational systems in a central database
designed for reporting and analysis. Data warehouses support multidimensional data analysis, also
known as online analytical processing (OLAP). OLAP represents relationships among data as a
multidimensional 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 World Wide
Web, examining the structure of Web sites and activities of Web site 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.
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 237

238 Part Two Information Technology Infrastructure
Key Terms
Attribute, 210
Data administration, 230
Data cleansing, 231
Data definition, 217
Data dictionary, 217
Data governance, 230
Data inconsistency, 211
Data manipulation language, 217
Data mart, 223
Data mining, 224
Data quality audit, 231
Data redundancy, 211
Data warehouse, 222
Database, 210
Database (rigorous definition), 212
Database administration, 230
Database management system (DBMS), 212
Database server, 229
Entity, 210
Entity-relationship diagram, 221
Field, 210
File, 210
Foreign key, 215
Information policy, 230
Key field, 214
Normalization, 219
Object-oriented DBMS, 215
Object-relational DBMS, 215
Online analytical processing
(OLAP), 224
Predictive analytics, 226
Primary key, 210
Program-data dependence, 211
Record, 214
Referential integrity, 220
Relational DBMS, 213
Structured Query Language
(SQL), 217
Text mining, 226
Tuple, 214
Web mining, 226
5. 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 problems 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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 239
Review Questions
1. What are the problems of managing data resources
in a traditional file environment and how are they
solved by a database management system?
• List and describe each of the components in
the data hierarchy.
• Define and explain the significance of
entities, attributes, and key fields.
• List and describe the problems of the
traditional file environment.
• Define a database and a database manage-
ment system and describe how it solves the
problems of a traditional file environment.
2. What are the major capabilities of DBMS and why
is a relational DBMS so powerful?
• 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.
3. What are some important database design princi-
ples?
• Define and describe normalization and referen-
tial integrity and explain how they contribute
to a well-designed relational database.
• Define and describe an entity-relationship dia-
gram and explain its role in database design.
Discussion Questions
1. It has been said that you do not need database
management software to create a database
environment. Discuss.
2. To what extent should end users be involved in
the selection of a database management system
and database design?
3. What are the consequences of an organization not
having an information policy?
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
4. What are the principal tools and technologies for
accessing information from databases to
improve business performance and decision
making?
• Define a data warehouse, explaining how it
works and how it benefits organizations.
• Define business intelligence and explain how
it is related to database technology.
• Describe the capabilities of online analytical
processing (OLAP).
• Define data mining, describing how it differs
from OLAP and the types of information it
provides.
• Explain how text mining and Web mining
differ from conventional data mining.
• Describe how users can access information
from a company’s internal databases through
the Web.
5. 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 manage-
ment.
• Explain why data quality audits and data
cleansing are essential.
Collaboration and Teamwork: Identifying Entities and Attributes in an
Online Database
between the entities you have identified. If possible,
use Google Sites to post links to Web pages,
team communication announcements, and work
assignments; to brainstorm; and to work collabora-
tively on project documents. Try to use Google Docs
to develop a presentation of your findings for the
class.
With your team of three or four students, select an
online database to explore, such as AOL Music,
iGo.com, or the Internet Movie Database (IMDb).
Explore one of these Web sites to see what informa-
tion it provides. Then list the entities and attributes
that the company running the Web site must keep
track of in its databases. Diagram the relationship

T h e Te r r o r Wa t c h L i s t D a t a b a s e ’ s Tr o u b l e s C o n t i n u e
CASE STUDY
n the aftermath of the 9-11 attacks, the FBI’s
Terrorist Screening Center, or TSC, was
established to consolidate information about
suspected terrorists from multiple government
agencies into a single list to enhance inter-agency
communication. A database of suspected terrorists
known as the terrorist watch list was created.
Multiple U.S. government agencies had been
maintaining separate lists and these agencies lacked
a consistent process to share relevant information.
Records in the TSC database contain sensitive but
unclassified information on terrorist identities, such
as name and date of birth, that can be shared with
other screening agencies. Classified information
about the people in the watch list is maintained in
other law enforcement and intelligence agency data-
bases. Records for the watchlist database are pro-
vided by two sources: The National Counterterrorism
Center (NCTC) managed by the Office of the
Director of National Intelligence provides identifying
information on individuals with ties to international
terrorism. The FBI provides identifying information
on individuals with ties to purely domestic terrorism.
These agencies collect and maintain terrorist
information and nominate individuals for inclusion
in the TSC’s consolidated watch list. They are
required to follow strict procedures established by
the head of the agency concerned and approved by
the U.S. Attorney General. TSC staff must review
each record submitted before it is added to the
database. An individual will remain on the watch list
until the respective department or agency that
nominated that person to the list determines that the
person should be removed from the list and deleted
from the database
The TSC watch list database is updated daily with
new nominations, modifications to existing records,
and deletions. Since its creation, the list has
ballooned to 400,000 people, recorded as 1.1 million
names and aliases, and is continuing to grow at a rate
of 200,000 records each year. Information on the list
is distributed to a wide range of government agency
systems for use in efforts to deter or detect the
movements of known or suspected terrorists.
Recipient agencies include the FBI, CIA, National
Security Agency (NSA), Transportation Security
Administration (TSA), Department of Homeland
Security, State Department, Customs and Border
I
240 Part Two Information Technology Infrastructure
Protection, Secret Service, U.S. Marshals Service, and
the White House. Airlines use data supplied by the
TSA system in their NoFly and Selectee lists for
prescreening passengers, while the U.S. Customs and
Border Protection system uses the watchlist data to
help screen travelers entering the United States. The
State Department system screens applicants for visas
to enter the United States and U.S. residents applying
for passports, while state and local law enforcement
agencies use the FBI system to help with arrests,
detentions, and other criminal justice activities. Each
of these agencies receives the subset of data in the
watch list that pertains to its specific mission.
When an individual makes an airline reservation,
arrives at a U.S. port of entry, applies for a U.S. visa,
or is stopped by state or local police within the
United States, the frontline screening agency or
airline conducts a name-based search of the individ-
ual against the records from the terrorist watch list
database. When the computerized name-matching
system generates a “hit” (a potential name match)
against a watch list record, the airline or agency will
review each potential match. Matches that are
clearly positive or exact matches that are inconclu-
sive (uncertain or difficult to verify) are referred to
the applicable screening agency’s intelligence or
operations center and to the TSC for closer examina-
tion. In turn, TSC checks its databases and other
sources, including classified databases maintained by
the NCTC and FBI to confirm whether the individual
is a positive, negative, or inconclusive match to the
watch list record. TSC creates a daily report summa-
rizing all positive matches to the watch list and
distributes them to numerous federal agencies.
The process of consolidating information from
disparate agencies has been a slow and painstaking
one, requiring the integration of at least 12 different
databases. Two years after the process of integration
took place, 10 of the 12 databases had been
processed. The remaining two databases (the U.S.
Immigration and Customs Enforcement’s Automatic
Biometric Identification System and the FBI’s
Integrated Automated Fingerprint Identification
System) are both fingerprint databases. There is still
more work to be done to optimize the list’s useful-
ness.
Reports from both the Government Accountability
Office and the Office of the Inspector General assert

that the list contains inaccuracies and that govern-
ment departmental policies for nomination and
removal from the lists are not uniform. There has also
been public outcry resulting from the size of the list
and well-publicized incidents of obvious non-terrorists
finding that they are included on the list.
Information about the process for inclusion on the
list must necessarily be carefully protected if the list
is to be effective against terrorists. The specific
criteria for inclusion are not public knowledge. We
do know, however, that government agencies popu-
late their watch lists by performing wide sweeps of
information gathered on travelers, using many
misspellings and alternate variations of the names of
suspected terrorists. This often leads to the inclusion
of people who do not belong on watch lists, known as
“false positives.” It also results in some people being
listed multiple times under different spellings of
their names.
While these selection criteria may be effective for
tracking as many potential terrorists as possible, they
also lead to many more erroneous entries on the list
than if the process required more finely tuned infor-
mation to add new entries. Notable examples of ‘false
positives’ include Michael Hicks, an 8-year-old New
Jersey Cub Scout who is continually stopped at the
airport for additional screening and the late senator
Ted Kennedy, who had been repeatedly delayed in
the past because his name resembles an alias once
used by a suspected terrorist. Like Kennedy, Hicks
may have been added because his name is the same
or similar to a different suspected terrorist.
These incidents call attention to the quality and
accuracy of the data in the TSC consolidated
terrorist watch list. In June 2005, a report by the
Department of Justice’s Office of the Inspector
General found inconsistent record counts, duplicate
records, and records that lacked data fields or had
unclear sources for their data. Although TSC
subsequently enhanced its efforts to identify and
correct incomplete or inaccurate watch list records,
the Inspector General noted in September 2007 that
TSC management of the watch list still showed some
weaknesses.
Given the option between a list that tracks every
potential terrorist at the cost of unnecessarily track-
ing some innocents, and a list that fails to track
many terrorists in an effort to avoid tracking inno-
cents, many would choose the list that tracked every
terrorist despite the drawbacks. But to make matters
worse for those already inconvenienced by wrongful
inclusion on the list, there is currently no simple and
quick redress process for innocents that hope to
remove themselves from it.
The number of requests for removal from the
watch list continues to mount, with over 24,000
requests recorded (about 2,000 each month) and only
54 percent of them resolved. The average time to
process a request in 2008 was 40 days, which was not
(and still is not) fast enough to keep pace with the
number of requests for removal coming in. As a
result, law-abiding travelers that inexplicably find
themselves on the watch list are left with no easy
way to remove themselves from it.
In February 2007, the Department of Homeland
Security instituted its Traveler Redress Inquiry
Program (TRIP) to help people that have been
erroneously added to terrorist watch lists remove
themselves and avoid extra screening and question-
ing. John Anderson’s mother claimed that despite
her best efforts, she was unable to remove her son
from the watch lists. Senator Kennedy reportedly
was only able to remove himself from the list by
personally bringing up the matter to Tom Ridge, then
the Director of the Department of Homeland
Security.
Security officials say that mistakes such as the one
that led to Anderson and Kennedy’s inclusion on
no-fly and consolidated watch lists occur due to the
matching of imperfect data in airline reservation
systems with imperfect data on the watch lists. Many
airlines don’t include gender, middle name, or date
of birth in their reservations records, which increases
the likelihood of false matches.
One way to improve screening and help reduce
the number of people erroneously marked for
additional investigation would be to use a more
sophisticated system involving more personal data
about individuals on the list. The TSA is developing
just such a system, called “Secure Flight,” but it has
been continually delayed due to privacy concerns
regarding the sensitivity and safety of the data it
would collect. Other similar surveillance programs
and watch lists, such as the NSA’s attempts to gather
information about suspected terrorists, have drawn
criticism for potential privacy violations.
Additionally, the watch list has drawn criticism
because of its potential to promote racial profiling
and discrimination. Some allege that they were
included by virtue of their race and ethnic descent,
such as David Fathi, an attorney for the ACLU of
Iranian descent, and Asif Iqbal, a U.S. citizen of
Pakistani decent with the same name as a
Guantanamo detainee. Outspoken critics of U.S.
foreign policy, such as some elected officials and
Chapter 6 Foundations of Business Intelligence: Databases and Information Management 241

university professors, have also found themselves on
the list.
A report released in May 2009 by Department of
Justice Inspector General Glenn A. Fine found that
the FBI had incorrectly kept nearly 24,000 people on
its own watch list that supplies data to the terrorist
watch list on the basis of outdated or irrelevant infor-
mation. Examining nearly 69,000 referrals to the FBI
list, the report found that 35 percent of those people
remained on the list despite inadequate justification.
Even more worrisome, the list did not contain the
names of people who should have been listed
because of their terrorist ties.
FBI officials claim that the bureau has made
improvements, including better training, faster
processing of referrals, and requiring field office
supervisors to review watch-list nominations for
accuracy and completeness. But this watch list and
the others remain imperfect tools. In early 2008, it
was revealed that 20 known terrorists were not cor-
rectly listed on the consolidated watch list. (Whether
these individuals were able to enter the U.S. as a
result is unclear.)
Umar Farouk Abdulmutallab, the Nigerian who
unsuccessfully tried to detonate plastic explosives on
the Northwest Airlines flight from Amsterdam to
Detroit on Christmas Day 2009, had not made it onto
the no-fly list. Although Abdulmutallab’s father had
reported concern over his son’s radicalization to the
U.S. State Department, the Department did not
revoke Adbulmutallab’s visa because his name was
misspelled in the visa database, so he was allowed to
enter the United States. Faisal Shahzad, the Times
Square car bomber, was apprehended on May 3,
2010, only moments before his Emirates airline flight
to Dubai and Pakistan was about to take off. The
airline had failed to check a last-minute update to the
no-fly list that had added Shahzad’s name.
Sources: Scott Shane, “Lapses Allowed Suspect to Board Plane,”
The New York Times, May 4, 2010; Mike McIntire, “Ensnared by
Error on Growing U.S. Watch List,” The New York Times, April 6,
2010; Eric Lipton, Eric Schmitt, and Mark Mazzetti, “Review of Jet
Bomb Plot Shows More Missed Clues,” The New York Times,
January 18, 2010; Lizette Alvarez, “Meet Mikey, 8: U.S. Has Him
on Watch List,” The New York Times, January 14, 2010; Eric
Lichtblau, “Justice Dept. Finds Flaws in F.B.I. Terror List,” The New
York Times, May 7, 2009; Bob Egelko, “Watch-list Name Confusion
Causes Hardship,” San Francisco Chronicle, March 20, 2008;
“Reports Cite Lack of Uniform Policy for Terrorist Watch List,” The
Washington Post, March 18, 2008; Siobhan Gorman, “NSA’s
Domestic Spying Grows as Agency Sweeps Up Data,” The Wall
Street Journal, March 10, 2008; Ellen Nakashima, and Scott
McCartney, “When Your Name is Mud at the Airport,” The Wall
Street Journal, January 29, 2008.
242 Part Two Information Technology Infrastructure
CASE STUDY QUESTIONS
1. What concepts in this chapter are illustrated in
this case?
2. Why was the consolidated terror watch list
created? What are the benefits of the list?
3. Describe some of the weaknesses of the watch
list. What management, organization, and
technology factors are responsible for these
weaknesses?
4. How effective is the system of watch lists
described in this case study? Explain your answer.
5. If you were responsible for the management of
the TSC watch list database, what steps would you
take to correct some of these weaknesses?
6. Do you believe that the terror watch list
represents a significant threat to individuals’
privacy or Constitutional rights? Why or why not?

!”#$%&'()%#*+)*+#,*’–.%-)/+%0-‘*1%

LEARNING OBJECTIVESS
After reading this chapter, you
will be able to answer the
following questions:
1. What are the principal components
of telecommunications networks and
key networking technologies?
2. What are the main telecommunica-
tions transmission media and types
of networks?
3. How do the Internet and Internet
technology work and how do they
support communication and
e-business?
4. What are the principal technologies
and standards for wireless network-
ing, communication, and Internet
access?
5. Why are radio frequency identifica-
tion (RFID) and wireless sensor
networks valuable for business?
CHAPTER OUTLINE
7.1 TELECOMMUNICATIONS AND NETWORKING
IN TODAY’S BUSINESS WORLD
Networking and Communication Trends
What Is a Computer Network?
Key Digital Networking Technologies
7.2 COMMUNICATIONS NETWORKS
Signals: Digital vs. Analog
Types of Networks
Physical Transmission Media
7.3 THE GLOBAL INTERNET
What Is the Internet?
Internet Addressing and Architecture
Internet Services and Communications Tools
The Web
7.4 THE WIRELESS REVOLUTION
Cellular Systems
Wireless Computer Networks and Internet Access
RFID and Wireless Sensor Networks
7.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Improving Decision Making: Using Spreadsheet
Software to Evaluate Wireless Services
Achieving Operational Excellence: Using Web Search
Engines for Business Research
LEARNING TRACK MODULES
Computing and Communications Services Provided
by Commercial Communications Vendors
Broadband Network Services and Technologies
Cellular System Generations
WAP and I-Mode: Wireless Cellular Standards for
Web Access
Wireless Applications for Customer Relationship
Management, Supply Chain Management, and
Health care
Web 2.0
Chapter 7
Telecommunications, the Internet,
and Wireless Technology
Interactive Sessions:
The Battle Over Net Neutrality
Monitoring Employees on
Networks: Unethical or
Good Business?

245
hat’s it like to be the world’s largest shipbuilder? Ask Hyundai Heavy Industries
(HHI), headquartered in Ulsan, South Korea, which produces 10 percent of the
world’s ships. HHI produces tankers, bulk carriers, containerships, gas and
chemical carriers, ship engines, offshore oil and gas drilling platforms, and under-
sea pipelines.
Coordinating and optimizing the production of so many different products, is obviously a
daunting task. The company has already invested nearly $50 million in factory planning
software to help manage this effort. But HHI’s “factory” encompasses 11 square kilometers
(4.2 square miles) stretching over land and sea, including nine drydocks, the largest of
which spans more than seven football fields to support construction of four vessels simul-
taneously. Over 12,000 workers build up to 30 ships at one time, using millions of parts
ranging in size from small rivets to five-story buildings.
This production environment proved too large and complex to easily track the movement of
parts and inventory in real time as these events were taking place. Without up-to-the-minute
data, the efficiencies from enterprise resource planning software are very limited. To make
matters worse, the recent economic downturn hit HHI especially hard, as world trading and
shipping plummeted. Orders for new ships in 2009 plunged to 7.9 million compensated gross
tons (CGT, a measurement of vessel size), down from 150 million CGT the previous year. In
this economic environment, Hyundai Heavy was looking for new ways to reduce expenses
and streamline production.
HHI’s solution was a high-speed wireless network across the entire shipyard, which was
built by KT Corp., South Korea’s largest telecommunications firm. It is able to transmit data at
a rate of 4 megabits per second, about four times faster than the typical cable modem deliver-
ing high-speed Internet service to U.S. households. The company uses radio sensors to track
the movement of parts as they move from fabrication shop to the side of a drydock and then
onto a ship under construction. Workers on the ship use notebook computers or handheld
mobile phones to access plans and engage in two-way video conversations with ship designers
in the office, more than a mile away.
In the past, workers who were inside a vessel below ground or below sea level had to climb
topside to use a phone or walkie-talkie when they had to talk to someone about a problem. The
new wireless network is connected to the electric lines in the ship, which convey digital data
HYUNDAI HEAVY INDUSTRIES CREATES
A WIRELESS SHIPYARD
to Wi-Fi wireless transmitters
placed around the hull during
construction. Workers’ Internet
phones, webcams, and PCs are
linked to the Wi-Fi system, so
workers can use Skype VoIP to
call their colleagues on the sur-
face. Designers in an office
building a mile from the con-
struction site use the webcams
to investigate problems.
On the shipyard roads, 30 trans-
porter trucks fitted to receivers
connected to the wireless net-
work update their location
every 20 seconds to a control
room. This helps dispatchers
W

246 Part Two Information Technology Infrastructure
match the location of transporters with orders for parts, shortening the trips
each truck makes. All of the day’s movements are finished by 6 P.M. instead of
8 P.M. By making operations more efficient and reducing labor costs, the wire-
less technology is expected to save Hyundai Heavy $40 million annually.
Sources: Evan Ramstad, “High-Speed Wireless Transforms a Shipyard,” The Wall Street
Journal, March 15, 2010 and “Hyundai Heavy Plans Wireless Shipyard,” The Korea Herald,
March 30, 2010.
Hyundai Heavy Industries’s experience illustrates some of the powerfulcapabilities and opportunities provided by contemporary networking
technology. The company used wireless networking technology to connect
designers, laborers, ships under construction, and transportation vehicles to
accelerate communication and coordination, and cut down on the time, dis-
tance, or number of steps required to perform a task.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Hyundai Heavy Industries produces ships and other
products that are very labor-intensive and sensitive to changes in global
economic conditions. Its production environment is large, complex, and
extremely difficult to coordinate and manage. The company needs to keep
operating costs as low as possible. HHI’s shipyard extends over a vast area, and
it was extremely difficult to monitor and coordinate different projects and work
teams.
Management decided that wireless technology provided a solution and
arranged for the deployment of a wireless network throughout the entire
shipyard. The network also links the yard to designers in HHI’s office a mile
away. The network made it much easier to track parts and production activities
and to optimize the movements of transporter trucks. HHI had to redesign its
production and other work processes to take advantage of the new technology.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 247
7.1 TELECOMMUNICATIONS AND NETWORKING IN
TODAY’S BUSINESS WORLD
f 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 computers and e-mail, the Internet, cell
phones, and mobile computers 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:
telephone networks and computer networks. Telephone networks historically
handled voice communication, and computer networks handled data traffic.
Telephone networks were built by telephone companies throughout the twenti-
eth century using voice transmission technologies (hardware and software),
and these companies almost always operated as regulated monopolies through-
out the world. Computer networks were originally built by computer
companies seeking 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 equipment.
Telecommunications providers today, such as AT&T and Verizon, offer data
transmission, Internet access, cellular telephone service, and television
programming as well as voice service. (See the Chapter 3 opening case.) Cable
companies, such as Cablevision and Comcast, now offer voice service and
Internet access. Computer networks have expanded to include Internet
telephone and limited video services. Increasingly, all of these voice, video, and
data communications are based on Internet technology.
Both voice and data communication networks have also become more power-
ful (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 more than 60 percent of U.S. Internet users have high-speed broadband
connections provided by telephone and cable TV companies running at 1 to 15
million bits per second. The cost for this service has fallen exponentially, from 25
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 cell phones, mobile
handheld devices, and PCs in wireless networks. In a few years, more than half
the Internet users in the United States will use smartphones and mobile
netbooks to access the Internet. In 2010, 84 million Americans accessed the
Internet through mobile devices, and this number is expected to double by 2014
(eMarketer, 2010).
WHAT IS A COMPUTER NETWORK?
If you had to connect the computers for two or more employees together in the
same office, you would need a computer network. Exactly what is a network?
In its simplest form, a network consists of two or more connected computers.
I

248 Part Two Information Technology Infrastructure
FIGURE 7-1 COMPONENTS OF A SIMPLE COMPUTER NETWORK
Illustrated here is a very simple computer network, consisting of computers, a network operating system residing on a dedicated server
computer, cable (wiring) connecting the devices, network interface cards (NICs), switches, and a router.
Figure 7-1 illustrates the major hardware, software, and transmission compo-
nents used in a simple network: a client computer and a dedicated server
computer, network interfaces, a connection medium, network operating
system software, and either a hub or a switch.
Each computer on the network contains a network interface device called a
network interface card (NIC). Most personal computers today have this card
built into the motherboard. 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 it can reside primarily on a dedicated server
computer for all the applications on the network. A server computer is a
computer on a network that performs important network functions for client
computers, such as serving up Web pages, storing data, and storing the network
operating system (and hence controlling the network). Server software such as
Microsoft Windows Server, Linux, and Novell Open Enterprise Server 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 very simple devices that connect network
components, 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
destination 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
used to route packets of data through different networks, ensuring that the data
sent gets to the correct address.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 249
N e t w o r k s i n L a r g e C o m p a n i e s
The network we’ve just described might be suitable for a small business. But what
about large companies with many different locations and thousands of employ-
ees? As a firm grows, and collects hundreds of small local area networks, these
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 powerful servers support a corporate
Web site, 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 corpo-
rate-wide networks. Here you can see that the corporate network infrastructure
supports a mobile sales force using cell phones and smartphones, mobile
employees linking to the company Web site, internal company networks using
mobile wireless local area networks (Wi-Fi networks), and a videoconferencing
system to support managers across the world. In addition to these computer
networks, the firm’s infrastructure usually includes 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 and
corporate data networks to Internet service, wireless Internet, and cell phones.
FIGURE 7-2 CORPORATE NETWORK INFRASTRUCTURE
Today’s corporate network infrastructure is a collection of many different networks from the public
switched telephone network, to the Internet, to corporate local area networks linking workgroups,
departments, or office floors.

250 Part Two Information Technology Infrastructure
One of the major problems facing corporations today is how to integrate 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. As more and more communication networks become dig-
ital, and based on Internet technologies, it will become easier to integrate them.
KEY DIGITAL NETWORKING TECHNOLOGIES
Contemporary digital networks and the Internet are based on three key
technologies: client/server computing, the use of packet switching, and the
development of widely used communications standards (the most important of
which is Transmission Control Protocol/Internet Protocol, or TCP/IP) for
linking disparate networks and computers.
C l i e n t / S e r v e r C o m p u t i n g
We introduced client/server computing in Chapter 5. Client/server computing
is a distributed computing model in which some of the processing power is
located within small, inexpensive client computers, and resides literally on
desktops, 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
computing in which nearly all of the processing takes place on a central large
mainframe 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. The Internet is the largest
implementation of client/server computing.
P a c k e t S w i t c h i n g
Packet switching is a method of slicing digital messages into parcels called
packets, sending the packets along different communication paths as they
become 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 makes much more efficient use of the communications
capacity of a network. In packet-switched networks, messages are first broken
down into small fixed bundles of data called packets. The packets include
information for directing the packet to the right address and for checking trans-
mission errors along with the data. The packets are transmitted over various
communications channels using routers, each packet traveling independently.
Packets of data originating at one source will be routed through many different
paths and networks before being reassembled into the original message when
they reach their destinations.
T C P / I P a n d C o n n e c t i v i t y
In a typical telecommunications network, diverse hardware and software
components need to work together to transmit information. Different com-

Chapter 7 Telecommunications, the Internet, and Wireless Technology 251
ponents in a network communicate with each other only by adhering to a
common set of rules called protocols. A protocol is a set of rules and proce-
dures governing transmission of information between two points in a
network.
In the past, many diverse proprietary and incompatible protocols often forced
business firms to purchase computing and communications equipment from a
single vendor. But 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
computers over long distances.
TCP/IP uses a suite of protocols, the main ones being TCP and IP. TCP refers
to the Transmission Control Protocol (TCP), which handles the movement of
data between computers. TCP establishes a connection between the computers,
sequences 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.
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 Application
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.
FIGURE 7-3 PACKED-SWITCHED NETWORKS AND PACKET COMMUNICATIONS
Data are grouped into small packets, which are transmitted independently over various communica-
tions channels and reassembled at their final destination.

252 Part Two Information Technology Infrastructure
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
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 are able to 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
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 COMMUNICATIONS NETWORKS
Let’s look more closely at alternative networking technologies available to
businesses.
SIGNALS: DIGITAL VS. ANALOG
There are two ways to communicate a message in a network: either using 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 voice communication. The most common analog devices are the telephone
handset, the speaker on your computer, or your iPod earphone, all of which
create analog wave forms that your ear can hear.
A digital signal is a discrete, binary waveform, rather than a continuous
waveform. Digital signals communicate information as strings of two discrete
states: one bit and zero bits, which are represented as on-off electrical pulses.
Computers use digital signals and require a modem to convert these digital signals
into analog 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

Chapter 7 Telecommunications, the Internet, and Wireless Technology 253
modulator-demodulator. Cable modems connect your computer to the Internet
using a cable network. DSL modems connect your computer to the Internet using
a telephone company’s land line 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. Without modems,
computers could not communicate with one another using analog networks
(which include the telephone system and cable networks).
TYPES OF NETWORKS
There are many different 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).
L o c a l A r e a N e t w o r k s
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
within a half-mile or 500-meter radius. LANs typically connect a few computers
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 file server, providing
users with access to shared computing resources in the network, including
software 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
another corporate network, so that the LAN can exchange information with
networks external to it. The most common LAN operating systems are
Windows, Linux, and Novell. Each of these network operating systems supports
TCP/IP as their default networking protocol.
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.
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 transcontinental or global area

254 Part Two Information Technology Infrastructure
Ethernet is the dominant LAN standard at the physical network level,
specifying the physical medium to carry signals between computers, access
control rules, and a standardized set of bits used to carry data over the system.
Originally, Ethernet supported a data transfer rate of 10 megabits per second
(Mbps). Newer versions, such as Fast Ethernet and Gigabit Ethernet, support
data transfer rates of 100 Mbps and 1 gigabits per second (Gbps), respectively,
and are used in network backbones.
The LAN illustrated in Figure 7-1 uses a client/server architecture where the
network operating system resides primarily on a single file 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
network treats all processors equally and is used primarily in small networks
with 10 or fewer users. The various computers on the network can exchange
data by direct access and can share peripheral devices without going through a
separate server.
In LANs using the Windows Server family of operating systems, the peer-
to-peer architecture is called the workgroup network model, in which a small
group of computers can share resources, such as files, folders, and printers,
over the network without a dedicated server. The Windows domain network
model, in contrast, uses a dedicated server to manage the computers in the
network.
Larger LANs have many clients and multiple servers, with separate servers
for specific services, such as storing and managing files and databases (file
servers or database servers), managing printers (print servers), storing and
managing e-mail (mail servers), or storing and managing Web pages (Web
servers).
Sometimes LANs are described in terms of the way their components are
connected together, or their topology. There are three major LAN topologies:
star, bus, and ring (see Figure 7-6).
In a star topology, all devices on the network connect to a single hub.
Figure 7-6 illustrates a simple star topology in which all network traffic flows
through the hub. In an extended star network, multiple layers of hubs are
organized into a hierarchy.
In a bus topology, one station transmits signals, which travel in both
directions along a single transmission segment. All of the signals are broadcast
in both directions to the entire network. All machines on the network receive
the same signals, and software installed on the client computers enables each
client to listen for messages addressed specifically to it. The bus topology is the
most common Ethernet topology.
A ring topology connects network components in a closed loop. Messages
pass from computer to computer in only one direction around the loop, and
only one station at a time may transmit. The ring topology is primarily found in
older LANs using Token Ring networking software.
M e t r o p o l i t a n a n d W i d e A r e a N e t w o r k s
Wide area networks (WANs) span broad geographical distances—entire
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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 255
PHYSICAL TRANSMISSION MEDIA
Networks use different kinds of physical transmission media, including twisted
wire, coaxial cable, fiber optics, 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.
Tw i s t e d W i r e
Twisted wire consists of strands of copper wire twisted in pairs and is an older
type of transmission medium. Many of the telephone systems in buildings had
twisted wires installed for analog communication, but they can be used for
digital communication as well. Although an older physical transmission
medium, the twisted wires used in today’s LANs, such as CAT5, can obtain
speeds up to 1 Gbps. Twisted-pair cabling is limited to a maximum recom-
mended run of 100 meters (328 feet).
C o a x i a l C a b l e
Coaxial cable, similar to that used for cable television, consists of thickly
insulated copper wire that can transmit a larger volume of data than twisted
wire. Cable was used in early LANs and is still used today for longer (more than
100 meters) runs in large buildings. Coaxial has speeds up to 1 Gbps.
F i b e r O p t i c s a n d O p t i c a l N e t w o r k s
Fiber-optic cable consists of bound strands of clear glass fiber, each the thick-
ness of a human hair. Data are transformed into pulses of light, which are sent
through the fiber-optic cable by a laser device at rates varying from 500 kilobits to
several trillion bits per second in experimental settings. Fiber-optic cable is
considerably faster, lighter, and more durable than wire media, and is well suited
to systems requiring transfers of large volumes of data. However, fiber-optic cable
is more expensive than other physical transmission media and harder to install.
FIGURE 7-6 NETWORK TOPOLOGIES
The three basic network topologies are the star, bus, and ring.

256 Part Two Information Technology Infrastructure
Until recently, fiber-optic cable had been used primarily for the high-speed
network backbone, which handles the major traffic. Now cellular phone
companies such as Verizon are starting to bring fiber lines into the home for
new types of services, such as Verizon’s Fiber Optic Services (FiOS) Internet
service that provides up 50 Mbps download speeds.
W i r e l e s s Tr a n s m i s s i o n M e d i a
Wireless transmission is based on radio signals of various frequencies. There
are three kinds of wireless networks used by computers: microwave, cellular,
and Wi-Fi. Microwave systems, both terrestrial and celestial, transmit high-
frequency radio signals through the atmosphere and are widely used for
high-volume, long-distance, point-to-point communication. Microwave sig-
nals follow a straight line and do not bend with the curvature of the earth.
Therefore, long-distance terrestrial transmission systems require that trans-
mission stations be positioned about 37 miles apart. Long-distance transmis-
sion is also possible by using communication satellites as relay stations for
microwave signals transmitted from terrestrial stations.
Communication satellites use microwave transmission and are typically
used for transmission in large, geographically dispersed organizations that
would be difficult to network using cabling media or terrestrial microwave, as
well as for home Internet service, especially in rural areas. For instance, the
global energy company BP p.l.c. uses satellites for real-time data transfer of oil
field exploration data gathered from searches of the ocean floor. Using geosyn-
chronous satellites, exploration ships transfer these data to central computing
centers in the United States for use by researchers in Houston, Tulsa, and
suburban Chicago. Figure 7-7 illustrates how this system works. Satellites are
also used for home television and Internet service. The two major satellite
Internet providers (Dish Network and DirectTV) have about 30 million
subscribers, and about 17 percent of all U.S. households access the Internet
using satellite services (eMarketer, 2010).
FIGURE 7-7 BP’S SATELLITE TRANSMISSION SYSTEM
Communication satellites help BP transfer seismic data between oil exploration ships and research
centers in the United States.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 257
Cellular systems also use radio waves and a variety of different protocols to
communicate with radio antennas (towers) placed within adjacent geographic
areas called cells. Communications transmitted from a cell phone to a local
cell pass from antenna to antenna—cell to cell—until they reach their final
destination.
Wireless networks are supplanting traditional wired networks for many
applications and creating new applications, services, and business models.
In Section 7.4, we provide a detailed description of the applications and
technology standards driving the “wireless revolution.”
Tr a n s m i s s i o n S p e e d
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
transmission capacity of each type of telecommunications medium is a func-
tion 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 THE GLOBAL INTERNET
We all use the Internet, and many of us can’t do without it. It’s 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 has become the world’s most extensive, public communication
system that now rivals the global telephone system in reach and range. It’s also
the world’s largest implementation of client/server computing and internet-
working, linking millions of individual networks all over the world. This global
network of networks began in the early 1970s as a U.S. Department of Defense
network 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 commercial
organization with a permanent connection to the Internet that sells temporary
connections to retail subscribers. EarthLink, NetZero, AT&T, and Time Warner
are ISPs. Individuals also connect to the Internet through their business firms,
universities, or research centers that have designated Internet domains.
There are a variety of services for ISP Internet connections. Connecting via a
traditional telephone line and modem, at a speed of 56.6 kilobits per second
(Kbps) used to be the most common form of connection worldwide, but it has
been largely replaced by broadband connections. Digital subscriber line (DSL),
cable, satellite Internet connections, and T lines provide these broadband
services.

258 Part Two Information Technology Infrastructure
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 9 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 15 Mbps. In areas where DSL and cable services are unavail-
able, 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
agencies requiring high-speed guaranteed service levels. T1 lines offer guaran-
teed 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
earlier in this chapter. Every computer on the Internet is assigned a unique
Internet Protocol (IP) address, which currently is a 32-bit number repre-
sented by four strings of numbers ranging from 0 to 255 separated by periods.
For instance, the IP address of www.microsoft.com is 207.46.250.119.
When a user sends a message to another user on the Internet, the message is
first decomposed into packets using the TCP protocol. 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.
T h e D o m a i n N a m e S y s t e m
Because it would be incredibly difficult for Internet users to remember strings
of 12 numbers, the Domain Name System (DNS) converts domain names to IP
addresses. The domain name is the English-like name that corresponds to the
unique 32-bit numeric IP address for each computer connected to the Internet.
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.
DNS has a hierarchical structure (see Figure 7-8). At the top of the DNS
hierarchy is the root domain. The child domain of the root is called a top-level
domain, and the child domain of a top-level domain is called is 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 hierar-
chy designates a specific computer on either the Internet or a private
network.
The most common domain extensions currently available and officially
approved are shown in the following list. 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 (ICANN, 2010). In the future, this list will expand to
include many more types of organizations and industries.

www.microsoft.com

Chapter 7 Telecommunications, the Internet, and Wireless Technology 259
.com Commercial organizations/businesses
.edu Educational institutions
.gov U.S. government agencies
.mil U.S. military
.net Network computers
.org Nonprofit organizations and foundations
.biz Business firms
.info Information providers
I n t e r n e t A r c h i t e c t u r e a n d G o v e r n a n c e
Internet data traffic is carried over transcontinental high-speed backbone
networks that generally operate today in the range of 45 Mbps to 2.5 Gbps (see
Figure 7-9). These trunk lines are typically owned by long-distance telephone
companies (called network service providers) or by national governments. Local
connection lines are owned by regional telephone and cable television compa-
nies in the United States 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
connection 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, as it examines the pros and cons of
network neutrality.
FIGURE 7-8 THE DOMAIN NAME SYSTEM
Domain Name System is a hierarchical system with a root domain, top-level domains, second-level
domains, and host computers at the third level.

260 Part Two Information Technology Infrastructure
No one “owns” the Internet, and it has no formal management. However,
worldwide Internet policies are established by a number of professional organi-
zations 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 assigns IP
addresses; and the World Wide Web Consortium (W3C), which sets Hypertext
Markup Language and other programming standards for the Web.
These organizations influence government agencies, network owners, ISPs,
and software developers with the goal of keeping the Internet operating as
efficiently as possible. The Internet must also conform to the laws of the
sovereign nation-states in which it operates, as well as the technical infra-
structures that exist within the nation-states. Although in the early years of
the Internet and the Web there was very little legislative or executive interfer-
ence, this situation is changing as the Internet plays a growing role in the
distribution of information and knowledge, including content that some find
objectionable.
T h e F u t u r e I n t e r n e t : I P v 6 a n d I n t e r n e t 2
The Internet was not originally designed to handle the transmission of massive
quantities of data and billions of users. Because many corporations and govern-
ments have been given large blocks of millions of IP addresses to accommodate
current and future workforces, and because of sheer Internet population
growth, the world will run out of available IP addresses using the existing
FIGURE 7-9 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 261
addressing convention by 2012 or 2013. Under development is a new version of
the IP addressing schema called Internet Protocol version 6 (IPv6), which contains
128-bit addresses (2 to the power of 128), or more than a quadrillion possible
unique addresses.
Internet2 and Next-Generation Internet (NGI) are consortia representing
200 universities, private businesses, and government agencies in the United
States that are working on a new, robust, high-bandwidth version of the
Internet. They have established several new high-performance backbone net-
works with bandwidths reaching as much as 100 Gbps. Internet2 research
groups are developing and implementing new technologies for more effective
routing practices; different levels of service, depending on the type and impor-
tance of the data being transmitted; and advanced applications for distributed
computation, virtual laboratories, digital libraries, distributed learning, and tele-
immersion. These networks do not replace the public Internet, but they do pro-
vide test beds for leading-edge technology that may eventually migrate to the
public Internet.
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 e-mail 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
requested information back to the client over the Internet. Chapters 5 and 6
describe how Web servers work with application servers and database servers
to access information from an organization’s internal information systems
applications and their associated databases. Client platforms today include
not only PCs and other computers but also cell phones, small handheld digital
devices, and other information appliances.
I n t e r n e t S e r v i c e s
A client computer connecting to the Internet has access to a variety of services.
These services include e-mail, electronic discussion groups, chatting and
instant messaging, Telnet, File Transfer Protocol (FTP), and the Web.
Table 7-2 provides a brief description of these services.
Each Internet service is implemented by one or more software programs. All
of the services may run on a single server computer, or different services may
TABLE 7-2 MAJOR INTERNET SERVICES
CAPABILITY FUNCTIONS SUPPORTED
E-mail 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) using hypertext links

What kind of Internet user are you? Do you primar-
ily use the Net to do a little e-mail and look up
phone numbers? Or are you online all day, watching
YouTube videos, downloading music files, or playing
massively multiplayer online games? If you’re the
latter, you are consuming a great deal of bandwidth,
and hundreds of millions of people like you might
start to slow the Internet down. YouTube consumed
as much bandwidth in 2007 as the entire Internet
did in 2000. That’s one of the arguments being made
today for charging Internet users based on the
amount of transmission capacity they use.
If user demand for the Internet overwhelms
network capacity, the Internet might not come to a
screeching halt, but users would be faced with very
sluggish download speeds and slow performance of
YouTube, Facebook, and other data-heavy services.
(Heavy use of iPhones in urban areas such as New
York and San Francisco has already degraded service
on the AT&T wireless network. AT&T reports that 3
percent of its subscriber base accounts for 40
percent of its data traffic. )
Other researchers believe that as digital traffic on
the Internet grows, even at a rate of 50 percent per
year, the technology for handling all this traffic is
advancing at an equally rapid pace.
In addition to these technical issues, the debate
about metering Internet use centers around the
concept of network neutrality. Network neutrality is
the idea that Internet service providers must allow
customers equal access to content and applications,
regardless of the source or nature of the content.
Presently, the Internet is indeed neutral: all Internet
traffic is treated equally on a first-come, first-served
basis by Internet backbone owners.
However, telecommunications and cable compa-
nies are unhappy with this arrangement. They want
to be able to charge differentiated prices based on
the amount of bandwidth consumed by content
being delivered over the Internet. These companies
believe that differentiated pricing is “the fairest way”
to finance necessary investments in their network
infrastructures.
Internet service providers point to the upsurge in
piracy of copyrighted materials over the Internet.
Comcast, the second largest Internet service
provider in the United States, reported that illegal
file sharing of copyrighted material was consuming
THE BATTLE OVER NET NEUTRALITY
50 percent of its network capacity. In 2008, the
company slowed down transmission of BitTorrent
files, used extensively for piracy and illegal sharing
of copyrighted materials, including video. The
Federal Communications Commission (FCC) ruled
that Comcast had to stop slowing peer-to-peer traffic
in the name of network management. Comcast then
filed a lawsuit challenging the FCC’s authority to
enforce network neutrality. In April 2010, a federal
appeals court ruled in favor of Comcast that the
FCC did not have the authority to regulate how an
Internet provider manages its network.
Advocates of net neutrality are pushing Congress
to find ways to regulate the industry to prevent
network providers from adopting Comcast-like
practices. The strange alliance of net neutrality
advocates includes MoveOn.org, the Christian
Coalition, the American Library Association, every
major consumer group, many bloggers and small
businesses, and some large Internet companies like
Google and Amazon.
Net neutrality advocates argue that the risk of
censorship increases when network operators can
selectively block or slow access to certain content
such as Hulu videos or access to competing low-cost
services such as Skype and Vonage. There are
already many examples of Internet providers
restricting access to sensitive materials (such as
Pakistan’s government blocking access to anti-
Muslim sites and YouTube as a whole in response to
content it deemed defamatory to Islam.)
Proponents of net neutrality also argue that a
neutral Internet encourages everyone to innovate
without permission from the phone and cable
companies or other authorities, and this level
playing field has spawned countless new busi-
nesses. Allowing unrestricted information flow
becomes essential to free markets and democracy
as commerce and society increasingly move online.
Network owners believe regulation to enforce net
neutrality will impede U.S. competitiveness by stifling
innovation, discouraging capital expenditures for new
networks, and curbing their networks’ ability to cope
with the exploding demand for Internet and wireless
traffic. U.S. Internet service lags behind many other
nations in overall speed, cost, and quality of service,
adding credibility to this argument.
I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S
262 Part Two Information Technology Infrastructure

1. What is network neutrality? Why has the Internet
operated under net neutrality up to this point in
time?
2. Who’s in favor of net neutrality? Who’s opposed?
Why?
3. What would be the impact on individual users,
businesses, and government if Internet providers
switched to a tiered service model?
4. Are you in favor of legislation enforcing network
neutrality? Why or why not?
And with enough options for Internet access,
regulation would not be essential for promoting net
neutrality. Dissatisfied consumers could simply
switch to providers who enforce net neutrality and
allow unlimited Internet use.
Since the Comcast ruling was overturned, FCC
efforts to support net neutrality have been in a
holding pattern as it searches for some means of
regulating broadband Internet service within the
constraints of current law and current court rulings.
One proposal is to reclassify broadband Internet
transmission as a telecommunications service so the
FCC could apply decades-old regulations for
traditional telephone networks.
In August 2010, Verizon and Google issued a policy
statement proposing that regulators enforce net
1. Visit the Web site of the Open Internet Coalition
and select five member organizations. Then visit
the Web site of each of these organizations or surf
the Web to find out more information about each.
Write a short essay explaining why each organiza-
tion is in favor of network neutrality.
2. Calculate how much bandwidth you consume
when using the Internet every day. How many
e-mails do you send daily and what is the size of
each? (Your e-mail program may have e-mail file
size information.) How many music and video
clips do you download daily and what is the size of
each? If you view YouTube often, surf the Web to
find out the size of a typical YouTube file. Add up
the number of e-mail, audio, and video files you
transmit or receive on a typical day.
neutrality on wired connections, but not on wireless
networks, which are becoming the dominant Internet
platform. The proposal was an effort to define some
sort of middle ground that would safeguard net neu-
trality while giving carriers the flexibility they needed
to manage their networks and generate revenue from
them. None of the major players in the net neutrality
debate showed support and both sides remain dug in.
Sources: Joe Nocera, “The Struggle for What We Already Have,”
The New York Times, September 4, 2010; Claire Cain Miller, “Web
Plan is Dividing Companies,” The New York Times, August 11,
2010; Wayne Rash, “Net Neutrality Looks Dead in the Clutches of
Congress,” eWeek, June 13 2010; Amy Schatz and Spencer E. Ante,
“FCC Web Rules Create Pushback,” The Wall Street Journal, May 6,
2010; Amy Schatz, “New U.S. Push to Regulate Internet Access,”
The Wall Street Journal, May 5, 2010; and Joanie Wexler: “Net
Neutrality: Can We Find Common Ground?” Network World, April
1, 2009.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
Chapter 7 Telecommunications, the Internet, and Wireless Technology 263
be allocated to different machines. Figure 7-10 illustrates one way that these
services can be arranged in a multitiered client/server architecture.
E-mail 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. Although some
organizations operate their own internal electronic mail systems, most e-mail
today is sent through the Internet. The costs of e-mail is far lower than equiva-
lent voice, postal, or overnight delivery costs, making the Internet a very inex-
pensive and rapid communications medium. Most e-mail messages arrive
anywhere in the world in a matter of seconds.
Nearly 90 percent of U.S. workplaces have employees communicating
interactively using chat or instant messaging tools. Chatting enables two or

264 Part Two Information Technology Infrastructure
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 businesses offer chat services
on their Web sites to attract visitors, to encourage repeat purchases, and to
improve customer service.
Instant messaging is a type of chat service that enables participants to
create 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
consumers include Yahoo! Messenger, Google Talk, and Windows Live
Messenger. Companies concerned with security use proprietary instant
messaging systems such as Lotus 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. Many thousands of groups exist that discuss almost all
conceivable topics.
Employee use of e-mail, 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 rea-
sons why companies may need to monitor their employees’ e-mail and Web
activities, what does this mean for employee privacy?
Vo i c e o v e r I P
The Internet has also become a popular platform for voice transmission and
corporate networking. Voice over IP (VoIP) technology delivers voice
information in digital form using packet switching, avoiding the tolls charged
FIGURE 7-10 CLIENT/SERVER COMPUTING ON THE INTERNET
Client computers running Web browser 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 265
by local and long-distance telephone networks (see Figure 7-11). Calls that
would ordinarily be transmitted over public telephone networks travel over the
corporate network based on the Internet Protocol, or 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 there are up-front investments required for an IP phone system,
VoIP can reduce communication and network management costs by 20 to 30
percent. For example, VoIP saves Virgin Entertainment Group $700,000 per
year in 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 infrastructure for both telecommunications and computing services.
Companies no longer have to maintain separate networks or provide support
services and personnel for each different type of network.
Another advantage of VoIP is its flexibility. Unlike the traditional telephone
network, phones can be added or moved to different offices without rewiring or
reconfiguring the network. With VoIP, a conference call is arranged by a simple
click-and-drag operation on the computer screen to select the names of the
conferees. Voice mail and e-mail can be combined into a single directory.
U n i f i e d C o m m u n i c a t i o n s
In the past, each of the firm’s networks for wired and wireless data, voice
communications, and videoconferencing operated independently of each other
and had to be managed separately by the information systems department.
Now, however, firms are able to merge disparate communications modes into a
single universally accessible service using unified communications technology.
Unified communications integrates disparate channels for voice communica-
tions, data communications, instant messaging, e-mail, and electronic confer-
encing into a single experience where users can seamlessly switch back and
forth between different communication modes. Presence technology shows
whether a person is available to receive a call. Companies will need to examine
FIGURE 7-11 HOW VOICE OVER IP WORKS
An 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 destination, 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.

I N T E R A C T I V E S E S S I O N : M A N A G E M E N T
When you were at work, how many minutes (or
hours) did you spend on Facebook today? Did you
send personal e-mail or visit some sports Web sites? If
so, you’re not alone. According to a Nucleus Research
study, 77 percent of workers with Facebook accounts
use them during work hours. An IDC Research study
shows that as much as 40 percent of Internet surfing
occurring during work hours is personal, while other
studies report as many as 90 percent of employees
receive or send personal e-mail at work.
This behavior creates serious business problems.
Checking e-mail, responding to instant messages,
and sneaking in a brief YouTube video create a series
of nonstop interruptions that divert employee atten-
tion from the job tasks they are supposed to be
performing. According to Basex, a New York City
business research company, these distractions take
up as much as 28 percent of the average U.S.
worker’s day and result in $650 billion in lost
productivity each year!
Many companies have begun monitoring their
employee use of e-mail, blogs, and the Internet,
sometimes without their knowledge. A recent
American Management Association (AMA) survey of
304 U.S. companies of all sizes found that 66 percent
of these companies monitor employee e-mail
messages and Web connections. Although U.S.
companies have the legal right to monitor employee
Internet and e-mail activity while they are at work, is
such monitoring unethical, or is it simply good
business?
Managers worry about the loss of time and
employee productivity when employees are focusing
on personal rather than company business. Too
much time on personal business, on the Internet or
not, can mean lost revenue. 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.
Schemmer Associates, an architecture firm in
Omaha, Nebraska, and Potomac Hospital in
Woodridge, Virginia, found that computing resources
were limited by a lack of bandwidth caused by
employees using corporate Internet connections to
watch and download video files.
MONITORING EMPLOYEES ON NETWORKS: UNETHICAL OR GOOD
BUSINESS?
When employees use e-mail or the Web (including
social networks) at employer facilities or with
employer equipment, anything they do, including
anything illegal, carries the company’s name.
Therefore, the employer can be traced and held
liable. Management in many firms fear that racist,
sexually 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 cost the company tens
of thousands of dollars.
Companies also fear leakage of confidential
information and trade secrets through e-mail or
blogs. A recent survey conducted by the American
Management Association and the ePolicy Institute
found that 14 percent of the employees polled
admitted they had sent confidential or potentially
embarrassing company e-mails to outsiders.
U.S. companies have the legal right to monitor
what employees 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 specific Web sites or social sites
or limit personal time on the Web.
For example, Enterprise Rent-A-Car blocks
employee access to certain social sites and monitors
the Web for employees’ online postings about the
company. Ajax Boiler in Santa Ana, California, uses
software from SpectorSoft Corporation that records
all the Web sites employees visit, time spent at each
site, and all e-mails sent. Flushing Financial
Corporation installed software that prevents employ-
ees from sending e-mail to specified addresses and
scans e-mail attachments for sensitive information.
Schemmer Associates uses OpenDNS to categorize
and filter Web content and block unwanted video.
Some firms have fired employees who have
stepped out of bounds. One-third of the companies
surveyed in the AMA study had fired workers for
misusing the Internet on the job. Among managers
who fired employees for Internet misuse, 64 percent
did so because the employees’ e-mail contained inap-
propriate or offensive language, and more than 25
266 Part Two Information Technology Infrastructure

C A S E S T U D Y Q U E S T I O N S
1. Should managers monitor employee e-mail and
Internet usage? Why or why not?
2. Describe an effective e-mail 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?
percent fired workers for excessive personal use of e-
mail.
No solution is problem free, but many consultants
believe companies should write corporate policies on
employee e-mail and Internet use. The policies
should include explicit ground rules that state, by
position or level, under what circumstances employ-
ees can use company facilities for e-mail, blogging,
or Web surfing. The policies should also inform
employees whether these activities are monitored
and explain why.
IBM now has “social computing guidelines” that
cover employee activity on sites such as Facebook
and Twitter. The guidelines urge employees not to
conceal their identities, to remember that they are
personally responsible for what they publish, and to
refrain from discussing controversial topics that are
not related to their IBM role.
Explore the Web site of online employee monitoring
software such as Websense, Barracuda Networks,
MessageLabs, or SpectorSoft, and answer the
following questions:
1. What employee activities does this software track?
What can an employer learn about an employee
by using this software?
2. How can businesses benefit from using this
software?
3. How would you feel if your employer used this
software where you work to monitor what you are
doing on the job? Explain your response.
The rules should be tailored to specific business
needs and organizational cultures. For example,
although some companies may exclude all
employees from visiting sites that have explicit
sexual material, law firm or hospital employees may
require access to these sites. Investment firms will
need to allow many of their employees access to
other investment sites. A company dependent on
widespread information sharing, innovation, and
independence could very well find that monitoring
creates more problems than it solves.
Sources: Joan Goodchild, “Not Safe for Work: What’s Acceptable for
Office Computer Use,” CIO Australia, June 17, 2010; Sarah E.
Needleman, “Monitoring the Monitors,” The Wall Street Journal,
August 16, 2010; Michelle Conline and Douglas MacMillan, “Web
2.0: Managing Corporate Reputations,” Business Week, May 20,
2009; James Wong, “Drafting Trouble-Free Social Media Policies,”
Law.com, June 15, 2009; and Maggie Jackson, “May We Have Your
Attention, Please?” Business Week, June 23, 2008.
M I S I N A C T I O N
Chapter 7 Telecommunications, the Internet, and Wireless Technology 267
how work flows and business processes will be altered by this technology in
order to gauge its value.
CenterPoint Properties, a major Chicago area industrial real estate company,
used unified communications technology to create collaborative Web sites for
each of its real estate deals. Each Web site provides a single point for accessing
structured and unstructured data. Integrated presence technology lets team
members e-mail, instant message, call, or videoconference with one click.
V i r t u a l P r i v a t e N e t w o r k s
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 to be able to e-mail each other and communicate with the home
office without any chance that outsiders could intercept the communications.
In the past, one answer to this problem was to work with large private network-

268 Part Two Information Technology Infrastructure
ing firms who offered secure, private, dedicated networks to customers. But this
was an expensive solution. A much less-expensive solution is to create a virtual
private network within the public Internet.
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 7-12). A VPN provides your firm with secure, encrypted
communications at a much lower cost than the same capabilities offered by
traditional non-Internet providers who use their private networks to secure
communications. 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
You’ve probably used the Web to download music, to find information for a term
paper, or to obtain news and weather reports. The Web is the most popular
Internet service. It’s a system with universally accepted standards for storing,
retrieving, formatting, and displaying information using a client/server archi-
tecture. Web pages are formatted using hypertext with 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 Web site is a collection of
Web pages linked to a home page.
H y p e r t e x t
Web pages are based on a standard Hypertext Markup Language (HTML),
which formats documents and incorporates dynamic links to other documents
and pictures stored in the same or remote computers (see Chapter 5). Web
FIGURE 7-12 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 (IP). By adding a wrapper around a network message to hide its
content, organizations can create a private connection that travels through the public Internet.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 269
pages are accessible through the Internet because Web browser software
operating your computer can request Web pages stored on an Internet host
server using the Hypertext Transfer Protocol (HTTP). HTTP is the
communications standard used to transfer pages on the Web. For example,
when you type a Web address in your browser, such as 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 document. Most companies have a domain name that is the
same as or closely related to their official corporate name. The directory path
and document 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 infor-
mation. For example, in the URL http://www.megacorp.com/content/fea-
tures/082610.html, http names the protocol used to display 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 document name and the name of the format it is in (it is an
HTML page).
W e b S e r v e r s
A Web server is software for locating and managing stored Web pages. It locates
the Web pages requested by a user 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 most common Web server in use today is Apache HTTP Server, which
controls 54 percent of the market. Apache is an open source product that is free
of charge and can be downloaded from the Web. Microsoft Internet Information
Services is the second most commonly used Web server, with a 25 percent
market share.
S e a r c h i n g f o r I n f o r m a t i o n o n t h e W e b
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 visited about 100 billion pages in 2010, and this
reflects a large portion of the publicly accessible Web page population. But
there is a “deep Web” that contains an estimated 900 billion additional pages,
many of them proprietary (such as the pages of The Wall Street Journal Online,
which cannot be visited without an access code) or that are stored in protected
corporate databases.
Search Engines Obviously, with so many Web pages, finding specific Web
pages that can help you or your business, nearly instantly, is an important
problem. The question is, how can you find the one or two pages you really
want and need out of billions 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, as well as audio, video, and image files. There are hundreds of different

www.sec.gov

http://www.megacorp.com/content/features/082610.html

http://www.megacorp.com/content/features/082610.html

www.megacorp.com

270 Part Two Information Technology Infrastructure
search engines in the world, but the vast majority of search results are supplied
by three top providers: Google, Yahoo!, and Microsoft’s Bing search engine.
Web search engines started out in the early 1990s as relatively simple
software programs that roamed the nascent Web, visiting pages and gathering
information about the content of each page. The first search engines were sim-
ple keyword indexes of all the pages they visited, leaving the user 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 Web sites organized by cate-
gories the editors found useful, but it has since developed its own search engine
capabilities.
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 based on the relevance of each page. Page patented the idea of a page
ranking system (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 which it links to. 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 7-13 illustrates how Google
works.
Search engine Web sites are so popular that many people use them as their
home page, the page where they start surfing the Web(see Chapter 10). As use-
ful as they are, no one expected search engines to be big money makers. Today,
however, search engines are the foundation for the fastest growing form of mar-
keting and advertising, search engine marketing.
Search engines have become major shopping tools by offering what is now
called search engine marketing. When users enter a search term at 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 advertisements 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 2010, search engine marketing generated $12.3 billion in revenue,
half of all online advertising ($25.6 billion). Ninety seven percent of Google’s
annual revenue of $23.6 billion comes from search engine marketing
(eMarketer, 2010).
Because search engine marketing is so effective, companies are starting to
optimize their Web sites 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 Web site by employing a series of techniques that
help a Web site achieve a higher ranking with the major search engines when
certain keywords and phrases are put in the search field. One technique is to
make sure that the keywords used in the Web site description match the
keywords likely to be used as search terms by prospective customers. For exam-
ple, your Web site is more likely to be among the first ranked by search engines

Chapter 7 Telecommunications, the Internet, and Wireless Technology 271
if it uses the keyword “lighting” rather than “lamps” if most prospective
customers are searching for “lighting.” It is also advantageous to link your Web
site to as many other Web sites as possible because search engines evaluate
such links to determine the popularity of a Web page and how it is linked to
other content on the Web. The assumption is the more links there are to a Web
site, the more useful the Web site must be.
In 2010, about 110 million people each day in the United States alone used a
search engine, producing over 17 billion searches a month. There are hundreds
of search engines, but the top three (Google, Yahoo!, and Bing) account for over
90 percent of all searches (see Figure 7-14).
Although search engines were originally built to search text documents, the
explosion in online video and images has created a demand for search engines
that can quickly find specific videos. The words “dance,” “love,” “music,” and
“girl” are all exceedingly popular in titles of YouTube videos, and searching on
these keywords produces a flood of responses even though the actual contents
of the video may have nothing to do with the search term. Searching videos is
challenging because computers are not very good or quick at recognizing digital
images. Some search engines have started indexing movie scripts so it will be
possible to search on dialogue to find a movie. Blinkx.com is a popular video
search service and Google has added video search capabilities.
Intelligent Agent Shopping Bots Chapter 11 describes the capabilities of
software agents with built-in intelligence that can gather or filter information
and perform other tasks to assist users. Shopping bots use intelligent agent
FIGURE 7-13 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 one-half second.

272 Part Two Information Technology Infrastructure
software for searching the Internet for shopping information. Shopping bots
such as MySimon or Google Product Search can help people interested in mak-
ing a purchase filter and retrieve information about products of interest, evalu-
ate competing products according to criteria the users have established, and
negotiate with vendors for price and delivery terms. Many of these shopping
agents search the Web for pricing and availability of products specified by the
user and return a list of sites that sell the item along with pricing information
and a purchase link.
W e b 2 . 0
Today’s Web sites don’t just contain static content—they enable people to
collaborate, share information, and create new services and content online.
These second-generation interactive Internet-based services are referred to as
Web 2.0. If you have shared photos over the Internet at Flickr or another photo
site, posted a video to YouTube, created a blog, used Wikipedia, or added a wid-
get to your Facebook page, you’ve used some of these Web 2.0 services.
Web 2.0 has four defining features: interactivity, real-time user control, social
participation (sharing), and user-generated content. The technologies and
services behind these features include cloud computing, software mashups and
widgets, blogs, RSS, wikis, and social networks.
Mashups and widgets, which we introduced in Chapter 5, are software
services that enable users and system developers to mix and match content or
software components to create something entirely new. For example, Yahoo’s
photo storage and sharing site Flickr combines photos with other information
about the images provided by users and tools to make it usable within other
programming environments.
These software applications run on the Web itself instead of the desktop.
With Web 2.0, the Web is not just a collection of destination sites, but a source of
data and services that can be combined to create applications users need. Web
2.0 tools and services have fueled the creation of social networks and other
online communities where people can interact with one another in the manner
of their choosing.
FIGURE 7-14 TOP U.S. WEB SEARCH ENGINES
Google is the most popular search engine on the Web, handling 72 percent of all Web searches.
Sources: Based on data from SeoConsultants.com, August 28, 2010.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 273
A blog, the popular term for a Weblog, is a personal Web site 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 are
either hosted by a third-party site such as Blogger.com, LiveJournal.com,
TypePad.com, and Xanga.com, or prospective bloggers can download software
such as Movable Type to create a blog that is housed by the user’s ISP.
Blog pages are usually variations 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 Web sites is often referred to as the blogosphere. Although blogs
have become popular personal publishing tools, they also have business uses
(see Chapters 9 and 10).
If you’re an avid blog reader, you might use RSS to keep up with your favorite
blogs without constantly checking them for updates. RSS, which stands for Rich
Site Summary or Really Simple Syndication, syndicates Web site content so that
it can be used in another setting. RSS technology pulls specified content from
Web sites and feeds it automatically to users’ computers, where it can be stored
for later viewing.
To receive an RSS information feed, you need to install aggregator or news
reader software that can be downloaded from the Web. (Most current Web
browsers include RSS reading capabilities.) Alternatively, you can establish an
account with an aggregator Web site. You tell the aggregator to collect all
updates from a given Web page, or list of pages, or gather information on a
given subject by conducting Web searches at regular intervals. Once subscribed,
you automatically receive new content as it is posted to the specified Web site.
A number of businesses use RSS internally to distribute updated corporate
information. Wells Fargo uses RSS to deliver news feeds that employees can
customize to see the business news of greatest relevance to their jobs. RSS feeds
are so popular that online publishers are developing ways to present advertis-
ing along with content.
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
collaborative Web sites where visitors can add, delete, or modify content on the
site, including 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.
Most wikis provide capabilities for monitoring the work of other users and
correcting mistakes.
Because wikis make information sharing so easy, they have many business
uses. For example, Motorola sales representatives use wikis for sharing sales
information. Instead of developing a different pitch for every client, reps reuse
the information posted on the wiki. The U.S. Department of Homeland
Security’s National Cyber Security Center deployed a wiki to facilitate collabo-
ration among federal agencies on cybersecurity. NCSC and other agencies use
the wiki for real-time information sharing on threats, attacks, and responses
and as a repository for technical and standards information.

274 Part Two Information Technology Infrastructure
Social networking sites enable users to build communities of friends and
professional colleagues. Members each typically create a “profile,” a Web page
for posting photos, videos, MP3 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, MySpace (with 500 million and 180 million global members respec-
tively in 2010), and LinkedIn (for professional contacts).
For many, social networking sites are the defining Web 2.0 application,
and one that will radically change 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 morphing into
application development platforms where members can create and sell
software applications to other members of the community. Facebook alone
had over 1 million developers who created over 550,000 applications for
gaming, video sharing, and communicating 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 the
text. You can also find a more detailed discussion of Web 2.0 in our Learning
Tracks.
W e b 3 . 0 : T h e F u t u r e W e b
Every day about 110 million Americans enter 500 million queries search
engines. How many of these 500 million queries produce a meaningful result (a
useful answer in the first three listings)? Arguably, fewer than half. Google,
Yahoo, Microsoft, and Amazon are all trying to increase the odds of people find-
ing meaningful answers to search engine queries. But with over 100 billion Web
pages indexed, the means available for finding the information you really want
are quite primitive, based on the words used on the pages, and the relative pop-
ularity of the page among people who use those same search terms. In other
words, it’s hit and miss.
To a large extent, the future of the Web involves developing techniques to
make searching the 100 billion public Web pages more productive and
meaningful for ordinary people. Web 1.0 solved the problem of obtaining access
to information. Web 2.0 solved the problem of sharing that information with
others, and building new Web experiences. Web 3.0 is the promise of a future
Web where all this digital information, all these contacts, can be woven together
into a single meaningful experience.
Sometimes this is referred to as the Semantic Web. “Semantic” refers to
meaning. Most of the Web’s content today is designed for humans to read and
for computers to display, not for computer programs to analyze and manipu-
late. Search engines can discover when a particular term or keyword appears in
a Web document, but they do not really understand its meaning or how it
relates to other information on the Web. You can check this out on Google by
entering two searches. First, enter “Paris Hilton”. Next, enter “Hilton in Paris”.
Because Google does not understand ordinary English, it has no idea that you
are interested in the Hilton Hotel in Paris in the second search. Because it can-
not understand the meaning of pages it has indexed, Google’s search engine
returns the most popular pages for those queries where “Hilton” and “Paris”
appear on the pages.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 275
First described in a 2001 Scientific American article, the Semantic Web is a
collaborative effort led by the World Wide Web Consortium to add a layer of
meaning atop the existing Web to reduce the amount of human involvement in
searching for and processing Web information (Berners-Lee et al., 2001).
Views on the future of the Web vary, but they generally focus on ways to
make the Web more “intelligent,” with machine-facilitated understanding of
information promoting a more intuitive and effective user experience. For
instance, let’s say you want to set up a party with your tennis buddies at a
local restaurant Friday night after work. One problem is that you had earlier
scheduled to go to a movie with another friend. In a Semantic Web 3.0 envi-
ronment, you would be able to coordinate this change in plans with the sched-
ules of your tennis buddies, the schedule of your movie friend, and make a
reservation at the restaurant all with a single set of commands issued as text
or voice to your handheld smartphone. Right now, this capability is beyond
our grasp.
Work proceeds slowly on making the Web a more intelligent experience, in
large part because it is difficult to make machines, including software
programs, that are truly intelligent like humans. But there are other views of
the future Web. Some see a 3-D Web where you can walk through pages in a 3-
D environment. Others point to the idea of a pervasive Web that controls every-
thing from the lights in your living room, to your car’s rear view mirror, not to
mention managing your calendar and appointments.
Other complementary trends leading toward a future Web 3.0 include
more widespread use of cloud computing and SaaS business models, ubiqui-
tous 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. These more
modest visions of the future Web 3.0 are more likely to be realized in the
near term.
7.4 THE WIRELESS REVOLUTION
If you have a cell phone, do you use it for taking and sending photos, sending
text messages, or downloading music clips? Do you take your laptop to class or
to the library to link up to the Internet? If so, you’re part of the wireless revolu-
tion! Cell phones, laptops, and small handheld devices have morphed into
portable computing platforms that let you perform some of the computing tasks
you used to do at your desk.
Wireless communication helps businesses more easily stay in touch with
customers, suppliers, and employees and provides more flexible arrangements
for organizing work. Wireless technology has also created new products,
services, and sales channels, which we discuss in Chapter 10.
If you require mobile communication and computing power or remote
access to corporate systems, you can work with an array of wireless devices,
including cell phones, smartphones, and wireless-enabled personal comput-
ers. We introduced smartphones in our discussions of the mobile digital
platform in Chapters 1 and 5. In addition to voice transmission, they feature
capabilities for e-mail, messaging, wireless Internet access, digital photography,
and personal information management. The features of the iPhone and
BlackBerry illustrate the extent to which cellphones have evolved into small
mobile computers.

276 Part Two Information Technology Infrastructure
CELLULAR SYSTEMS
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 Communication (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 Wireless.
The major standard in the United States is Code Division Multiple Access
(CDMA), which is the system used by Verizon and Sprint. CDMA was devel-
oped 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.
Earlier generations of cellular systems were designed primarily for voice and
limited data transmission in the form of short text messages. Wireless carriers
now offer more powerful cellular networks called third-generation or 3G
networks, with transmission speeds ranging from 144 Kbps for mobile users in,
say, a car, to more than 2 Mbps for stationary users. This is sufficient transmis-
sion capacity for video, graphics, and other rich media, in addition to voice,
making 3G networks suitable for wireless broadband Internet access. Many of
the cellular handsets available today are 3G-enabled.
High-speed cellular networks are widely used in Japan, South Korea, Taiwan,
Hong Kong, Singapore, and parts of northern Europe. In U.S. locations without
full 3G coverage, U.S. cellular carriers have upgraded their networks to support
higher-speed transmission, enabling cell phones to be used for Web access,
music downloads, and other broadband services. PCs equipped with a special
card can use these broadband cellular services for anytime, anywhere wireless
Internet access.
The next evolution in wireless communication, called 4G networks, is
entirely packet switched and capable of 100 Mbps transmission speed (which
can reach 1 Gbps under optimal conditions), with premium quality and high
security. Voice, data, and high-quality streaming video will be available to users
anywhere, anytime. Pre-4G technologies currently include Long Term
Evolution (LTE) and the mobile WiMax. (See the discussion of WiMax in the fol-
lowing section.) You can find out more about cellular generations in the
Learning Tracks for this chapter.
WIRELESS COMPUTER NETWORKS AND INTERNET
ACCESS
If you have a laptop computer, you might be able to use it to access the
Internet as you move from room to room in your dorm, or table to table in
your university library. An array of technologies provide high-speed wireless
access to the Internet for PCs and other wireless handheld devices as well as
for cell phones. These new high-speed services have extended Internet access
to numerous locations that could not be covered by traditional wired Internet
services.
B l u e t o o t h
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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 277
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 7-15). 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
without wires. Bluetooth has low-power requirements, making it appropriate
for battery-powered handheld computers, cell phones, or PDAs.
Although Bluetooth lends itself to personal networking, it has uses in large
corporations. For example, FedEx drivers use Bluetooth to transmit the delivery
data captured by their handheld PowerPad 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.
W i – F i a n d W i r e l e s s I n t e r n e t A c c e s s
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 netbooks 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.
Mobile access points such as Virgin Mobile’s MiFi use the existing cellular net-
work to create Wi-Fi connections.
FIGURE 7-15 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.

278 Part Two Information Technology Infrastructure
Figure 7-16 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 devices
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. (A bridge connects
two LANs based on different technologies.) The access point also controls the
wireless stations.
The most popular use for Wi-Fi today is for high-speed wireless Internet
service. In this instance, the access point plugs into an Internet connection,
which could come from a cable TV line or DSL telephone service. Computers
within range of the access point use it to link wirelessly to the Internet.
Hotspots typically consist of one or more access points providing wireless
Internet access in a public place. Some hotspots are free or do not 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 wireless
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
provide more detail about Wi-Fi security issues in Chapter 8.
FIGURE 7-16 AN 802.11 WIRELESS LAN
Mobile laptop computers equipped with network interface cards link to the wired LAN by communi-
cating 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 into 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 279
Another drawback of Wi-Fi networks is susceptibility to interference from
nearby systems operating in the same spectrum, such as wireless phones,
microwave ovens, or other wireless LANs. However, wireless networks based on
the 802.11n standard are able to 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.
W i M a x
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 IEEE developed a new family 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 up to 75 Mbps.
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 pre-4G network technologies we discussed earlier
in this chapter. Clearwire, which is owned by Sprint-Nextel, is using WiMax
technology as the foundation for the 4G networks it is deploying throughout the
United States.
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.
R a d i o F r e q u e n c y I d e n t i f i c a t i o n ( R F I D )
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
location, where and when it was made, or its status during production.
Embedded in the tag is a microchip for storing the data. The rest of the tag is an
antenna that transmits data to the reader.
The reader unit consists of an antenna and radio transmitter with a decoding
capability attached to a stationary or handheld device. The reader emits radio
waves in ranges anywhere from 1 inch to 100 feet, depending on its power
output, the radio frequency employed, and surrounding environmental condi-
tions. When an RFID tag comes within the range of the reader, the tag is
activated and starts sending data. 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 7-17). Both RFID tags and antennas
come in a variety of shapes and sizes.

280 Part Two Information Technology Infrastructure
Active RFID tags are powered by an internal battery and typically enable
data to be rewritten and modified. Active tags can transmit for hundreds of feet
but may cost several dollars per tag. Automated toll-collection systems such as
New York’s E-ZPass use active RFID tags.
Passive RFID tags do not have their own power source and obtain their
operating power from the radio frequency energy transmitted by the RFID
reader. They are smaller, lighter, and less expensive than active tags, but only
have a range of several feet.
In inventory control and supply chain management, RFID systems capture
and manage more detailed information about items in warehouses or in
production than bar coding systems. If a large number of items are shipped
together, 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.
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 depleted 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 is
less than 10 cents per passive tag in the United States. As the price decreases,
RFID is starting to become cost-effective for some 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 hun-
dreds of terabytes.
FIGURE 7-17 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 281
Software is used to filter, aggregate, and prevent RFID data from overloading
business networks and system applications. Applications often need to be
redesigned to accept large volumes of frequently generated RFID data and to
share those data with other applications. Major enterprise software vendors,
including SAP and Oracle-PeopleSoft, now offer RFID-ready versions of their
supply chain management applications.
W i r e l e s s S e n s o r N e t w o r k s
If your company wanted state-of-the art technology to monitor building
security or detect hazardous substances in the air, it might deploy a wireless
sensor network. Wireless sensor networks (WSNs) are networks of intercon-
nected wireless devices that are embedded into 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. Because
wireless sensor devices are placed in the field for years at a time without any
maintenance or human intervention, they must have very low power require-
ments and batteries capable of lasting for years.
Figure 7-18 illustrates one type of wireless sensor network, with data from
individual nodes flowing across the network to a server with greater processing
power. The server acts as a gateway to a network based on Internet technology.
Wireless sensor networks are valuable in areas such as monitoring environ-
mental changes, monitoring traffic or military activity, protecting property,
efficiently operating and managing machinery and vehicles, establishing secu-
rity perimeters, monitoring supply chain management, or detecting chemical,
biological, or radiological material.
FIGURE 7-18 A WIRELESS SENSOR NETWORK
The small circles represent lower-level nodes and the larger circles represent high-end nodes. Lower-
level nodes forward data to each other or to higher-level nodes, which transmit data more rapidly and
speed up network performance.

282 Part Two Information Technology Infrastructure
7.5 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.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. 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?
2. BestMed Medical Supplies Corporation sells medical and surgical products and
equipment from over 700 different manufacturers to hospitals, health clinics,
and medical offices. The company employs 500 people at seven different
locations in western and midwestern states, including account managers,
customer service and support representatives, and warehouse staff. Employees
communicate via traditional telephone voice services, e-mail, 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 have to be made in
determining whether to adopt this technology? Use the Web, if necessary, to
find out more about unified communications and its costs.
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g S p r e a d s h e e t
S o f t w a r e t o E v a l u a t e W i r e l e s s S e r v i c e s
Software skills: Spreadsheet formulas, formatting
Business skills: Analyzing telecommunications services and costs
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 Cincinnati, Ohio, with
mobile phones that have capabilities for voice transmission, text messaging,
and taking and sending photos. Use the Web to select a wireless service
provider that provides nationwide service as well as good service in your home
area. Examine the features of the mobile handsets offered by each of these
vendors. Assume that each of the 35 salespeople will need to spend three hours
per day during business hours (8 a.m. to 6 p.m.) on mobile voice communica-
tion, send 30 text messages per day, and five photos per week. Use your spread-
sheet 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.
A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : U s i n g W e b S e a r c h
E n g i n e s f o r B u s i n e s s R e s e a r c h
Software skills: Web search tools
Business skills: Researching new technologies
This project will help develop your Internet skills in using Web search engines
for business research.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 283
You want to learn more about ethanol as an alternative fuel for motor vehicles.
Use the following search engines to obtain that information: Yahoo!, Google, and
Bing. 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?
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. Computing and Communications Services Provided by Commercial
Communications Vendors
2. Broadband Network Services and Technologies
3. Cellular System Generations
4. WAP and I-Mode: Wireless Cellular Standards for Web Access
5. Wireless Applications for Customer Relationship Management, Supply Chain
Management, and Health care
6. Web 2.0

284 Part Two Information Technology Infrastructure
Review Summary
1. What are the principal components of telecommunications networks and key networking tech-
nologies?
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, video-
conferencing systems, a corporate Web site, 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
universal 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.
2. What are the main telecommunications transmission media and types of networks?
The principal physical transmission media are twisted copper telephone wire, coaxial copper
cable, fiber-optic cable, and wireless transmission. Twisted wire enables companies to use existing
wiring for telephone systems for digital communication, although it is relatively slow. Fiber-optic and
coaxial cable are used for high-volume transmission but are expensive to install. Microwave and
communications satellites are used for wireless communication over long distances.
local area networks (LANs) connect PCs and other digital devices together within a 500-meter
radius and are used today for many corporate computing tasks. Network components may be
connected together using a star, bus, or ring topology. Wide area networks (WANs) span broad
geographical distances, ranging from several miles to continents, and are private networks that are
independently 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.
Cable Internet connections provide high-speed access to the Web or corporate intranets at speeds
of up to 10 Mbps. A T1 line supports a data transmission rate of 1.544 Mbps.
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 computing
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 e-mail, newgroups, chatting, instant messaging, Telnet, FTP, and
the Web. Web pages are based on Hypertext Markup Language (HTML) and can display text, graph-
ics, video, and audio. Web site directories, search engines, and RSS technology help users locate the
information they need on the Web. RSS, blogs, social networking, and wikis are features of Web 2.0.
Firms are also starting to realize economies by using VoIP technology for voice transmission and
by using virtual private networks (VPNs) as low-cost alternatives to private WANs.
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
transmission. Broadband 3G networks are capable of transmitting data at speeds ranging from 144
Kbps to more than 2 Mbps. 4G networks capable of transmission speeds that could reach 1 Gbps 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 285
Key Terms
3G networks, 276
4G networks, 276
Bandwidth, 257
Blog, 273
Blogosphere, 273
Bluetooth, 276
Broadband, 247
Bus topology, 254
Cable Internet connections, 258
Cell phone, 257
Chat, 263
Coaxial cable, 255
Digital subscriber line (DSL), 258
Domain name, 258
Domain Name System (DNS), 258
E-mail, 263
Fiber-optic cable, 255
File Transfer Protocol (FTP), 261
Hertz, 257
Hotspots, 278
Hubs, 248
HypertextTransfer Protocol (HTTP), 269
Instant messaging, 264
Internet Protocol (IP) address, 258
Internet service provider (ISP), 257
Internet2, 261
local area network (LAN), 253
Metropolitan-area network (MAN), 200
Microwave, 256
Modem, 252
Network interface card (NIC), 248
Network operating system (NOS), 248
Packet switching, 250
Standards for wireless computer networks include Bluetooth (802.15) for small personal area networks
(PANs), Wi-Fi (802.11) for local area networks (LANs), and WiMax (802.16) for metropolitan area networks
(MANs).
5. Why are radio frequency identification (RFID) and wireless sensor networks valuable for business?
Radio frequency identification (RFID) systems provide a powerful technology for tracking the movement
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. Wireless
sensor networks (WSNs) are networks of interconnected wireless sensing and transmitting devices that are
embedded into the physical environment to provide measurements of many points over large spaces.
Peer-to-peer, 254
Personal-area networks (PANs), 276
Protocol, 251
Radio frequency identification (RFID), 279
Ring topology, 254
Router, 248
RSS, 273
Search engines, 270
Search engine marketing, 270
Search engine optimization (SEO), 270
Semantic Web, 274
Shopping bots, 272
Smartphones, 276
Social networking, 274
Star topology, 254
Switch, 248
T1 lines, 258
Telnet, 261
Topology, 254
Transmission Control Protocol/Internet
Protocol (TCP/IP), 251
Twisted wire, 255
Unified communications, 265
Uniform resource locator (URL), 269
Virtual private network (VPN), 268
Voice over IP (VoIP), 264
Web 2.0, 272
Web 3.0, 274
Web site, 268
Wide-area networks (WANs), 254
Wi-Fi, 277
Wiki, 273
WiMax, 279
Wireless sensor networks (WSNs), 281

286 Part Two Information Technology Infrastructure
Review Questions
1. What are the principal components of telecom-
munications 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 technologies
and trends that have shaped contemporary
telecommunications systems.
2. What are the main telecommunications transmis-
sion media and types of networks?
• Name the different types of physical trans-
mission media and compare them in terms of
speed and cost.
• Define a LAN, and describe its components
and the functions of each component.
• Name and describe the principal network
topologies.
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 private
networks, and explain how they provide
value to businesses.
• List and describe alternative ways of locating
information on the Web.
• Compare Web 2.0 and Web 3.0.
4. What are the principal technologies and
standards for wireless networking, communica-
tions, and Internet access?
• Define Bluetooth, Wi-Fi, WiMax, 3G and 4G
networks.
• Describe the capabilities of each and for
which types of applications each is best
suited.
5. Why are RFID and wireless sensor networks
(WSNs) valuable for business?
• Define RFID, explain how it works, and
describe how it provides value to businesses.
• Define WSNs, explain how they work, and
describe the kinds of applications that use
them.
Discussion Questions
1. 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.
2. Should all major retailing and manufacturing
companies switch to RFID? Why or why not?
3. Compare Wi-Fi and high-speed cellular systems
for accessing the Internet. What are the advan-
tages and disadvantages of each?
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
Collaboration and Teamwork: Evaluating Smartphones
existing corporate or PC applications. Which device
would you select? What criteria would you use to
guide your selection? If possible, use Google Sites to
post links to Web pages, team communication
announcements, and work assignments; to
brainstorm; and to work collaboratively on project
documents. Try to use Google Docs to develop a –
presentation of your findings for the class.
Form a group with three or four of your classmates.
Compare the capabilities of Apple’s iPhone with a
smartphone handset from another vendor with similar
features. Your analysis should consider the purchase
cost of each device, the wireless networks where each
device can operate, service plan and handset costs, and
the services available for each device.
You should also consider other capabilities of each
device, including the ability to integrate with

G o o g l e , A p p l e , a n d M i c r o s o f t S t r u g g l e f o r Yo u r I n t e r n e t E x p e r i e n c e
CASE STUDY
In what looks like a college food fight, the three
Internet titans—Google, Microsoft, and Apple—are in
an epic struggle to dominate your Internet experi-
ence. What’s at stake is where you search, buy, find
your music and videos, and what device you will use
to do all these things. The prize is a projected 2015
$400 billion e-commerce marketplace where the
major access device will be a mobile smartphone or
tablet computer. Each firm generates extraordinary
amounts of cash based on different business models.
Each firm brings billions of dollars of spare cash to
the fight.
In this triangular fight, at one point or another,
each firm has befriended one of the other firms to
combat the other firm. Two of the firms—Google
and Apple—are determined to prevent Microsoft
from expanding its dominance beyond the PC
desktop. So Google and Apple are friends. But
when it comes to mobile phones and apps, Goggle
and Apple are enemies: each want to dominate the
mobile market. Apple and Microsoft are deter-
mined to prevent Google from extending beyond its
dominance in search and advertising. So Apple and
Microsoft are friends. But when it comes to the
mobile marketplace for devices and apps, Apple
and Microsoft are enemies. Google and Microsoft
are just plain enemies in a variety of battles.
Google is trying to weaken Microsoft’s PC software
dominance, and Microsoft is trying to break into
the search advertising market with Bing.
Today the Internet, along with hardware devices
and software applications, is going through a major
expansion. Mobile devices with advanced
functionality and ubiquitous Internet access are
rapidly gaining on traditional desktop computing as
the most popular form of computing, changing the
basis for competition throughout the industry.
Research firm Gartner predicts that by 2013, mobile
phones will surpass PCs as the way most people
access the Internet. Today, mobile devices account
for 5 percent of all searches performed on the
Internet; in 2016, they are expected to account for
23.5% of searches.
These mobile Internet devices are made possible
by a growing cloud of computing capacity available
to anyone with a smartphone and Internet connec-
tivity. Who needs a desktop PC anymore when you
can listen to music and watch videos 24/7? It’s no
surprise, then, that today’s tech titans are so
aggressively battling for control of this brave new
mobile world.
Apple, Google, and Microsoft already compete in
an assortment of fields. Google has a huge edge in
advertising, thanks to its dominance in Internet
search. Microsoft’s offering, Bing, has grown to
about 10 percent of the search market, and the rest
essentially belongs to Google. Apple is the leader in
mobile software applications, thanks to the
popularity of the App Store for its iPhones. Google
and Microsoft have less popular app offerings on
the Web.
Microsoft is still the leader in PC operating
systems and desktop productivity software, but has
failed miserably with smartphone hardware and
software, mobile computing, cloud-based software
apps, its Internet portal, and even its game
machines and software. All contribute less than 5
percent to Microsoft’s revenue (the rest comes
from Windows, Office, and network software).
While Windows is still the operating system on 95
percent of the world’s 2 billion PCs, Google’s
Android OS and Apple’s iOS are the dominant play-
ers in the mobile computing market. The compa-
nies also compete in music, Internet browsers,
online video, and social networking.
For both Apple and Google, the most critical
battleground is mobile computing. Apple has
several advantages that will serve it well in the
battle for mobile supremacy. It’s no coincidence
that since the Internet exploded in size and
popularity, so too did the company’s revenue,
which totaled well over $40 billion in 2009. The
iMac, iPod, and iPhone have all contributed to the
company’s enormous success in the Internet era,
and the company hopes that the iPad will follow
the trend of profitability set by these products.
Apple has a loyal user base that has steadily grown
and is very likely to buy future product offerings.
Apple is hopeful that the iPad will be as successful
as the iPhone, which already accounts for over 30
percentof Apple’s revenue. So far, the iPad appears
to be living up to this expectation.
Part of the reason for the popularity of the Apple
iPhone, and for the optimism surrounding Internet-
Chapter 7 Telecommunications, the Internet, and Wireless Technology 287

equipped smartphones in general, has been the
success of the App Store. A vibrant selection of
applications (apps) distinguishes Apple’s offerings
from its competitors’, and gives the company a
measurable head start in this marketplace. Apple
already offers over 250,000 apps for its devices, and
Apple takes a 30% cut of all app sales. Apps greatly
enrich the experience of using a mobile device, and
without them, the predictions for the future of
mobile Internet would not be nearly as bright.
Whoever creates the most appealing set of devices
and applications will derive a significant competi-
tive advantage over rival companies. Right now,
that company is Apple.
But the development of smartphones and mobile
Internet is still in its infancy. Google has acted
swiftly to enter the battle for mobile supremacy
while it can still ‘win’, irreparably damaging its
relationship with Apple, its former ally, in the
process. As more people switch to mobile
computing as their primary method for accessing
the Internet, Google is aggressively following the
eyeballs. Google is as strong as the size of its
advertising network. With the impending shift
towards mobile computing looming, it’s no cer-
tainty that it will be able to maintain its dominant
position in search. That’s why the dominant online
search company began developing a mobile
operating system and its Nexus One entry into the
smartphone marketplace. Google hopes to control
its own destiny in an increasingly mobile world.
Google’s efforts to take on Apple began when it
acquired Android, Inc., the developer of the
mobile operating system of the same name.
Google’s original goal was to counter Microsoft’s
attempts to enter the mobile device market, but
Microsoft was largely unsuccessful. Instead, Apple
and Research In Motion, makers of the popular
BlackBerry series of smartphones, filled the void.
Google continued to develop Android, adding
features that Apple’s offerings lacked, such as the
ability to run multiple apps at once. After an initial
series of blocky, unappealing prototypes, there are
now Android-equipped phones that are function-
ally and aesthetically competitive with the iPhone.
For example, the Motorola Droid was heavily
advertised, using the slogan “Everything
iDon’t…Droid Does.”
Google has been particularly aggressive with its
entry into the mobile computing market because it
is concerned about Apple’s preference for ‘closed’,
proprietary standards on its phones. It would like
smartphones to have open nonproprietary
platforms where users can freely roam the Web and
pull in apps that work on many different devices.
Apple believes devices such as smartphones and
tablets should have proprietary standards and be
tightly controlled, with customers using applica-
tions on these devices that have been downloaded
from the its App Store. Thus Apple retains the final
say over whether or not its mobile users can access
various services on the Web, and that includes
services provided by Google. Google doesn’t want
Apple to be able to block it from providing its
services on iPhones, or any other smartphone.
A high- profile example of Apple’s desire to fend off
Google occurred after Google attempted to place its
voice mail management program, Google Voice,
onto the iPhone. Apple cited privacy concerns in
preventing Google’s effort.
Soon after, Google CEO Eric Schmidt stepped
down from his post on Apple’s board of directors.
Since Schmidt’s departure from Apple’s board, the
two companies have been in an all-out war.
They’ve battled over high-profile acquisitions,
including mobile advertising firm AdMob, which
was highly sought after by both companies. AdMob
sells banner ads that appear inside mobile
applications, and the company is on the cutting
edge of developing new methods of mobile
advertising. Apple was close to a deal with the
start-up when Google swooped in and bought
AdMob for $750 million in stock. Google doesn’t
expect to earn anything close to that in returns
from the deal, but it was willing to pay a premium
to disrupt Apple’s mobile advertising effort.
Undeterred, Apple bought top competitor
Quattro Wireless for $275 million in January 2010.
It then shuttered the service in September of that
year in favor of its own iAd advertising platform.
IAd allows developers of the programs in Apple’s
App Store for the iPhone, iPad, and iPod Touch to
embed ads in their software. Apple will sell the ads
and give the app developers 60 percent of the ad
revenue.
Apple has been more than willing to use
similarly combative tactics to slow its competition
down. Apple sued HTC, the Taiwanese mobile
phone manufacturer of Android-equipped phones,
citing patent infringement. Apple CEO Steve Jobs
has consistently bashed Google in the press,
characterizing the company as a bully and
questioning its ethics. Many analysts speculate that
Apple may take a shot at Google by teaming up
with a partner that would have been unthinkable
just a few years ago: Microsoft. News reports
288 Part Two Information Technology Infrastructure

Chapter 7 Telecommunications, the Internet, and Wireless Technology 289
suggest that Apple is considering striking a deal
with Microsoft to make Bing its default search
engine on both the iPhone and Apple’s Web
browser. This would be a blow to Google, and a
boon to Microsoft, which would receive a much
needed boost to its fledgling search service.
The struggle between Apple and Google
wouldn’t matter much if there wasn’t so much
potential money at stake. Billions of dollars hang in
the balance, and the majority of that money will
come from advertising. App sales are another
important component, especially for Apple. Apple
has the edge in selection and quality of apps, but
while sales have been brisk, developers have
complained that making money is too difficult. A
quarter of the 250,000 apps available in early 2010
were free, which makes no money for developers
or for Apple but it does bring consumers to the
Apple marketplace where they can be sold other
apps or entertainment services.
Google in the meantime is moving aggressively
to support manufacturers of handsets that run its
Android operating system and can access its
services online. Apple relies on sales of its devices
to remain profitable. It has had no problems with
this so far, but Google only needs to spread its
advertising networks onto these devices to make a
profit. In fact, some analysts speculate that Google
envisions a future where mobile phones cost a frac-
tion of what they do today, or are even free, requir-
ing only the advertising revenue generated by the
devices to turn a profit. Apple would struggle to
remain competitive in this environment. Jobs has
kept the Apple garden closed for a simple reason:
you need an Apple device to play there.
The three-way struggle between Microsoft,
Apple, and Google really has no precedent in the
history of computing platforms. In early contests it
was typically a single firm that rode the crest of a
new technology to become the dominant player.
Examples include IBM’s dominance of the
mainframe market, Digital Euipment’s dominance
of minicomputers, Microsoft’s dominance of PC
operating systems and productivity applications,
and Cisco Systems’ dominance of the Internet
router market. In the current struggle are three
firms trying to dominate the customer experience
on the Internet. Each firm brings certain strengths
and weaknesses to the fray. Will a single firm
“win,” or will all three survive the contest for the
consumer Internet experience? It’s still too early to
tell.
Sources: Jennifer LeClaire, “Quattro Wireless to be Closed as
Apple Focuses on IAd,” Top Tech News, August 20, 2010; Yukari
Iwatani Kane and Emily Steel, “Apple Fights Rival Google on New
Turf,” The Wall Street Journal, April 8, 2010; Brad Stone and Miguel
Helft, “Apple’s Spat with Google Is Getting Personal,” The New York
Times, March 12, 2010; Peter Burrows, “Apple vs. Google,”
BusinessWeek, January 14, 2010; Holman W. Jenkins, Jr.,
“The Microsofting of Apple?”, The Wall Street Journal, February 10,
2010; Jessica E. Vascellaro and Ethan Smith, “Google and Microsoft
Crank Up Rivalry,” The Wall Street Journal, October 21, 2009;
Jessica E. Vascellaro and Don Clark, “Google Targets Microsoft’s
Turf,” The Wall Street Journal, July 9, 2009; Miguel Helft, “Google
Set to Acquire AdMob for $750 Million,” The New York Times,
November 10, 2009; Jessica E. Vascellaro, “Google Rolls Out New
Tools as it Battles Rival,” The Wall Street Journal, December 8, 2009;
and Jessica E. Vascellaro and Yukari Iwatani Kane, “Apple, Google
Rivalry Heats Up,” The Wall Street Journal, December 10, 2009.
CASE STUDY QUESTIONS
1. Compare the business models and areas of
strength of Apple, Google, and Microsoft.
2. Why is mobile computing so important to these
three firms? Evaluate the mobile platform
offerings of each firm.
3. What is the significance of applications and app
stores to the success or failure of mobile computing?
4. Which company and business model do you think
will prevail in this epic struggle? Explain your
answer.
5. What difference would it make to you as a
manager or individual consumer if Apple, Google,
or Microsoft dominated the Internet experience?
Explain your answer.

LEARNING OBJECTIVESS
After reading this chapter, you
will be able to answer the
following questions:
1. Why are information systems vulnerable
to destruction, error, and abuse?
2. What is the business value of security
and control?
3. What are the components of an organi-
zational framework for security and
control?
4. What are the most important tools and
technologies for safeguarding informa-
tion resources?
CHAPTER OUTLINE
8.1 SYSTEM VULNERABILITY 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 BUSINESS VALUE OF SECURITY AND CONTROL
Legal and Regulatory Requirements for Electronic Records
Management
Electronic Evidence and Computer Forensics
8.3 ESTABLISHING A 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 TECHNOLOGIES AND TOOLS FOR PROTECTING
INFORMATION RESOURCES
Identity Management and Authentication
Firewalls, Intrusion Detection Systems, and Antivirus
Software
Securing Wireless Networks
Encryption and Public Key Infrastructure
Ensuring System Availability
Security Issues for Cloud Computing and the Mobile Digital
Platform
Ensuring Software Quality
8.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Improving Decision Making: Using Spreadsheet Software to
Perform a Security Risk Assessment
Improving Decision Making: Evaluating Security
Outsourcing Services
LEARNING TRACK MODULES
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
Chapter 8
Securing Information Systems
Interactive Sessions:
When Antivirus Software
Cripples Your Computers
How Secure Is the Cloud?

291
acebook is the world’s largest online social network, and increasingly, the destination
of choice for messaging friends, sharing photos and videos, and collecting “eyeballs”
for business advertising and market research. But, watch out! It’s also a great place for
losing your identity or being attacked by malicious software.
How could that be? Facebook has a security team that works hard to counter threats on that
site. It uses up-to-date security technology to protect its Web site. But with 500 million users, it
can’t police everyone and everything. And Facebook makes an extraordinarily tempting target
for both mischief-makers and criminals.
Facebook has a huge worldwide user base, an easy-to-use Web site, and a community of
users linked to their friends. Its members are more likely to trust messages they receive from
friends, even if this communication is not legitimate. Perhaps for these reasons, research from
the Kaspersky Labs security firm shows malicious software on social networking sites such as
Facebook and MySpace is 10 times more successful at infecting users than e-mail-based
attacks. Moreover, IT security firm Sophos reported on February 1, 2010, that Facebook poses
the greatest security risk of all the social networking sites.
Here are some examples of what can go wrong:
According to a February 2010 report from Internet security company NetWitness, Facebook
served as the primary delivery method for an 18-month-long hacker attack in which Facebook
users were tricked into revealing their passwords and downloading a rogue program that steals
financial data. A legitimate-looking Facebook e-mail notice asked users to provide information
to help the social network update its login system. When the user clicked the “update” button
in the e-mail, that person was directed to a bogus Facebook login screen where the user’s
name was filled in and that person was prompted to provide his or her password. Once the
user supplied that information, an “Update Tool,” installed the Zeus “Trojan horse” rogue soft-
ware program designed to steal financial and personal data by surreptitiously tracking users’
keystrokes as they enter information into their computers. The hackers, most likely an
Eastern European criminal group, stole as many as 68,000 login credentials from 2,400 com-
panies and government agencies for online banking, social networking sites, and e-mail.
The Koobface worm targets Microsoft Windows users of Facebook, Twitter, and other social
networking Web sites in order to gather sensitive information from the victims such as credit card
YOU’RE ON FACEBOOK? WATCH OUT!
F
numbers. Koobface was first
detected in December 2008. It
spreads by delivering bogus
Facebook messages to people
who are “friends” of a Facebook
user whose computer has
already been infected. Upon
receipt, the message directs the
recipients to a third-party Web
site, where they are prompted to
download what is purported to
be an update of the Adobe Flash
player. If they download and
execute the file, Koobface is able
to infect their system and use
the computer for more mali-
cious work.
For much of May 2010,
Facebook members and their

292 Part Two Information Technology Infrastructure
friends were victims of a spam campaign that tries to e-mail unsolicited advertise-
ments and steal Facebook users’ login credentials. The attack starts with a message
containing a link to a bogus Web page sent by infected users to all of their friends.
The message addresses each friend by name and invites that person to click on a
link to “the most hilarious video ever.” The link transports the user to a rogue Web
site mimicking the Facebook login form. When users try to log in, the page
redirects back to a Facebook application page that installs illicit adware software,
which bombards their computers with all sorts of unwanted ads.
Recovering from these attacks is time-consuming and costly, especially for
business firms. A September 2010 study by Panda Security found that one-third
of small and medium businesses it surveyed had been hit by malicious software
from social networks, and more than a third of these suffered more than $5,000
in losses. Of course, for large businesses, losses from Facebook are much greater.
Sources: Lance Whitney, “Social-Media Malware Hurting Small Businesses,” CNET News,
September 15, 2010; Raj Dash, “Report: Facebook Served as Primary Distribution Channel for
Botnet Army,” allfacebook.com, February 18, 2010; Sam Diaz, “Report: Bad Guys Go Social:
Facebook Tops Security Risk List,” ZDNet, February 1, 2010; Lucian Constantin, “Weekend
Adware Scam Returns to Facebook,” Softpedia, May 29, 2010; Brad Stone, “Viruses that Leave
Victims Red in the Facebook,” The New York Times, December 14, 2009; and Brian Prince,
“Social Networks 10 Times as Effective for Hackers, Malware,” eWeek, May 13, 2009.
The problems created by malicious software on Facebook illustrate some ofthe reasons why businesses need to pay special attention to information
system security. Facebook provides a plethora of benefits to both individuals and
businesses. But from a security standpoint, using Facebook is one of the easiest
ways to expose a computer system to malicious software—your computer, your
friends’ computers, and even the computers of Facebook-participating businesses.
The chapter-opening diagram calls attention to important points raised by this
case and this chapter. Although Facebook’s management has a security policy
and security team in place, Facebook has been plagued with many security prob-
lems that affect both individuals and businesses. The “social” nature of this site
and large number of users make it unusually attractive for criminals and hackers
intent on stealing valuable personal and financial information and propagating
malicious software. Even though Facebook and its users deploy security technol-
ogy, they are still vulnerable to new kinds of malicious software attacks and crim-
inal scams. In addition to losses from theft of financial data, the difficulties of
eradicating the malicious software or repairing damage caused by identity theft
add to operational costs and make both individuals and businesses less effective.

Chapter 8 Securing Information Systems 293
8.1 SYSTEM VULNERABILITY AND ABUSE
an you imagine what would happen if you tried to link to the Internet
without a firewall or antivirus software? Your computer would be
disabled in 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 destroyed valuable data, including confidential
payment data from your customers. If too much data were destroyed or
divulged, your business might never be able to operate!
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 technical
measures used to prevent unauthorized access, alteration, theft, or physical dam-
age to information systems. Controls are methods, policies, and organizational
procedures that ensure the safety of the organization’s assets; the accuracy and
reliability of its records; and operational adherence to management standards.
WHY SYSTEMS ARE VULNERABLE
When large amounts of data are stored in electronic form, they are vulnerable
to many more kinds of threats than when they existed in manual form.
Through communications networks, information systems in different locations
are interconnected. The potential for unauthorized access, abuse, or fraud is
not limited to a single location but can occur at any access point in the network.
Figure 8-1 illustrates the most common threats against contemporary informa-
tion systems. They can stem from technical, organizational, and environmental
factors compounded by poor management decisions. In the multi-tier
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
C
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.

294 Part Two Information Technology Infrastructure
authorization. It is possible to access data flowing over networks, steal valuable
data during transmission, or alter messages without 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 Web sites.
Those capable of penetrating corporate systems can 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 adds to system vul-
nerability if valuable information resides on networks and computers outside
the organization’s control. Without strong safeguards, valuable data could be
lost, destroyed, or could fall into the wrong hands, revealing important trade
secrets or information that violates personal privacy.
The popularity of handheld mobile devices for business computing adds to
these woes. Portability makes cell phones, smartphones, and tablet computers
easy to lose or steal. Smartphones share the same security weaknesses as other
Internet devices, and are vulnerable to malicious software and penetration
from outsiders. In 2009, security experts identified 30 security flaws in software
and operating systems of smartphones made by Apple, Nokia, and BlackBerry
maker Research in Motion.
Even the apps that have been custom-developed for mobile devices are capa-
ble of turning into rogue software. For example, in December 2009, Google
pulled dozens of mobile banking apps from its Android Market because they
could have been updated to capture customers’ banking credentials.
Smartphones used by corporate executives may contain sensitive data such as
sales figures, customer names, phone numbers, and e-mail addresses. Intruders
may be able to access internal corporate networks through these devices.
I n t e r n e t V u l n e r a b i l i t i e s
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 becomes part of the corporate network, the organization’s
information systems are even more vulnerable to actions from outsiders.
Computers that are constantly connected to the Internet by cable modems or
digital subscriber line (DSL) lines are more open to penetration by outsiders
because they use fixed Internet addresses where they can be easily identified.
(With dial-up service, a temporary Internet address is assigned for each
session.) A fixed Internet address creates a fixed target for hackers.
Telephone service based on Internet technology (see Chapter 7) is more
vulnerable than the switched voice network if it does not run over a secure
private network. Most Voice over IP (VoIP) traffic over the public Internet is not
encrypted, so anyone with a network can listen in on conversations. Hackers
can intercept conversations or shut down voice service by flooding servers
supporting VoIP with bogus traffic.
Vulnerability has also increased from widespread use of e-mail, instant
messaging (IM), and peer-to-peer file-sharing programs. E-mail may contain
attachments that serve as springboards for malicious software or unauthorized
access to internal corporate systems. Employees may use e-mail messages to
transmit valuable trade secrets, financial data, or confidential customer informa-

tion to unauthorized recipients. Popular IM applications for consumers do not
use a secure layer for text messages, so they can be intercepted and read by out-
siders during transmission over the public Internet. Instant messaging activity
over the Internet can in some cases be used as a back door to an otherwise secure
network. Sharing files over peer-to-peer (P2P) networks, such as those for illegal
music sharing, may also transmit malicious software or expose information on
either individual or corporate computers to outsiders.
W i r e l e s s S e c u r i t y C h a l l e n g e s
Is it safe to log onto a wireless network at an airport, library, or other public
location? It depends on how vigilant you are. Even the wireless network in your
home is vulnerable because radio frequency bands are easy to scan. Both
Bluetooth and Wi-Fi networks are susceptible to hacking by eavesdroppers.
Although the range of Wi-Fi networks is only several hundred feet, it can be
extended up to one-fourth of a mile using external antennae. Local area
networks (LANs) using the 802.11 standard can be easily penetrated by out-
siders armed with laptops, wireless cards, external antennae, and hacking soft-
ware. 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) identifying 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
networks in many locations do not have basic protections against war driving,
Chapter 8 Securing Information Systems 295
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.

296 Part Two Information Technology Infrastructure
in which eavesdroppers drive by buildings or park outside and try to intercept
wireless network traffic.
A hacker can employ an 802.11 analysis tool to identify the SSID. (Windows
XP, Vista, and 7 have capabilities for detecting the SSID used in a network and
automatically configuring the radio NIC within the user’s device.) An intruder
that has associated with an access point by using the correct SSID is capable of
accessing other resources on the network, using 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 NIC to associate with the rogue access point. Once this association
occurs, hackers using the rogue access point can capture the names and
passwords of unsuspecting users.
The initial security standard developed for Wi-Fi, called Wired Equivalent
Privacy (WEP), is not very effective. WEP is built into all standard 802.11 prod-
ucts, but its use is optional. Many users neglect to use WEP security features,
leaving them unprotected. The basic WEP specification calls for an access point
and all of its users to share the same 40-bit encrypted password, which can be
easily decrypted by hackers from a small amount of traffic. Stronger encryption
and authentication systems are now available, such as Wi-Fi Protected Access 2
(WPA2), but users must be willing to install them.
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. A computer
virus is a rogue software program that attaches itself to other software
programs or data files in order to be executed, usually without user knowledge
or permission. Most computer viruses deliver a “payload.” The payload may be
relatively benign, such as the instructions to display a message or image, or it
may be highly destructive—destroying programs or data, clogging computer
memory, reformatting a computer’s hard drive, or causing programs to run
improperly. Viruses typically spread from computer to computer when
humans take an action, such as sending an e-mail attachment or copying an
infected file.
Most recent attacks have come from worms, which are independent
computer programs that copy themselves from one computer to other comput-
ers over a network. (Unlike viruses, they can operate on their own without
attaching to other computer program files and rely less on human behavior in
order to spread from computer to computer. This explains why computer
worms spread much more rapidly than computer viruses.) Worms destroy data
and programs as well as disrupt or even halt the operation of computer
networks.
Worms and viruses are often spread over the Internet from files of
downloaded software, from files attached to e-mail transmissions, or from
compromised e-mail messages or instant messaging. Viruses have also invaded
computerized information systems from “infected” disks or infected machines.
E-mail worms are currently the most problematic.
Malware targeting mobile devices is not as extensive as that targeting
computers, but is spreading nonetheless using e-mail, text messages, Bluetooth,

Chapter 8 Securing Information Systems 297
and file downloads from the Web via Wi-Fi or cellular networks.There are now
more than 200 viruses and worms targeting mobile phones, such as Cabir,
Commwarrior, Frontal.A, and Ikee.B. Frontal.A installs a corrupted file that
causes phone failure and prevents the user from rebooting, while Ikee.B turns
jailbroken iPhones into botnet-controlled devices. Mobile device viruses pose
serious threats to enterprise computing because so many wireless devices are
now linked to corporate information systems.
Web 2.0 applications, such as blogs, wikis, and social networking sites such as
Facebook and MySpace, have emerged as new conduits for malware or
spyware. These applications allow users to post software code as part of the
permissible content, and such code can be launched automatically as soon as a
Web page is viewed. The chapter-opening case study describes other channels
for malware targeting Facebook. In September 2010, hackers exploited a Twitter
security flaw to send users to Japanese pornographic sites and automatically
generated messages from other accounts (Coopes, 2010).
Table 8-1 describes the characteristics of some of the most harmful worms
and viruses that have appeared to date.
Over the past decade, worms and viruses have caused billions of dollars of
damage to corporate networks, e-mail systems, and data. According to
Consumer Reports’ State of the Net 2010 survey, U.S. consumers lost $3.5 billion
TABLE 8-1 EXAMPLES OF MALICIOUS CODE
NAME TYPE DESCRIPTION
Conficker (aka Worm First detected in November 2008. Uses flaws in Windows software to take over machines
Downadup, and link them into a virtual computer that can be commanded remotely. Has more than 5
Downup) million computers worldwide under its control. Difficult to eradicate.
Storm Worm/ First identified in January 2007. Spreads via e-mail spam with a fake attachment.
Trojan horse Infected up to 10 million computers, causing them to join its zombie network of computers
engaged in criminal activity.
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, disrupting British Airways flight
check-ins, operations of British coast guard stations, Hong Kong hospitals, Taiwan post office
branches, and Australia’s Westpac Bank. Sasser and its variants caused an estimated $14.8
billion to $18.6 billion in damages worldwide.
MyDoom.A Worm First appeared on January 26, 2004. Spreads as an e-mail attachment. Sends e-mail to
addresses harvested from infected machines, forging the sender’s address. At its peak this
worm lowered global Internet performance by 10 percent and Web page loading times by as
much as 50 percent. Was programmed to stop spreading after February 12, 2004.
Sobig.F Worm First detected on August 19, 2003. Spreads via e-mail attachments and sends massive
amounts of mail with forged sender information. Deactivated itself on September 10, 2003,
after infecting more than 1 million PCs and doing $5 to $10 billion in damage.
ILOVEYOU Virus First detected on May 3, 2000. Script virus written in Visual Basic script and transmitted as
an attachment to e-mail 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.
Melissa Macro virus/ First appeared in March 1999. Word macro script mailing infected Word file to first 50
worm entries in user’s Microsoft Outlook address book. Infected 15 to 29 percent of all business
PCs, causing $300 million to $600 million in damage.

298 Part Two Information Technology Infrastructure
because of malware and online scams, and the majority of these losses came
from malware (Consumer Reports, 2010).
A Trojan horse is a software program that appears to be benign but then
does something other than expected, such as the Zeus Trojan described in the
chapter-opening case. 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 intro-
duced into a computer system. The term Trojan horse is based on the huge
wooden horse used by the Greeks to trick the Trojans into opening the gates to
their fortified city during the Trojan War. Once inside the city walls, Greek sol-
diers hidden in the horse revealed themselves and captured the city.
At the moment, SQL injection attacks are the largest malware threat. SQL
injection attacks take advantage of vulnerabilities in poorly coded Web applica-
tion software to introduce malicious program code into a company’s systems
and networks. These vulnerabilities occur when a Web application fails to prop-
erly validate or filter data entered by a user on a Web page, which might occur
when ordering 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. Large Web applications
have hundreds of places for inputting user data, each of which creates an
opportunity for an SQL injection attack.
A large number of Web-facing applications are believed to have SQL injection
vulnerabilities, and tools are available for hackers to check Web applications for
these vulnerabilities. Such tools are able to locate a data entry field on a Web
page form, enter data into it, and check the response to see if shows vulnerabil-
ity to a SQL injection.
Some types of spyware also act as malicious software. These small programs
install themselves surreptitiously on computers to monitor user Web surfing
activity and serve up advertising. Thousands of forms of spyware have been
documented.
Many users find such spyware annoying and some critics worry about its
infringement on computer users’ privacy. Some forms of spyware are espe-
cially nefarious. Keyloggers record every keystroke made on a computer to
steal serial numbers for software, to launch Internet attacks, to gain access to
e-mail accounts, to obtain passwords to protected computer systems, or to pick
up personal information such as credit card numbers. Other spyware programs
reset Web browser home pages, redirect search requests, or slow performance
by taking up too much memory. The Zeus Trojan described in the chapter-
opening case uses keylogging to steal financial information.
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 and crackers gain unau-
thorized access by finding weaknesses in the security protections employed by
Web sites and computer systems, often taking advantage of various features of
the Internet that make it an open system that is easy to use.
Hacker activities have broadened beyond mere system intrusion to include
theft of goods and information, as well as system damage and cybervandalism,
the intentional disruption, defacement, or even destruction of a Web site or
corporate information system. For example, cybervandals have turned many of
the MySpace “group” sites, which are dedicated to interests such as home beer

Chapter 8 Securing Information Systems 299
brewing or animal welfare, into cyber-graffiti walls, filled with offensive
comments and photographs.
S p o o f i n g a n d S n i f f i n g
Hackers attempting to hide their true identities often spoof, or misrepresent,
themselves by using fake e-mail addresses or masquerading as someone else.
Spoofing also may involve redirecting a Web link to an address different from the
intended one, with the site masquerading as the intended destination. For exam-
ple, if hackers redirect customers to a fake Web site 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 provide
more detail on other forms of spoofing in our discussion of computer crime.
A sniffer is a type of eavesdropping program that monitors information
traveling over a network. When used legitimately, sniffers help identify
potential network trouble spots or criminal activity on networks, but when
used for criminal purposes, they can be damaging and very difficult to
detect. Sniffers enable hackers to steal proprietary information from
anywhere on a network, including e-mail messages, company files, and
confidential reports.
D e n i a l – o f – S e r v i c e A t t a c k s
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 distrib-
uted denial-of-service (DDoS) attack uses numerous computers to inundate
and overwhelm the network from numerous launch points.
For example, during the 2009 Iranian election protests, foreign activists
trying to help the opposition engaged in DDoS attacks against Iran’s govern-
ment. The official Web site of the Iranian government (ahmadinejad.ir) was
rendered inaccessible on several occasions.
Although DoS attacks do not destroy information or access restricted areas of
a company’s information systems, they often cause a Web site 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 corpo-
rations.
Perpetrators of DoS 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. Once a hacker infects enough
computers, her or she can use the amassed resources of the botnet to launch
DDos attacks, phishing campaigns, or unsolicited “spam” e-mail.
The number of computers that are part of botnets is variously estimated to
be from 6 to 24 million, with thousands of botnets operating worldwide. The
largest botnet attack in 2010 was the Mariposa botnet, which started in Spain
and spread across the world. Mariposa had infected and controlled about 12.7
million computers in its efforts to steal credit card numbers and online banking
passwords. More than half the Fortune 1000 companies, 40 major banks, and
numerous government agencies were infected—and did not know it.

300 Part Two Information Technology Infrastructure
The chapter-ending case study describes multiple waves of DDoS attacks tar-
geting a number of Web sites of government agencies and other organizations
in South Korea and the United States in July 2009. The attacker used a botnet
controlling over 65,000 computers, and was able to cripple some of these sites
for several days. Most of the botnet originated from China, and North Korea.
Botnet attacks thought to have originated in Russia were responsible for crip-
pling the Web sites of the Estonian government in April 2007 and the Georgian
government in July 2008.
C o m p u t e r C r i m e
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. For example, in early July 2009, U.S. federal agents arrested Sergey
Aleynikov, a computer programmer at investment banking firm Goldman
Sachs, for stealing proprietary computer programs used in making lucrative
rapid-fire trades in the financial markets. The software brought Goldman many
millions of dollars of profits per year and, in the wrong hands, could have been
used to manipulate financial markets in unfair ways. 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, inves-
tigation, or prosecution.” Table 8-2 provides examples of the computer as a
target of crime and as an instrument of crime.
No one knows the magnitude of the computer crime problem—how many
systems are invaded, how many people engage in the practice, or the total
economic damage. According to the 2009 CSI Computer Crime and Security
Survey of 500 companies, participants’ average annual loss from computer crime
and security attacks was close to $234,000 (Computer Security Institute, 2009).
Many companies are reluctant to report computer crimes because the crimes may
involve employees, or the company fears that publicizing its vulnerability will
hurt its reputation. The most economically damaging kinds of computer crime are
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 e-mail for threats or harassment
Intentionally attempting to intercept electronic communication
Illegally accessing stored electronic communications, including e-mail and voice mail
Transmitting or possessing child pornography using a computer

Chapter 8 Securing Information Systems 301
DoS attacks, introducing viruses, theft of services, and disruption of computer sys-
tems.
I d e n t i t y T h e f t
With the growth of the Internet and electronic commerce, identity theft has
become especially troubling. Identity theft is a crime in which an imposter
obtains key pieces of personal information, such as social security identification
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 of the victim or to provide the thief with false credentials.
According to Javelin Strategy and Research, losses from identity theft rose to
$54 billion in 2009, and over 11 million U.S. adults were victims of identity
fraud (Javelin Strategy & Research, 2010).
Identify theft has flourished on the Internet, with credit card files a major
target of Web site hackers. Moreover, e-commerce sites are wonderful sources
of customer personal information—name, address, and phone number. Armed
with this information, criminals are able to assume new identities and establish
new credit for their own purposes.
One increasingly popular tactic is a form of spoofing called phishing. Phishing
involves setting up fake Web sites or sending e-mail or text messages that look
like those of legitimate businesses to ask users for confidential personal data. The
message 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 e-mail message, by entering the information at a
bogus Web site, or by calling a telephone number. EBay, PayPal, Amazon.com,
Walmart, and a variety of banks, are among the top spoofed companies.
New phishing techniques called evil twins and pharming are harder to
detect. Evil twins are wireless networks that pretend to offer trustworthy Wi-Fi
connections 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 stored
by Internet service providers to speed up Web browsing and the ISP companies
have flawed software on their servers that allows the fraudsters to hack in and
change those addresses.
In the largest instance of identity theft to date, Alberto Gonzalez of Miami
and two Russian co-conspirators penetrated the corporate systems of TJX
Corporation, Hannaford Brothers, 7-Eleven, and other major retailers, stealing
over 160 million credit and debit card numbers between 2005 and 2008. The
group initially planted “sniffer” programs in these companies’ computer
networks that captured card data as they were being transmitted between
computer systems. They later switched to SQL injection attacks, which we
introduced earlier in this chapter, to penetrate corporate databases. In March
2010, Gonzalez was sentenced to 20 years in prison. TJX alone spent over $200
million to deal with its data theft, including legal settlements.
The U.S. Congress addressed the threat of computer crime in 1986 with the
Computer Fraud and Abuse Act. This act makes it illegal to access a computer
system without authorization. Most states have similar laws, and nations in
Europe have comparable legislation. Congress also passed the National
Information Infrastructure Protection Act in 1996 to make virus distribution

302 Part Two Information Technology Infrastructure
and hacker attacks that disable Web sites federal crimes. U.S. legislation, such
as the Wiretap Act, Wire Fraud Act, Economic Espionage Act, Electronic
Communications Privacy Act, E-mail Threats and Harassment Act, and Child
Pornography Act, covers computer crimes involving intercepting electronic
communication, using electronic communication to defraud, stealing trade
secrets, illegally accessing stored electronic communications, using e-mail for
threats or harassment, and transmitting or possessing child pornography.
C l i c k F r a u d
When you click on 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 on 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 Web sites that feature pay-per-click online advertising.
Some companies hire third parties (typically from low-wage countries) to
fraudulently click on a competitor’s ads to weaken them by driving up their
marketing 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 but have been reluctant to
publicize their efforts to deal with the problem.
G l o b a l T h r e a t s : C y b e r t e r r o r i s m a n d C y b e r w a r f a r e
The cybercriminal activities we have described—launching malware, denial-of-
service attacks, and phishing probes—are borderless. Computer security firm
Sophos reported that 42 percent of the malware it identified in early 2010
originated in the United States, while 11 percent came from China, and 6 per-
cent from Russia (Sophos, 2010). The global nature of the Internet makes it pos-
sible for cybercriminals to operate—and to do harm—anywhere in the world.
Concern is mounting that the vulnerabilities of the Internet or other
networks make digital networks easy targets for digital attacks by terrorists,
foreign intelligence services, or other groups seeking to create widespread
disruption and harm. Such cyberattacks might target the software that runs
electrical power grids, air traffic control systems, or networks of major banks
and financial institutions. At least 20 countries, including China, are believed to
be developing offensive and defensive cyberwarfare capabilities. The chapter-
ending case study discusses this problem in greater detail.
INTERNAL THREATS: EMPLOYEES
We tend to think the security threats to a business originate outside the organi-
zation. In fact, company insiders pose serious security problems. Employees
have access to privileged information, and in the presence of sloppy internal
security procedures, they are often able to roam throughout an organization’s
systems without leaving a trace.
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 co-workers to use them, which compromises the
system. Malicious intruders seeking system access sometimes trick employees
into revealing their passwords by pretending to be legitimate members of the
company in need of information. This practice is called social engineering.
Both end users and information systems specialists are also a major source of
errors introduced into information systems. End users introduce errors by

Chapter 8 Securing Information Systems 303
entering faulty data or by not following the proper instructions for processing
data and using computer equipment. Information systems specialists may
create software errors as they design and develop new software or maintain
existing programs.
SOFTWARE VULNERABILITY
Software errors pose a constant threat to information systems, causing untold
losses in productivity. Growing complexity and size of software programs, cou-
pled with demands for timely delivery to markets, have contributed to an
increase in software flaws or vulnerabilities For example, a database-related
software error prevented millions of JP Morgan Chase retail and small-business
customers from accessing their online bank accounts for two days in September
2010 (Dash, 2010).
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 deci-
sion-making code. A relatively small program of several hundred lines will con-
tain tens of decisions leading to hundreds or even thousands of different 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 create
security vulnerabilities that open networks to intruders. Each year security
firms identify thousands of software vulnerabilities in Internet and PC soft-
ware. For instance, in 2009, Symantec identified 384 browser vulnerabilities:
169 in Firefox, 94 in Safari, 45 in Internet Explorer, 41 in Chrome, and 25 in
Opera. Some of these vulnerabilities were critical (Symantec, 2010).
To correct software flaws once they are identified, the software vendor
creates small pieces of software called patches to repair the flaws without
disturbing the proper operation of the software. An example is Microsoft’s
Windows Vista Service Pack 2, released in April 2009, which includes some
security enhancements to counter malware and hackers. 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
business applications, operating system installations, and other system
services, maintaining patches on all devices and services used by a company is
often time-consuming and costly. Malware is being created so rapidly that
companies 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.
The need to respond so rapidly to the torrent of security vulnerabilities even
creates defects in the software meant to combat them, including popular
antivirus products. What happened in the spring of 2010 to McAfee, a leading
vendor of commercial antivirus software is an example, as discussed in the
Interactive Session on Management.

McAfee is a prominent antivirus software and
computer security company based in Santa Clara,
California. Its popular VirusScan product (now
named AntiVirus Plus) is used by companies and
individual consumers across the world, driving its
revenues of $1.93 billion in 2009.
A truly global company, McAfee has over 6,000
employees across North America, Europe, and Asia.
VirusScan and other McAfee security products
address endpoint security, network security, and
risk and compliance. The company has worked to
compile a long track record of good customer service
and strong quality assurance.
At 6 a.m. PDT April 21, 2010, McAfee made a
blunder that threatened to destroy that track record
and prompted the possible departure of hundreds of
valued customers. McAfee released what should
have been a routine update for its flagship VirusScan
product that was intended to deal with a powerful
new virus known as ‘W32/wecorl.a”. Instead,
McAfee’s update caused potentially hundreds of
thousands of McAfee-equipped machines running
Windows XP to crash and fail to reboot. How could
McAfee, a company whose focus is saving and
preserving computers, commit a gaffe that accom-
plished the opposite for a significant portion of its
client base?
That was the question McAfee’s angry clients
were asking on the morning of April 21, when their
computers were crippled or totally non-functional.
The updates mistakenly targeted a critical Windows
file, svchost.exe, which hosts other services used by
various programs on PCs. Usually, more than one
instance of the process is running at any given
time, and eliminating them all would cripple any
system. Though many viruses, including
W32/wecorl.a, disguise themselves using the name
svchost.exe to avoid detection, McAfee had never
had problems with viruses using that technique
before.
To make matters worse, without svchost.exe,
Windows computers can’t boot properly. VirusScan
users applied the update, tried rebooting their
systems, and were powerless to act as their systems
went haywire, repeatedly rebooting, losing their net-
work capabilities and, worst of all, their ability to
detect USB drives, which is the only way of fixing
affected computers. Companies using McAfee and
WHEN ANTIVIRUS SOFTWARE CRIPPLES YOUR COMPUTERS
that relied heavily on Windows XP computers strug-
gled to cope with the majority of their machines
suddenly failing.
Angry network administrators turned to McAfee
for answers, and the company was initially just as
confused as its clients regarding how such a
monumental slipup could occur. Soon, McAfee deter-
mined that the majority of affected machines were
using Windows XP Service Pack 3 combined with
McAfee VirusScan version 8.7. They also noted that
the “Scan Processes on enable” option of VirusScan,
off by default in most VirusScan installations, was
turned on in the majority of affected computers.
McAfee conducted a more thorough investigation
into its mistake and published a FAQ sheet that
explained more completely why they had made
such a big mistake and which customers were
affected. The two most prominent points of failure
were as follows: first, users should have received a
warning that svchost.exe was going to be quaran-
tined or deleted, instead of automatically disposing
of the file. Next, McAfee’s automated quality assur-
ance testing failed to detect such a critical error
because of what the company called “inadequate
coverage of product and operating systems in the
test systems used.”
The only way tech support staffs working in orga-
nizations could fix the problem was to go from com-
puter to computer manually. McAfee released a util-
ity called “SuperDAT Remediation Tool,” which had
to be downloaded to an unaffected machine, placed
on a flash drive, and run in Windows Safe Mode on
affected machines. Because affected computers
lacked network access, this had to be done one
computer at a time until all affected machines were
repaired. The total number of machines impacted is
not known but it doubtless involved tens of
thousands of corporate computers. Needless to say,
network administrators and corporate tech support
divisions were incensed.
Regarding the flaws in McAfee’s quality assurance
processes, the company explained in the FAQ that
they had not included Windows XP Service Pack 3
with VirusScan version 8.7 in the test configuration
of operating systems and McAfee product versions.
This explanation flabbergasted many of McAfee’s
clients and other industry analysts, since XP SP3 is
the most widely used desktop PC configuration.
I N T E R A C T I V E S E S S I O N : M A N A G E M E N T
304 Part Two Information Technology Infrastructure

1. What management, organization, and technology
factors were responsible for McAfee’s software
problem?
2. What was the business impact of this software
problem, both for McAfee and for its customers?
3. If you were a McAfee enterprise customer, would
you consider McAfee’s response to the problem be
acceptable? Why or why not?
4. What should McAfee do in the future to avoid
similar problems?
Vista and Windows 7 generally ship with new
computers and are rarely installed on functioning XP
computers.
Another reason that the problem spread so quickly
without detection was the increasing demand for
faster antivirus updates. Most companies aggressively
deploy their updates to ensure that machines spend
as little time exposed to new viruses as possible.
McAfee’s update reached a large number of machines
so quickly without detection because most companies
trust their antivirus provider to get it right.
Unfortunately for McAfee, it only takes a single
slipup or oversight to cause significant damage to
an antivirus company’s reputation. McAfee was
criticized for its slow response to the crisis and for
its initial attempts to downplay the issue’s impact
on its customers. The company released a
Search online for the apology by Barry McPherson
(“Barry McPherson apology”) and read the reaction of
customers. Do you think McPherson’s apology
helped or inflamed the situation? What is a “false
positive remediation”?
statement claiming that only a small fraction of its
customers were affected, but this was soon shown
to be false. Two days after the update was released,
McAfee executive Barry McPherson finally
apologized to customers on the company’s blog.
Soon after, CEO David DeWalt recorded a video for
customers, still available via McAfee’s Web site, in
which he apologized for and explained the
incident.
Sources: Peter Svensson, “McAfee Antivirus Program Goes Berserk,
Freezes PCs,” Associated Press, April 21, 2010; Gregg Keizer, “McAfee
Apologizes for Crippling PCs with Bad Update,” Computerworld, April
23, 2010 and “McAfee Update Mess Explained,” Computerworld, April
22, 2010; Ed Bott, “McAfee Admits ‘Inadequate’ Quality Control
Caused PC Meltdown,” ZDNet, April 22, 2010; and Barry McPherson,
“An Update on False Positive Remediation,” http://siblog.
mcafee.com/support/an-update-on-false-positive-remediation, April
22, 2010.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
Chapter 8 Securing Information Systems 305
8.2 BUSINESS VALUE OF SECURITY AND CONTROL
Many firms are reluctant to spend heavily on security because it is not directly
related to sales revenue. However, protecting information systems is so critical
to the operation of the business that it deserves a second look.
Companies have very valuable information assets to protect. Systems often
house confidential information about individuals’ taxes, financial assets,
medical records, and job performance reviews. They also can contain informa-
tion 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. One study estimated
that when the security of a large firm is compromised, the company loses
approximately 2.1 percent of its market value within two days of the security
breach, which translates into an average loss of $1.65 billion in stock market
value per incident (Cavusoglu, Mishra, and Raghunathan, 2004).

http://siblog.mcafee.com/support/an-update-on-false-positive-remediation

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306 Part Two Information Technology Infrastructure
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, BJ’s Wholesale Club was sued by the
U.S. Federal Trade Commission for allowing hackers to access its systems and
steal credit and debit card data for fraudulent purchases. Banks that issued the
cards with the stolen data sought $13 million from BJ’s to compensate them for
reimbursing card holders for the fraudulent purchases. A sound security and
control framework that protects business information assets can thus produce a
high return on investment. Strong security and control also increase employee
productivity and lower operational costs.
LEGAL AND REGULATORY REQUIREMENTS FOR
ELECTRONIC RECORDS MANAGEMENT
Recent U.S. government regulations are forcing companies to take security and
control 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.
If you work in the health care 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
simplifying the administration of health care billing and automating the
transfer of health care data between health care providers, payers, and plans.
It requires members of the health care industry to retain patient information
for six years and ensure the confidentiality of those records. It specifies
privacy, security, and electronic transaction standards for health care
providers handling patient information, providing penalties for breaches of
medical privacy, disclosure of patient records by e-mail, or unauthorized
network access.
If you work in a firm providing financial services, your firm will need to
comply 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
comply 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 accu-
racy 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.
Sarbanes-Oxley is fundamentally about ensuring that internal controls are in
place to govern the creation and documentation of information in financial

Chapter 8 Securing Information Systems 307
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 floppy disks, CDs, and computer
hard disk drives, as well as in e-mail, instant messages, and e-commerce
transactions over the Internet. E-mail is currently the most common type of
electronic evidence.
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
required 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, e-mail, 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 following
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 be recovered
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
systems 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.

308 Part Two Information Technology Infrastructure
8.3 ESTABLISHING A 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
policy 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
both general controls and application controls. General controls govern the
design, security, 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 overall control environment.
General controls include software controls, physical hardware controls,
computer operations controls, data security controls, controls over implemen-
tation of system processes, and administrative controls. Table 8-3 describes the
functions of each of these controls.
Application controls are specific controls unique to each computerized
application, such as payroll or order processing. They include both automated
and manual procedures that ensure that only authorized data are completely
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
conversion, data editing, and error handling. Processing controls establish that
data are complete and accurate during updating. Output controls ensure that
TABLE 8-3 GENERAL CONTROLS
TYPE OF GENERAL CONTROL DESCRIPTION
Software controls Monitor the use of system software and prevent unauthorized access 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 on either disk or tape 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 309
the results of computer processing are accurate, complete, and properly
distributed. You can find more detail about application and general controls in
our Learning Tracks.
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
specialists should try to determine the value of information assets, points of
vulnerability, 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
maximum of a $1,000 loss to the organization, it is not be 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 8-4 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 together and dividing by two. The expected annual
loss for each exposure can be determined by multiplying the average loss by its
probability 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 $5,000 to $200,000 (averaging $102,500) for each occur-
rence, depending on how long processing is halted. The probability of embez-
zlement occurring over a yearly period is about 5 percent, with potential losses
ranging from $1,000 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 $20,100) for each occur-
rence.
Once the risks have been assessed, system builders will concentrate on the
control points with the greatest vulnerability and potential for loss. In this case,
controls should focus on ways to minimize the risk of power failures and user
errors because anticipated annual losses are highest for these areas.
TABLE 8-4 ONLINE ORDER PROCESSING RISK ASSESSMENT
EXPOSURE PROBABILITY OF LOSS RANGE/ EXPECTED
OCCURRENCE (%) AVERAGE ($) ANNUAL LOSS ($)
Power failure 30% $5,000–$200,000 ($102,500) $30,750
Embezzlement 5% $1,000–$50,000 ($25,500) $1,275
User error 98% $200–$40,000 ($20,100) $19,698

310 Part Two Information Technology Infrastructure
SECURITY POLICY
Once 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 pro-
tect 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-year disaster? Management must estimate
how much it will cost to achieve this level of acceptable risk.
The security policy drives 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, wireless devices, telephones, and the Internet. The policy
should clarify company policy regarding privacy, user responsibility, and per-
sonal use of company equipment and networks. A good AUP defines unaccept-
able and acceptable actions for every user and specifies consequences for non-
compliance. For example, security policy at Unilever, the giant multinational
consumer goods company, requires every employee equipped with a laptop or
mobile handheld device to use a company-specified device and employ a pass-
word or other method of identification when logging onto the corporate network.
Security policy also includes provisions for identity management. Identity
management consists of business processes and software tools for identifying
the valid users of a system and controlling their access to system resources. It
includes policies for identifying and authorizing different categories of system
users, specifying what systems or portions of systems each user is allowed to
access, and the processes and technologies for authenticating users and
protecting their identities.
Figure 8-3 is one example of how an identity management system might cap-
ture the access rules for different levels of users in the human resources func-
tion. It specifies what portions of a human resource database each user is per-
mitted 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.
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
salary, 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 provide
more detail on 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

Chapter 8 Securing Information Systems 311
plans for the restoration of computing and communications services after they
have been disrupted. 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 maintenance 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 disaster recovery firms, such as Comdisco Disaster Recovery Services in
Rosemont, Illinois, and SunGard Availability Services, headquartered in Wayne,
Pennsylvania. These disaster recovery firms provide hot sites housing spare
computers at locations around the country where subscribing firms can run
their critical applications in an emergency. For example, Champion
Technologies, which supplies chemicals used in oil and gas operations, is able
to switch its enterprise systems from Houston to a SunGard hot site in
Scottsdale, Arizona, in two hours.
Business continuity planning focuses on how the company can restore busi-
ness operations after a disaster strikes. The business continuity plan identifies
critical business processes and determines action plans for handling mission-crit-
ical functions if systems go down. For example, Deutsche Bank, which provides
investment banking and asset management services in 74 different countries, has
a well-developed business continuity plan that it continually updates and refines.
It maintains full-time teams in Singapore, Hong Kong, Japan, India, and Australia
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 access rules, a user would have certain restrictions on access to
various systems, locations, or data in an organization.

312 Part Two Information Technology Infrastructure
to coordinate plans addressing loss of facilities, personnel, or critical systems so
that the company can continue to operate when a catastrophic event occurs.
Deutsche Bank’s plan distinguishes between processes critical for business
survival and those critical to crisis support and is coordinated with the company’s
disaster recovery planning for its computer centers.
Business managers and information technology specialists need to work
together on both types of plans to determine which systems and business
processes 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
maximum 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 MIS audit examines the firm’s overall security
environment as well as controls governing individual information systems. The
auditor should trace the flow of sample transactions through the system and
perform tests, using, if appropriate, automated audit software. The MIS audit
may also examine data quality.
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 TECHNOLOGIES AND TOOLS FOR PROTECTING
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
Large and midsize companies have complex IT infrastructures and many
different systems, each with its own set of users. Identity management software
automates the process of keeping track of all these users and their system
privileges, assigning each user a unique digital identity for accessing each
system. It also includes tools for authenticating users, protecting user identities,
and controlling 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

Chapter 8 Securing Information Systems 313
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 writing down their passwords at their work-
stations in plain view. Passwords can also be “sniffed” if transmitted over a net-
work or stolen through social engineering.
New authentication technologies, such as tokens, smart cards, and biomet-
ric authentication, overcome some of these problems. A token is a physical
device, 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 device 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, in order to grant or deny
access. Biometric authentication is based on the measurement of a physical or
behavioral trait that makes each individual unique. It compares a person’s
unique characteristics, such as the fingerprints, face, or retinal image, against a
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 sys-
tem 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
taken by management.

314 Part Two Information Technology Infrastructure
stored profile of these characteristics to determine whether there are any dif-
ferences between these characteristics and the stored profile. If the two profiles
match, access is granted. Fingerprint and facial recognition technologies are
just beginning to be used for security applications, with many PC laptops
equipped with fingerprint identification devices and several models with built-
in webcams and face recognition software.
FIREWALLS, INTRUSION DETECTION SYSTEMS, AND
ANTIVIRUS SOFTWARE
Without protection against malware and intruders, connecting to the Internet
would be very dangerous. Firewalls, intrusion detection systems, and antivirus
software have become essential business tools.
F i r e w a l l s
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
organization’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 who examines each user’s credentials
before access is granted to a network. The firewall identifies names, IP
addresses, applications, and other characteristics of incoming traffic. It checks
this information against the access rules that have been programmed into the
system by the network administrator. The firewall prevents unauthorized com-
munication 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.
This PC has a biometric fin-
gerprint reader for fast yet
secure access to files and
networks. New models of
PCs are starting to use bio-
metric identification to
authenticate users.

Chapter 8 Securing Information Systems 315
Packet filtering examines selected fields in the headers of data packets flowing
back and forth between the trusted network and the Internet, examining indi-
vidual packets in isolation. This filtering technology can miss many types of
attacks. Stateful inspection provides additional security by determining whether
packets 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
whether they are attempting to establish a legitimate connection.
Network Address Translation (NAT) can provide another layer of protection
when static packet filtering and stateful inspection are employed. NAT conceals
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
outside user first “talks” to the proxy application and the proxy application
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
rejected. Firewalls can deter, but not completely prevent, network penetration
by outsiders and should be viewed as one element in an overall security plan.
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 unautho-
rized traffic.

316 Part Two Information Technology Infrastructure
I n t r u s i o n D e t e c t i o n S y s t e m s
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 gen-
erates an alarm if it finds a suspicious or anomalous event. Scanning software
looks for patterns indicative of known methods of computer attacks, such as
bad passwords, checks to see if important files have been removed or modified,
and sends warnings of vandalism or system administration errors. Monitoring
software examines events as they are happening to discover security attacks in
progress. The intrusion detection tool can also be customized to shut down a
particularly sensitive part of a network if it receives unauthorized traffic.
A n t i v i r u s a n d A n t i s p y w a r e S o f t w a r e
Defensive technology plans for both individuals and businesses must include
antivirus protection for every computer. Antivirus software is designed to
check computer systems and drives for the presence of computer viruses.
Often the software eliminates the virus from the infected area. However, most
antivirus software is effective only against viruses already known when the
software was written. To remain effective, the antivirus software must be con-
tinually updated. Antivirus products are available for many different types of
mobile and handheld devices in addition to servers, workstations, and desktop
PCs.
Leading antivirus software vendors, such as McAfee, Symantec, and Trend
Micro, have enhanced their products to include protection against spyware.
Antispyware software tools such as Ad-Aware, Spybot S&D, and Spyware Doctor
are also very helpful.
U n i f i e d T h r e a t M a n a g e m e n t S y s t e m s
To help businesses reduce costs and improve manageability, security vendors
have combined into a single appliance various security tools, including fire-
walls, virtual private networks, intrusion detection systems, and Web content
filtering and antispam software. These comprehensive security management
products are called unified threat management (UTM) systems. Although
initially aimed at small and medium-sized businesss, UTM products are avail-
able for all sizes of networks. Leading UTM vendors include Crossbeam,
Fortinent, and Check Point, and networking vendors such as Cisco Systems and
Juniper Networks provide some UTM capabilities in their equipment.
SECURING WIRELESS NETWORKS
Despite its flaws, WEP provides some margin of security if Wi-Fi users remem-
ber to activate it. A simple first step to thwart hackers is to assign a unique
name to your network’s SSID and instruct your router not to broadcast 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
replaces 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. It also employs an encrypted authentica-

Chapter 8 Securing Information Systems 317
tion system with a central authentication server to ensure that only authorized
users access the network.
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
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
messages, whereas SSL and TLS are designed to establish a secure connection
between 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.
There are two alternative methods of encryption: 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 128 bits long (a string of 128 binary digits).
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, communi-
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
the data when they are received. The sender locates the recipient’s public key in a directory 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.

318 Part Two Information Technology Infrastructure
cators 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 recipient 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, or certification authority), to validate a user’s identity. There are many
CAs in the United States and around the world, including VeriSign, IdenTrust,
and Australia’s KeyPost.
The CA verifies a digital certificate user’s identity offline. This information
is put into a CA server, which generates an encrypted digital certificate
containing owner identification information and a copy of the owner’s public
key. The certificate authenticates that the public key belongs to the desig-
nated owner. The CA makes its own public key available publicly 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 information contained in the certificate. Using this information,
the recipient can send an encrypted reply. The digital certificate system
would enable, for example, 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 pub-
lic key cryptography working with a CA, is now widely used in e-commerce.
ENSURING SYSTEM AVAILABILITY
As companies increasingly rely on digital networks for revenue and operations,
they need to take additional steps to ensure that their systems and applications
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.

Chapter 8 Securing Information Systems 319
are always available. Firms such as those in the airline and financial 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, transac-
tions 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 hardware
failures and automatically switch to a backup device. Parts from these comput-
ers can be removed and repaired without disruption to the computer system.
Fault tolerance should be distinguished from high-availability computing.
Both fault tolerance and high-availability computing try to minimize downtime.
Downtime refers to periods of time in which a system is not operational.
However, high-availability computing helps firms recover quickly from a
system crash, whereas fault tolerance promises continuous availability and the
elimination of recovery time altogether.
High-availability computing environments are a minimum requirement for
firms with heavy e-commerce processing or for firms that depend on digital
networks for their internal operations. High-availability computing requires
backup servers, distribution of processing across multiple servers, high-capacity
storage, and good disaster recovery and business continuity plans. The firm’s
computing platform must be extremely robust with scalable processing power,
storage, and bandwidth.
Researchers are exploring ways to make computing systems recover even
more rapidly when mishaps occur, an approach called recovery-oriented
computing. This work includes designing systems that recover quickly, and
implementing capabilities and tools to help operators pinpoint the sources of
faults in multi-component systems and easily correct their mistakes.
C o n t r o l l i n g N e t w o r k Tr a f f i c : D e e p P a c k e t I n s p e c t i o n
Have you ever tried to use your campus network and found it was very slow? It
may be because your fellow students are using the network to download music or
watch YouTube. Bandwith-consuming applications such as file-sharing programs,
Internet phone service, and online video are able to clog and slow down corporate
networks, degrading performance. For example, Ball Sate University in Muncie,
Indiana, found its network had slowed because a small minority of students were
using peer-to-peer file-sharing programs to download movies and music.
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 priority 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 destination or should be blocked or delayed while more
important traffic proceeds. Using a DPI system from Allot Communications,
Ball State was able to cap the amount of file-sharing traffic and assign it a much
lower priority. Ball State’s preferred network traffic speeded up.
S e c u r i t y O u t s o u r c i n g
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

320 Part Two Information Technology Infrastructure
providers (MSSPs) that monitor network activity and perform vulnerability
testing and intrusion detection. SecureWorks, BT Managed Security Solutions
Group, 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
security and reliability. We now describe some of these challenges and how
they should be addressed.
S e c u r i t y i n t h e C l o u d
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. The Interactive Session on Technology details
some of the cloud security issues that should be addressed.
Cloud users need to confirm that regardless of where their data are stored or
transferred, they are protected at a level that meets their corporate require-
ments. They should stipulate that the cloud provider store and process data in
specific jurisdictions 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 completely restore your
data, and how long this should take. Cloud users should also ask whether cloud
providers will submit to external audits and security certifications. These kinds
of controls can be written into the service level agreement (SLA) before to
signing with a cloud provider.
S e c u r i n g M o b i l e P l a t f o r m s
If mobile devices are performing many of the functions of computers, they
need to be secured like desktops and laptops against malware, theft, accidental
loss, unauthorized access, and hacking attempts. Mobile devices accessing
corporate systems and data require special protection.
Companies should make sure that their corporate security policy includes
mobile devices, with additional details on how mobile devices should be sup-
ported, protected, and used. They will need tools to authorize all devices in use; to
maintain accurate inventory records on all mobile devices, users, and applications;
to control updates to applications; and to lock down lost devices so they can’t be
compromised. Firms should develop guidelines stipulating approved mobile plat-
forms and software applications as well as the required software and procedures
for remote access of corporate systems. Companies will need to ensure that all
smartphones are up to date with the latest security patches and antivirus/anti-
spam software, and they should encrypt communication whenever possible.
ENSURING SOFTWARE QUALITY
In addition to implementing effective security and controls, organizations can
improve system quality and reliability by employing software metrics and
rigorous software testing. Software metrics are objective assessments of the
system in the form of quantified measurements. Ongoing use of metrics allows

I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y
New York-based investment banking and financial
services firm Cowen and Co. has moved its global
sales systems to the cloud using Salesforce.com. So
far, Cowen’s CIO Daniel Flax is pleased. Using cloud
services has helped the company lower upfront tech-
nology costs, decrease downtime and support addi-
tional services. But he’s trying to come to grips with
cloud security issues.Cloud computing is indeed
cloudy, and this lack of transparency is troubling to
many.
One of the biggest risks of cloud computing is that
it is highly distributed. Cloud applications and appli-
cation mash-ups reside in virtual libraries 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, and you might not even know the
country where they are being stored.
The dispersed nature of cloud computing makes it
difficult to track unauthorized activity. Virtually all
cloud providers use encryption, such as Secure
Sockets Layer, to secure the data they handle while
the data are being transmitted. But if the data are
stored on devices that also store other companies’
data, it’s important to ensure these stored data are
encrypted as well.
Indian Harvest Specialtifoods, a Bemidji,
Minnesota-based company that distributes rice,
grains, and legumes to restaurants worldwide, relies
on cloud software provider NetSuite to ensure that its
data sent to the cloud are fully protected. Mike
Mullin, Indian Harvest’s IT director, feels that using
SSL (Secure Sockets Layer) to encrypt the data gives
him some level of confidence that the data are
secure. He also points out that his company and
other users of cloud services need to pay attention to
their own security practices, especially access
controls. “Your side of the infrastructure is just as
vulnerable, if not more vulnerable, than the
provider’s side,” he observes.
One way to deal with these problems is to use a
cloud vendor that is a public company, which is
required by law to disclose how it manages informa-
tion. Salesforce.com meets this requirement, with
HOW SECURE IS THE CLOUD?
strict processes and guidelines for managing its data
centers. “We know our data are in the U.S. and we
have a report on the very data centers that we’re
talking about, “ says Flax.
Another alternative is to use a cloud provider that
give subscribers the option to choose where their
cloud computing work takes place. For example,
Terremark Worldwide Inc. is giving its subscriber
Agora Games the option to choose where its
applications run. Terremark has a Miami facility but
is adding other locations. In the past, Agora had no
say over where Terremark hosted its applications
and data.
Even if your data are totally secure in the cloud,
you may not be able to prove it. Some cloud
providers don’t meet current compliance require-
ments regarding security, and some of those
providers, such as Amazon, have asserted that they
don’t intend to meet those rules and won’t allow
compliance auditors on-site.
There are laws restricting where companies can
send and store some types of information—person-
ally identifiable information in the European Union
(EU), government work in the United Sates or appli-
cations that employ certain encryption algorithms.
Companies required to meet these regulations
involving protected data either in the United States
or the EU won’t be able to use public cloud providers.
Some of these regulations call for proof that
systems are securely managed, which may require
confirmation from an independent audit. Large
providers are unlikely to allow another company’s
auditors to inspect their data centers. Microsoft found
a way to deal with this problem that may be helpful.
The company reduced 26 different types of audits to
a list of 200 necessary controls for meeting compli-
ance standards that were applied to its data center
environments and services. Microsoft does not give
every customer or auditor access to its data centers,
but its compliance framework allows auditors to order
from a menu of tests and receive the results.
Companies expect their systems to be running
24/7, but cloud providers haven’t always been able to
provide this level of service. Millions of customers of
Salesforce.com suffered a 38-minute outage in early
January 2009 and others several years earlier. The
January 2009 outage locked more than 900,000
subscribers out of crucial applications and data
Chapter 8 Securing Information Systems 321

C A S E S T U D Y Q U E S T I O N S
1. What security and control problems are described
in this case?
2. What people, organization, and technology factors
contribute to these problems?
3. How secure is cloud computing? Explain your
answer.
4. If you were in charge of your company’s informa-
tion systems department, what issues would you
want to clarify with prospective vendors?
5. Would you entrust your corporate systems to a
cloud computing provider? Why or why not?
needed to transact business with customers. More
than 300,000 customers using Intuit’s online network
of small business aplications were unable to access
these services for two days in June 2010 following a
power outage.
Agreements for services such as Amazon EC2 and
Microsoft Azure state that these companies are not
going to be held liable for data losses or fines or
other legal penalties when companies use their
services. Both vendors offer guidance on how to use
their cloud platforms securely, and they may still be
able to protect data better than some companies’
home-grown facilities.
Salesforce.com had been building up and
redesigning its infrastructure to ensure better
service. The company invested $50 million in
Go to www.trust.salesforce.com, then answer the
following questions:
1. Click on Security and describe Salesforce.com’s
security provisions. How helpful are these?
2. Click on Best Practices and describe what
subscribing companies can do to tighten security.
How helpful are these guidelines?
3. If you ran a business, would you feel confident
about using Salesforce.com’s on-demand service?
Why or why not?
Mirrorforce technology, a mirroring system that cre-
ates a duplicate database in a separate location and
synchronizes the data instantaneously. If one data-
base is disabled, the other takes over. Salesforce.com
added two data centers on the East and West coasts
in addition to its Silicon Valley facility. The company
distributed processing for its larger customers among
these centers to balance its database load.
Sources: Seth Fineberg, “A Shadow on the Cloud?” Information
Management, August, 2010; Ellen Messmer, “Secrecy of Cloud
Computing Providers Raises IT Security Risks,” IT World, July 13,
2010; John Edwards, “Cutting Through the Fog of Cloud Security,”
Computerworld, February 23, 2009; Wayne Rash, “Is Cloud
Computing Secure? Prove It,” eWeek, September 21, 2009; Robert
Lemos, ”Five Lessons from Microsoft on Cloud Security,”
Computerworld, August 25, 2009; and Mike Fratto, “Cloud Control,”
Information Week, January 26, 2009.
M I S I N A C T I O N
322 Part Two Information Technology Infrastructure
the information systems department and end users to jointly measure the
performance of the system 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.
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 objec-
tives being tested. Once developers start writing software programs, coding
walkthroughs also can be used to review program code. However, code must

www.trust.salesforce.com

Chapter 8 Securing Information Systems 323
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 13. Our Learning Tracks also contain descriptions of
methodologies for developing software programs that also contribute to
software quality.
8.5 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.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. K2 Network operates online game sites used by about 16 million people in over
100 countries. Players are allowed to enter a game for free, but must buy digital
“assets” from K2, such as swords to fight dragons, if they want to be deeply
involved. The games can accommodate millions of players at once and are
played simultaneously by people all over the world. 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 Web sites and continuing operations?
2. A survey of your firm’s information technology infrastructure has produced the
following security analysis statistics:
SECURITY VULNERABILITIES BY TYPE OF COMPUTING PLATFORM
PLATFORM NUMBER OF HIGH RISK MEDIUM LOW TOTAL
COMPUTERS RISK RISK VULNERABILITIES
Windows Server (corporate applications) 1 11 37 19
Windows 7 Enterprise (high-level administrators) 3 56 242 87
Linux (e-mail and printing services) 1 3 154 98
Sun Solaris (Unix) (E-commerce and Web servers) 2 12 299 78
Windows 7 Enterprise user desktops and laptops 195 14 16 1,237
with office productivity tools that can also be linked to
the corporate network running corporate applications
and intranet
High risk vulnerabilities include non-authorized users accessing applica-
tions, guessable passwords, user names matching the password, active user
accounts with missing passwords, and the existence of unauthorized programs
in application systems.
Medium risk vulnerabilities include the ability of users to shut down the
system without being logged on, passwords and screen saver settings that were

• In addition to the potential exposures listed, you should 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.
324 Part Two Information Technology Infrastructure
not established for PCs, and outdated versions of software still being stored on
hard drives.
Low risk vulnerabilities include the inability of users to change their
passwords, user passwords that have not been changed periodically, and pass-
words that were smaller than the minimum size specified by the company.
• Calculate the total number of vulnerabilities for each platform. What is the
potential impact of the security problems for each computing platform on
the organization?
• If you only have one information systems specialist in charge of security,
which platforms should you address first in trying to eliminate these vulnera-
bilities? Second? Third? Last? Why?
• Identify the types of control problems illustrated by these vulnerabilities and
explain the measures that should be taken to solve them.
• What does your firm risk by ignoring the security vulnerabilities identified?
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g S p r e a d s h e e t
S o f t w a r e t o P e r f o r m a S e c u r i t y R i s k A s s e s s m e n t
Software skills: Spreadsheet formulas and charts
Business skills: Risk assessment
This project uses spreadsheet software to calculate anticipated annual losses
from various security threats identified for a small company.
Mercer Paints is a small but highly regarded paint manufacturing company
located in Alabama. The company has a network in place linking many of its
business operations. Although the firm believes that its security is adequate, the
recent addition of a Web site has become an open invitation to hackers.
Management requested a risk assessment. The risk assessment identified a
number of potential exposures. These exposures, their associated probabilities,
and average losses are summarized in the following table.
MERCER PAINTS RISK ASSESSMENT
EXPOSURE PROBABILITY OF OCCURRENCE AVERAGE LOSS
Malware attack 60% $75,000
Data loss 12% $70,000
Embezzlement 3% $30,000
User errors 95% $25,000
Threats from hackers 95% $90,000
Improper use by employees 5% $5,000
Power failure 15% $300,000

Chapter 8 Securing Information Systems 325
I m p r o v i n g D e c i s i o n M a k i n g : E v a l u a t i n g S e c u r i t y
O u t s o u r c i n g S e r v i c e s
Software skills: Web browser and presentation software
Business skills: Evaluating business outsourcing services
Businesses today have a choice of whether to outsource the security function or
maintain their own internal staff for this purpose. This project will help
develop your Internet skills in using the Web to research and evaluate security
outsourcing services.
As an information systems expert in your firm, you have been asked to help
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 outsource 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.
• Prepare an electronic presentation for management summarizing your
findings. Your presentation should make the case on whether or not your
company should outsource computer security. If you believe your
company should outsource, the presentation should identify which
security outsourcing service should be selected and justify your selection.
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. The Booming Job Market in IT Security
2. The Sarbanes-Oxley Act
3. Computer Forensics
4. General and Application Controls for Information Systems
5. Management Challenges of Security and Control
6. Software Vulnerability and Reliability

326 Part Two Information Technology Infrastructure
Review Summary
1. Why are information systems vulnerable to destruction, error, and abuse?
Digital data are vulnerable to destruction, misuse, error, fraud, and hardware or software failures.
The Internet is designed to be an open system and makes internal corporate systems more vulnera-
ble to actions from outsiders. Hackers can unleash denial-of-service (DoS) attacks or penetrate cor-
porate networks, causing serious system disruptions. Wi-Fi networks can easily be penetrated by
intruders using sniffer programs to obtain an address to access the resources of the network.
Computer viruses and worms can disable systems and Web sites. The dispersed nature of cloud com-
puting makes it difficult to track unauthorized activity or to apply controls from afar. Software pre-
sents problems because software bugs may be impossible to eliminate and because software vulner-
abilities can be exploited by hackers and malicious software. End users often introduce errors.
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. New 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 management.
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
systems. 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 coher-
ent corporate security policy and plans for continuing business operations in the event of disaster or
disruption. The security policy includes policies for acceptable use and identity management.
Comprehensive and systematic MIS auditing helps organizations determine the effectiveness of
security and controls for their information systems.
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 from suspicious network traffic and
attempts to access corporate systems. Passwords, tokens, smart cards, and biometric authentication
are used to authenticate system users. Antivirus software checks computer systems for infections by
viruses and worms and often eliminates the malicious software, while antispyware software combats
intrusive and harmful spyware programs. Encryption, the coding and scrambling of messages, is a
widely used technology for securing electronic transmissions over unprotected networks. 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 or cre-
ate high-availability computing environments to make sure that their information systems are always
available. Use of software metrics and rigorous software testing help improve software quality and
reliability.
Key Terms
Acceptable use policy (AUP), 310
Antivirus software, 316
Application controls, 308
Authentication, 312
Biometric authentication, 313
Botnet, 299
Bugs, 303
Business continuity planning, 311
Click fraud, 302
Computer crime, 300
Computer forensics, 307
Computer virus, 296
Controls, 293
Cybervandalism, 298
Deep packet inspection (DPI), 319
Denial-of-service (DoS) attack, 299

Chapter 8 Securing Information Systems 327
Digital certificates, 318
Disaster recovery planning, 310
Distributed denial-of-service (DDoS) attack, 299
Downtime, 319
Encryption, 317
Evil twin, 301
Fault-tolerant computer systems, 319
Firewall, 314
General controls, 308
Gramm-Leach-Bliley Act, 306
Hacker, 298
High-availability computing, 319
HIPAA, 306
Identity management, 310
Identity theft, 301
Intrusion detection systems, 316
Keyloggers, 298
Malware, 296
Managed security service providers
(MSSPs), 319
MIS audit, 312
Online transaction processing, 319
Password, 313
Patches, 303
Review Questions
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.
• Define computer crime. Provide two exam-
ples 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 prob-
lem today.
• Describe the security and system reliability
problems created by employees.
• Explain how software defects affect system
reliability and security.
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 reg-
ulatory requirements and computer foren-
sics.
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 information
systems.
• Define and describe the following: security
policy, acceptable use policy, and identity
management.
• Explain how MIS auditing promotes security
and control.
4. What are the most important tools and technolo-
gies for safeguarding information resources?
• Name and describe three authentication
methods.
• Describe the roles of firewalls, intrusion
detection systems, and antivirus software in
promoting security.
Pharming, 301
Phishing, 301
Public key encryption, 317
Public key infrastructure (PKI), 318
Recovery-oriented computing, 319
Risk assessment, 309
Sarbanes-Oxley Act, 306
Secure Hypertext Transfer Protocol
(S-HTTP), 317
Secure Sockets Layer (SSL), 317
Security, 293
Security policy, 310
SQL injection attack, 298
Smart card, 313
Sniffer, 299
Social engineering, 302
Spoofing, 299
Spyware, 298
Token, 313
Trojan horse, 298
Unified threat management (UTM), 316
War driving, 295
Worms, 296

328 Part Two Information Technology Infrastructure
• Explain how encryption protects information.
• Describe the role of encryption and digital
certificates in a public key infrastructure.
• Distinguish between fault-tolerant and high-
availability computing, and between disaster
recovery planning and business continuity
planning.
• Identify and describe the security problems
posed by cloud computing.
• Describe measures for improving software
quality and reliability.
Discussion Questions
1. Security isn’t simply a technology issue, it’s a
business issue. Discuss.
2. If you were developing a business continuity plan
for your company, where would you start? What
aspects of the business would the plan address?
3. Suppose your business had an e-commerce Web
site where it sold goods and accepted credit card
payments. Discuss the major security threats to
this Web site and their potential impact. What can
be done to minimize these threats?
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
Collaboration and Teamwork: Evaluating Security Software Tools
Which is the best product? Why? If possible, use
Google Sites to post links to Web pages, team commu-
nication announcements, and work assignments; to
brainstorm; and to work collaboratively on project
documents. Try to use Google Docs to develop a
presentation of your findings for the class.
With a group of three or four students, use the Web to
research and evaluate security products from two
competing vendors, such as antivirus software,
firewalls, or antispyware software. For each product,
describe its capabilities, for what types of businesses
it is best suited, and its cost to purchase and install.

Chapter 8 Securing Information Systems 329
A r e We Re a d y f o r C y b e r w a r f a r e ?
CASE STUDY
or most of us, the Internet is a tool we use
for e-mail, news, entertainment, socializing,
and shopping. But for computer security
experts affiliated with government agencies
and private contractors, as well as their hacker coun-
terparts from across the globe, the Internet has
become a battlefield—a war zone where cyberwar-
fare is becoming more frequent and hacking tech-
niques are becoming more advanced. Cyberwarfare
poses a unique and daunting set of challenges for
security experts, not only in detecting and prevent-
ing intrusions but also in tracking down perpetrators
and bringing them to justice.
Cyberwarfare can take many forms. Often, hack-
ers use botnets, massive networks of computers that
they control thanks to spyware and other malware,
to launch large-scale DDoS attacks on their target’s
servers. Other methods allow intruders to access
secure computers remotely and copy or delete e-mail
and files from the machine, or even to remotely
monitor users of a machine using more sophisticated
software. For cybercriminals, the benefit of cyber-
warfare is that they can compete with traditional
superpowers for a fraction of the cost of, for example,
building up a nuclear arsenal. Because more and
more modern technological infrastructure will rely
on the Internet to function, cyberwarriors will have
no shortage of targets at which to take aim.
Cyberwarfare also involves defending against
these types of attacks. That’s a major focus of U.S.
intelligence agencies. While the U.S. is currently at
the forefront of cyberwarfare technologies, it’s
unlikely to maintain technological dominance
because of the relatively low cost of the technologies
needed to mount these types of attacks.
In fact, hackers worldwide have already begun
doing so in earnest. In July 2009, 27 American and
South Korean government agencies and other organi-
zations were hit by a DDoS attack. An estimated
65,000 computers belonging to foreign botnets
flooded the Web sites with access requests. Affected
sites included those of the White House, the
Treasury, the Federal Trade Commission, the Defense
Department, the Secret Service, the New York Stock
Exchange, and the Washington Post, in addition to the
Korean Defense Ministry, National Assembly, the
presidential Blue House, and several others.
The attacks were not sophisticated, but were
widespread and prolonged, succeeding in slowing
down most of the U.S. sites and forcing several South
Korean sites to stop operating. North Korea or
pro-North Korean groups were suspected to be
behind the attacks, but the Pyongyang government
denied any involvement.
The lone positive from the attacks was that only
the Web sites of these agencies were affected.
However, other intrusions suggest that hackers
already have the potential for much more damaging
acts of cyberwarfare. The Federal Aviation
Administration (FAA), which oversees the airline
activity of the United States, has already been subject
to successful attacks on its systems, including one in
2006 that partially shut down air-traffic data systems
in Alaska.
In 2007 and 2008, computer spies broke into the
Pentagon’s $300 billion Joint Strike Fighter project.
Intruders were able to copy and siphon off several
terabytes of data related to design and electronics
systems, potentially making it easier to defend
against the fighter when it’s eventually produced.
The intruders entered through vulnerabilities of two
or three contractors working on the fighter jet pro-
ject. Fortunately, computers containing the most
sensitive data were not connected to the Internet,
and were therefore inaccessible to the intruders.
Former U.S. officials say that this attack originated in
China, and that China had been making steady
progress in developing online-warfare techniques.
China rebutted these claims, stating that the U.S.
media was subscribing to outdated, Cold War-era
thinking in blaming them, and that Chinese hackers
were not skilled enough to perpetrate an attack of
that magnitude.
In December 2009, hackers reportedly stole a
classified PowerPoint slide file detailing U.S. and
South Korean strategy for fighting a war against
North Korea. In Iraq, insurgents intercepted Predator
drone feeds using software they had downloaded
from the Internet.
Earlier that year, in April, cyberspies infiltrated
the U.S. electrical grid, using weak points where
computers on the grid are connected to the Internet,
and left behind software programs whose purpose is
unclear, but which presumably could be used to
disrupt the system. Reports indicated that the spies
F

330 Part Two Information Technology Infrastructure
originated in computer networks in China and
Russia. Again, both nations denied the charges.
In response to these and other intrusions, the
federal government launched a program called
“Perfect Citizen” to detect cyberassaults on private
companies running critical infrastructure. The U.S.
National Security Agency (NSA) plans to install sen-
sors in computer networks for critical infrastructure
that would be activated by unusual activity signalling
an impending cyberattack. The initial focus will be
older large computer control systems that have since
been linked to the Internet, making them more
vulnerable to cyber attack. NSA will likely start with
electric, nuclear, and air-traffic control systems with
the greatest impact on national security.
As of this writing, most federal agencies get
passing marks for meeting the requirements of the
Federal Information Security Management Act, the
most recent set of standards passed into law. But as
cyberwarfare technologies develop and become more
advanced, the standards imposed by this legislation
will likely be insufficient to defend against attacks.
In each incident of cyberwarfare, the governments
of the countries suspected to be responsible have
roundly denied the charges with no repercussions.
How could this be possible? The major reason is that
tracing identities of specific attackers through
cyberspace is next to impossible, making deniability
simple.
The real worry for security experts and govern-
ment officials is an act of cyberwar against a criti-
cal resource, such as the electric grid, financial sys-
tem, or communications systems. First of all, the
U.S. has no clear policy about how the country
would respond to that level of a cyberattack.
Although the electric grid was accessed by hackers,
it hasn’t yet actually been attacked. A three-year
study of U.S. cybersecurity recommended that such
a policy be created and made public. It also sug-
gested that the U.S. attempt to find common
ground with other nations to join forces in prevent-
ing these attacks.
Secondly, the effects of such an attack would
likely be devastating. Mike McConnell, the former
director of national intelligence, stated that if even a
single large American bank were successfully
attacked, “it would have an order-of-magnitude
greater impact on the global economy” than the
World Trade Center attacks, and that “the ability to
threaten the U.S. money supply is the equivalent of
today’s nuclear weapon.” Such an attack would have
a catastrophic effect on the U.S. financial system,
and by extension, the world economy.
Lastly, many industry analysts are concerned that
the organization of our cybersecurity is messy, with
no clear leader among our intelligence agencies.
Several different agencies, including the Pentagon
and the NSA, have their sights on being the leading
agency in the ongoing efforts to combat cyberwar-
fare. In June 2009, Secretary of Defense Robert Gates
ordered the creation of the first headquarters
designed to coordinate government cybersecurity
efforts, called Cybercom. Cybercom was activated in
May 2010 with the goal of’ coordinating the operation
and protection of military and Pentagon computer
networks in the hopes of resolving this organiza-
tional tangle.
In confronting this problem, one critical question
has arisen: how much control over enforcing cyber-
security should be given to American spy agencies,
since they are prohibited from acting on American
soil? Cyberattacks know no borders, so distinguishing
between American soil and foreign soil means
domestic agencies will be unnecessarily inhibited in
their ability to fight cybercrime. For example, if the
NSA was investigating the source of a cyberattack on
government Web sites, and determined that the
attack originated from American servers, under our
current laws, it would not be able to investigate
further.
Some experts believe that there is no effective way
for a domestic agency to conduct computer opera-
tions without entering prohibited networks within
the United States, or even conducting investigations
in countries that are American allies. The NSA has
already come under heavy fire for its surveillance
actions after 9-11, and this has the potential to raise
similar privacy concerns. Preventing terrorist or
cyberwar attacks may require examining some
e-mail messages from other countries or giving intel-
ligence agencies more access to networks or Internet
service providers. There is a need for an open debate
about what constitutes a violation of privacy and
what is acceptable during ‘cyber-wartime’, which is
essentially all the time. The law may need to be
changed to accommodate effective cybersecurity
techniques, but it’s unclear that this can be done
without eroding some privacy rights that we consider
essential.
As for these offensive measures, it’s unclear as to
how strong the United States’ offensive capabilities
for cyberwarfare are. The government closely guards
this information, almost all of which is classified. But
former military and intelligence officials indicate
that our cyberwarfare capabilities have dramatically
increased in sophistication in the past year or two.

And because tracking cybercriminals has proven so
difficult, it may be that the best defense is a strong
offense.
Sources: “Cyber Task Force Passes Mission to Cyber
Command,”Defence Professionals, September 8, 2010; Siobhan
Gorman, “U.S. Plans Cyber Shield for Utilities, Companies,” The
Wall Street Journal, July 8, 2010 and “U.S. Hampered in Fighting
Cyber Attacks, Report Says,” The Wall Street Journal, June, 16, 2010;
Siobhan Gorman, Yochi Dreazen and August Cole, “Drone Breach
Stirs Calls to Fill Cyber Post,” The Wall Street Journal, December 21,
2009; Sean Gallagher, “New Threats Compel DOD to Rethink
Cyber Strategy,” Defense Knowledge Technologies and Net-Enabled
Warfare, January 22, 2010; Lance Whitney, Cyber Command Chief
Details Threat to U.S.,” Military Tech, August 5, 2010; Hoover, J.
Nicholas, “Cybersecurity Balancing Act,” Information Week, April
27, 2009; David E. Sanger, John Markoff, and Thom Shanker, “U.S.
Steps Up Effort on Digital Defenses,” The New York Times, April
28, 2009; John Markoff and Thom Shanker. “Panel Advises
Clarifying U.S. Plans on Cyberwar,” The New York Times, April 30,
2009; Siobhan Gorman and Evan Ramstad, “Cyber Blitz Hits U.S.,
Korea,” The Wall Street Journal, July 9, 2009; Lolita C. Baldor,
“White House Among Targets of Sweeping Cyber Attack,”
Associated Press, July 8, 2009; Choe Sang-Hun, “Cyberattacks Hit
U.S. and South Korean Web Sites,” The New York Times, July 9,
2009; Siobhan Gorman, “FAA’s Air-Traffic Networks Breached by
Hackers,” The Wall Street Journal, May 7, 2009; Thom Shanker,
“New Military Command for Cyberspace,” The New York Times,
June 24, 2009; David E. Sanger and Thom Shanker, “Pentagon
Plans New Arm to Wage Wars in Cyberspace,” The New York Times,
May 29, 2009; Siobhan Gorman, August Cole, and Yochi Dreazen,
“Computer Spies Breach Fighter-Jet Project,” The Wall Street
Journal, April 21, 2009; Siobhan Gorman, “Electricity Grid in U.S.
Penetrated by Spies,” The Wall Street Journal, April 8, 2009; “Has
Power Grid Been Hacked? U.S. Won’t Say,” Reuters, April 8, 2009;
Markoff, John, “Vast Spy System Loots Computers in 103
Countries.” The New York Times, March 29, 2009; Markoff, John,
“Tracking Cyberspies Through the Web Wilderness,” The New York
Times, May 12, 2009.
CASE STUDY QUESTIONS
1. Is cyberwarfare a serious problem? Why or why
not?
2. Assess the management, organization, and tech-
nology factors that have created this problem.
3. What solutions have been proposed? Do you think
they will be effective? Why or why not?
4. Are there other solutions for this problem that
should be pursued? What are they?
Chapter 8 Securing Information Systems 331

!”#$%&'()%#*+)*+#,*’–.%-)/+%0-‘*1%

P A R T T H R E E
Key System Applications
for the Digital Age
Chapter 9
Achieving Operational Excellence and
Customer Intimacy: Enterprise
Applications
Chapter 10
E-Commerce: Digital Markets,
Digital Goods
Chapter 11
Managing Knowledge
Chapter 12
Enhancing Decision Making
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 rela-
tionship management, collaboration, and knowledge management; e-commerce
applications; and decision-support systems. This part answers questions such as:
How can enterprise applications improve business performance? How do firms use
e-commerce to extend the reach of their businesses? How can systems improve col-
laboration and decision making and help companies make better use of their knowl-
edge assets?

LEARNING OBJECTIVESS
After reading this chapter,
you will be able to answer
the following questions:
1. How do enterprise systems help
businesses achieve operational
excellence?
2. How do supply chain management
systems coordinate planning,
production, and logistics with
suppliers?
3. How do customer relationship
management systems help firms
achieve customer intimacy?
4. What are the challenges posed by
enterprise applications?
5. How are enterprise applications
used in platforms for new
cross-functional services?
CHAPTER OUTLINE
9.1 ENTERPRISE SYSTEMS
What Are Enterprise Systems?
Enterprise Software
Business Value of Enterprise Systems
9.2 SUPPLY CHAIN MANAGEMENT SYSTEMS
The Supply Chain
Information Systems and Supply Chain
Management
Supply Chain Management Applications
Global Supply Chains and the Internet
Business Value of Supply Chain Management
Systems
9.3 CUSTOMER RELATIONSHIP MANAGEMENT
SYSTEMS
What Is Customer Relationship Management?
Customer Relationship Management Software
Operational and Analytical CRM
Business Value of Customer Relationship
Management Systems
9.4 ENTERPRISE APPLICATIONS: NEW
OPPORTUNITIES AND CHALLENGES
Enterprise Application Challenges
Next-Generation Enterprise Applications
9.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Improving Decision Making: Using Database
Software to Manage Customer Service Requests
Improving Operational Excellence: Evaluating
Supply Chain Management Services
LEARNING TRACK MODULES
SAP Business Process Map
Business Processes in Supply Chain Management
and Supply Chain Metrics
Best-Practices Business Processes in CRM Software
Chapter 9
Achieving Operational Excellence
and Customer Intimacy: Enterprise
Applications
Interactive Sessions:
Southwest Airlines Takes Off
with Better Supply Chain
Management
Enterprise Applications Move
to the Cloud

335
f you enjoy cycling, you may very well be using a Cannondale bicycle. Cannondale,
headquartered in Bethel, Connecticut, is the world-leading manufacturer of high-end
bicycles, apparel, footwear, and accessories, with dealers and distributors in more than
66 countries. Cannondale’s supply and distribution chains span the globe, and the
company must coordinate manufacturing, assembly, and sales/distribution sites in many
different countries. Cannondale produces more than 100 different bicycle models each year;
60 percent of these are newly introduced to meet ever-changing customer preferences.
Cannondale offers both make-to-stock and make-to-order models. A typical bicycle requires
a 150-day lead time and a four-week manufacturing window, and some models have bills of
materials with over 150 parts. (A bill of materials specifies the raw materials, assemblies,
components, parts, and quantities of each needed to manufacture a final product.)
Cannondale must manage more than 1 million of these bills of materials and more than
200,000 individual parts. Some of these parts come from specialty vendors with even longer
lead times and limited production capacity.
Obviously, managing parts availability in a constantly changing product line impacted by
volatile customer demand requires a great deal of manufacturing flexibility. Until recently,
that flexibility was missing. Cannondale had an antiquated legacy material requirements
planning system for planning production, controlling inventory, and managing manufacturing
processes that could only produce reports on a weekly basis. By Tuesday afternoon, Monday’s
reports were already out of date. The company was forced to substitute parts in order to meet
demand, and sometimes it lost sales. Cannondale needed a solution that could track the flow
of parts more accurately, support its need for flexibility, and work with its existing business
systems, all within a restricted budget.
Cannondale selected the Kinaxis RapidResponse on-demand software service as a solution.
RapidResponse furnishes accurate and detailed supply chain information via an easy-to-use
spreadsheet interface, using data supplied automatically from Cannondale’s existing manufac-
turing systems. Data from operations at multiple sites are assembled in a single place for
analysis and decision making. Supply chain participants from different locations are able to
model manufacturing and inventory data in “what-if” scenarios to see the impact of alternative
actions across the entire supply chain. Old forecasts can be compared to new ones, and the
system can evaluate the constraints of a new plan.
.CANNONDALE LEARNS TO MANAGE A GLOBAL
SUPPLY CHAIN
I
Cannondale buyers, plan-
ners, master schedulers,
sourcers, product managers,
customer service, and finance
personnel, use RapidResponse
for sales reporting, forecasting,
monitoring daily inventory
availability, and feeding pro-
duction schedule information
to Cannondale’s manufactur-
ing and order processing
systems. Users are able to see
up-to-date information for all
sites. Management uses the
system daily to examine areas
where there are backlogs.

336 Part Three Key System Applications for the Digital Age
The improved supply chain information from RapidResponse enables
Cannondale to respond to customer orders much more rapidly with lower
levels of inventory and safety stock. Cycle times and lead times for producing
products have also been reduced. The company’s dates for promising deliveries
are more reliable and accurate.
Sources: Kinaxis Corp., “Cannondale Improves Customer Response Times While Reducing
Inventory Using RapidResponse,” 2010; www.kinaxis.com, accessed June 21, 2010; and
www.cannondale.com, accessed June 21, 2010.
Cannondale’s problems with its supply chain illustrate the critical role ofsupply chain management (SCM) systems in business. Cannondale’s
business performance was impeded because it could not coordinate its sourc-
ing, manufacturing, and distribution processes. Costs were unnecessarily high
because the company was unable to accurately determine the exact amount of
each product it needed to fulfill orders and hold just that amount in inventory.
Instead, the company resorted to keeping extra “safety stock” on hand “just in
case.” When products were not available when the customer wanted them,
Cannondale lost sales.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Like many other firms, Cannondale had a complex
supply chain and manufacturing processes to coordinate in many different
locations. The company had to deal with hundreds and perhaps thousands of
suppliers of parts and raw materials. It was not always possible to have just the
right amount of each part or component available when it was needed because
the company lacked accurate, up-to-date information about parts in inventory
and what manufacturing processes needed those parts.
An on-demand supply chain management software service from Kinaxis
helped solve this problem. The Kinaxis RapidResponse software takes in data
from Cannondale’s existing manufacturing systems and assembles data from
multiple sites to furnish a single view of Cannondale’s supply chain based on up-
to-date information. Cannondale staff are able to see exactly what parts are avail-
able or on order as well as the status of bikes in production. With better tools for
planning, users are able to see the impact of changes in supply and demand so
that they can make better decisions about how to respond to these changes. The
system has greatly enhanced operational efficiency and decision making.

www.kinaxis.com

www.cannondale.com

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 337
9.1 ENTERPRISE SYSTEMS
round 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 different databases and systems, none of which could speak to one
another? Imagine your company had 10 different 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 really 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 inven-
tory, and manufacturing could not easily use sales data to plan for new produc-
tion. You now have a good idea of why firms need a special enterprise system to
integrate information.
Chapter 2 introduced enterprise systems, also known as enterprise resource
planning (ERP) systems, which are based on a suite of integrated software
modules and a common central database. The database collects data from many
different 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 of an organization’s internal business activi-
ties. 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 system
verifies the customer’s credit limit, schedules the shipment, identifies the best
shipping route, and reserves the necessary items from inventory. If inventory
stock were 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 infor-
mation from the order. Users could tap into the system and find out where that
particular order was at any minute. Management could obtain information at
any point in time about how the business was operating. The system could also
generate enterprise-wide data for management analyses of product cost and
profitability.
A

338 Part Three Key System Applications for the Digital Age
ENTERPRISE SOFTWARE
Enterprise software is built around thousands of predefined business
processes that reflect best practices. Table 9-1 describes some of the major
business processes supported by enterprise software.
Companies implementing this software must first select the functions of the
system they wish to use and then map their business processes to the pre-
defined business processes in the software. (One of our Learning Tracks shows
how SAP enterprise software handles the procurement process for a new piece
of equipment.) Identifying the organization’s business processes to be included
in the system and then mapping them to the processes in the enterprise soft-
ware is often a major effort. A firm would use configuration tables provided by
the software to tailor a particular aspect of the system to the way it does busi-
ness. For example, the firm could use these tables to select whether it wants to
track revenue by product line, geographical unit, or distribution channel.
FIGURE 9-1 HOW ENTERPRISE SYSTEMS WORK
Enterprise systems feature a set of integrated software modules and a central database that enables
data to be shared by many different business processes and functional areas throughout the
enterprise.
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, quotations, contracts, product configuration, pricing, billing, credit checking, incentive
and commission management, and sales planning.

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
system. If companies want to reap the maximum benefits from enterprise
software, they must change the way they work to conform to the business
processes in the software. To implement a new enterprise system, Tasty Baking
Company identified its existing business processes and then translated them
into the business processes built into the SAP ERP software it had selected. To
ensure it obtained the maximum benefits from the enterprise software, Tasty
Baking Company deliberately 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 (with its acquisition
PeopleSoft) Infor Global Solutions, and Microsoft. There are versions of enter-
prise software packages designed for small businesses and on-demand versions,
including software services delivered over the Web (see the Interactive Session
on Technology in Section 9.4). Although initially designed to automate the
firm’s internal “back-office” business processes, enterprise systems have
become more externally-oriented and capable of communicating with cus-
tomers, suppliers, and other entities.
BUSINESS VALUE OF ENTERPRISE SYSTEMS
Enterprise systems provide value both by increasing operational efficiency and
by providing firm-wide information to help managers make better decisions.
Large companies with many operating units in different locations have used
enterprise systems to enforce standard practices and data so that everyone does
business 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
standard, company-wide business processes prevented the company from
leveraging its worldwide buying power to obtain lower prices for raw materials
and from reacting rapidly to market changes.
Enterprise systems help firms respond rapidly to customer requests for
information 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 amount 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 41 countries and 500 locations, had initially been orga-
nized around lines of business, each of which had its own set of information sys-
tems. 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 industry. (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
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 339

340 Part Three Key System Applications for the Digital Age
generating receipts for payment. Alcoa’s accounts payable transaction process-
ing dropped 89 percent. Alcoa was able to centralize financial and procurement
activities, 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 for using data captured by the system to evaluate
overall organizational performance. Enterprise system data have common
standardized definitions and formats that are accepted by the entire organiza-
tion. Performance figures mean the same thing across the company. Enterprise
systems allow senior management to easily find out at any moment how a
particular 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 training and quality, measures the company-wide costs of delivering
services to employees, and measures the effectiveness of employee recruit-
ment, compensation, and training.
9.2 SUPPLY CHAIN MANAGEMENT SYSTEMS
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 using a telephone and fax machine. But if you man-
age a firm that produces more complex products and services, then you will have
hundreds of suppliers, and your suppliers will each have their own set of suppli-
ers. Suddenly, you are in a situation where you will need to coordinate the activi-
ties of hundreds or even thousands of other firms in order to produce your prod-
ucts and services. Supply chain management systems, which we introduced in
Chapter 2, are an answer to these problems of supply chain complexity and scale.
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 customers
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.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 341
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 would 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
sneakers; it shows the flow of information and materials among suppliers,
Nike, and Nike’s distributors, retailers, and customers. Nike’s contract manu-
facturers 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 suppliers,
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 doing
manufacturing, such as Nike’s contract suppliers of sneakers, also manage their
own internal supply chain processes for transforming materials, components,
and services furnished by their suppliers into finished products or intermediate
products (components or parts) for their customers and for managing materials
and inventory.
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 coordi-
nate 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.

342 Part Three Key System Applications for the Digital Age
The supply chain illustrated in Figure 9-2 only shows two contract manufac-
turers for sneakers and only the upstream supply chain for sneaker soles. Nike
has hundreds of contract manufacturers turning out finished sneakers, socks,
and athletic clothing, each with its own set of suppliers. The upstream portion
of Nike’s supply chain would actually comprise 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 com-
plex.
INFORMATION SYSTEMS AND SUPPLY CHAIN
MANAGEMENT
Inefficiencies in the supply chain, such as parts shortages, underutilized plant
capacity, excessive finished goods inventory, or high transportation costs, are
caused by inaccurate or untimely information. For example, manufacturers
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 cannot
be foreseen—uncertain product demand, late shipments from suppliers, defec-
tive 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 what they think
they may actually need. The safety stock acts as a buffer for the lack of flexibil-
ity 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,
manufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and ter-
tiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each
has enough “just in case.” These changes ripple throughout the supply chain,
magnifying what started out as a small change from planned orders, creating
excess inventory, production, warehousing, and shipping costs (see Figure 9-3).
For example, Procter & Gamble (P&G) found it had excessively high invento-
ries 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 would spike when P&G offered
aggressive price promotions. Pampers and Pampers’ components accumulated
in warehouses 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 processes and used more accurate demand forecasting
The bullwhip is tamed by reducing uncertainties about demand and supply
when all members of the supply chain have accurate and up-to-date informa-
tion. If all supply chain members share dynamic information about inventory

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 343
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.
Table 9-2 describes how firms benefit from these systems.
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.
TABLE 9-2 HOW INFORMATION SYSTEMS FACILITATE SUPPLY CHAIN MANAGEMENT
INFORMATION FROM SUPPLY CHAIN MANAGEMENT SYSTEMS HELPS FIRMS
Decide when and what to produce, store, and move
Rapidly communicate orders
Track the status of orders
Check inventory availability and monitor inventory levels
Reduce inventory, transportation, and warehousing costs
Track shipments
Plan production based on actual customer demand
Rapidly communicate changes in product design

344 Part Three Key System Applications for the Digital Age
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 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 of its customers’ demands.
Manugistics and i2 Technologies (both acquired by JDA Software) are major
supply chain management software vendors, and enterprise software vendors
SAP and Oracle-PeopleSoft offer supply chain management modules.
Whirlpool Corporation, which produces washing; machines, dryers, refriger-
ators, ovens, and other home appliances, uses supply chain planning systems
to make sure what it produces matches customer demand. The company uses
supply chain planning software from i2 Technologies, which includes modules
for master scheduling, deployment planning, and inventory planning.
Whirlpool also installed i2’s Web-based tool for Collaborative Planning,
Forecasting, and Replenishment (CPFR) for sharing and combining its sales
forecasts with those of its major sales partners. Improvements in supply chain
planning combined with new state-of-the-art distribution centers helped
Whirlpool increase availability of products in stock when customers needed
them to 97 percent, while reducing the number of excess finished goods in
inventory by 20 percent and forecasting errors by 50 percent (Barrett, 2009).
Supply chain execution systems manage the flow of products through
distribution 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. Haworth Incorporated’s
Warehouse Management System (WMS) is an example. Haworth is a world-
leading manufacturer and designer of office furniture, with distribution centers
in four different 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 imme-
diate conditions for space, equipment, inventory, and personnel.
The Interactive Session on Organizations describes how supply chain
management software improved decision making and operational performance
at Southwest Airlines. This company maintains a competitive edge by combin-
ing superb customer service with low costs. Effectively managing its parts
inventory is crucial to achieving these goals.

“Weather at our destination is 50 degrees with some
broken clouds, but they’ll try to have them fixed
before we arrive. Thank you, and remember, nobody
loves you or your money more than Southwest
Airlines.”
Crew humor at 30,000 feet? Must be Southwest
Airlines. The company is the largest low-fare, high-
frequency, point-to-point airline in the world, and
largest overall measured by number of passengers
per year. Founded in 1971 with four planes serving
three cities, the company now operates over 500 air-
craft in 68 cities, and has revenues of $10.1 billion.
Southwest has the best customer service record
among major airlines, the lowest cost structure, and
the lowest and simplest fares. The stock symbol is
LUV (for Dallas’s Love Field where the company is
headquartered), but love is the major theme of
Southwest’s employee and customer relationships.
The company has made a profit every year since
1973, one of the few airlines that can make that
claim.
Despite a freewheeling, innovative corporate
culture, even Southwest needs to get serious about
its information systems to maintain profitability.
Southwest is just like any other company that needs
to manage its supply chain and inventory efficiently.
The airline’s success has led to continued expansion,
and as the company has grown, its legacy informa-
tion systems have been unable to keep up with the
increasingly large amount of data being generated.
One of the biggest problems with Southwest’s
legacy systems was lack of information visibility.
Often, the data that Southwest’s managers needed
were safely stored on their systems but weren’t
”visible”, or readily available for viewing or use in
other systems. Information about what replacement
parts were available at a given time was difficult or
impossible to acquire, and that affected response
times for everything from mechanical problems to
part fulfillment.
For Southwest, which prides itself on its excellent
customer service, getting passengers from one
location to another with minimal delay is critically
important. Repairing aircraft quickly is an important
part of accomplishing that goal. The company had
$325 million in service parts inventory, so any
solution that more efficiently handled that inventory
SOUTHWEST AIRLINES TAKES OFF WITH BETTER SUPPLY CHAIN
MANAGEMENT
and reduced aircraft groundings would have a strong
impact on the airline’s bottom line. Richard
Zimmerman, Southwest’s manager of inventory
management, stated that “there’s a significant cost
when we have to ground aircraft because we ran out
of a part. The long-term, cost-effective way to solve
that problem was to increase productivity and to
ensure that our maintenance crews were supported
with the right spare parts, through the right software
application.”
Southwest’s management started looking for a
better inventory management solution, and a vendor
that was capable of working within the airline’s
unique corporate culture. After an extensive search,
Southwest eventually chose i2 Technologies, a
leading supply chain management software and
services company that was recently purchased by
JDA Software. Southwest implemented the i2
Demand Planner, i2 Service Parts Planner, and i2
Service Budget Optimizer to overhaul its supply
chain management and improve data visibility.
I2 Demand Planner improves Southwest’s
forecasts for all of the part location combinations in
its system, and provides better visibility into
demand for each part. Planners are able to differen-
tiate among individual parts based on criticality and
other dimensions such as demand volume, demand
variability, and dollar usage. I2 Service Parts Planner
helps Southwest replenish its store of parts and
ensures that “the right parts are in the right location
at the right time.“ The software can recommend the
best mix of parts for each location that will satisfy
the customer service requirements of that location
at the lowest cost. If excess inventory builds up in
certain service locations, the software will recom-
mend the most cost-efficient way to transfer that
excess inventory to locations with parts deficits. I2
Service Budget Optimizer helps Southwest use its
historical data of parts usage to generate forecasts of
future parts usage.
Together, these solutions gather data from
Southwest’s legacy systems and provide useful
information to Southwest’s managers. Most impor-
tantly, Southwest can recognize demand shortages
before they become problems, thanks to the visibil-
ity provided by i2’s solutions. Southwest’s managers
I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 345

1. Why is parts inventory management so important
at Southwest Airlines? What business processes
are affected by the airline’s ability or inability to
have required parts on hand?
2. Why management, organization, and technology
factors were responsible for Southwest’s problems
with inventory management?
3. How did implementing the i2 software change the
way Southwest ran its business?
4. Describe two decisions that were improved by
implementing the i2 system.
now have a clear and unobstructed view of all of the
data up and down the company’s supply chain.
By using what-if analysis, planners can quantify
the cost to the company of operating at different
levels of service. Zimmerman added that i2 “will
help us lower inventory costs and keep our cost per
air seat mile down to the lowest in the industry.
Also, the solutions will help us ensure that the
maintenance team can quickly repair the aircraft so
that our customers experience minimal delays.”
The results of the i2 implementation were
Visit i2’s site (www.i2.com) and learn more about
some of the other companies using its software. Pick
one of these companies, then answer the following
questions:
1. What problem did the company need to address
with i2’s software?
2. Why did the company select i2 as its software
vendor?
3. What were the gains that the company realized as
a result of the software implementation?
increased availability of parts, increased speed and
intelligence of decision making, reduced parts
inventory by 15 percent, saving the company over
$30 million, and increased service levels from 92
percent prior to the implementation to over 95 per-
cent afterwards.
Sources: Chris Lauer, Southwest Airlines: Corporations That Changed
the World, Greenwood Press, May 2010; www.i2.com, “Ensuring
Optimal Parts Inventory at Southwest Airlines,” and “Service Parts
Management,” accessed April 25, 2010; and www.southwest.com,
accessed July 1, 2010.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
346 Part Three Key System Applications for the Digital Age
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
partners 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 will use a Web interface to tap into suppliers’ systems to deter-
mine whether inventory and production capabilities match demand for the
firm’s products. Business partners will use Web-based supply chain manage-
ment tools to collaborate online on forecasts. Sales representatives will access
suppliers’ production schedules and logistics information to monitor customers’
order status.
G l o b a l S u p p l y C h a i n I s s u e s
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.

www.i2.com

www.southwest.com

www.i2.com

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 347
Global supply chains typically span greater geographic distances and time
differences than domestic supply chains and have participants from a number
of different countries. Although the purchase price of many goods might be
lower abroad, there are often additional costs for transportation, inventory (the
need for a larger buffer of safety stock), and local taxes or fees. Performance
standards may vary from region to region or from nation to nation. Supply
chain management may need to reflect foreign government regulations and
cultural differences. All of these factors impact how a company takes orders,
plans distribution, sizes warehousing, and manages inbound and outbound
logistics throughout the global markets it services.
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
companies are starting to use the Web to manage their global supply chain and
production issues.
For example, Koret of California, a subsidiary of apparel maker Kellwood Co.,
uses e-SPS Web-based software to gain end-to-end visibility into its entire global
supply chain. E-SPS features Web-based software for sourcing, work-in-progress
tracking, production routing, product-development tracking, problem identifi-
cation and collaboration, delivery-date projections, and production-related
inquiries and reports.
As goods are being sourced, produced, and shipped, communication is
required among retailers, manufacturers, contractors, agents, and logistics
providers. Many, especially smaller companies, still share product information
over the phone, via e-mail, or through faxes. These methods slow down the sup-
ply chain and also increase errors and uncertainty. With e-SPS, all supply chain
members communicate through a Web-based system. If one of Koret’s vendors
makes a change in the status of a product, everyone in the supply chain sees
the change.
In addition to contract manufacturing, globalization has encouraged out-
sourcing warehouse management, transportation management, and related
operations to third-party logistics providers, such as UPS Supply Chain
Solutions and Schneider Logistics Services. These logistics services offer Web-
based software to give their customers a better view of their global supply
chains. Customers are able to check a secure Web site to monitor inventory and
shipments, helping them run their global supply chains more efficiently.
D e m a n d – D r i v e n S u p p l y C h a i n s : F r o m P u s h t o P u l l
M a n u f a c t u r i n g a n d E f f i c i e n t C u s t o m e r R e s p o n s e
In addition to reducing costs, supply chain management systems facilitate
efficient customer response, enabling the workings of the business to be driven
more by customer demand. (We introduced efficient customer response
systems 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
master schedules are based on forecasts or best guesses of demand for prod-
ucts, 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 model or build-to-order, 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

348 Part Three Key System Applications for the Digital Age
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 system described in Chapter 3 is an exam-
ple 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 are able to adjust immediately to
changes in schedules or orders. Ultimately, the Internet could create a “digital
logistics nervous system” throughout the supply chain (see Figure 9-5).
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 operating bud-
get. Reducing supply chain costs may have a major impact on firm profitability.
In addition to reducing costs, supply chain management systems help
increase 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
customer purchases at the right time.
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.”

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 349
9. 3 CUSTOMER RELATIONSHIP MANAGEMENT
SYSTEMS
You’ve probably heard phrases such as “the customer is always right” or “the
customer comes first.” Today these words ring more true than ever. Because
competitive advantage based on an innovative new product or service is often
very short lived, companies are realizing that their only enduring competitive
strength may be their relationships with their customers. Some say that the
basis of competition 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
customers 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 really know their customers 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
different ways that customers interact with the firm (over the Web, the phone,
FIGURE 9-5 THE FUTURE INTERNET-DRIVEN SUPPLY CHAIN
The future 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.

350 Part Three Key System Applications for the Digital Age
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, including customer service,
sales, and marketing.
fax, and in person). It becomes especially difficult to integrate information from
all theses sources and to deal with the large numbers 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 organized in terms of that person’s account with the company. Other
pieces of information about the same customer might be organized by products
that were purchased. There is no way to consolidate all of 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
telephone, e-mail, customer service desk, conventional mail, Web site, 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. Such systems
likewise provide customers with a single view of the company regardless of
what touch point the customer uses (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?” (It can cost six times more
to sell to a new customer than to an existing customer.) “Who are our most
profitable customers?” and “What do these profitable customers want to buy?”
Firms use the answers to these questions to acquire new customers, provide
better service and support to existing customers, customize their offerings more
precisely to customer preferences, and provide ongoing value to retain
profitable customers.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 351
CUSTOMER RELATIONSHIP MANAGEMENT SOFTWARE
Commercial CRM software packages range from niche tools that perform
limited functions, such as personalizing Web sites for specific customers, to
large-scale enterprise applications that capture myriad interactions with
customers, analyze 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).
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-owned Siebel Systems and PeopleSoft, 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.
S a l e s Fo r c e A u t o m a t i o n ( S FA )
Sales force automation modules in CRM systems help sales staff increase their
productivity by focusing sales efforts on the most profitable customers, those
who are good candidates for sales and services. CRM systems 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 personalized recommendations. CRM software enables sales, marketing,
and delivery departments to easily share customer and prospect information. It
increases each salesperson’s efficiency in reducing the cost per sale as well as
the cost of acquiring new customers and retaining old ones. CRM software also
has capabilities for sales forecasting, territory management, and team selling.
C u s t o m e r S e r v i c e
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
customer 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. Once the customer’s data are in the system, any service
representative can handle the customer relationship. Improved access to
consistent and accurate customer information help 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

352 Part Three Key System Applications for the Digital Age
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
company Web site 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.
M a r k e t i n g
CRM systems support direct-marketing campaigns by providing capabilities for
capturing prospect and customer data, for providing product and service
information, for qualifying leads for targeted marketing, and for scheduling and
tracking direct-marketing mailings or e-mail (see Figure 9-7). Marketing modules
also include tools for analyzing marketing and customer data, identifying prof-
itable and unprofitable customers, designing products and services to satisfy spe-
cific 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
help firms manage and execute marketing campaigns at all stages, from
planning to determining the rate of success for each campaign.
Figure 9-8 illustrates the most important capabilities for sales, service, and mar-
keting processes that would be found in major CRM software products. Like enter-
prise software, 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
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 e-mail, direct mail, telephone, the Web, and
wireless messages.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 353
FIGURE 9-8 CRM SOFTWARE CAPABILITIES
The major CRM software products support business processes in sales, service, and marketing,
integrating customer information from many different sources. Included are support for both the
operational and analytical aspects of CRM.
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.

354 Part Three Key System Applications for the Digital Age
servicing customers provides firms with opportunities to increase customer
retention 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 customer’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 service to the customer to encourage the
customer to keep transacting business with the company. You will find more
information on other best-practice business processes in CRM systems in our
Learning Tracks.
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 automation,
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 warehouses that consolidate the
data from operational CRM systems and customer touch points for use with online
analytical processing (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).
FIGURE 9-10 ANALYTICAL CRM DATA WAREHOUSE
Analytical CRM uses a customer data warehouse and tools to analyze customer data collected from
the firm’s customer touch points and from other sources.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 355
Another important output of analytical CRM is the customer’s lifetime value
to the firm. Customer lifetime value (CLTV) is based on the relationship
between 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 by
identifying the most profitable customers and segments for focused marketing
and cross-selling.
Customer churn is reduced as sales, service, and marketing better respond 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 ENTERPRISE APPLICATIONS: NEW
OPPORTUNITIES AND CHALLENGES
Many firms have implemented enterprise systems and systems for supply
chain management and customer relationship 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
organization 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, as
well as more efficient customer response and higher product and customer
profitability make enterprise systems and systems for supply chain manage-
ment and customer relationship management 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
expensive to purchase and implement. It might take a large Fortune 500
company several years to complete a large-scale implementation of an
enterprise system or a system for SCM or CRM. The total cost for an average
large system implementation based on SAP or Oracle software, including
software, database tools, consulting fees, personnel costs, training, and
perhaps hardware costs, runs over $12 million. The implementation cost of a
enterprise system for a small or mid-sized company based on software
from a “Tier II” vendor such as Epicor or Lawson averages $3.5 million.
(Wailgum, 2009).
Enterprise applications require not only deep-seated technological changes
but also fundamental changes in the way the business operates. Companies

356 Part Three Key System Applications for the Digital Age
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.
Supply chain management systems require multiple organizations to share
information and business 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 get-
ting products to store shelves when it first implemented i2 Technologies supply
chain management software in July 2000. The i2 software did not work well
with Kmart’s promotion-driven business model, which created sharp spikes in
drops in demand for products. Overstock.com’s order tracking system went
down for a full week in October 2005 when the company replaced a home-
grown system with an Oracle enterprise system. The company rushed to
implement the software, and did not properly synchronize the Oracle soft-
ware’s process for recording customer refunds with its accounts receivable sys-
tem. These problems contributed to a third-quarter loss of $14.5 million that
year.
Enterprise applications also introduce “switching costs.” Once 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 customer relationship management, supply chain
management, or enterprise 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.
Our Interactive Session on Technology describes how on-demand and cloud-
based tools deal with this problem as well.
Companies adopting enterprise applications can also save time and money
by keeping customizations to the 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 over 6,400 customizations. The
company is now replacing it with a “plain vanilla,” non-customized-version of
SAP enterprise software and changing its business processes to conform to the
software (Johnson, 2010).
NEXT-GENERATION ENTERPRISE APPLICATIONS
Today, enterprise application vendors are delivering more value by becoming
more flexible, Web-enabled, and capable of integration with other systems.
Standalone enterprise systems, customer relationship systems, and supply
chain management systems are becoming a thing of the past.
The major enterprise software vendors have created what they call
enterprise solutions, enterprise suites, or e-business suites to make their
customer relationship management, supply chain management, and enter-

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 357
prise systems work closely with each other, and link to systems of cus-
tomers and suppliers. SAP Business Suite, Oracle’s e-Business Suite, and
Microsoft’s Dynamics suite (aimed at mid-sized companies) are examples,
and they now utilize Web services and service-oriented architecture (SOA,
see Chapter 5).
SAP’s next-generation enterprise applications are based on its enterprise
service-oriented architecture. It incorporates service-oriented architecture
(SOA) standards and uses its NetWeaver tool as an integration platform linking
SAP’s own applications and Web services developed by independent software
vendors. The goal is to make enterprise applications easier to implement and
manage.
For example, the current version of SAP enterprise software combines key
applications in finance, logistics and procurement, and human resources
administration into a core ERP component. Businesses then extend these
applications by linking to function-specific Web services such as employee
recruiting or collections management provided by SAP and other vendors. SAP
provides over 500 Web services through its Web site.
Oracle also has included SOA and business process management capabilities
into its Fusion middleware products. Businesses can use Oracle tools to
customize Oracle’s applications without breaking the entire application.
Next-generation enterprise applications also include open source and
on-demand solutions. Compared to commercial enterprise application
software, open source products such as Compiere, Apache Open for Business
(OFBiz), and Openbravo are not as mature, nor do they include as much
support. However, companies such as small manufacturers are choosing this
option because there are no software licensing fees and fees are based on usage.
(Support and customization for open source products cost extra.)
SAP now offers an on-demand enterprise software solution called Business
ByDesign for small and medium-sized businesses in select countries. For large
businesses, SAP’s on-site software is the only version available. SAP is, however,
hosting function-specific applications (such as e-sourcing and expense manage-
ment) available by subscription that integrate with customers’ on-site SAP
Business Suite systems.
The most explosive growth in software as a service (SaaS) offerings has been
for customer relationship management. Salesforce.com has been the leader in
hosted CRM solutions, but Oracle and SAP have also developed SaaS capabili-
ties. SaaS and cloud-based versions of enterprise systems are starting to be
offered by vendors such as NetSuite and Plex Online. Compiere sells both cloud
and on-premise versions of its ERP systems. Use of cloud-based enterprise
applications is starting to take off, as discussed in the Interactive Session on
Technology.
The major enterprise application vendors also offer portions of their
products 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.
Salesforce.com and Oracle have added Web 2.0 capabilities that enable
organizations to identify new ideas more rapidly, improve team productivity,
and deepen interactions with customers. For example, Salesforce Ideas
enables subscribers to harness the “wisdom of crowds” by allowing their
customers to submit and discuss new ideas. Dell Computer deployed this
technology as Dell IdeaStorm (dellideastorm.com) to encourage its
customers to suggest and vote on new concepts and feature changes in Dell
products.

I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y
You’ve already read about Salesforce.com in this
book. It’s the most successful enterprise-scale
software as a service (SaaS). Until recently, there
were few other SaaS enterprise software applications
available on the Internet. Today, that’s changed, as a
growing number of cloud-based enterprise resource
planning (ERP) and customer relationship manage-
ment (CRM) application providers enter this market-
space. While traditional enterprise software vendors
like Oracle are using their well-established position
to grab a share of the cloud-based application market,
newcomers like RightNow, Compiere, and SugarCRM
have found success using some different tactics.
Most companies interested in cloud computing are
small to midsize and lack the know-how or financial
resources to successfully build and maintain ERP
and CRM applications in-house. Others are simply
looking to cut costs by moving their applications to
the cloud. According to the International Data
Corporation (IDC), about 3.2 percent of U.S. small
businesses, or about 230,000 businesses, use cloud
services. Small-business spending on cloud services
increased by 36.2 percent in 2010 to $2.4 billion.
Even larger companies have made the switch to
the cloud. For example, camera manufacturer Nikon
decided to go with a cloud-based solution as it
attempted to merge customer data from 25 disparate
sources and applications into a single system.
Company officials were hoping to eliminate
maintenance and administrative costs, but not at the
expense of a storage system that met their require-
ments, was never out of service, and worked
perfectly.
Nikon found its solution with RightNow, a cloud-
based CRM provider located in Bozeman, Montana.
The company was founded in 1997 and has attracted
firms intrigued by its customizable applications,
impeccable customer service, and robust infrastruc-
ture. Prices start at $110 per user per month and the
average deployment time is 45 days.
Nikon had been using several different systems to
perform business functions, and was struggling to
merge customer data located in a variety of legacy
systems. While looking for vendors to help imple-
ment a Web-based FAQ system to answer customer
questions and provide support on the basis of these
data, the company came across RightNow. Nikon
found that not only did RightNow have the capabil-
ENTERPRISE APPLICATIONS MOVE TO THE CLOUD
ity to implement that system, but it also had an
array of other useful services. When Nikon discov-
ered that it could combine outbound e-mail, contact
management, and customer records into a single
system in RightNow’s cloud, it made the move,
expecting to receive a solid return on the invest-
ment.
What Nikon got was far more than expected: an
astonishing 3,200 percent return on investment
(ROI), equivalent to a savings of $14 million after
three years! The FAQ system reduced the number of
incoming calls to Nikon’s customer service staff.
More customers found the information they needed
on the Web, call response times dropped by 50 per-
cent, and incoming e-mail dropped by 70 percent.
While Nikon still hosts its SAP ERP system internally
due to its complexity, Nikon switched its entire CRM
system to RightNow.
Not all companies experience gains of that magni-
tude, and cloud computing does have drawbacks.
Many companies are concerned about maintaining
control of their data and security. Although cloud
computing companies are prepared to handle these
issues, availability assurances and service-level
agreements are uncommon. Companies that manage
their CRM apps with a cloud infrastructure have no
guarantees that their data will be available at all
times, or even that the provider will still exist in the
future.
Many smaller companies have taken advantage of
a new type of cloud computing known as open
source cloud computing. Under this model, cloud
vendors make the source code of their applications
available to their customers and allow them to make
any changes they want on their own. This differs
from the traditional model, where cloud vendors
offer applications which are customizable, but not at
the source code level.
For example, Jerry Skaare, president of O-So-Pure
(OSP), a manufacturer of ultraviolet water purifica-
tion systems, selected the Compiere Cloud Edition
versions of ERP software hosted on the Amazon
EC2 Cloud virtual environment. OSP had long
outgrown its existing ERP system and was held back
by inefficient, outdated processes in accounting,
inventory, manufacturing, and e-commerce.
Compiere ERP provides a complete end-to-end ERP
solution that automates processes from accounting
358 Part Three Key System Applications for the Digital Age

C A S E S T U D Y Q U E S T I O N S
1. What types of companies are most likely to adopt
cloud-based ERP and CRM software services?
Why? What companies might not be well-suited
for this type of software?
2. What are the advantages and disadvantages of
using cloud-based enterprise applications?
3. What management, organization, and technology
issues should be addressed in deciding whether to
use a conventional ERP or CRM system versus a
cloud-based version?
to purchasing, order fulfillment, manufacturing,
and warehousing.
Compiere uses a model-driven platform that stores
business logic in an applications dictionary rather
than being hard-coded into software programs. Firms
using Compiere are able to customize their applica-
tions by creating, modifying, or deleting business
logic in the applications dictionary without extensive
programming. In contrast to traditional ERP systems
that encourage subscribers to modify their business
processes to conform to the software, Compiere
encourages its subscribers to customize its system to
match their unique business needs.
The fact that the Compiere software is open
source also makes it easier for users to modify. OSP
was attracted to this feature, along with the robust
functionality, scalability, and low cost, of the
Compiere ERP Cloud Edition. Skaare said that he
was comfortable that “the little idiosyncrasies of my
company” could be handled by the software. Though
Skaare is unlikely to make any changes himself, it’s
important for him to know that his staff has the
option to tweak OSP’s ERP applications. Open
source cloud computing provides companies that
flexibility.
Visit the Web site of RightNow, Compiere, or another
competing company offering a cloud-based version of
ERP or CRM. Then answer the following questions:
1. What kinds of open source offerings does the
company have, if any? Describe some of the
features.
2. Toward what types of companies is the company
marketing its services?
3. What other services does the company offer?
Not to be outdone, established CRM companies
like Oracle have moved into SaaS. Pricing starts at
$70 per month per user. Oracle may have an edge
because its CRM system has so many capabilities and
includes embedded tools for forecasting and analyt-
ics, including interactive dashboards. Subscribers are
able to use these tools to answer questions such as
“How efficient is your sales effort?” or “How much
are your customers spending?”
Bryant & Stratton College, a pioneer in career
education, used Oracle CRM On Demand to create
more successful marketing campaigns. Bryant &
Stratton analyzed past campaigns for tech-savvy recent
high school graduates, as well as older, non-traditional
students returning to school later in life. Oracle CRM
On Demand tracked advertising to prospective stu-
dents and determined accurate costs for each lead,
admissions application, and registered attending stu-
dent. This information helped the school determine
the true value of each type of marketing program.
Sources: Marta Bright, “Know Who. Know How.” Oracle Magazine,
January/February 2010; Brad Stone, “Companies Slowly Join
Cloud-Computing,” The New York Times, April 28, 2010; and Esther
Shein, “Open-source CRM and ERP: New Kids on the Cloud,”
Computerworld, October 30, 2009.
M I S I N A C T I O N
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise 359
Enterprise application vendors have also beefed up their business intelli-
gence features to help managers obtain more meaningful information from
the massive amounts of data generated by these systems. Rather than requir-
ing users to leave an application and launch separate reporting and analytics
tools, the vendors are starting to embed analytics within the context of the
application itself. They are also offering complementary analytics products,
such as SAP Business Objects and Oracle Business Intelligence Enterprise
Edition. We discuss business intelligence analytics in greater detail in
Chapter 12.

360 Part Three Key System Applications for the Digital Age
S e r v i c e P l a t f o r m s
Another way of extending enterprise applications is to use them to create service
platforms for new or improved business processes that integrate information
from multiple functional areas. These enterprise-wide service platforms provide
a greater degree of cross-functional integration than the traditional enterprise
applications. A service platform integrates multiple applications from multiple
business functions, business units, or business partners to deliver a seamless
experience for the customer, employee, manager, or business partner.
For instance, the order-to-cash process involves receiving an order and
seeing it all the way through obtaining payment for the order. This process
begins with lead generation, marketing campaigns, and order entry, which are
typically supported by CRM systems. Once the order is received, manufactur-
ing is scheduled and parts availability is verified—processes that are usually
supported by enterprise software. The order then is handled by processes for
distribution planning, warehousing, order fulfillment, and shipping, which are
usually supported by supply chain management systems. Finally, the order is
billed to the customer, which is handled by either enterprise financial applica-
tions or accounts receivable. If the purchase at some point required customer
service, customer relationship management systems would again be invoked.
A service such as order-to-cash requires data from enterprise applications
and financial systems to be further integrated into an enterprise-wide
composite process. To accomplish this, firms need software tools that use
existing applications as building blocks for new cross-enterprise processes (see
Figure 9-11). Enterprise application vendors provide middleware and tools that
use XML and Web services for integrating enterprise applications with older
legacy applications and systems from other vendors.
FIGURE 9-11 ORDER-TO-CASH SERVICE
Order-to-cash is a composite process that integrates data from individual enterprise systems and
legacy financial applications. The process must be modeled and translated into a software system
using application integration tools.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 361
Increasingly, these new services will be delivered through portals. Portal
software can integrate information from enterprise applications and disparate
in-house legacy systems, presenting it to users through a Web interface so that
the information appears to be coming from a single source. For example, Valero
Energy, North America’s largest refiner, used SAP NetWeaver Portal to create a
service for wholesale clients to view their account information all at once.
SAP NetWeaver Portal provides an interface to clients’ invoice, price, electronic
funds, and credit card transaction data stored in SAP’s customer relationship
management system data warehouse as well as in non-SAP systems.
9.5 HANDS-ON MIS PROJECTS
The projects in this section give you hands-on experience analyzing business
process integration, suggesting supply chain management and customer
relationship management applications, using database software to manage
customer service requests, and evaluating supply chain management business
services.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. 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, and its process for tracking dealers that failed to report was
cumbersome. There was no real incentive for dealers to share information with
the company. How could CRM and partner relationship management (PRM)
systems help solve this problem?
2. Office Depot sells a wide range of office products and services in the United
States and internationally, including general office supplies, computer supplies,
business machines (and related supplies), and office furniture. 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 replen-
ish 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.
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g D a t a b a s e S o f t w a r e
t o M a n a g e C u s t o m e r S e r v i c e R e q u e s t s
Software skills: Database design; querying and reporting
Business skills: Customer service analysis
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 number and

362 Part Three Key System Applications for the Digital Age
writes down the service request number, 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 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.
Management is not happy with this arrangement because the most impor-
tant and profitable clients—those with accounts of more than $70,000—are
treated no differently from its clients with small accounts. It would like to find
a way to provide its best customers with better service. Management 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 MyMISLab. A sample is shown above, but the Web site may have a
more recent version of this database for this exercise. The database table includes
fields for the account ID, company (account) name, street address, city, state, ZIP
code, account size (in dollars), contact last name, contact first name, and contact
telephone number. The contact is the name of the person in each company who is
responsible for contacting Prime about maintenance and repair work.
Use your database software to design a solution that would enable Prime’s cus-
tomer 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 15 service requests. Create several reports
that would be of interest to management, such as a list of the highest—and low-
est—priority accounts or a report showing the most frequently occurring service
problems. Create a report listing service calls that customer service representa-
tives should respond to first on a specific date.
A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : E v a l u a t i n g S u p p l y
C h a i n M a n a g e m e n t S e r v i c e s
Software skills: Web browser and presentation software
Business skills: Evaluating supply chain management services
Trucking companies no longer merely carry goods from one place to another.
Some also provide supply chain management services to their customers and
help them manage their information. In this project, you’ll use the Web to
research and evaluate two of these business services.
Investigate the Web sites of two companies, UPS Logistics and Schneider
Logistics, 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 their
clients?

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 363
• How can customers use the Web sites of each company to help them with
supply chain management?
• Compare the supply chain management services provided by these compa-
nies. Which company would you select to help your firm manage its supply
chain? Why?
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. SAP Business Process Map
2. Business Processes in Supply Chain Management and Supply Chain Metrics
3. Best-Practice Business Processes in CRM Software
Review Summary
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 database. The database collects data from and feeds the
data into numerous applications that can support nearly all of an organiza-
tion’s internal business activities. When new information is entered by one
process, 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 generated by enterprise systems
helps managers evaluate organizational performance.
2. How do supply chain management systems coordinate planning,
production, and logistics with suppliers?
Supply chain management 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, produce, 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 plan-
ning and for supply chain execution. Internet technology facilitates the man-
agement of global supply chains by providing the connectivity for organizations
in different countries to share supply chain information. Improved communi-
cation among supply chain members also facilitates efficient customer
response and movement toward a demand-driven model.
3. How do customer relationship management systems help firms achieve
customer intimacy?
Customer relationship management (CRM) systems integrate and automate
customer-facing processes in sales, marketing, and customer service, providing
an enterprise-wide view of customers. Companies can use this knowledge
when they interact with customers to provide them with better service or to sell

364 Part Three Key System Applications for the Digital Age
new products and services. These systems also identify profitable or nonprof-
itable customers or opportunities to reduce the churn rate.
The major customer relationship management software packages provide
capabilities for both operational CRM and analytical CRM. They often include
modules for managing relationships with selling partners (partner relationship
management) and for employee relationship management.
4. What are the challenges posed by enterprise applications?
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 performance. 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 perfor-
mance improvements. Employees require training to prepare for new proce-
dures and roles. Attention to data management is essential.
5. How are enterprise applications used in platforms for new cross-functional
services?
Service platforms integrate data and processes from the various enterprise
applications (customer relationship management, supply chain manage-
ment, and enterprise systems), as well as from disparate legacy applications
to create new composite business processes. Web services tie various
systems together. The new services are delivered through enterprise portals,
which can integrate disparate applications so that information appears to be
coming from a single source. Open source, mobile, and cloud versioins of
some of these products are becoming available.
Key Terms
Analytical CRM, 354
Bullwhip effect, 342
Churn rate, 355
Cross-selling, 352
Customer lifetime value (CLTV), 355
Demand planning, 344
Employee relationship management (ERM), 351
Enterprise software, 338
Just-in-time strategy, 342
Operational CRM, 354
Partner relationship management (PRM), 351
Pull-based model, 347
Push-based model, 347
Service platform, 360
Supply chain, 340
Supply chain execution systems, 344
Supply chain planning systems, 344
Touch point, 350
Review Questions
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.
2. How do supply chain management systems coor-
dinate 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 planning
systems and supply chain execution systems.
• Describe the challenges of global supply
chains and how Internet technology can help
companies manage them better.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 365
• Distinguish between a push-based and pull-
based model of supply chain management
and explain how contemporary supply chain
management systems facilitate a pull-based
model.
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 customer
relationship management software for sales,
marketing, and customer service.
Discussion Questions
1. Supply chain management is less about manag-
ing the physical movement of goods and more
about managing information. Discuss the implica-
tions of this statement.
2. If a company wants to implement an enterprise
application, it had better do its homework.
Discuss the implications of this statement.
3. Which enterprise application should a business
install first: ERP, SCM, or CRM? Explain your
answer.
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
• Distinguish between operational and analytical
CRM.
4. What are the challenges posed by enterprise
applications?
• List and describe the challenges posed by
enterprise applications.
• Explain how these challenges can be
addressed.
5. How are enterprise applications used in platforms
for new cross-functional services?
• Define a service platform and describe the
tools for integrating data from enterprise
applications.
• How are enterprise applications taking advan-
tage of cloud computing, wireless technology,
Web 2.0, and open source technology?
Collaboration and Teamwork: Analyzing Enterprise Application Vendors
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 as well as a large
one? If possible, use Google Sites to post links to Web
pages, team communication announcements, and
work assignments; to brainstorm; and to work collabo-
ratively on project documents. Try to use Google Docs
to develop a presentation of your findings for the class.
With a group of three or four 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 i2 and
SAP, or the customer relationship management sys-
tems of Oracle’s Siebel CRM and Salesforce.com. Use
what you have learned from these companies’ Web
sites to compare the software packages you have

B o r d e r S t a t e s I n d u s t r i e s Fu e l s Ra p i d G r o w t h w i t h E R P
CASE STUDY
order States Industries Inc., also known as
Border States Electric (BSE), is a wholesale
distributor for the construction, industrial,
utility, and data communications markets.
The company is headquartered in Fargo, North
Dakota, and has 57 sales offices in states along the
U.S. borders with Canada and Mexico as well as in
South Dakota, Wisconsin, Iowa, and Missouri. BSE
has 1,400 employees and is wholly employee-owned
through its employee stock ownership plan. For the
fiscal year ending March 31, 2008, BSE earned rev-
enues of over US $880 million.
BSE’s goal is to provide customers with what they
need whenever they need it, including providing
custom services beyond delivery of products. Thus,
the company is not only a wholesale distributor but
also a provider of supply chain solutions, with
extensive service operations such as logistics, job-site
trailers, and kitting (packaging individually separate
but related items together as one unit). BSE has
distribution agreements with more than 9,000 prod-
uct vendors.
BSE had relied on its own legacy ERP system
called Rigel since 1988 to support its core business
processes. However, Rigel had been designed
exclusively for electrical wholesalers, and by the
mid-1990s, the system could not support BSE’s new
lines of business and extensive growth.
At that point, BSE’s management decided to
implement a new ERP system and selected the
enterprise software from SAP AG. The ERP solution
included SAP’s modules for sales and distribution,
materials management, financials and controlling,
and human resources.
BSE initially budgeted $6 million for the new
system, with a start date of November 1, 1998. Senior
management worked with IBM and SAP consulting to
implement the system. Although close involvement
of management was one key ingredient in the
systems’ success, day-to-day operations suffered
while managers were working on the project.
BSE also decided to customize the system
extensively. It wrote its own software to enable the
ERP system to interface automatically with systems
from other vendors, including Taxware Systems, Inc.,
Innovis Inc., and TOPCALL International GmbH.
The Taxware system enabled BSE to comply with the
sales tax requirements of all the states and munici-
B palities where it conducts business. The Innovissystem supported electronic data interchange (EDI)so that BSE could electronically exchange purchase
and payment transactions with its suppliers. The
TOPCALL system enabled BSE to fax customers and
vendors directly from the SAP system.
At the time of this implementation, BSE had no
experience with SAP software, and few consultants
familiar with the version of the SAP software that
BSE was using. Instead of adopting the best-practice
business processes embedded in the SAP software,
BSE hired consultants to further customize the SAP
software to make its new SAP system look like its old
Rigel system in certain areas. For example, it tried to
make customer invoices resemble the invoices
produced by the old Rigel system.
Implementing these changes required so much
customization of the SAP software that BSE had to
delay the launch date for the new ERP system until
February 1, 1999. By that time, continued customiza-
tion and tuning raised total implementation costs to
$9 million (an increase of 50 percent).
Converting and cleansing data from BSE’s legacy
system took far longer than management had antici-
pated. The first group of “expert users” were trained
too early in the project and had to be retrained when
the new system finally went live. BSE never fully
tested the system as it would be used in a working
production environment before the system actually
went live.
For the next five years, BSE continued to use its
SAP ERP system successfully as it acquired several
small companies and expanded its branch office infra-
structure to 24 states. As the business grew further,
profits and inventory turns increased. However, the
Internet brought about the need for additional
changes, as customers sought to transact business
with BSE through an e-commerce storefront. BSE
automated online credit card processing and special
pricing agreements (SPAs) with designated cus-
tomers. Unfortunately, the existing SAP software did
not support these changes, so the company had to
process thousands of SPAs manually.
To process a credit card transaction in a branch
office, BSE employees had to leave their desks, walk
over to a dedicated credit card processing system in
the back office, manually enter the credit card
numbers, wait for transaction approval, and then
366 Part Three Key System Applications for the Digital Age

return to their workstations to continue processing
sales transactions.
In 2004, BSE began upgrading its ERP system to a
more recent version of the SAP software. The soft-
ware included new support for bills of material and
kitting, which were not available in the old system.
This functionality enabled BSE to provide better
support to utility customers because it could prepare
kits that could be delivered directly to a site.
This time the company kept customization to a min-
imum and used the SAP best practices for wholesale
distribution embedded in the software. It also replaced
TOPCALL with software from Esker for faxing and e-
mailing outbound invoices, order acknowledgments,
and purchase orders and added capabilities from
Vistex Inc. to automate SPA rebate claims processing.
BSE processes over 360,000 SPA claims each year, and
the Vistex software enabled BSE to reduce rebate ful-
fillment time to 72 hours and transaction processing
time by 63 percent. In the past, it took 15 to 30 days for
BSE to receive rebates from vendors.
BSE budgeted $1.6 million and 4.5 months for
implementation, which management believed was
sufficient for a project of this magnitude. This time
there were no problems. The new system went live
on its target date and cost only $1.4 million to
implement—14 percent below budget.
In late 2006, BSE acquired a large company that
was anticipated to increase sales volume by 20
percent each year. This acquisition added 19 new
branches to BSE. These new branches were able to
run BSE’s SAP software within a day after the acquisi-
tion had been completed. BSE now tracks 1.5 million
unique items with the software.
Since BSE first deployed SAP software in 1998,
sales have increased 300 percent, profits have
climbed more than 500 percent, 60 percent of
accounts payable transactions take place electroni-
cally using EDI, and SPA processing has been reduced
by 63 percent. The company turns over its inventory
more than four times per year. Instead of waiting 15
to 20 days for monthly financial statements, monthly
and year-to-date financial results are available within
a day after closing the books. Manual work for han-
dling incoming mail, preparing bank deposits, and
taking checks physically to the bank has been signifi-
cantly reduced. Over 60 percent of vendor invoices
arrive electronically, which has reduced staff size in
accounts payable and the number of transaction
errors. Transaction costs are lower.
The number of full-time BSE employees did
increase in the information systems area to support
the SAP software. BSE had initially expected to have
3 IT staff supporting the system, but needed 8 people
when the first ERP implementation went live in 1999
and 11 by 2006 to support additional SAP software
and the new acquisition. BSE’s information technol-
ogy (IT) costs rose by approximately $3 million per
year after the first SAP implementation. However,
sales expanded during the same period, so the
increased overhead for the system produced a cost
increase of only .5 percent of total sales.
BSE management has pointed out that much of
the work that was automated by the ERP systems has
been in the accounting department and involved
activities that were purely transactional. This has
freed up resources for adding more employees who
work directly with customers trying to reduce costs
and increase sales.
In the past, BSE had maintained much of its data
outside its major corporate systems using PC-based
Microsoft Access database and Excel spreadsheet soft-
ware. Management lacked a single company-wide
version of corporate data because the data were frag-
mented into so many different systems. Now the
company is standardized on one common platform
and the information is always current and available to
management. Management can obtain a picture of
how the entire business is performing at any moment
in time. Since the SAP system makes all of BSE’s plan-
ning and budgeting data available online, manage-
ment is able to make better and quicker decisions.
In 2006, Gartner Group Consultants performed an
independent evaluation of BSE’s ERP implementa-
tion. Gartner interviewed top executives and ana-
lyzed BSE data on the impact of the ERP system on
BSE’s business process costs, using costs as a per-
centage of sales as its final metric for assessing the
financial impact of SAP software. Cost categories
analyzed included costs of goods sold, overhead and
administration, warehousing costs, IT support, and
delivery.
Gartner’s analysis validated that the SAP software
implementation cost from 1998 to 2001 did indeed
total $9 million and that this investment was paid
back by savings from the new ERP system within 2.5
years. Between 1998 and 2006, the SAP software
implemented by BSE produced total savings of $30
million, approximately one-third of BSE’s cumulative
earnings during the same period. As a percentage of
sales, warehouse costs went down 1 percent, deliv-
ery costs decreased by .5 percent, and total overhead
costs declined by 1.5 percent. Gartner calculated the
total return on investment (ROI) for the project
between 1998 and 2006 was $3.3 million per year, or
37 percent of the original investment.
Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 367

BSE is now focusing on providing more support
for Internet sales, including online ordering, inven-
tory, order status, and invoice review, all within a
SAP software environment. The company imple-
mented SAP NetWeaver Master Data Management to
provide tools to manage and maintain catalog data
and prepare the data for publication online and in
traditional print media. The company is using SAP’s
Web Dynpro development environment to enable
wireless warehouse and inventory management
activities to interact with the SAP software. And it is
using SAP NetWeaver Business Intelligence software
to learn more about customers, their buying habits,
and opportunities to cross-sell and upsell products.
Sources: Border States Industries, “Operating System-SAP
Software,” 2010; Jim Shepherd and Aurelie Cordier, “Wholesale
Distributor Uses ERP Solution to Fuel Rapid Growth,” AMR
Research, 2009; SAP AG, “Border States Industries: SAP Software
Empowers Wholesale Distributor,” 2008; www.borderstateselec-
tric.com, accessed July 7, 2009; and “Border States (BSE),” 2008
ASUG Impact Award.
CASE STUDY QUESTIONS
1. What problems was Border States Industries
encountering as it expanded? What management,
organization, and technology factors were respon-
sible for these problems?
2. How easy was it to develop a solution using SAP
ERP software? Explain your answer.
3. List and describe the benefits from the SAP
software.
4. How much did the new system solution transform
the business? Explain your answer.
5. How successful was this solution for BSE? Identify
and describe the metrics used to measure the
success of the solution.
6. If you had been in charge of SAP’s ERP implemen-
tations, what would you have done differently?
368 Part Three Key System Applications for the Digital Age

www.borderstateselectric.com

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LEARNING OBJECTIVESS
After reading this chapter,
you will be able to answer
the following questions:
1. What are the unique features of
e-commerce, digital markets, and
digital goods?
2. What are the principal e-commerce
business and revenue models?
3. How has e-commerce transformed
marketing?
4. How has e-commerce affected
business-to-business transactions?
5. What is the role of mobile com-
merce in business and what are the
most important m-commerce
applications?
6. What issues must be addressed
when building an e-commerce Web
site?
CHAPTER OUTLINE
10.1 E-COMMERCE AND THE INTERNET
E-commerce Today
Why E-commerce is Different
Key Concepts in E-commerce: Digital Markets and
Digital Goods in a Global Marketplace
10.2 E-COMMERCE: BUSINESS AND TECHNOLOGY
Types of E-commerce
E-commerce Business Models
E-commerce Revenue Models
Web 2.0: Social Networking and the Wisdom of
Crowds
E-commerce Marketing
B2B E-commerce: New Efficiencies and
Relationships
10.3 THE MOBILE DIGITAL PLATFORM AND
MOBILE E-COMMERCE
Mobile commerce Services and Applications
10.4 BUILDING AN E-COMMERCE WEB SITE
Pieces of the Site-Building Puzzle
Business Objectives, System Functionality, and
Information Requirements
Building the Web Site: In-House Vs. Outsourcing
10.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Improving Decision Making: Using a Spreadsheet to
Analyze a Dot-Com Business
Achieving Operational Excellence: Evaluating
E-commerce Hosting Services
LEARNING TRACK MODULES
Creating a Web Page
E-commerce Challenges: The Story of Online
Groceries
Build an E-commerce Business Plan
Hot New Careers in E-commerce
Chapter 10
E-commerce: Digital Markets,
Digital Goods
Interactive Sessions:
Twitter Searches for a Business
Model
Facebook: Managing Your
Privacy for Their Profit

371
Food, a new organic burger restaurant in Manhattan, opened its doors with a promise
of delicious food. But what’s equally delicious are its plans to drive the business using
social networking. This restaurant wants to be much more than a place to dine. It wants
to be a vast social networking experience.
Inside the restaurant, located at the corner of Madison Avenue and 40th Street, a 240-
square-foot monitor constantly streams Twitter tweets, restaurant information, and
Foursquare check-ins. Foursquare is a Web and mobile application that allows registered
users to connect with friends and update their location information. Points are awarded for
“checking in” at selected restaurants, bars, and other sites. Customers see tweets and status
updates and reply to them or add their own messages with their cell phones or other mobile
devices using 4Food’s free Wi-Fi wireless Internet connection.
This restaurant has multiple options for placing an order. You can give your order to a
restaurant employee using an iPad, or you can place the order online yourself. Naturally,
4Food has its own Facebook page, which it uses for social marketing. Tagging its Facebook
wall makes you eligible to win an iPad. 4Food offered $20 worth of food to whoever was the
first to tweet a picture of himself or herself in front of the restaurant’s “tag wall”—a wall in
the front of the restaurant inviting people to write “tweets” using a Magic Marker. 4Food
also uses social networks for hiring and to promote it’s “De-Junk NYC” campaign to
promote innovative ideas for improving the city.
But what makes 4Food really stand out is its use of crowdsourcing for both marketing and
menu development. This restaurant has an online tool for customers to invent their own
sandwiches and other dishes and to give their inventions clever names. Every time some-
one orders an item invented by another customer, the inventor receives a $.25 in-store
credit. With 4Food’s list of ingredients, millions of combinations are possible.
Some customers will no doubt use their extensive social networks to promote the burgers
they invented. Those with hundreds of thousands of followers on social networks could
conceivably earn free burgers for the rest of their lives if they constantly promote 4Food. All
of these measures create very low- cost incentives for large numbers of customers to actively
promote the restaurant. They also generate word-of-mouth “buzz” with minimal expendi-
4FOOD: BURGERS GO SOCIAL
4
ture. All it takes is establishing
a presence on social networks
and rolling out promotions.
Will 4Food be successful?
Competing with 20,000 other
New York City restaurants
won’t be easy. But by using
social networking technology
to forge ties with customers
and giving those customers a
stake in the success of prod-
ucts, 4Food hopes to have the
recipe for a successful busi-
ness.
Sources: Mike Elgan, “New York
Burger Joint Goes Social, Mobile,”
Computerworld, May 31, 2010 and
www.4food.com, accessed October
22, 2010.

www.4food.com

372 Part Three Key System Applications for the Digital Age
4Food exemplifies the new face of e-commerce. Selling physical goods onthe Internet is still important, but much of the excitement and interest
now centers around services and social experiences-connecting with friends
and family through social networking; sharing photos, video, and music, and
ideas; and using social networking to attract customers and design new
products and services. 4Food ‘s business model relies on mobile technology and
social networking tools to attract customers, take orders, promote its brand, and
use customer feedback to improve its menu offerings.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. The business challenge facing 4Food is that it needs
a way to stand out amid 20,000 other restaurants in New York City.
E-commerce and social networking technology introduced new opportunities
for linking to customers and for distinguishing products and services. 4Food’s
management decided to base its business model around social technology, and
make social networking part of the dining experience. 4Food uses social
networking and mobile technology—including Twitter, Foursquare, and
Facebook—to attract customers, to process reservations, to promote its brand
image, and to solicit customer feedback for improving its menu offerings. By
taking advantage of social networking tools, 4Food is able to differentiate itself
from other restaurants and promote the business at a very low cost.

Chapter 10 E-commerce: Digital Markets, Digital Goods 373
10.1 E-COMMERCE AND THE INTERNET
ave you ever purchased music over the Web or streamed a movie?
Have you ever used the Web to search for information about your
sneakers before you bought them in a retail store? If so, you’ve
participated in e-commerce. In 2010, 133 million adult Americans
bought something online, as did millions of others worldwide. And although
most purchases still take place through traditional channels, e-commerce
continues to grow rapidly and to transform the way many companies do
business. In 2010, e-commerce represents about 6 percent of all retail sales in
the United States, and is growing at 12 percent annually (eMarketer, 2010a).
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
means transactions that occur over the Internet and the Web. Commercial
transactions 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 popularized
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 exponential 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. In 2009, e-commerce revenues were flat (Figure 10-1),
not bad considering that traditional retail sales were shrinking by 5 percent
annually. In fact, e-commerce during the recession was the only stable segment
in retail. Some online retailers forged ahead at a record pace: Amazon’s 2009
revenues were up 25 percent over 2008 sales. Despite the recession, in 2010, the
H
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 2010,
e-commerce revenues are growing again at an estimated 12 percent annually.

374 Part Three Key System Applications for the Digital Age
number of online buyers increased by 6 percent to 133 million, and the average
annual purchase is up 5 percent to $1,139. Amazon’s sales grew by 28 percent
in the year.
Mirroring the history of many technological innovations, such as the
telephone, radio, and television, the very rapid growth in e-commerce in the
early years created a market bubble in e-commerce stocks. Like all bubbles, the
“dot-com” bubble burst (in March 2001). A large number of e-commerce compa-
nies 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 grew to an estimated $225 billion in 2010, an increase
of more than 12 percent over 2009 (including travel services and digital down-
loads), with 133 million people purchasing online and 162 million shopping
and gathering information but not necessarily purchasing (eMarketer, 2010a).
• The number of individuals of all ages online in the United States expanded to
221 million in 2010, up from 147 million in 2004. In the world, over 1.9
billion people are now connected to the Internet. Growth in the overall
Internet population has spurred growth in e-commerce (eMarketer, 2010b).
• Approximately 80 million households have broadband access to the Internet
in 2010, representing about 68 percent of all households.
• About 83 million Americans now access the Internet using a smartphone
such as an iPhone, Droid, or BlackBerry. Mobile e-commerce has begun a
rapid growth based on apps, ring tones, downloaded entertainment, and
location-based services. In a few years, mobile phones will be the most
common Internet access device.
• On an average day, an estimated 128 million adult U.S. Internet users go
online. About 102 million send e-mail, 81 million use a search engine, and 71
million get news. Around 63 million use a social network, 43 million do
online banking, 38 million watch an online video, and 28 million look for
information on Wikipedia (Pew Internet & American Life Project, 2010).
• B2B e-commerce-use of the Internet for business-to-business commerce and
collaboration among business partners expanded to more than $3.6 trillion.
The e-commerce revolution is still unfolding. Individuals and businesses will
increasingly use the Internet to conduct commerce as more products and
services come online and households switch to broadband telecommunications.
More industries will be transformed by e-commerce, including travel reserva-
tions, music and entertainment, news, software, education, and finance.
Table 10-1 highlights these new e-commerce developments.
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
technologies are much more rich and powerful than previous technology
revolutions like 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.
U b i q u i t y
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

Chapter 10 E-commerce: Digital Markets, Digital Goods 375
that is it available just about everywhere, at all times. It makes it possible to
shop from your desktop, at home, at work, or even from your car, using mobile
commerce. The result is called a marketspace—a marketplace extended
beyond traditional boundaries and removed from a temporal and geographic
location.
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.
• The first wave of e-commerce transformed the business world of books, music, and air travel. In the
second wave, nine new industries are facing a similar transformation scenario: marketing and
advertising, telecommunications, movies, television, jewelry and luxury goods, real estate, online travel,
bill payments, and software.
• The breadth of e-commerce offerings grows, especially in the services economy of social networking,
travel, information clearinghouses, entertainment, retail apparel, 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, whereas
traditional retail brands, such as Sears, JCPenney, L.L.Bean, and Walmart, use e-commerce to retain
their dominant retail positions.
• 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 begins to take off in the United States with location-based services and
entertainment downloads including e-books.
TECHNOLOGY FOUNDATIONS
• Wireless Internet connections (Wi-Fi, WiMax, and 3G/4G smart phones) grow rapidly.
• Powerful handheld mobile devices support music, Web surfing, and entertainment as well as voice
communication. Podcasting and streaming take off as mediums for distribution of video, radio, and
user-generated content.
• The Internet broadband foundation becomes stronger in households and businesses as transmission
prices fall. More than 80 million households had broadband cable or DSL access to the Internet in 2010
,about 68 percent of all households in the United States (eMarketer, 2010a).
• Social networking software and sites such as Facebook, MySpace, Twitter, LinkedIn, and thousands of
others become a major new platform for e-commerce, marketing, and advertising. Facebook hits 500
million users worldwide, and 180 million in the United States (comScore, 2010).
• New Internet-based models of computing, such as cloud computing, software as a service (SaaS), and
Web 2.0 software greatly reduce the cost of e-commerce Web sites.
NEW BUSINESS MODELS EMERGE
• More than half the Internet user population have joined an online social network, contribute to social
bookmarking sites, create blogs, and share photos. Together these sites create a massive online
audience as large as television that is attractive to marketers.
• The traditional advertising business model is severely disrupted as Google and other technology
players such as Microsoft and Yahoo! seek to dominate online advertising, and expand into offline ad
brokerage for television and newspapers.
• Newspapers and other traditional media adopt online, interactive models but are losing advertising
revenues to the online players despite gaining online readers.
• Online entertainment business models offering television, movies, music, sports, and e-books surge,
with cooperation among the major copyright owners in Hollywood and New York with the Internet
distributors like Google, YouTube, Facebook, and Microsoft.

376 Part Three Key System Applications for the Digital Age
TABLE 10-2 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
E-commerce Technology Dimension Business Significance
Ubiquity. Internet/Web technology is The marketplace is extended beyond traditional
available everywhere: at work, at home, boundaries and is removed from a temporal
and elsewhere via mobile devices. and geographic location. “Marketspace” anytime,
is created; shopping can take place anywhere.
Customer convenience is enhanced, and shopping
costs are reduced.
Global reach. The technology reaches Commerce is enabled across cultural and national
across national boundaries, around the Earth. boundaries seamlessly and without modification.
The marketspace includes, potentially, billions of
consumers and millions of businesses worldwide.
Universal standards. There is one set of With one set of technical standards across the
technology standards, namely Internet standards. globe, disparate computer systems can easily
communicate with each other.
Richness. Video, audio, and text messages Video, audio, and text marketing messages are
are possible. integrated into a single marketing message and
consumer experience.
Interactivity. The technology works through Consumers are engaged in a dialog that
interaction with the user. dynamically adjusts the experience to the
individual, and makes the consumer a
co-participant in the process of delivering goods to
the market.
Information Density. The technology Information processing, storage, and
reduces information costs and raises quality. communication costs drop dramatically, whereas
currency, accuracy, and timeliness improve greatly.
Information becomes plentiful, cheap, and more
accurate.
Personalization/Customization. The technology Personalization of marketing messages and
allows personalized messages to be delivered customization of products and services are based
to individuals as well as groups. on individual characteristics.
Social technology. User content generation New Internet social and business models enable
and social networking. user content creation and distribution, and support
social networks.
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
that you spend time or money traveling to a market, and much less mental
effort is required to make a purchase.
G l o b a l R e a c h
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 (estimated
to be more than 1.9 billion, and growing rapidly) (Internetworldstats.com, 2010).
In contrast, most traditional commerce is local or regional—it involves local
merchants or national merchants with local outlets. Television and radio
stations and newspapers, for instance, are primarily local and regional institu-
tions with limited, but powerful, national networks that can attract a national
audience but not easily cross national boundaries to a global audience.

Chapter 10 E-commerce: Digital Markets, Digital Goods 377
U n i v e r s a l S t a n d a r d s
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. They are shared by all nations around the
world and enable any computer to link with any other computer regardless of
the technology platform each is using. In contrast, most traditional commerce
technologies differ from one nation to the next. For instance, television and
radio standards differ around the world, as does cell 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.
R i c h n e s s
Information richness refers to the complexity and content of a message.
Traditional markets, national sales forces, and small retail stores have great
richness: They are able to provide personal, face-to-face service using aural and
visual 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
audience reached, the less rich the message. The Web makes it possible to
deliver rich messages with text, audio, and video simultaneously to large num-
bers of people.
I n t e r a c t i v i t y
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
consumer. Television, for instance, cannot ask viewers any questions or enter
into conversations with them, and it cannot request that customer information
be entered into a form. In contrast, all of these activities are possible on an
e-commerce Web site. Interactivity allows an online merchant to engage a
consumer in ways similar to a face-to-face experience but on a massive, global
scale.
I n f o r m a t i o n D e n s i t y
The Internet and the Web vastly increase information density—the total
amount and quality of information available to all market participants,
consumers, and merchants alike. E-commerce technologies reduce information
collection, storage, processing, and communication costs while greatly increas-
ing 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
ability 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
segment 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
expensive, 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

378 Part Three Key System Applications for the Digital Age
such a vacation. 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.
P e r s o n a l i z a t i o n / C u s t o m i z a t i o n
E-commerce technologies permit personalization: Merchants can target their
marketing messages to specific individuals by adjusting the message to a
person’s name, interests, and past purchases. The technology 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 gathered in the
marketplace at the moment of purchase. With the increase in information
density, a great deal of information about the consumer’s past purchases 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, the Wall Street Journal
Online allows you to select the type of news stories you want to see first and
gives you the opportunity to be alerted when certain events happen.
S o c i a l Te c h n o l o g y : U s e r C o n t e n t G e n e r a t i o n a n d S o c i a l
N e t w o r k i n g
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 personal friends (and a larger worldwide community) content in the form
of text, videos, music, or photos. Using these forms of communication, users are
able to create new social networks and strengthen existing ones.
All previous mass media in modern history, including the printing press, use
a broadcast model (one-to-many) where content is created in a central location
by experts (professional writers, editors, directors, and producers) and
audiences are concentrated 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 provides 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 are able to exchange
massive amounts of information directly, instantly, and for 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 important
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.

Chapter 10 E-commerce: Digital Markets, Digital Goods 379
For example, before auto retailing sites appeared on the Web, there was a
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
depended on this asymmetry of information. Today’s consumers have access to
a legion of Web sites 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 businesses 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 customer or the
supply situation of the seller.
These new digital markets may either reduce or increase switching costs,
depending on the nature of the product or service being sold, and they may
cause some extra delay in gratification. 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.)
Digital markets provide many opportunities to sell directly to the consumer,
bypassing intermediaries, such as distributors or retail outlets. Eliminating
intermediaries in the distribution channel can significantly lower purchase
transaction 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 are able to raise profits while charging
lower prices. The removal of organizations or business process layers responsi-
ble for intermediary steps in a value chain is called disintermediation.
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 consumer.

380 Part Three Key System Applications for the Digital Age
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
differences between digital markets and traditional markets.
D i g i t a l G o o d s
The Internet digital marketplace has greatly expanded sales of digital goods.
Digital goods are 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.
Currently, most of these products are sold as physical goods, for example, CDs,
DVDs, newspapers, and hard-copy books. But the Internet offers the possibility
of delivering all these products on demand as digital products.
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 remain
the same, and pricing can be highly variable. (On the Internet, the merchant
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,
book publishers, music labels, and film studios—face the possibility of declin-
ing sales and even destruction of their businesses. Newspapers and maga-
zines are losing readers to the Internet, and losing advertisers even as online
newspaper readership soars. Record label companies are losing sales to music
download sites and Internet piracy, and music stores are going out of busi-
ness. Video rental firms, such as Blockbuster (now in bankruptcy), based on a
physical DVD market and physical stores, lost sales to Netflix using an
Internet catalog and streaming video model. Hollywood studios as well face
the prospect that Internet pirates will distribute their product as a digital
stream, bypassing Hollywood’s monopoly on DVD rentals and sales, which
TABLE 10-3 DIGITAL MARKETS COMPARED TO 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 Lower: purchase now
a digital good)
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 High
product characteristics)
Network effects Strong Weaker
Disintermediation More possible/likely Less possible/unlikely

Chapter 10 E-commerce: Digital Markets, Digital Goods 381
now accounts for more than half of industry film revenues. To date, pirated
movies have not seriously threatened Hollywood revenues in part because
the major film studios and Internet distributors like YouTube, Amazon, and
Apple are learning how to cooperate. Table 10.4 describes digital goods and
how they differ from traditional physical goods.
10.2 E-COMMERCE: BUSINESS AND TECHNOLOGY
E-commerce has grown from a few advertisements on early Web portals in
1995, to over 6 percent of all retail sales in 2010 (an estimated $255 billion),
surpassing the mail order catalog business. E-commerce is a fascinating combi-
nation of business models and new information technologies. Let’s start with a
basic understanding of the types of e-commerce, and then describe
e-commerce business and revenue models. We’ll also cover new technologies
that help companies reach over 221 million online consumers in the United
States, and an estimated 800 million more worldwide.
TYPES OF E-COMMERCE
There are many ways to classify electronic commerce transactions. One is by
looking at the nature of the participants in the electronic commerce transaction.
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
products and services to individual shoppers. BarnesandNoble.com, which
sells books, software, 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. ChemConnect’s Web site for buying and
selling chemicals and plastics 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,
enables people to sell their goods to other consumers by auctioning their mer-
chandise off to the highest bidder, or for a fixed price. Craigslist is the most
widely used platform used by consumers to buy from and sell directly to oth-
ers.
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 0 Greater than zero, high
Distributed delivery cost Low High
Inventory cost Low High
Marketing cost Variable Variable
Pricing More variable (bundling, Fixed, based on unit costs
random pricing games)

382 Part Three Key System Applications for the Digital Age
Another way of classifying electronic commerce transactions is in terms of
the platforms used by participants in a transaction. Until recently, most
e-commerce transactions took place using a personal computer connected to
the Internet over wired networks. Two wireless mobile alternatives have
emerged: smartphones and dedicated e-readers like the Kindle using cellular
networks, and smartphones and small tablet computers using Wi-Fi wireless
networks. The use of handheld wireless devices for purchasing goods and ser-
vices from any location is termed mobile commerce or m-commerce. Both
business-to-business and business-to-consumer 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
business models that have emerged. All, in one way or another, use the
Internet to add extra value to existing products and services or to provide the
foundation for new products and services.
P o r t a l
Portals such as Google, Bing, Yahoo, MSN, and AOL offer powerful Web
search tools as well as an integrated package of content and services, such as
news, e-mail, instant messaging, maps, calendars, shopping, music down-
loads, video streaming, and more, all in one place. Initially, portals were
primarily “gateways” to the Internet. Today, however, the portal business
model provides a destination site where users start their Web searching and
linger to read news, find entertainment, and meet other people, and be
exposed to advertising. Portals generate revenue primarily by attracting very
large audiences, charging advertisers for ad placement, collecting referral
fees for steering customers to other sites, and charging for premium services.
In 2010, portals generated an estimated $13.5 billion in revenues. Although
there are hundreds of portal/search engine sites, the top five sites
(Google, Yahoo, MSN/Bing, AOL, and Ask.com) gather more than 95 percent
of the Internet traffic because of their superior brand recognition (eMarketer,
2010e).
E – t a i l e r
Online retail stores, often called e-tailers, come in all sizes, from giant Amazon
with 2010 revenues of more than $24 billion, to tiny local stores that have Web
sites. An e-tailer is similar to the typical bricks-and-mortar storefront, except
that customers only need to connect to the Internet to check their inventory
and place an order. Altogether, online retail generated about $152 billion in
revenues for 2010. The value proposition of e-tailers is to provide convenient,
low-cost shopping 24/7, offering large selections and consumer 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. Amazon, BlueNile.com, and Drugstore.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.

Chapter 10 E-commerce: Digital Markets, Digital Goods 383
C o n t e n t P r o v i d e r
While e-commerce began as a retail product channel, it has increasingly turned
into a global content channel. “Content” is defined broadly to include all forms
of intellectual property. Intellectual property refers to all forms of human
expression that can be put into a tangible medium such as text, CDs, DVDs, or
stored on any digital (or other) media, including the Web. 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 find a wide range of content online, conveniently, 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 distributors
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 the iTunes Store, and Apple’s Internet-
connected devices like the iPhone, iPod, and iPad, have enabled new forms of
digital content delivery from podcasting to mobile streaming. Podcasting is a
method of publishing audio or video broadcasts via the Internet, allowing
subscribing users to download audio or video files onto their personal
computers or portable music players. Streaming is a publishing method for
TABLE 10-5 INTERNET BUSINESS MODELS
CATEGORY DESCRIPTION EXAMPLES
E-tailer Sells physical products directly to consumers Amazon
or to individual businesses. RedEnvelope.com
Transaction broker Saves users money and time by processing online ETrade.com
sales transactions and generating a fee each Expedia
time a transaction occurs.
Market creator Provides a digital environment where buyers eBay
and sellers can meet, search for products, Priceline.com
display products, and establish prices for ChemConnect.com
those products. Can serve consumers or
B2B e-commerce, generating revenue from
transaction fees.
Content provider Creates revenue by providing digital content, WSJ.com
such as news, music, photos, or video, GettyImages.com
over the Web. The customer may pay to iTunes.com
access the content, or revenue may be Games.com
generated by selling advertising space.
Community Provides an online meeting place where Facebook
provider people with similar interests can MySpace
communicate and find useful information. iVillage , Twitter
Portal Provides initial point of entry to the Web Yahoo
along with specialized content and other Bing
services. Google
Service provider Provides Web 2.0 applications such as photo Google Apps
sharing, video sharing, and user-generated Photobucket.com
content as services. Provides other services such Xdrive.com
as online data storage and backup.

384 Part Three Key System Applications for the Digital Age
music and video files that flows a continuous stream of content to a user’s
device without being stored locally on the device.
Estimates vary, but total download and subscription media revenues for 2010
are somewhere between $8 billion and $10 billion annually. They are the
fastest growing segment within e-commerce, growing at an estimated 20
percent annual rate (eMarketer, 2010b).
Tr a n s a c t i o n B r o k e r
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 broker’s
primary value propositions are savings of money and time, as well as providing
an extraordinary inventory of financial products and travel packages, in a single
location. Online stock brokers and travel booking services charge fees that are
considerably less than traditional versions of these services.
M a r k e t C r e a t o r
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 where purchasers can buy directly
from sellers. Online auction markets like 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 Web site and sell goods
at fixed prices to consumers. This is reminiscent of open air markets where
the market creator operates a facility (a town square) where merchants and
consumers meet. Online market creators will generate about $12 billion in
revenues for 2010.
S e r v i c e P r o v i d e r
While e-tailers sell products online, service providers offer services online.
There’s been an explosion in online services. Web 2.0 applications, 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 (see Chapter 5). Google has led the way in
developing online software service applications such as Google Apps, Gmail,
and online data storage services.
C o m m u n i t y P r o v i d e r
Community providers are sites that create 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
personalities called avatars. The social networking sites Facebook, MySpace,
LinkedIn, and Twitter; online communities such as iVillage; and hundreds of
other smaller, niche sites such as Doostang and Sportsvite all offer users
community-building tools and services. Social networking sites have been
the fastest growing Web sites in recent years, often doubling their audience
size in a year. However, they are struggling to achieve profitability. The
Interactive Session on Organizations explores this topic.

Twitter, the social networking site based on 140-
character text messages, is the buzz social network-
ing phenomenon of the year. Like all social network-
ing sites, such as Facebook, MySpace, YouTube,
Flickr, and others, Twitter provides a platform for
users to express themselves by creating content and
sharing it with their “followers,” who sign up to
receive someone’s “tweets.” And like most social
networking sites, Twitter faces the problem of how
to make money. As of October 2010, Twitter has
failed to generate earnings as its management
ponders how best to exploit the buzz and user base it
has created.
Twitter began as a Web-based version of popular
text messaging services provided by cell phone
carriers. Executives in a podcasting company called
Odeo were searching for a new revenue-producing
product or service. In March 2006, they created a
stand-alone, private company called Twitter.
The basic idea was to marry short text messaging
on cell phones with the Web and its ability to create
social groups. You start by establishing a Twitter
account online, and identifying the friends that you
would like to receive your messages. By sending a
text message called a “tweet” to a short code on your
cell phone (40404), you can tell your friends what
you are doing, your location, and whatever else you
might want to say. You are limited to 140 characters,
but there is no installation and no charge. This social
network messaging service to keep buddies
informed is a smash success.
Coming up with solid numbers for Twitter is not
easy because the firm is not releasing any “official”
figures. By September 2010, Twitter, according to
comScore, had around 30 million unique monthly
users in the United States, and perhaps 96 million
worldwide, displacing MySpace as the number three
global social network (behind Facebook and
Microsoft’s Live Profile).
The number of individual tweets is also known
only by the company. According to the company, by
early 2007, Twitter had transmitted 20,000 tweets,
which jumped to 60,000 tweets in a few months.
During the Iranian rebellion in June 2009, there
were reported to be over 200,000 tweets per hour
worldwide. In October 2010, Twitter was recording
over 1.2 million tweets a month. On the other hand,
experts believe that 80 percent of tweets are
TWITTER SEARCHES FOR A BUSINESS MODEL
generated by only 10 percent of users, and that the
median number of tweet readers per tweet is 1
(most tweeters tweet to one follower). Even more
disturbing is that Twittter has a 60 percent churn
rate: only 40 percent of users remain more than one
month. Obviously, many users lose interest in
learning about their friends’ breakfast menu, and
many feel “too connected” to their “friends,” who in
fact may only be distant acquaintances, if that. On
the other hand, celebrities such as Britney Spears
have hundreds of thousands of “friends” who follow
their activities, making Twitter a marvelous, free
public relations tool. Twitter unfortunately does not
make a cent on these activities.
The answer to these questions about unique users,
numbers of tweets, and churn rate are critical to
understanding the business value of Twitter as a firm.
To date, Twitter has generated losses and has
unknown revenues, but in February 2009, it raised
$35 million in a deal that valued the company at
$255 million. The following September, Twitter
announced it had raised $100 million in additional
funding, from private equity firms, previous
investors, and mutual fund giant T. Rowe Price, based
on a company valuation of a staggering $1 billion!
So how can Twitter make money from its users
and their tweets? What’s its business model and how
might it evolve over time? To start, consider the
company’s assets and customer value proposition.
The main asset is user attention and audience size
(eyeballs per day). The value proposition is “get it
now” or real-time news on just about anything from
the mundane to the monumental. An equally
important asset is the database of tweets that
contains the comments, observations, and opinions
of the audience, and the search engine that mines
those tweets for patterns. These are real-time and
spontaneous observations.
Yet another asset has emerged in the last year:
Twitter is a powerful alternative media platform for
the distribution of news, videos, and pictures. Once
again, no one predicted that Twitter would be the
first to report on terrorist attacks in Mumbai, the
landing of a passenger jet in the Hudson River, the
Iranian rebellion in June 2009, or the political vio-
lence in Bangkok and Kenya in May 2010.
How can these assets be monetized? Advertising,
what else! In April 2010, Twitter announced it s first
I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S
Chapter 10 E-commerce: Digital Markets, Digital Goods 385

foray into the big-time ad marketplace with Promoted
Tweets. Think Twitter search engine: in response to a
user’s query to Twitter’s search function for, say
netbooks, a Best Buy ad for netbooks will be dis-
played. The company claims Promoted Tweets are
not really ads because they look like all other tweets,
just a part of the tweet stream of messages. These
so-called “organic tweets” differ therefore from tradi-
tional search engine text ads, or social network ads
which are far from organic. So far, Best Buy, Bravo,
Red Bull, Sony, Starbucks, and Virgin American have
signed up. If this actually works, thousands of compa-
nies might sign up to blast messages to millions of
subscribers in response to related queries.
A second Twitter monetization effort announced
in June 2010 is called Promoted Trends. Trends is a
section of the Twitter home page that lets users know
what’s hot, what a lot of people are talking about.
The company claims this is “organic,” and a true
reflection of what people are tweeting about.
Promoted Trends are trends that companies would
like to initiate. A company can place a Promoted
Trends banner on the bottom of the page and when
users click on the banner, they are taken to the
follower page for that movie or product. Disney
bought Promoted Trends for its film Toy Story 3,
according to Twitter.
In July 2010, Twitter announced its third initiative
of the year: @earlybird accounts, which users can
follow to receive special offers. Walt Disney Pictures
has used the service to promote The Sorcerer’s
Apprentice by offering twofers (buy one ticket, get
another one free). The service could work nicely
with so-called real-time or “flash” marketing
campaigns in entertainment, fashion, luxury goods,
technology, and beauty products. So far, Twitter has
over 50,000 @earlybird followers and hopes to reach
“influentials,” people who shape the purchasing
decisions of many others.
Another monetizing service is temporal real-time
search. If there’s one thing Twitter has uniquely
among all the social network sites, it’s real-time
information. In 2010, Twitter entered into agree-
ments with Google, Microsoft, and Yahoo to permit
these search engines to index tweets and make them
available to the entire Internet. This service will give
free real-time content to the search engines as
opposed to archival content. It is unclear who’s doing
who a service here, and the financial arrangements
are not public.
Other large players are experimenting. Dell
created a Twitter outlet account, @DellOutlet, and is
using it to sell open-box and discontinued computers.
Dell also maintains several customer service
accounts. Twitter could charge such accounts a
commission on sales because Twitter is acting like an
e-commerce sales platform similar to Amazon. Other
firms have used their Twitter followers’ fan base to
market discount air tickets (Jet Blue) and greeting
cards (Somecards).
Freemium is another possibility: ask users to pay
a subscription fee for premium services such as
videos and music downloads. However, it may be too
late for this idea because users have come to expect
the service to be free. Twitter could charge service
providers such as doctors, dentists, lawyers, and hair
salons for providing their customers with unexpected
appointment availabilities. But Twitter’s most likely
steady revenue source might be its database of hun-
dreds of millions of real-time tweets. Major firms
such as Starbucks, Amazon, Intuit (QuickBooks and
Mint.com), and Dell have used Twitter to understand
how their customers are reacting to products,
services, and Web sites, and then making corrections
or changes in those services and products. Twitter is
a fabulous listening post on the Internet frontier.
The possibilities are endless, and just about any of
the above scenarios offers some solution to the com-
pany’s problem, which is a lack of revenue (forget
about profits). The company is coy about announc-
ing its business model, what one pundit described as
hiding behind a “Silicon Valley Mona Lisa smile.”
These Wall Street pundits are thought to be party
poopers in the Valley. In a nod to Apple’s iTunes and
Amazon’s merchant services, Twitter has turned over
its messaging capabilities and software platform to
others, one of which is CoTweet.com, a company
that organizes multiple Twitter exchanges for cus-
tomers so they can be tracked more easily. Google is
selling ad units based around a company’s last five
tweets (ads are displayed to users who have created
or viewed tweets about a company). Twitter is not
charging for this service. In the meantime, observers
wonder if Twitter is twittering away its assets and
may not ever show a profit for its $160 million
investment.
Sources: Matthew Shaer, “Twitter Hits 145 Million User Mark, Sees
Rise in Mobile Use,” Christian Science Monitor, September 3, 2010;
Jason Lipshutz, “Lady Gaga to Steal Britney Spears’ Twitter Crown,”
Reuters, August 19, 2010; Emir Afrati, “Twitter’s Early Bird Ad Ploy
Takes Flight,” Wall Street Journal, July 14, 2010; Jessica Guynn, “Twitter
Tests New Promoted Trends Feature with ‘Toy Story 3’ from Disney’s
Pixar,” Los Angeles Times, June 16, 2010; Erica Naone, “Will Twitter’s Ad
Strategy Work,” Technology Review, April 15, 2010; Jessica Vascellaro
and Emily Steel, “Twitter Rolls Out Ads,” Wall Street Journal, April 14,
2010; Brad Stone, “Twitter’s Latest Valuation: $1 Billion,” New York
Times, September 24, 2009; Jon Fine, “Twitter Makes a Racket. But
Revenues?” Business Week, April 9, 2009.
386 Part Three Key System Applications for the Digital Age

1. Based on your reading in this chapter, how would
you characterize Twitter’s business model?
2. If Twitter is to have a revenue model, which of the
revenue models described in this chapter would
work?
3. What is the most important asset that Twitter has,
and how could it monetize this asset?
4. What impact will a high customer churn rate have
on Twitter’s potential advertising revenue?
1. Go to Twitter.com and enter a search on your
favorite (or least favorite) car. Can you find the
company’s official site? What else do you find?
Describe the results and characterize the potential
risks and rewards for companies that would like to
advertise to Twitter’s audience.
2. How would you improve Twitter’s Web site to
make it more friendly for large advertisers?
3. Teenagers are infrequent users of Twitter because
they use their cell phones for texting, and most
users are adults 18–34 years of age. Find five users
of Twitter and ask them how long they have used
the service, are they likely to continue using the
service, and how would they feel about banner
ads appearing on their Twitter Web screen and
phone screens. Are loyal users of Twitter less
likely (or more likely) to tolerate advertising on
Twitter?
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
Chapter 10 E-commerce: Digital Markets, Digital Goods 387
E-COMMERCE REVENUE MODELS
A firm’s revenue model describes how the firm will earn revenue, generate
profits, and produce a superior return on investment. Although there are many
different e-commerce revenue models that have been developed, most compa-
nies rely on one, or some combination, of the following six revenue models:
advertising, sales, subscription, free/freemium, transaction fee, and affiliate.
A d v e r t i s i n g R e v e n u e M o d e l
In the advertising revenue model, a Web site generates revenue by attracting
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 different
experience from what it is now. Content on the Web—everything from news to
videos and opinions—is “free” to visitors because advertisers pay the production
and distribution costs in return for the right to expose visitors to ads.
Companies will spend an estimated $240 billion on advertising in 2010, and an
estimated $25 billion of that amount on online advertising (in the form of a paid
message on a Web site, paid search listing, video, widget, game, or other online
medium, such as instant messaging). In the last five years, advertisers have
increased online spending and cut outlays on traditional channels such as radio
and newspapers. Television advertising has expanded along with online adver-
tising revenues.
Web sites with the largest viewership or that attract a highly specialized,
differentiated viewership and are able to retain user attention (“stickiness”) are
able to charge higher advertising rates. Yahoo, for instance, derives nearly all its
revenue from display ads (banner ads) and to a lesser extent search engine text
ads. Ninety-eight percent of Google’s revenue derives from selling keywords to

388 Part Three Key System Applications for the Digital Age
advertisers in an auction-like market (the AdSense program). The average
Facebook user spends over five hours a week on the site, far longer than other
portal sites.
S a l e s R e v e n u e M o d e l
In the sales revenue model, companies derive revenue by selling goods,
information, 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 downloading
music and/or video streams (Hulu.com TV shows—see Chapter 3). Apple has
pioneered and strengthened the acceptance of micropayments. Micropayment
systems provide content providers with a cost-effective method for processing
high volumes of very small monetary transactions (anywhere from $.25 to $5.00
per transaction). MyMISlab has a Learning Track with more detail on micropay-
ment and other e-commerce payment systems.
S u b s c r i p t i o n R e v e n u e M o d e l
In the subscription revenue model, a Web site offering content or services
charges a subscription fee for access to some or all of its offerings on an ongoing
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, who have a
choice of paying a $5.95 monthly subscription fee or a $26.00 annual fee. Netflix
is one of the most successful subscriber sites with more that 15 million
subscribers in September 2010. The Wall Street Journal has the largest online
subscription newspaper with more than 1 million online subscribers. To be
successful, the subscription model requires that the content be perceived as a
having high added value, differentiated, and not readily available elsewhere nor
easily replicated. Companies successfully offering content or services online on
a subscription basis include Match.com and eHarmony (dating services),
Ancestry.com and Genealogy.com (genealogy research), Microsoft’s
Xboxlive.com (video games), and Rhapsody.com (music).
F r e e / F r e e m i u m R e v e n u e M o d e l
In the free/freemium revenue model, firms offer basic services or content for
free, while charging 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 a
premium service with unlimited play. The Flickr photo-sharing service offers
free basic services for sharing photos with friends and family, and also sells a
$24.95 “premium” package that provides users unlimited storage, high-defini-
tion video storage and playback, and freedom from display advertising. The
idea is to attract very large audiences with free services, and then to convert
some of this audience to pay a subscription for premium services. One problem
with this model is converting people from being “free loaders” into paying
customers. “Free” can be a powerful model for losing money.
Tr a n s a c t i o n Fe e R e v e n u e M o d e l
In the transaction fee revenue model, a company receives a fee for enabling
or executing a transaction. For example, eBay provides an online auction
marketplace and receives a small transaction fee from a seller if the seller is
successful in selling an item. E*Trade, an online stockbroker, receives transac-

Chapter 10 E-commerce: Digital Markets, Digital Goods 389
tion 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.
A f f i l i a t e R e v e n u e M o d e l
In the affiliate revenue model, Web sites (called “affiliate Web sites”) send vis-
itors to other Web sites in return for a referral fee or percentage of the revenue
from any resulting sales. For example, MyPoints makes money by connecting
companies to potential 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 Web sites where
they make a purchase. Amazon uses affiliates who steer business to the
Amazon Web site by placing the Amazon logo on their blogs. Personal blogs
may be involved in affiliate marketing. Some bloggers are paid directly by man-
ufacturers, or receive free products, for speaking highly of products and provid-
ing links to sales channels.
WEB 2.0: SOCIAL NETWORKING AND THE WISDOM OF
CROWDS
One of the fastest growing areas of e-commerce revenues are Web 2.0 online
services, which we described in Chapter 7. The most popular Web 2.0 service is
social networking, online meeting places where people can meet their friends
and their friends’ friends. Every day over 60 million Internet users in the
United States visit a social networking site like Facebook, MySpace, LinkedIn,
and hundreds of others.
Social networking sites link people through their mutual business or
personal connections, enabling them to mine their friends (and their friends’
friends) for sales leads, job-hunting tips, or new friends. MySpace, Facebook,
and Friendster appeal to people who are primarily interested in extending their
friendships, while LinkedIn focuses on job networking for professionals.
Social networking sites and online communities offer new possibilities for
e-commerce. Networking sites like Facebook and MySpace sell banner, video,
and text ads; sell user preference information to marketers; and sell products
such as music, videos, and e-books. Corporations set up their own Facebook and
MySpace profiles to interact with potential customers. For example, Procter &
Gamble set up a MySpace profile page for Crest toothpaste soliciting “friends”
for a fictional character called “Miss Irresistable.” Business firms can also
“listen” to what social networkers are saying about their products, and obtain
valuable feedback from consumers. At user-generated content sites like
YouTube, high-quality video content is used to display advertising, and
Hollywood studios have set up their own channels to market their products.
The Interactive Session on Management looks more closely at social network-
ing on Facebook, focusing on its impact on privacy.
At social shopping sites like Kaboodle, ThisNext, and Stylehive you can
swap shopping ideas with friends. Facebook offers this same service on a
voluntary basis. Online communities are also ideal venues to employ viral
marketing techniques. Online viral marketing is like traditional word-of-
mouth marketing except that the word can spread across an online commu-

Facebook is the largest social networking site in the
world. Founded in 2004 by Mark Zuckerberg, the site
had over 500 million worldwide users as of October
2010, and has long since surpassed all of its social
networking peers. Facebook allows users to create a
profile and join various types of self-contained
networks, including college-wide, workplace, and
regional networks. The site includes a wide array of
tools that allow users to connect and interact with
other users, including messaging, groups,
photo-sharing, and user-created applications.
Although the site is the leader in social network-
ing, it has waged a constant struggle to develop
viable methods of generating revenue. Though many
investors are still optimistic regarding Facebook’s
future profitability, it still needs to adjust its business
model to monetize the site traffic and personal
information it has accumulated.
Like many businesses of its kind, Facebook makes
its money through advertising. Facebook represents
a unique opportunity for advertisers to reach highly
targeted audiences based on their demographic
information, hobbies and personal preferences,
geographical regions, and other narrowly specified
criteria in a comfortable and engaging environment.
Businesses both large and small can place advertise-
ments that are fully integrated into primary features
of the site or create Facebook pages where users can
learn more about and interact with them.
However, many individuals on Facebook aren’t
interested in sharing their personal information with
anyone other than a select group of their friends on
the site. This is a difficult issue for Facebook. The
company needs to provide a level of privacy that
makes their users comfortable, but it’s that very
privacy that prevents it from gathering as much
information as it would like, and the more
information Facebook has, the more money it earns.
Facebook’s goal is to persuade its users to be
comfortable sharing information willingly by
providing an environment that becomes richer and
more entertaining as the amount of information
shared increases. In trying to achieve this goal, the
site has made a number of missteps, but is
improving its handling of users’ privacy rights.
The launch of Facebook’s Beacon advertising
service in 2007 was a lightning rod for criticism of
Facebook’s handling of its private information.
FACEBOOK: MANAGING YOUR PRIVACY FOR THEIR PROFIT
Beacon was intended to inform users about what
their friends were purchasing and what sites they
were visiting away from Facebook. Users were angry
that Beacon continued to communicate private
information even after a user opted out of the
service. After significant public backlash and the
threat of a class-action lawsuit, Facebook shut down
Beacon in September 2009.
Facebook has also drawn criticism for preserving
the personal information of people who attempted to
remove their profiles from the site. In early 2009, it
adjusted its terms of service to assign it ownership
rights over the information contained in deleted
profiles. In many countries, this practice is illegal,
and the user backlash against the move was swift.
In response, Facebook’s chief privacy officer,
Chris Kelly, presided over a total overhaul of
Facebook’s privacy policy, which took the form of an
open collaboration with some of the most vocal
critics of the old policies, including the previously
mentioned protest group’s founders. In February,
Facebook went forward with the new terms after
holding a vote open to all Facebook users, 75 percent
of whom approved. The site now allows users either
to deactivate or to delete their account entirely, and
only saves information after deactivation.
In late 2009, tensions between Facebook and its
users came to a head when the site rolled out new
privacy controls for users, but had adjusted those
settings to be public by default. Even users that had
previously set their privacy to be “friends-only” for
photos and profile information had their content
exposed, including the profile of Zuckerberg himself.
When asked about the change, Zuckerberg explained
that the moves were in response to a shift in social
norms towards openness and away from privacy,
saying “we decided that these would be the social
norms now and we just went for it.”
The fallout from the change and is still ongoing,
and more privacy problems keep cropping up. In
October 2010, Facebook unveiled new features giv-
ing users more control over how they share personal
information on the site with other users and
third-party applications. These include a groups
feature allowing users to distinguish specific circles
of “friends” and choose what information they want
to share with each group and whether the groups are
public or private.
I N T E R A C T I V E S E S S I O N : M A N A G E M E N T
390 Part Three Key System Applications for the Digital Age

1. What concepts in the chapter are illustrated in
this case?
2. Describe the weaknesses of Facebook’s privacy
policies and features. What management,
organization, and technology factors have
contributed to those weaknesses?
3. List and describe some of the options that
Facebook managers have in balancing privacy and
profitability. How can Facebook better safeguard
user privacy? What would be the impact on its
profitability and business model?
4. Do you anticipate that Facebook will be
successful in developing a business model that
monetizes their site traffic? Why or why not?
Shortly thereafter, a Wall Street Journal investiga-
tion found that some of the most popular Facebook
applications (apps) had been transmitting user IDs—
identifying information which could provide access
to people’s names and, in some cases, their friends’
names—to dozens of advertising and Internet
tracking companies. Sharing user IDs is in violation
of Facebook’s privacy policies.
All these privacy flaps have not diminished
advertiser interest. Facebook serves ads on each
user’s home page and on the sidebars of user
profiles. In addition to an image and headline from
the advertiser, Facebook ads include the names of
any user’s friends who have clicked on a button indi-
cating they like the brand or ad. A Nielsen Co. study
found that including information about individuals a
person knows in an ad boosted recall of the ad by 68
percent and doubled awareness of a brand’s message.
To determine what ads to serve to particular people,
Facebook abstracts profile information into key-
words, and advertisers match ads to those keywords.
No individual data is shared with any advertiser.
Visit Facebook’s Web site and review the site’s privacy
policy. Then answer the following questions:
1. To what user information does Facebook retain
the rights?
2. What is Facebook’s stance regarding information
shared via third-party applications developed for
the Facebook platform?
3. Did you find the privacy policy to be clear and
reasonable? What would you change, if anything?
However, it’s still unclear how much money is
there to be made from advertising on Facebook.
The site insists that it doesn’t plan to charge its
users any kind of fee for site access. Facebook’s
2010 revenue was expected to approach $1 billion,
which is a far cry from a $33 billion private market
valuation. But the site has already become a critical
component of the Web’s social fabric, and Facebook
management insists that it’s unworried about prof-
itability in 2010 or the immediate future.
Sources: Emily Steel and Geoffrey A. Fowler, “Facebook in Privacy
Breach,” The Wall Street Journal, October 18, 2010; Jessica E.
Vascellaro, “Facebook Makes Gains in Web Ads,” The Wall Street
Journal, May 12, 2010 and “Facebook Grapples with Privacy Issues,”
The Wall Street Journal, May 19, 2010; Geoffrey A. Fowler, “Facebook
Fights Privacy Concerns,” The Wall Street Journal, August 21, 2010 and
“Facebook Tweaks Allow Friends to Sort Who They Really ‘Like,’”
The Wall Street Journal, October 5, 2010; Emily Steel and Geoffrey A.
Fowler, “Facebook Touts Selling Power of Friendship,” The Wall Street
Journal, July 7, 2010; Brad Stone, “Is Facebook Growing Up Too Fast?”
The New York Times, March 29, 2009; and CG Lynch, “Facebook’s
Chief Privacy Officer: Balancing Needs of Users with the Business of
Social Networks”, CIO.com, April 1 2009.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
Chapter 10 E-commerce: Digital Markets, Digital Goods 391
nity at the speed of light, and go much further geographically than a small
network of friends.
T h e W i s d o m o f C r o w d s
Creating sites where thousands, even millions, of people can interact offers
business firms new ways to market and advertise, to discover who likes (or
hates) their products. In a phenomenon called “the wisdom of crowds,” some

392 Part Three Key System Applications for the Digital Age
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 committee of
experts (Surowiecki, 2004).
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 better understand 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 using what is called crowdsourcing. For instance, in
2006, Netflix announced a contest in which it offered to pay $1 million to the
person or team who comes up with a method for improving by 10 percent
Netflix’s prediction of what movies customers would like as measured against
their actual choices. By 2009, Netflix received 44,014 entries from 5,169 teams
in 186 countries. The winning team improved a key part of Netflix’s business: a
recommender system that recommends to its customers what new movies to
order based on their personal past movie choices and the choices of millions of
other customers who are like them (Howe, 2008; Resnick and Varian, 1997).
Firms can also use the wisdom of crowds in the form of prediction markets.
Prediction markets are established as peer-to-peer betting markets where
participants make bets on specific outcomes of, say, quarterly sales of a new
product, designs for new products, or political elections. The world’s largest
commercial prediction market is Betfair, founded in 2000, where you bet for or
against specific outcomes on football games, horse races, and whether or not
the Dow Jones will go up or down in a single day. Iowa Electronic Markets
(IEM) is an academic market focused on elections. You can place bets on the
outcome of local and national elections.
E-COMMERCE MARKETING
While e-commerce and the Internet have changed entire industries and enable
new business models, no industry has been more affected than marketing and
marketing communications. The Internet provides marketers with new ways of
identifying and communicating with millions of potential customers at costs far
lower than traditional media, including search engine marketing, data mining,
recommender systems, and targeted e-mail. 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 inexpensively find potential
customers for which demand is very low, people on the far ends of the bell
(normal) curve. 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 sponta-
neous—to gather information from customers, adjust product offerings, and
increase customer value. Table 10-6 describes the leading marketing and
advertising formats used in e-commerce.
Many e-commerce marketing firms use behavioral targeting techniques to
increase the effectiveness of banner, rich media, and video ads. Behavioral

Chapter 10 E-commerce: Digital Markets, Digital Goods 393
targeting refers to tracking the click-streams (history of clicking behavior) of
individuals on thousands of Web sites for the purpose of understanding their
interests and intentions, and exposing them to advertisements that are
uniquely suited to their behavior. Proponents believe this more precise under-
standing 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
(see our discussion in Chapter 4). When consumers lose trust in their Web
experience, they tend not to purchase anything.
Behavioral targeting takes place at two levels: at individual Web sites and on
various advertising networks that track users across thousands of Web sites. All
Web sites 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 Web site,
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 customers.
This information enables firms to understand how well their Web site 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 benefits
of using individual salespeople at dramatically lower costs. For instance,
TABLE 10-6 ONLINE MARKETING AND ADVERTISING FORMATS (BILLIONS)
MARKETING FORMAT 2010 REVENUE DESCRIPTION
Search engine $12.3 Text ads targeted at precisely what the customer is
looking for at the moment of shopping and purchasing.
Sales oriented.
Display ads $5.8 Banner ads (pop-ups and leave-behinds) with interactive
features; increasingly behaviorally targeted to individual
Web activity. Brand development and sales.
Classified $1.9 Job, real estate, and services ads; interactive, rich media,
and personalized to user searches. Sales and branding.
Rich media $1.57 Animations, games, and puzzles. Interactive, targeted,
and entertaining. Branding orientation.
Affiliate and blog $1.5 Blog and Web site marketing steers customers to
marketing parent sites; interactive, personal, and often with video.
Sales orientation.
Video $1.5 Fastest growing format, engaging and entertaining;
behaviorally targeted, interactive. Branding and sales.
Sponsorships $.4 Online games, puzzle, contests, and coupon sites
sponsored by firms to promote products. Sales
orientation.
E-mail $.27 Effective, targeted marketing tool with interactive and
rich media potential. Sales oriented.

394 Part Three Key System Applications for the Digital Age
FIGURE 10-3 WEB SITE VISITOR TRACKING
E-commerce Web sites have tools to track a shopper’s every step through an online store. Close
examination of customer behavior at a Web site selling women’s clothing shows what the store might
learn at each step and what actions it could take to increase sales.
FIGURE 10-4 WEB SITE 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.
General Motors will show a Chevrolet banner ad to women emphasizing safety
and utility, while men will receive different ads emphasizing power and
ruggedness.

Chapter 10 E-commerce: Digital Markets, Digital Goods 395
What if you are a large national advertising company with many different
clients trying to reach millions of consumers? What if you were a large global
manufacturer trying to reach potential consumers for your products? With
millions of Web sites, working with each one would be impractical. Advertising
networks solve this problem by creating a network of several thousand of the
most popular Web sites visited by millions of people, tracking the behavior of
these users across the entire network, building profiles of each user, and then
selling these profiles to advertisers. Popular Web sites 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 purchasing a European car? Not a problem. Advertising
networks can identify and deliver hundreds of thousands of people who fit this
profile and expose them to ads for European cars as they move from one Web
site to another. Estimates vary, but behaviorally targeted ads are 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 advertisers in a few
milliseconds.
B2B E-COMMERCE: NEW EFFICIENCIES AND
RELATIONSHIPS
The trade between business firms (business-to-business commerce or B2B)
represents a huge marketplace. The total amount of B2B trade in the United States
in 2009 was about $12.2 trillion, with B2B e-commerce (online B2B) contributing
about $3.6 trillion of that amount (U.S. Census Bureau, 2010; authors’ estimates).
By 2014, B2B e-commerce should grow to about $5.1 trillion in the United States,
assuming an average growth rate of about 7 percent. The process of conducting
trade among business firms is complex and requires significant human interven-
FIGURE 10-5 HOW AN ADVERTISING NETWORK SUCH AS DOUBLECLICK WORKS
Advertising networks have become controversial among privacy advocates because of their ability to
track individual consumers across the Internet. We discuss privacy issues further in Chapter 4.

396 Part Three Key System Applications for the Digital Age
tion, and therefore, it consumes significant resources. Some firms estimate that
each corporate purchase order for support products costs them, on average, at
least $100 in administrative overhead. Administrative overhead includes process-
ing paper, approving purchase decisions, spending time using the telephone and
fax machines to search for products and arrange for purchases, arranging for
shipping, and receiving the goods. Across the economy, this adds up to trillions of
dollars annually being spent for procurement processes that could potentially be
automated. If even just a portion of inter-firm trade were automated, and parts of
the entire procurement process assisted by the Internet, literally trillions of dol-
lars 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-based B2B solutions.
Business-to-business e-commerce refers to the commercial transactions that
occur among business firms. Increasingly, these transactions are flowing
through a variety of different Internet-enabled mechanisms. About 80 percent
of online B2B e-commerce is still based on proprietary systems for electronic
data interchange (EDI). Electronic data interchange 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 information 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 standards that define the structure and
information fields of electronic documents for that industry.
EDI originally automated the exchange of documents such as purchase orders,
invoices, and shipping notices. Although some companies still use EDI for docu-
ment automation, firms engaged in just-in-time inventory replenishment and con-
tinuous production use EDI as a system for continuous replenishment. Suppliers
have online access to selected parts of the purchasing firm’s production and deliv-
ery 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 are able to
extend digital technology to a wider range of activities and broaden their circle
of trading partners.
FIGURE 10-6 ELECTRONIC DATA INTERCHANGE (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replenish-
ment. 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.

Chapter 10 E-commerce: Digital Markets, Digital Goods 397
Take procurement, for example. Procurement involves not only purchasing
goods and materials but also sourcing, negotiating with suppliers, paying for
goods, and making 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 transporta-
tion. They are not limited to partners linked by traditional EDI networks.
The Internet and Web technology enable businesses to create new electronic
storefronts for selling to other businesses with multimedia graphic displays and
interactive features similar to those for B2C commerce. Alternatively,
businesses can use Internet technology to create extranets or electronic
marketplaces for linking to other businesses for purchase and sale transactions.
Private industrial networks typically consist of a large firm using an
extranet to link to its suppliers and other key business partners (see Figure 10-7).
The network is owned by the buyer, and it permits the firm and designated sup-
pliers, distributors, and other business partners to share product design and
development, marketing, production scheduling, inventory management, and
unstructured communication, including graphics and e-mail. 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 different buyers
and sellers (see Figure 10-8). They are industry owned or operate as inde-
pendent intermediaries between buyers and sellers. Net marketplaces gener-
ate revenue from purchase and sale transactions and other services provided
to clients. Participants in Net marketplaces can establish prices through
online negotiations, auctions, or requests for quotations, or they can use
fixed prices.
FIGURE 10-7 A PRIVATE INDUSTRIAL NETWORK
A private industrial network, also known as a private exchange, links a firm to its suppliers, distribu-
tors, and other key business partners for efficient supply chain management and other collaborative
commerce activities.

398 Part Three Key System Applications for the Digital Age
There are many different types of Net marketplaces and ways of classifying
them. Some Net marketplaces 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 relationships with designated suppliers, and others support short-term
spot purchasing, where goods are purchased based on immediate needs, often
from many different 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 different
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
networks 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 16,000 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. Elemica is another example of a Net market-
place serving the chemical industry.
Exchanges are independently owned third-party Net marketplaces that
connect thousands of suppliers and buyers for spot purchasing. Many
exchanges provide vertical markets for a single industry, such as food, electron-
ics, or industrial equipment, and they primarily deal with direct inputs. For
example, Go2paper enables a spot market for paper, board, and kraft among
buyers and sellers in the paper industries from over 75 countries.
Exchanges proliferated during the early years of e-commerce but many have
failed. Suppliers were reluctant to participate because the exchanges encour-
FIGURE 10-8 A NET MARKETPLACE
Net marketplaces are online marketplaces where multiple buyers can purchase from multiple sellers.

Chapter 10 E-commerce: Digital Markets, Digital Goods 399
aged competitive bidding that drove prices down and did not offer any
long-term relationships with buyers or services to make lowering prices worth-
while. Many essential direct purchases are not conducted on a spot basis
because they require contracts and consideration of issues such as delivery
timing, customization, and quality of products.
10.3 THE MOBILE DIGITAL PLATFORM AND MOBILE
E-COMMERCE
Walk down the street in any major metropolitan area and count how many
people are pecking away at their iPhones or BlackBerrys. Ride the trains, fly the
planes, and you’ll see your fellow travelers reading an online newspaper,
watching a video on their phone, or reading a novel on their Kindle. In five
years, the majority of Internet users in the United States will rely on mobile
devices as their primary device for accessing the Internet. M-commerce has
taken off.
In 2010, m-commerce represented less than 10 percent of all e-commerce,
with about $5 billion in annual revenues generated by selling music, videos,
ring tones, applications, movies, television, and location-based services like
local restaurant locators and traffic updates. However, m-commerce is the
fastest growing form of e-commerce, with some areas expanding at a rate of 50
percent or more per year, and is estimated to grow to $19 billion in 2014
(see Figure 10-9). In 2010, there were an estimated 5 billion cell phone
subscribers worldwide, with over 855 million in China and 300 million in the
United States (eMarketer, 2010d).
M-COMMERCE SERVICES AND APPLICATIONS
The main areas of growth in mobile e-commerce are location-based services,
about $215 million in revenue in 2010; software application sales at stores such
as iTunes (about $1.8 billion); entertainment downloads of ring tones, music,
video, and TV shows (about $1 billion); mobile display advertising ($784
million); direct shopping services such as Slifter ($200 million); and e-book
sales ($338 million).
FIGURE 10-9 CONSOLIDATED MOBILE COMMERCE REVENUES
Mobile e-commerce is the fastest growing type of B2C e-commerce although it represents only a small
part of all e-commerce in 2010.

400 Part Three Key System Applications for the Digital Age
M-commerce applications have taken off for services that are time-critical,
that appeal to people on the move, or that accomplish a task more efficiently
than other methods. They are especially popular in Europe, Japan, South
Korea, and other countries with strong wireless broadband infrastructures. The
following sections describe some examples.
L o c a t i o n – B a s e d S e r v i c e s
Wikitude.me provides a special kind of browser for smart phones equipped with
a built-in global positioning system (GPS) and compass that can identify your
precise location and where the phone is pointed. Using information from over
800,000 points of interest available on Wikipedia, plus thousands of other local
sites, the browser overlays information about points of interest you are viewing,
and displays that information on your smartphone screen, superimposed on a
map or photograph that you just snapped. For example, users can point their
smart phone cameras towards mountains from a tour bus and see the names
and heights of the mountains displayed on the screen. Lost in a European
medieval city, or downtown Los Angeles? Open up the Wikitude browser, point
your camera at a building, and then find the address and other interesting
details. Wikitude.me also allows users to geo-tag the world around them, and
then submit the tags to Wikitude in order to share content with other users. In
2010, both Facebook and Twitter launched a Places feature that allows users to
let their friends know where they are. These services compete with Foursquare
and Gowalla, which allow users to check in at places and broadcast their
location to friends.
Loopt is a free social networking application that allows you to share your
status and track the location of friends via smartphones such as the iPhone,
BlackBerry, and over 100 other mobile devices. Users also have the ability to
integrate Loopt with other social networks, including Facebook and Twitter.
Loopt has 4 million users. The service doesn’t sell information to advertisers,
but does post ads based on user location. Loopt’s target is to deal with advertis-
ers at the walking level (within 200 to 250 meters).
Foursquare provides a similar service to 4 million registered users, who are
able to connect with friends and update their location. Points are awarded for
“checking in” at designated venues. Users choose to have their check-ins posted
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. More than 3,000 restaurants, bars, and other businesses
(including 4Food, described in the chapter-opening case) use Foursquare to
attract customers with promotions.
B a n k i n g a n d F i n a n c i a l S e r v i c e s
Banks and credit card companies are rolling out 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.
W i r e l e s s A d v e r t i s i n g a n d R e t a i l i n g
Although the mobile advertising market is currently small ($784 million), it is
rapidly growing (up 17 percent from last year and expected to grow to over $6.2
billion by 2014), as more and more companies seek ways to exploit new
databases of location-specific information. Alcatel-Lucent offers a new service
to be managed by 1020 Placecast that will identify cell phone users within a
specified distance of an advertiser’s nearest outlet and notify them about the

Chapter 10 E-commerce: Digital Markets, Digital Goods 401
outlet’s address and phone number, perhaps including a link to a coupon or
other promotion. 1020 Placecast’s clients include Hyatt, FedEx, and Avis Rent A
Car.
Yahoo displays ads on its mobile home page for companies such as Pepsi,
Procter & Gamble, Hilton, Nissan, and Intel. Google is displaying ads linked to
cell phone searches by users of the mobile version of its search engine, while
Microsoft offers banner and text advertising on its MSN Mobile portal in the
United States. Ads are embedded in games, videos, and other mobile applica-
tions.
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
entered a partner retail store, and offers a new virtual currency called “kick-
bucks,” which can be redeemed for Facebook credits, iTunes Gift Cards, travel
vouchers, DVD’s, or immediate cash-back rewards at any of the partner stores.
In 2010, shoppers ordered about $2.2 billion in physical goods from Web sites
via smartphones (over 1 billion of that at Amazon alone). Thirty percent of
retailers have m-commerce Web sites—simplified versions of their Web sites
that make it possible for shoppers to use cell phones to place orders. Clothing
retailers Lilly Pulitzer and Armani Exchange, Home Depot, and 1–800 Flowers
are among those companies with specialized apps for m-commerce sales.
G a m e s a n d E n t e r t a i n m e n t
Cell phones have developed into portable entertainment platforms.
Smartphones like the iPhone and Droid offer downloadable and streaming digi-
tal games, movies, TV shows, music, and ringtones.
Users of broadband services from the major wireless vendors can stream
on-demand video clips, news clips, and weather reports. MobiTV, offered by
Sprint and AT&T Wireless, features live TV programs, including MSNBC and
Fox Sports. Film companies are starting to produce short films explicitly
designed to play on mobile phones. User-generated content is also appearing in
mobile form. Facebook, MySpace, YouTube, and other social networking sites
have versions for mobile devices. In 2010, the top 10 most popular apps on
Facebook are games, led by Farmville with over 16 million daily users.
10.4 BUILDING AN E-COMMERCE WEB SITE
Building a successful e-commerce site requires a keen understanding of
business, technology, and social issues, as well as a systematic approach.
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, 2011).
The two most important management challenges in building a successful
e-commerce site are (1) developing a clear understanding of your business
objectives and (2) knowing how to choose the right technology to achieve those
objectives.
PIECES OF THE SITE-BUILDING PUZZLE
Let’s assume you are a manager for a medium-sized, industrial parts firm of
around 10,000 employees worldwide, operating in eight countries in Europe,
Asia, and North America. Senior management has given you a budget of $1

402 Part Three Key System Applications for the Digital Age
million to build an e-commerce site within one year. The purpose of this site
will be to sell and service the firm’s 20,000 customers, who are mostly small
machine and metal fabricating shops around the world. Where do you start?
First, you must be aware of the main areas where you will need to make
decisions. On the organizational and human resources fronts, you will have to
bring together a team of individuals who possess the skill sets needed to build
and manage a successful e-commerce site. This team will make the key deci-
sions about technology, site design, and social and information policies that will
be applied at your site. The entire site development effort must be closely man-
aged if you hope to avoid the disasters that have occurred at some firms.
You will also need to make decisions about your site’s hardware, software,
and telecommunications infrastructure. The demands of your customers
should drive your choices of technology. Your customers will want technology
that enables them to find what they want easily, view the product, purchase the
product, and then receive the product from your warehouses quickly. You will
also have to carefully consider your site’s design. Once you have identified the
key decision areas, you will need to think about a plan for the project.
BUSINESS OBJECTIVES, SYSTEM FUNCTIONALITY, AND
INFORMATION REQUIREMENTS
In planning your Web site you need to answer the question, “What do we want
the e-commerce site to do for our business?” The key lesson to be learned here
is to let the business decisions drive the technology, not the reverse. This will
ensure that your technology platform is aligned with your business. We will
assume here that you have identified a business strategy and chosen a business
model to achieve your strategic objectives. (Review Chapter 3.) But how do you
translate your strategies, business models, and ideas into a working e-com-
merce site?
Your planning should identify the specific business objectives for your site,
and then develop a list of system functionalities and information requirements.
Business objectives are simply capabilities you want your site to have. System
functionalities are types of information systems capabilities you will need to
achieve your business objectives. The information requirements for a system
are the information elements that the system must produce in order to achieve
the business objectives.
Table 10-7 describes some basic business objectives, system functionalities,
and information requirements for a typical e-commerce site. The objectives
must be translated into a description of system functionalities and ultimately
into a set of precise information requirements. The specific information
requirements for a system typically are defined in much greater detail than
Table 10-7 indicates (see Chapter 13). The business objectives of an
e-commerce site are similar to those of a physical retail store, but they must
be provided entirely in digital form, 24 hours a day, 7 days a week.
BUILDING THE WEB SITE: IN-HOUSE VERSUS
OUTSOURCING
There are many choices for building and maintaining Web sites. Much depends
on how much money you are willing to spend. Choices range from outsourcing
the entire Web site development to an external vendor to building everything
yourself (in-house). You also have a second decision to make: will you host

Chapter 10 E-commerce: Digital Markets, Digital Goods 403
(operate) the site on your firm’s own servers or will you outsource the hosting
to a Web host provider? There are some vendors who will design, build, and
host your site, while others will either build or host (but not both). Figure 10-10
illustrates the alternatives.
TABLE 10-7 SYSTEM ANALYSIS: BUSINESS OBJECTIVES, SYSTEM
FUNCTIONALITY, AND INFORMATION REQUIREMENTS FOR A
TYPICAL E-COMMERCE SITE
BUSINESS SYSTEM INFORMATION
OBJECTIVE FUNCTIONALITY REQUIREMENTS
Display goods Digital catalog Dynamic text and graphics catalog
Provide product information Product database Product description, stocking
(content) numbers, inventory levels
Personalize/customize Customer on-site Site log for every customer visit;
product tracking data mining capability to identify
common customer paths and
appropriate responses
Execute a transaction Shopping cart/payment Secure credit card clearing; multiple
payment system options
Accumulate customer Customer database Name, address, phone, and e-mail
information for all customers; online customer
registration
Provide after-sale Sales database Customer ID, product, date,
customer support and customer relationship payment, shipment date
management system (CRM)
Coordinate marketing/ Ad server, e-mail server, Site behavior log of prospects
advertising e-mail, campaign manager, and customers linked to e-mail and
ad banner manager banner ad campaigns
Understand marketing Site tracking and reporting Number of unique visitors, pages
effectiveness system visited, products purchased,
identified by marketing campaign
Provide production and Inventory management Product and inventory levels,
supplier links system supplier ID and contact, order quantity
data by product
FIGURE 10-10 CHOICES IN BUILDING AND HOSTING WEB SITES
You have a number of alternatives to consider when building and hosting an e-commerce site.

404 Part Three Key System Applications for the Digital Age
T h e B u i l d i n g D e c i s i o n
If you elect to build your own site, there are a range of options. Unless you are
fairly skilled, you should use a pre-built template to create the Web site. For
example, Yahoo Merchant Solutions, Amazon Stores, and eBay all provide tem-
plates that merely require you to input text, graphics, and other data, as well as
the infrastructure to run the Web site once it has been created. This is the least
costly and simplest solution, but you will be limited to the “look and feel” and
functionality provided by the template and infrastructure.
If you have some experience with computers, you might decide to build the
site yourself. There is a broad variety of tools, ranging from those that help you
build everything truly “from scratch,” such as Adobe Dreamweaver, Adobe
InDesign, and Microsoft Expression, to top-of-the-line prepackaged site-building
tools that can create sophisticated sites customized to your needs.
The decision to build a Web site on your own has a number of risks. Given
the complexity of features such as shopping carts, credit card authentication
and processing, inventory management, and order processing, development
costs are high, as are the risks of doing a poor job. You will be reinventing what
other specialized firms have already built, and your staff may face a long,
difficult learning curve, delaying your entry to market. Your efforts could fail.
On the positive side, you may able to build a site that does exactly what you
want, and develop the in-house knowledge to revise the site rapidly if necessi-
tated by a changing business environment.
If you choose more expensive site-building packages, you will be purchasing
state-of-the-art software that is well tested. You could get to market sooner.
However, to make a sound decision, you will have to evaluate many different
software packages and this can take a long time. You may have to modify the
packages to fit your business needs and perhaps hire additional outside consul-
tants to do the modifications. Costs rise rapidly as modifications mount. (We
discuss this problem in greater detail in Chapter 13.) A $4,000 package can
easily become a $40,000 to $60,000 development project.
In the past, bricks-and-mortar retailers typically designed their e-commerce
sites themselves (because they already had the skilled staff and IT infrastructure
in place to do this). Today, however, larger retailers rely heavily on external
vendors to provide sophisticated Web site capabilities, while also maintaining a
substantial internal staff. Medium-size start-ups will often purchase a sophisticated
package and then modify it to suit their needs. Very small mom-and-pop firms
seeking simple storefronts will use templates.
T h e H o s t i n g D e c i s i o n
Now let’s look at the hosting decision. Most businesses choose to outsource
hosting and pay a company to host their Web site, which means that the hosting
company is responsible for ensuring the site is “live” or accessible, 24 hours a
day. By agreeing to a monthly fee, the business need not concern itself with
technical aspects of setting up and maintaining a Web server, telecommunica-
tions links, or specialized staffing.
With a co-location agreement, your firm purchases or leases a Web server
(and has total control over its operation) but locates the server in a vendor’s
physical facility. The vendor maintains the facility, communications lines, and
the machinery. In the age of cloud computing, it is much less expensive to host
your Web site in virtualized computing facilities. In this case, you do not
purchase the server, but rent the capabilities of a cloud computing center.
There is an extraordinary range of prices for cloud hosting, ranging from $4.95
a month, to several hundred thousands of dollars per month depending on the

Chapter 10 E-commerce: Digital Markets, Digital Goods 405
size of the Web site, bandwidth, storage, and support requirements. Very large
providers (such as IBM, HP, and Oracle) achieve large economies of scale by
establishing huge “server farms” located strategically around the country and
the globe. What this means is that the cost of pure hosting has fallen as fast as
the fall in server prices, dropping about 50 percent every year.
W e b S i t e B u d g e t s
Simple Web sites can be built and hosted with a first-year cost of $5,000 or less.
The Web sites of large firms with high levels of interactivity and linkage to
corporate systems cost several million dollars a year to create and operate. For
instance, in September 2006, Bluefly, which sells discounted women’s and
men’s designer clothes online, embarked on the process of developing an
improved version of its Web site based on software from Art Technology Group
(ATG). It launched the new site in August 2008. To date, it has invested over
$5.3 million in connection with the redevelopment of the Web site. In 2010,
Bluefly had online sales of $81 million, and is growing at 7.5 percent a year. It’s
e-commerce technology budget is over $8 million a year, roughly 10 percent of
its total revenues (Bluefly, Inc., 2010).
Figure 10-11 provides some idea of the relative size of various Web site cost
components. In general, the cost of hardware, software, and telecommunications
for building and operating a Web site has fallen dramatically (by over 50 percent)
since 2000, making it possible for very small entrepreneurs to create fairly
sophisticated sites. At the same time, the costs of system maintenance and con-
tent creation have risen to make up more than half of typical Web site budgets.
Providing content and smooth 24/7 operations are both very labor-intensive.
FIGURE 10-11 COMPONENTS OF A WEB SITE BUDGET
10.5 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.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. Columbiana is a small, independent island in the Caribbean. It wants to
develop its tourist industry and attract more visitors. The island has many

406 Part Three Key System Applications for the Digital Age
historical buildings, forts, and other sites, along with rain forests and striking
mountains. A few first-class hotels and several dozen less-expensive accommo-
dations can be found 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 a Web presence help? What
Internet business model would be appropriate? What functions should the Web
site perform?
2. Explore the Web sites of the following companies: Blue Nile, J.Crew, Circuit
City, Black&Decker, Peet’s Coffee & Tea, and Priceline. Determine which of
these Web sites would benefit most from adding a company-sponsored blog to
the Web site. List the business benefits of the blog. Specify the intended audi-
ence for the blog. Decide who in the company should author the blog, and
select some topics for the blog.
I m p r o v i n g D e c i s i o n M a k i n g : U s i n g S p r e a d s h e e t
S o f t w a r e t o A n a l y z e a D o t – C o m B u s i n e s s
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
Publicly traded companies, including those specializing in e-commerce, are
required to file financial data with the U.S. Securities and Exchange
Commission. By analyzing this information, you can determine the profitability
of an e-commerce company and the viability of its business model.
Pick one e-commerce company on the Internet, for example, Ashford,
Buy.com, 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 Web site at www.sec.gov and select Filings & Forms 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. (MyMISLab provides more detailed instructions on how to down-
load 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 dictates 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.
A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : E v a l u a t i n g
E – C o m m e r c e H o s t i n g S e r v i c e s
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
This project will help develop your Internet skills in commercial services for
hosting an e-commerce site for a small start-up company.
You would like to set up a Web site to sell towels, linens, pottery, and table-
ware from Portugal and are examining services for hosting small business

www.sec.gov

Chapter 10 E-commerce: Digital Markets, Digital Goods 407
Internet storefronts. Your Web site should be able to take secure credit card
payments and to calculate shipping costs and taxes. Initially, you would like to
display photos and descriptions of 40 different products. Visit Yahoo! Small
Business, GoDaddy, and Volusion and compare the range of e-commerce
hosting services they offer to small businesses, their capabilities, and costs.
Also examine the tools they provide for creating an e-commerce site. Compare
these services and decide which you would use if you were actually establish-
ing a Web store. Write a brief report indicating your choice and explaining the
strengths and weaknesses of each.
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in
this chapter:
1. Building a Web Page
2. E-commerce Challenges: The Story of Online Groceries
3. Build an E-commerce Business Plan
4. Hot New Careers in E-commerce
Review Summary
1. What are the unique features of e-commerce, digital markets, and digital goods?
E-commerce involves digitally enabled commercial transactions between and among organizations and
individuals. Unique features of e-commerce technology include ubiquity, global reach, universal technology
standards, richness, interactivity, information density, capabilities for personalization and customization, and
social technology.
Digital markets are said to be more “transparent” than traditional markets, with reduced information
asymmetry, search costs, transaction costs, and menu costs, along with the ability to change prices dynami-
cally 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.
2. What are the principal e-commerce business and revenue models?
E-commerce business models are e-tailers, transaction brokers, market creators, content providers,
community providers, service providers, and portals. The principal e-commerce revenue models are
advertising, sales, subscription, free/freemium, transaction fee, and affiliate.
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 utilizing the “wisdom of crowds”
helps companies learn from customers in order to improve product offerings and increase customer value.
Behavioral targeting techniques increase the effectiveness of banner, rich media, and video ads.
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.

408 Part Three Key System Applications for the Digital Age
Key Terms
Advertising revenue model, 387
Affiliate revenue model, 389
Behavioral marketing, 392
Business-to-business (B2B) electronic commerce, 381
Business-to-consumer (B2C) electronic commerce, 381
Co-location, 404
Community providers, 384
Consumer-to-consumer (C2C) electronic commerce, 381
Cost Transparency, 377
Crowdsourcing, 392
Customization, 378
Digital goods, 380
Disintermediation, 379
Dynamic pricing, 379
Electronic data interchange (EDI), 396
E-tailer, 382
Exchanges, 398
Free/freemium revenue model, 388
Information asymmetry, 378
Information density, 377
Intellectual property, 383
Long tail marketing, 392
Market creator, 384
Review Questions
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.
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 revenue
models.
3. How has e-commerce transformed marketing?
• Explain how social networking and the
“wisdom of crowds” help companies improve
their marketing.
• Define behavioral targeting and explain how
it works at individual Web sites and on
advertising networks.
4. How has e-commerce affected business-to-
business transactions?
• Explain how Internet technology supports
business-to-business electronic commerce.
Market entry costs, 377
Marketspace, 375
Menu costs, 379
Micropayment systems, 388
Mobile commerce (m-commerce), 382
Net marketplaces, 397
Personalization, 378
Podcasting, 383
Prediction market, 392
Price discrimination, 377
Price transparency, 377
Private exchange, 397
Private industrial networks, 397
Revenue model, 387
Richness, 377
Sales revenue model, 388
Search costs, 377
Social shopping, 389
Streaming, 383
Subscription revenue model, 388
Transaction costs, 376
Transaction fee revenue model, 388
Wisdom of crowds, 391
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 hotels 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.
6. What issues must be addressed when building an e-commerce Web site?
Building a successful e-commerce site requires a clear understanding of the business objectives to be
achieved by the site and selection of the right technology to achieve those objectives. E-commerce sites can
be built and hosted in-house or partially or fully outsourced to external service providers.

Chapter 10 E-commerce: Digital Markets, Digital Goods 409
Discussion Questions
1. How does the Internet change consumer and
supplier relationships?
2. The Internet may not make corporations
obsolete, but the corporations will have to change
their business models. Do you agree? Why or why
not?
3. How have social technologies changed
e-commerce?
• Define and describe Net marketplaces and
explain how they differ from private indus-
trial networks (private exchanges).
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.
• Describe some of the barriers to
m-commerce.
6. What issues must be addressed when building
an e-commerce Web site?
• List and describe each of the factors that go
into the building of an e-commerce Web site.
• List and describe four business objectives,
four system functionalities, and four
information requirements of a typical
e-commerce Web site.
• List and describe each of the options for
building and hosting e-commerce Web sites.
Video Cases
Video Cases and Instructional Videos illustrating
some of the concepts in this chapter are available.
Contact your instructor to access these videos.
Collaboration and Teamwork: Performing a Competitive Analysis of
E-commerce Sites
Form a group with three or four of your classmates.
Select two businesses that are competitors in the
same industry and that use their Web sites for
electronic commerce. Visit these Web sites. You
might compare, for example, the Web sites for iTunes
and Napster, Amazon and BarnesandNoble.com, or
E*Trade and Scottrade. Prepare an evaluation of each
business’s Web site in terms of its functions, user
friendliness, and ability to support the company’s
business strategy. Which Web site does a better job?
Why? Can you make some recommendations to
improve these Web sites? If possible, use Google Sites
to post links to Web pages, team communication
announcements, and work assignments; to brain-
storm; and to work collaboratively on project docu-
ments. Try to use Google Docs to develop a presenta-
tion of your findings for the class.

Amazon vs. Walmart: Which Giant Will Dominate E-commerce?
CASE STUDY
ince arriving on the dot-com scene in 1995,
Amazon.com has grown from a small online
bookseller to one of the largest retailing
companies in the world, and easily the
largest e-commerce retailer. The company has come
a long way from its roots as a small Internet start-up
selling books online. In addition to books, Amazon
now sells millions of new, used, and collectible
items in categories such as apparel and accessories,
electronics, computers, kitchen and housewares,
music, DVDs, videos, cameras, office products, toys
and baby items, computers, software, travel services,
sporting goods, jewelry, and watches. In 2010, sales
of electronics and general merchandise comprised
the majority of Amazon’s sales for the first time.
Amazon.com would like to be “The Walmart of the
Web,” and it is indeed the Internet’s top retailer. But
in 2010, another firm emerged as a serious
challenger for the title of ‘Walmart of the Web’:
Walmart. Though Walmart is a latecomer to the
world of e-commerce, the world’s largest retailer
appears to have its sights set on Amazon and is ready
to battle it out for online e-tailing supremacy.
In contrast with Amazon, Walmart was founded as
a traditional, off-line, physical store in 1962, and has
grown from a single general store managed by
founder Sam Walton to the largest retailer in the
world with nearly 8,000 stores worldwide.
Based in Bentonville, Arkansas, Walmart made
$405 billion in sales last year, which is about 20 times
as much as Amazon. In fact, based on current size
alone, the battle between Walmart and Amazon is far
from a clash of two similarly powerful titans.
Walmart is clearly the bigger and stronger of the two,
and for the time being, Amazon is not a big threat to
Walmart as a whole.
Amazon, however, is not an easy target. The com-
pany has created a recognizable and highly success-
ful brand in online retailing as a mass-market, low-
price, high-volume online superstore. It has
developed extensive warehousing facilities and an
extremely efficient distribution network specifically
designed for Web shopping. Its premium shipping
service, Amazon Prime, provides “free” two-day ship-
ping at an affordable price (currently only $79 per
year), often considered to be a weak point for online
retailers. Even without Amazon Prime, designated
Super Saver items totaling at least $25.00 ship for
free.
Amazon’s technology platform is massive and
powerful enough to support not only sales of its
own items but also those of third-party small and
large businesses, which integrate their products
into Amazon’s Web site and use its order entry and
payment systems to process their own sales.
(Amazon does not own these products, and ship-
ping is handled by the third party, with Amazon
collecting 10-20 percent on the sale). This enables
Amazon to offer an even wider array of products
than it could carry on its own while keeping inven-
tory costs low and increasing revenue. Amazon has
further expanded its product selection via acquisi-
tions such as the 2009 purchase of online shoe
shopping site Zappos.com, which earned $1 billion
in retail sales in 2008 and gave the company an
edge in footwear.
In the third quarter of 2009, when retail sales
dipped 4 percent across the board, Amazon’s sales
increased by 24 percent. Its sales of electronics and
general merchandise, which is the most prominent
area of competition between Amazon and Walmart,
were up 44 percent. And e-commerce is expected to
become an increasingly large portion of total retail
sales. Some estimates indicate that e-commerce
could account for 15 to 20 percent of total retail in
the United States within the next decade, as more
and more shoppers opt to avoid the hassle of shop-
ping at a physical location in favor of shopping
online. If this happens, Amazon is in the best posi-
tion to benefit. In the meantime, e-commerce has
not suffered as much from the recession and is
recovering more quickly than traditional retail, giv-
ing Walmart more reason for concern.
However, Walmart also brings a strong hand to
the table. It is an even larger and more recognizable
brand than Amazon. Consumers associate Walmart
with the lowest price, which Walmart has the
flexibility to offer on any given item because of its
size and ability to keep overhead costs to a
minimum. Walmart can lose money selling a hot
product at extremely low margins and expect to
make money on the strength of the large quantities
of other items it sells. It also has a legendary
continuous inventory replenishment system that
S
410 Part Three Key System Applications for the Digital Age

starts restocking merchandise as soon as an item
reaches the checkout counter. Walmart’s efficiency,
flexibility, and ability to fine-tune its inventory to
carry exactly what customers want have been
enduring sources of competitive advantage. Walmart
also has a significant physical presence, with stores
all across the United States and in many other coun-
tries, and its stores provide the instant gratification
of shopping, buying an item, and taking it home
immediately, as opposed to waiting when ordering
from Amazon.
Walmart believes Amazon’s Achilles’ heel is the
costs and delays of shipping online purchases to
buyers. Customers who buy some of the more than
1.5 million products on Walmart.com can have
them shipped free to a local Walmart, and pick up
their purchases at these stores. Internet shoppers
may be tempted to pick up other items once they
are inside the store. New service desks at the front
of some stores make it even easier for shoppers to
retrieve their purchases. A Walmart on the outskirts
of Chicago is testing a drive-through window, simi-
lar to those found at pharmacies and fast-food
restaurants, where shoppers can pick up their
Internet orders.
In late 2009, Walmart.com began aggressively low-
ering prices on a wide variety of popular items, mak-
ing sure in each instance to undercut Amazon’s
price. The types of items Walmart discounted
included books, DVDs, other electronics, and toys.
The message was clear: Walmart is not going down
without a fight in e-commerce. And Walmart.com
executive Raul Vazquez echoed the same thought,
saying that Walmart will adjust its prices “as low as
we need to” to be the “low-cost leader” on the Web. In
other words, the two companies are now locked in a
price war, and both sites are determined to win.
The most high profile area where the two
companies have done battle is in online book sales.
Amazon’s Kindle e-book reader may have started the
conflict by offering the most popular books in e-book
format for just $9.99. Though many publishers have
since balked at allowing their books to be sold in the
e-book format for that price, the battle has raged on in
traditional formats. Several high-profile book releases,
such as Stephen King’s newest novel, Under the Dome,
illustrated just how low both companies are willing to
go. Walmart lowered its price for the novel to just $10,
claiming that it wasn’t in response to the $9.99 e-book
price. Amazon matched that price shortly thereafter. In
response, Walmart dropped the price to $9.00 a few
days later. The book’s retail cover price is $35 dollars,
and its wholesale price is about $17. This means that
both retailers are losing at least $7 on every copy of
Under the Dome that they sell at that price.
Walmart sees its massive price cuts as a way to
gain market share quickly as they enter the online
bookselling marketplace at a time when e-book
readers and Apple iPhones and iPads make the
e-book format popular. Amazon has demonstrated
that in the short term it is more than capable of
competing with Walmart on price. As of this case’s
writing, Amazon had raised its price on the Under the
Dome back up to $17. Walmart’s price, of course, was
$16.99. The two sites have had similar clashes over
many high-profile books, like J.K. Rowling’s Harry
Potter and the Half-Blood Prince and James Patterson’s
I, Alex Cross, the latter selling for $13.00 on Amazon
and $12.99 on Walmart.com as of this writing.
The feud between the two sites has spilled over
into other types of merchandise. Amazon and
Walmart.com have competed over Xbox 360
consoles, popular DVD releases, and other big-ticket
electronics. Even popular toys like the perennial top
seller Easy-Bake Oven have been caught up in the
fray. With the 2009 holiday shopping season in full
swing, Walmart dropped its price for the toy from $28
to just $17. Amazon slashed its price to $18 on the
very same day.
Amazon claims it doesn’t see shipping as a
weakness. According to Amazon spokesperson
Craig Berman, “Shopping on Amazon means you
don’t have to fight the crowds. We bring the items
to your doorstep. You don’t have to fight through
traffic or find a parking space.” Moreover, Amazon
has taken steps recently to speed delivery times.
In October, it began offering same-day delivery in
seven U.S. cities, at an extra cost to shoppers.
By working with carriers and improving its own
internal systems, Amazon also started offering sec-
ond-day deliveries on Saturdays, shaving two days
off some orders. And Amazon continues to expand
its selection of goods to be as exhaustive as
Walmart’s. In November 2010, Walmart introduced
free shipping for all online orders.
Amazon founder and CEO Jeff Bezos is fond of
describing the U.S. retail market as having “room for
many winners.” Will this hold true for Walmart and
Amazon going forward? Walmart remains
unchallenged among traditional physical retailers,
but will it topple Amazon on the Web? Or will
Amazon continue to be the “Walmart” of online
retailers? Alternatively, will Walmart end up
enlarging the online retail market space, helping
Amazon grow in the process?
Chapter 10 E-Commerce: Digital Markets, Digital Goods 411

412 Part Three Key System Applications for the Digital Age
Sources: Kelly Evans, “How America Now Shops: Online
Stores, Dollar Retailers (Watch Out Walmart),” The Wall Street
Journal, March 23, 2010; Brad Stone, “The Fight Over Who Sets
Prices at the Online Mall,” The New York Times, February 8,
2010; Paul Sharma, “The Music Battle, Replayed with Books,”
The Wall Street Journal, November 24, 2009; Martin Peers,
“Rivals Explore Amazon’s Territory,” The Wall Street Journal,
January 7, 2010; “Is Wal-Mart Gaining on Amazon.com?” The
Wall Street Journal, reprinted on MSN Money, December 18,
2009; “Amazon Steps Into Zappos’ Shoes,” eMarketer, July 24,
2009; Brad Stone, “Can Amazon Be the
Wal-Mart of the Web?” The New York Times, September 20, 2009;
and Brad Stone and Stephanie Rosenbloom, “Price War Brews
Between Amazon and Wal-Mart,” The New York Times,
November 24, 2009.
CASE STUDY QUESTIONS
1. What concepts in the chapter are illustrated in this
case?
2. Analyze Amazon and Walmart.com using the
value chain and competitive forces models.
3. What are the management, organization, and
technology factors that have contributed to the
success of both Wal-Mart and Amazon?
4. Compare Wal-Mart’s and Amazon’s
e-commerce business models. Which is stronger?
Explain your answer.
5. Where would you prefer to make your Internet
purchases? Amazon or Walmart.com? Why?

!”#$%&'()%#*+)*+#,*’–.%-)/+%0-‘*1%

LEARNING OBJECTIVESS
After reading this chapter,
you will be able to answer
the following questions:
1. What is the role of knowledge
management and knowledge
management programs in business?
2. What types of systems are used for
enterprise-wide knowledge
management and how do they
provide value for businesses?
3. What are the major types of
knowledge work systems and how
do they provide value for firms?
4. What are the business benefits of
using intelligent techniques for
knowledge management?
CHAPTER OUTLINE
11.1 THE KNOWLEDGE MANAGEMENT
LANDSCAPE
Important Dimensions of Knowledge
The Knowledge Management Value Chain
Types of Knowledge Management Systems
11.2 ENTERPRISE-WIDE KNOWLEDGE
MANAGEMENT SYSTEMS
Enterprise Content Management Systems
Knowledge Network Systems
Collaboration Tools and Learning Management
Systems
11.3 KNOWLEDGE WORK SYSTEMS
Knowledge Workers and Knowledge Work
Requirements of Knowledge Work Systems
Examples of Knowledge Work Systems
11.4 INTELLIGENT TECHNIQUES
Capturing Knowledge: Expert Systems
Organizational Intelligence: Case-Based Reasoning
Fuzzy Logic Systems
Neural Networks
Genetic Algorithms
Hybrid AI Systems
Intelligent Agents
11.5 HANDS-ON MIS PROJECTS
Management Decision Problems
Improving Decision Making: Building a Simple
Expert System for Retirement Planning
Improving Decision Making: Using Intelligent
Agents for Comparison Shopping
LEARNING TRACK MODULE
Challenges of Knowledge Management Systems
Chapter 11
Managing Knowledge
Interactive Sessions:
Augmented Reality: Reality
Gets Better
The Flash Crash: Machines
Gone Wild?

415
on’t be fooled by its modest name: Canadian Tire sells a lot more than tires. This
company is actually five interrelated companies consisting of petroleum outlets,
financial services, and retail outlets selling automotive, sports, leisure, home
products, and apparel. It is also one of Canada’s largest companies and most-
shopped retailers, with 57,000 employees, and 1,200 stores and gas stations across Canada.
The retail outlets are independently owned and operated and are spread across Canada.
Canadian Tire also sells merchandise online.
Obviously, a company this big needs efficient and effective ways of communicating with
its workforce and dealers, and arming them with up-to-date information to run the busi-
ness. The company created two different systems for this purpose, a dealer portal and an
employee information intranet.
The dealer portal was based on Microsoft Office SharePoint Portal Server, and provided a
central online source for merchandise setup information, alerts, best practices, product
ordering, and problem resolution. The money saved from reducing daily and weekly mailings
to dealers saved the company $1–2 million annually. Customer service improved because the
dealers no longer had to wade through thick paper product binders. Now product manuals are
all online, and dealers are able to automatically find accurate up-to-date information.
The employee intranet called TIREnet was initially more problematic. It was based on
Lotus Notes Domino software and had been poorly designed. Employees complained that
the site was disorganized, brimming with outdated and redundant material, and lacked
effective search features. People spent more time than necessary searching for administra-
tive and human resource-related documents.
Canadian Tire upgraded TIREnet with a new interface that was more streamlined and
intuitive. The foundation for the new TIREnet was Microsoft SharePoint Server, and the
company reorganized the internal Web site so that it was easier to use and find information.
SharePoint provides an option to freeze specific content, such as human resources documents,
so only staff with appropriate clearance can post changes.
Canadian Tire catalogued more than 30,000 documents from the old system and
transferred them to the new system. Employees no longer have to browse through
TIREnet to locate a document. SharePoint’s Enterprise Search technology lets employees
search for documents by typing their queries into a search box, instantly providing more up-
D
to-date information for deci-
sion making.
It is also much easier to keep
documents current. Employees
and managers archived up to
50 percent of old TIREnet con-
tent that was irrelevant and
outdated. Documents are now
automatically updated accord-
ing to who has reviewed each,
and the last date each was
accessed. This information
helps Canadian Tire manage-
ment identify and remove out-
dated and time-sensitive mater-
ial, further reducing the time
required to find information.
.CANADIAN TIRE KEEPS THE WHEELS ROLLING WITH
KNOWLEDGE MANAGEMENT SYSTEMS

416 Part Three Key System Applications for the Digital Age
Sources: Microsoft Canada, “Wheels In Motion,” www.microsoft.ca, acessed July 15, 2010;
Microsoft Corprpation, “Canadian Tire Major Tire Company Adopts Collaboration System
with Faster Search,” July 6, 2009; and www.canadiantire.ca, accessed September 28, 2010.
Canadian Tire’s experience shows how business performance can benefitby making organizational knowledge more easily available. Facilitating
access to knowledge, improving the quality and currency of knowledge, and
using that knowledge to improve business processes are vital to success and
survival.
The chapter-opening diagram calls attention to important points raised by
this case and this chapter. Canadian Tire is a very large and far-flung company
with multiple lines of business. It has many different business units and retail
dealers with which to communicate knowledge about the operation of the
business. Delays in accessing product information impaired dealer efficiency
and customer service, while cumbersome processes and tools for accessing
information used by employees similarly hampered internal operations.
Canadian Tire developed a successful information-sharing platform for its
dealers using Microsoft SharePoint Server, improving dealer operations and
customer service. But the knowledge it provided internally to employees was
disorganized and out of date. Canadian Tire revamped its TIREnet employee
intranet based on Lotus Notes Domino software by switching its technology
platform to Microsoft SharePoint Server and by streamlining and simplifying the
user interface. It improved its business processes for classifying and storing
documents to make them easier to locate using SharePoint search technology.
SharePoint has tools for automatically tracking the time and authorship of
document updates, which also helps Canadian Tire keep its information
up to date. Thanks to better knowledge management, Canadian Tire is operating
much more efficiently and effectively.

www.microsoft.ca

www.canadiantire.ca

Chapter 11 Managing Knowledge 417
11.1 THE KNOWLEDGE MANAGEMENT LANDSCAPE
nowledge 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 knowledge management in the economics, management, and infor-
mation 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.
As we described in Chapter 2, collaboration systems include Internet-based
collaboration environments like Google Sites and IBM’s Lotus Notes, social
networking, e-mail and instant messaging, virtual meeting systems, wikis,
and virtual worlds. In this chapter, we will be focusing on knowledge
management systems, always mindful of the fact that communicating and
sharing knowledge are becoming increasingly 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.
About 55 percent of the U.S. labor force consists of knowledge and information
workers, and 60 percent of the gross domestic product of the United States
comes from the knowledge and information sectors, such as finance and
publishing.
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; Blair and Wallman, 2001).
IMPORTANT DIMENSIONS OF KNOWLEDGE
There is an important distinction between data, information, knowledge, and
wisdom. Chapter 1 defines data as a flow of events or transactions captured by
an organization’s systems that, by itself, is 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 individual 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
inside peoples’ 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 e-mail,
voice mail, graphics, and unstructured documents as well as structured
K

418 Part Three Key System Applications for the Digital Age
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 applicable or easily moved. Finally, knowledge is thought to be
situational and contextual. 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,
buildings and financial assets; that knowledge is a complex phenomenon; and
that there are many aspects to the process of managing knowledge. We can also
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
effective in their use of resources and ultimately fail.
O r g a n i z a t i o n a l L e a r n i n g a n d K n o w l e d g e M a n a g e m e n t
Like humans, organizations create and gather knowledge using a variety of
organizational learning mechanisms. Through collection of data, careful
measurement of planned activities, trial and error (experiment), 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
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 as 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 419
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 environ-
ment and to incorporate knowledge into its business processes. Figure 11-1
illustrates the five 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 activities
on the top of the graphic and organizational and management activities below.
One apt slogan of the knowledge management field is, “Effective knowledge
management is 80 percent managerial and organizational, and 20 percent
technology.”
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
behavior patterns must be built to maximize the return on investment in
knowledge management projects. In Figure 11-1, the management and organiza-
tional activities in the lower half of the diagram represent the investment in
organizational capital required to obtain substantial returns on the information
technology (IT) investments and systems shown in the top half of the diagram.
FIGURE 11-1 THE KNOWLEDGE MANAGEMENT VALUE CHAIN
Knowledge management today involves both information systems activities and a host of enabling management and organiza-
tional activities.

420 Part Three Key System Applications for the Digital Age
K n o w l e d g e A c q u i s i t i o n
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 e-mail). In other cases, organizations acquire knowledge by developing
online expert networks so that employees can “find the expert” in the company
who has the knowledge in his or her head.
In still other cases, firms must create new knowledge by discovering patterns
in corporate data or by using knowledge workstations where engineers can
discover new knowledge. These various efforts are described throughout this
chapter. A coherent and organized knowledge system also requires systematic
data from the firm’s transaction processing systems that track sales, payments,
inventory, customers, and other vital data, as well as data from external sources
such as news feeds, industry reports, legal opinions, scientific research, and
government statistics.
K n o w l e d g e S t o r a g e
Once they are discovered, documents, patterns, and expert rules must be
stored so they can be retrieved and used by employees. Knowledge storage
generally 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
documents properly. For instance, it would reward the sales force for submit-
ting names of prospects to a shared corporate database of prospects where all
sales personnel can identify each prospect and review the stored knowledge.
K n o w l e d g e D i s s e m i n a t i o n
Portals, e-mail, instant messaging, wikis, social networks, and search engines
technology have added to an existing array of collaboration technologies and
office systems for sharing calendars, documents, data, and graphics (see
Chapter 7). Contemporary technology seems to have created a deluge of infor-
mation and knowledge. How can managers 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 communicated through a supportive culture help
managers focus their attention on the important knowledge and information.
K n o w l e d g e A p p l i c a t i o n
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,
organizational knowledge must become a systematic part of management
decision making and become situated in decision-support systems (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 key internal business processes and relationships with customers

Chapter 11 Managing Knowledge 421
and suppliers. Management supports this process by creating—based on new
knowledge—new business practices, new products and services, and new
markets for the firm.
B u i l d i n g O r g a n i z a t i o n a l a n d M a n a g e m e n t C a p i t a l :
C o l l a b o r a t i o n , C o m m u n i t i e s o f P r a c t i c e , a n d O f f i c e
E n v i r o n m e n t s
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
positions, 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 similar
work-related activities and interests. The activities of these communities
include self- and group education, conferences, online newsletters, 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 practice 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,
encouraging 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.
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
system 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 expertise
within the firm. They also include supporting technologies such as portals,
search engines, collaboration tools (e-mail, instant messaging, wikis, blogs, and
social bookmarking), and learning management systems.
The development of powerful networked workstations and software for
assisting engineers and scientists in the discovery of new knowledge has led to
the creation of knowledge work systems such as computer-aided design (CAD),
visualization, simulation, and virtual reality systems. Knowledge work
systems (KWS) are specialized systems built for engineers, scientists, and
other knowledge workers charged with discovering and creating new knowl-
edge for a company. We discuss knowledge work applications in detail in
Section 11.3.
Knowledge management also includes a diverse group of intelligent
techniques, such as data mining, expert systems, neural networks, fuzzy logic,
genetic algorithms, and intelligent agents. These techniques have different

422 Part Three Key System Applications for the Digital Age
objectives, from a focus on discovering knowledge (data mining and neural
networks), to distilling knowledge in the form of rules for a computer program
(expert systems and fuzzy logic), to discovering optimal solutions for problems
(genetic algorithms). Section 11.4 provides more detail about these intelligent
techniques.
11.2 ENTERPRISE-WIDE KNOWLEDGE MANAGEMENT
SYSTEMS
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 presenta-
tions). Decision makers also need knowledge that is semistructured, such as
e-mail, voice mail, chat room exchanges, videos, digital pictures, 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
exists in formal documents, as well as in formal rules that organizations derive
by observing experts and their decision-making behaviors. But, according to
experts, at least 80 percent of an organization’s business content is semistruc-
tured or unstructured—information in folders, messages, memos, proposals,
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.

Chapter 11 Managing Knowledge 423
e-mails, graphics, electronic slide presentations, and even videos created in
different formats and stored in many locations.
Enterprise content management systems help organizations manage
both types of information. They have capabilities for knowledge capture,
storage, retrieval, distribution, and preservation to help firms improve their
business processes and decisions. Such systems include corporate repositories
of documents, reports, presentations, and best practices, as well as capabilities
for collecting and organizing semistructured knowledge such as e-mail
(see Figure 11-3). Major enterprise content management systems also enable
users to access external sources of information, such as news feeds and
research, and to communicate via e-mail, chat/instant messaging, discussion
groups, and videoconferencing. Open Text Corporation, EMC (Documentum),
IBM, and Oracle Corporation are leading vendors of enterprise content
management software.
Barrick Gold, the world’s leading gold producer, uses Open Text LiveLink
Enterprise Content Management tools to manage the massive amounts of infor-
mation required for building mines. The system organizes and stores both
structured and unstructured content, including CAD drawings, contracts,
engineering data, and production reports. If an operational team needs to refer
back to the original document, that document is in a single digital repository as
opposed to being scattered over multiple systems. Barrick’s electronic content
management system reduces the amount of time required to search for
documents, shortening project schedules, improving the quality of decisions,
and minimizing rework (Open Text, 2010).
A key problem in managing knowledge is the creation of an appropriate
classification scheme, or taxonomy, to organize information into meaningful
categories 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
where the documents are stored, and creating an enterprise portal environ-
ment for employees to use when searching for corporate knowledge.
FIGURE 11-3 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.

424 Part Three Key System Applications for the Digital Age
Firms in publishing, advertising, broadcasting, and entertainment have
special needs for storing and managing unstructured digital data such as
photographs, 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 created
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.
KNOWLEDGE NETWORK SYSTEMS
Knowledge network systems, also known as expertise location and manage-
ment systems, address the problem that arises when the appropriate knowledge
is not in the form of a digital document but instead resides in the memory of
expert individuals in the firm. Knowledge network systems provide an online
directory of corporate experts in well-defined knowledge domains and use
communication technologies to make it easy for employees to find the appro-
priate expert in a company. Some knowledge network systems go further by
systematizing the solutions developed by experts and then storing the solutions
in a knowledge database as a best practices or frequently asked questions (FAQ)
repository (see Figure 11-4). AskMe provides stand-alone knowledge network
software, and some knowledge networking capabilities can be found in the
leading collaboration software suites.
COLLABORATION TOOLS AND LEARNING MANAGEMENT
SYSTEMS
The major enterprise content management systems include powerful portal
and collaboration technologies. Enterprise knowledge portals can provide
access to external sources of information, such as news feeds and research, as
well as to internal knowledge resources along with capabilities for e-mail,
chat/instant messaging, discussion groups, and videoconferencing.
Companies are starting to use consumer Web technologies such as blogs,
wikis, and social bookmarking for internal use to foster collaboration and
information exchange between individuals and teams. Blogs and wikis help
capture, consolidate, and centralize this knowledge for the firm. Collaboration
tools from commercial software vendors, such as Microsoft SharePoint and
Lotus Connections, also offer these capabilities along with secure online collab-
orative workspaces.
Wikis, which we introduced in Chapters 2 and 7, are inexpensive and easy to
implement. Wikis provide a central repository for all types of corporate data
that can be displayed in a Web browser, including electronic pages of
documents, spreadsheets, and electronic slides, and can embed e-mail and
instant messages. Although users are able to modify wiki content contributed
by others, wikis have capabilities for tracking these changes and tools for revert-
ing to earlier versions. A wiki is most appropriate for information that is revised
frequently but must remain available perpetually as it changes.
Social bookmarking makes it easier to search for and share information by
allowing users to save their bookmarks to Web pages on a public Web site and
tag these bookmarks with keywords. These tags can be used to organize and
search for the documents. Lists of tags can be shared with other people to help
them find information of interest. The user-created taxonomies created for

shared bookmarks are called folksonomies. Delicious and Digg are two
popular social bookmarking sites.
Suppose, for example, that you’re on a corporate team researching wind
power. If you did a Web search and found relevant Web pages on wind power,
you’d click on a bookmarking button on a social bookmarking site and create a
tag identifying each Web document you found to link it to wind power. By click-
ing on the “tags” button at the social networking site, you’d be able to see a list
of all the tags you created and select the documents you need.
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.
Chapter 11 Managing Knowledge 425
FIGURE 11-4 AN ENTERPRISE KNOWLEDGE NETWORK SYSTEM
A knowledge network maintains a database of firm experts, as well as accepted solutions to known
problems, and then facilitates the communication between employees looking for knowledge and
experts who have that knowledge. Solutions created in this communication are then added to a
database of solutions in the form of FAQs, best practices, or other documents.

426 Part Three Key System Applications for the Digital Age
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 administra-
tion of courses, assembles and delivers learning content, and measures
learning effectiveness.
For example, the Whirlpool Corporation uses CERTPOINT’s learning
management system to manage the registration, scheduling, reporting, and
content for its training programs for 3,500 salespeople. The system helps
Whirlpool tailor course content to the right audience, track the people who
took courses and their scores, and compile metrics on employee perfor-
mance.
11.3 KNOWLEDGE WORK SYSTEMS
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
properly 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 knowledge
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 improv-
ing existing ones. Knowledge workers perform three key roles that 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 office systems, such as word processors, voice
mail, e-mail, videoconferencing, and scheduling systems, which are designed
to increase worker productivity in the office. However, knowledge workers also
require highly specialized knowledge work systems with powerful 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, product designers, and financial analysts. Because
knowledge workers are so focused on knowledge in 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

Chapter 11 Managing Knowledge 427
needed tasks without having 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 expensive. Figure 11-5 summarizes the requirements of
knowledge work systems.
Knowledge workstations often are designed and optimized for the specific
tasks to be performed; so, for example, a design engineer requires a different
workstation setup than a financial analyst. Design engineers need graphics
with enough power to handle three-dimensional (3-D) CAD systems. However,
financial analysts are more interested in access to a myriad number of external
databases and large databases for efficiently storing and accessing massive
amounts of financial data.
EXAMPLES OF KNOWLEDGE WORK SYSTEMS
Major knowledge work applications include CAD systems, virtual reality
systems for simulation and modeling, and financial workstations. Computer-
aided design (CAD) automates the creation and revision of designs, using
computers and sophisticated graphics software. Using a more traditional physi-
cal 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 a very expensive and time-consuming process. 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.
Troy Lee Designs, which makes sports helmets, recently invested in CAD
design software that could create the helmets in 3-D. The technology defined
the shapes better than traditional methods, which involved sketching an idea
FIGURE 11-5 REQUIREMENTS OF KNOWLEDGE WORK SYSTEMS
Knowledge work systems require strong links to external knowledge bases in addition to specialized
hardware and software.

428 Part Three Key System Applications for the Digital Age
on paper, hand-molding a clay model, and shipping the model to Asian factories
to create a plastic prototype. Production is now about six months faster and
about 35 percent cheaper, with Asian factories about to produce an exact replica
after receiving the digital design via e-mail (Maltby, 2010).
Virtual reality systems have visualization, rendering, and simulation
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
information back to the computer. For instance, to walk through a virtual reality
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.
A virtual reality system helps mechanics in Boeing Co.’s 25-day training
course for its 787 Dreamliner learn to fix all kinds of problems, from broken
lights in the cabin to major glitches with flight controls. Using both laptop and
desktop computers inside a classroom with huge wall-mounted diagrams,
Boeing airline mechanics train on a system that displays an interactive Boeing
787 cockpit, as well as a 3-D exterior of the plane. The mechanics “walk” around
the jet by clicking a mouse, open virtual maintenance access panels, and go
inside the plane to repair and replace parts (Sanders, 2010).
Augmented reality (AR) is a related technology for enhancing visualiza-
tion. AR provides a live direct or indirect view of a physical real-world environ-
ment whose elements are augmented by virtual computer-generated imagery.
The user is grounded in the real physical world, and the virtual images are
merged with the real view to create the augmented display. The digital technol-
ogy provides additional information to enhance the perception of reality and
CAD systems improve
the quality and precision of
product design by perform-
ing much of the design and
testing work on the
computer.

Many of us are familiar with the concept of virtual
reality, either from films like Avatar and The Matrix,
or from science fiction novels and video games.
Virtual reality is a computer-generated, interactive,
three-dimensional environment in which people
become immersed. But in the past few years, a new
spin on virtual reality known as augmented reality
has emerged as a major focus of many companies’
marketing efforts. More than just science fiction,
augmented reality is an exciting new way of creating
richer, more interactive experiences with users and
future customers.
Augmented reality differs from traditional virtual
reality because users of augmented reality (also
called AR) tools maintain a presence in the real
world. In virtual reality, users are completely
immersed in a computer-generated environment,
and often use head-mounted displays that facilitate
the immersion and eliminate any interference from
the real world. Augmented reality mixes real-life
images with graphics or other effects and can use
any of three major display techniques—head-
mounted displays, just as with virtual reality, spatial
displays, which display graphical information on
physical objects, and handheld displays.
Almost everyone has already encountered some
form of AR technology. Sports fans are familiar with
the yellow first-down markers shown on televised
football games, or the special markings denoting the
location and direction of hockey pucks in hockey
games. These are examples of augmented reality.
Other common usages of AR include medical proce-
dures like image-guided surgery, where data
acquired from computerized 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.
As companies get more comfortable with
augmented reality, marketers are developing
creative new ways to use the technology. Print
media companies see AR as a way to generate
excitement about their products in an entirely new
way. Esquire magazine used AR extensively in its
December 2009 issue, adding several stickers with
designs that, when held up to a Web camera,
triggered interactive video segments featuring cover
subject Robert Downey Jr. Turning the magazine in
different directions yielded different images. A
fashion spread describing dressing in layers showed
actor Jeremy Renner adding more layers as the
seasons changed. The orientation of the magazine as
held up to a Web camera determined the season.
Lexus placed an advertisement in the magazine
that displayed “radar waves” bouncing off of nearby
objects on the page. Again, adjusting the angle of the
magazine affected the content of the ad. Lexus Vice
President of Marketing David Nordstrom stated that
AR was attractive to him because “our job as
marketers is to be able to communicate to people in
interesting ways that are relevant to them and also
entertaining.” User response to the magazine was
positive, suggesting that AR accomplished this goal.
Other companies that have pursued AR as a way to
attract and entertain their customers include Papa
John’s, which added AR tags to their pizza boxes.
These tags display images of the company’s founder
driving a car when triggered using a Web camera.
That company’s president believes AR is “a great
way to get customers involved in a promotion in a
more interactive way than just reading or seeing an
ad.”
Mobile phone application developers are also
excited about the growing demand for AR
technologies. Most mobile phones have camera,
global positioning system (GPS), Internet, and
compass functionalities, which make smartphones
ideal candidates for handheld AR displays. One of
the major new markets for AR is in real estate,
where applications that help users access real estate
listings and information on the go have already
taken off. An Amsterdam-based start-up, application
developer Layar, has created an app for French real
estate agency MeilleursAgents.com where users can
point their phones at any building in Paris and
within seconds the phone displays the property’s
value per square meter and a small photo of the
property, along with a live image of the building
streamed through the phone’s camera.
Over 30 similar applications have been developed
in other countries, including American real estate
company ZipRealty, whose HomeScan application
has met with early success. While the technology is
still new and will take some time to develop, users
can already stand in front of some houses for sale
I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y
Chapter 11 Managing Knowledge 429
AUGMENTED REALITY: REALITY GETS BETTER

1. What is the difference between virtual reality and
augmented reality?
2. Why is augmented reality so appealing to
marketers?
3. What makes augmented reality useful for real
estate shopping applications?
4. Suggest some other knowledge work applications
for augmented reality
and point their phones at the property to display
details superimposed on their screen. If the house is
too far away, users can switch to the phone’s interac-
tive map and locate the house and other nearby
houses for sale. ZipRealty is so encouraged by the
early response to HomeScan that it plans to add data
on restaurants, coffee shops, and other neighborhood
features to the app. Another well-known application,
Wikitude, allows users to view user-contributed Web-
based information about their surroundings using
their mobile phones.
Skeptics believe that the technology is more of a
gimmick than a useful tool, but Layar’s application
has been downloaded over 1,000 times per week
since its launch. Being able to access information on
properties is more than just a gimmick—it is a legiti-
mately useful tool to help buyers on the go.
Find example videos of augmented reality in action
(use Nick Burcher’s blog if you’re stuck:
http://www.nickburcher.com/2009/05/augmented-
reality-5-more-examples-of.html), and use them to
answer the following questions:
1. Why is the example shown in the video an
instance of AR?
2. Do you think it is an effective marketing tool or
application? Why or why not?
3. Can you think of other products or services that
would be well suited to AR?
Marketers are finding that users increasingly want
their phones to have all of the functionality of desk-
top computers, and more AR mash-ups have been
released that display information on tourist sites,
chart subway stops, and restaurants, and allow inte-
rior designers to superimpose new furniture schemes
onto a room so that potential customers can more
easily choose what they like best. Analysts believe
that AR is here to stay, predicting that the mobile AR
market will grow to $732 million by 2014.
Sources: R. Scott MacIntosh, “Portable Real Estate Listings-with a
Difference,” The New York Times, March 25, 2010; Alex Viega,
“Augmented Reality for Real Estate Search,” Associated Press, April
16, 2010; “Augmented Reality – 5 More Examples of This 3D Virtual
Experience,” http://www.nickburcher.com/2009/05/augmented-
reality-5-more-examples-of.html, May 30, 2009; Shira Ovide, ”Esquire
Flirts with Digital Reality,” The Wall Street Journal, October 29, 2009.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N
430 Part Three Key System Applications for the Digital Age
make the surrounding real world of the user more interactive and meaningful.
The Interactive Session on Technology provides more detail about AR and its
applications.
Virtual reality applications developed for the Web use a standard called
Virtual Reality Modeling Language (VRML). VRML is a set of specifications
for interactive, 3-D modeling on the World Wide Web that can organize multiple
media types, including animation, images, and audio to put users in a simu-
lated real-world environment. VRML is platform independent, operates over a
desktop computer, and requires little bandwidth.
DuPont, the Wilmington, Delaware, chemical company, created a VRML
application called HyperPlant, which enables users to access 3-D data over the
Internet using Web browser software. Engineers can go through 3-D models as
if they were physically walking through a plant, viewing objects at eye level.
This level of detail reduces the number of mistakes they make during construc-
tion of oil rigs, oil plants, and other structures.

http://www.nickburcher.com/2009/05/augmentedreality-5-more-examples-of.html

http://www.nickburcher.com/2009/05/augmentedreality-5-more-examples-of.html

http://www.nickburcher.com/2009/05/augmented-reality-5-more-examples-of.html

http://www.nickburcher.com/2009/05/augmented-reality-5-more-examples-of.html

Chapter 11 Managing Knowledge 431
The financial industry is using specialized investment workstations to
leverage the knowledge and time of its brokers, traders, and portfolio managers.
Firms such as Merrill Lynch and UBS Financial Services have installed invest-
ment workstations that integrate a wide range of data from both internal and
external sources, including contact management data, real-time and historical
market data, and research reports. Previously, financial professionals had to
spend considerable time accessing data from separate systems and piecing
together the information they needed. By providing one-stop information faster
and with fewer errors, the workstations streamline the entire investment
process from stock selection to updating client records. Table 11-2 summarizes
the major types of knowledge work systems.
11.4 INTELLIGENT TECHNIQUES
Artificial intelligence and database technology provide a number of intelligent
techniques that organizations can use to capture individual and collective
knowledge and to extend their knowledge base. Expert systems, case-based
reasoning, and fuzzy logic are used for capturing tacit knowledge. Neural
networks and data mining are used for knowledge discovery. They can
discover underlying patterns, categories, and behaviors in large data sets that
could not be discovered by managers alone or simply through experience.
Genetic algorithms are used for generating solutions to problems that are too
large and complex for human beings to analyze on their own. Intelligent
agents can automate routine tasks to help firms search for and filter informa-
tion for use in electronic commerce, supply chain management, and other
activities.
Data mining, which we introduced in Chapter 6, helps organizations capture
undiscovered knowledge residing in large databases, providing managers with
new insight for improving business performance. It has become an important
tool for management decision making, and we provide a detailed discussion of
data mining for management decision support in Chapter 12.
The other intelligent techniques discussed in this section are based on
artificial intelligence (AI) technology, which consists of computer-based
systems (both hardware and software) that attempt to emulate human behavior.
Such systems would be able to learn languages, accomplish physical tasks, use
a perceptual apparatus, and emulate human expertise and decision making.
Although AI applications do not exhibit the breadth, complexity, originality,
and generality of human intelligence, they play an important role in contem-
porary knowledge management.
TABLE 11-2 EXAMPLES OF KNOWLEDGE WORK SYSTEMS
KNOWLEDGE WORK SYSTEM FUNCTION IN ORGANIZATION
CAD/CAM (computer-aided Provides engineers, designers, and factory managers with
manufacturing) precise control over industrial design and manufacturing
Virtual reality systems Provide drug designers, architects, engineers, and medical
workers with precise, photorealistic simulations of objects
Investment workstations High-end PCs used in the financial sector to analyze
trading situations instantaneously and facilitate portfolio
management

432 Part Three Key System Applications for the Digital Age
CAPTURING KNOWLEDGE: EXPERT SYSTEMS
Expert systems are an intelligent technique for capturing tacit knowledge in a
very specific and limited domain of human expertise. These systems capture
the knowledge of skilled employees in the form of a set of rules in a software
system that can be used by others in the organization. The set of rules in the
expert system adds to the memory, or stored learning, of the firm.
Expert systems lack the breadth of knowledge and the understanding of
fundamental principles of a human expert. They typically perform very limited
tasks that can be performed by professionals in a few minutes or hours, such as
diagnosing a malfunctioning machine or determining whether to grant credit
for a loan. Problems that cannot be solved by human experts in the same short
period of time are far too difficult for an expert system. However, by capturing
human expertise in limited areas, expert systems can provide benefits, helping
organizations make high-quality decisions with fewer people. Today, expert
systems are widely used in business in discrete, highly structured decision-
making situations.
H o w E x p e r t S y s t e m s W o r k
Human knowledge must be modeled or represented in a way that a computer
can process. Expert systems model human knowledge as a set of rules that
collectively are called the knowledge base. Expert systems have from 200 to
many thousands of these rules, depending on the complexity of the problem.
These rules are much more interconnected and nested than in a traditional
software program (see Figure 11-6).
The strategy used to search through the knowledge base is called the
inference engine. Two strategies are commonly used: forward chaining and
backward chaining (see Figure 11-7).
In forward chaining, the inference engine begins with the information
entered by the user and searches the rule base to arrive at a conclusion.
The strategy is to fire, or carry out, the action of the rule when a condition is
true. In Figure 11-7, beginning on the left, if the user enters a client’s name with
income greater than $100,000, the engine will fire all rules in sequence from
left to right. If the user then enters information indicating that the same client
owns real estate, another pass of the rule base will occur and more rules will
fire. Processing continues until no more rules can be fired.
In backward chaining, the strategy for searching the rule base starts with a
hypothesis and proceeds by asking the user questions about selected facts until
the hypothesis is either confirmed or disproved. In our example, in Figure 11-7,
ask the question, “Should we add this person to the prospect database?” Begin
on the right of the diagram and work toward the left. You can see that the
person should be added to the database if a sales representative is sent, term
insurance is granted, or a financial adviser visits the client.
E x a m p l e s o f S u c c e s s f u l E x p e r t S y s t e m s
Expert systems provide businesses with an array of benefits including
improved decisions, reduced errors, reduced costs, reduced training time, and
higher levels of quality and service. Con-Way Transportation built an expert
system called Line-haul to automate and optimize planning of overnight
shipment routes for its nationwide freight-trucking business. The expert system
captures the business rules that dispatchers follow when assigning drivers,
trucks, and trailers to transport 50,000 shipments of heavy freight each night
across 25 states and Canada and when plotting their routes. Line-haul runs on a

Chapter 11 Managing Knowledge 433
FIGURE 11-6 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.
FIGURE 11-7 INFERENCE ENGINES IN EXPERT SYSTEMS
An inference engine works by searching through the rules and “firing” those rules that are triggered by facts gathered and entered
by the user. Basically, a collection of rules is similar to a series of nested IF statements in a traditional software program; however,
the magnitude of the statements and degree of nesting are much greater in an expert system.

434 Part Three Key System Applications for the Digital Age
Sun computer platform and uses data on daily customer shipment requests,
available drivers, trucks, trailer space, and weight stored in an Oracle database.
The expert system uses thousands of rules and 100,000 lines of program code
written in C++ to crunch the numbers and create optimum routing plans for 95
percent of daily freight shipments. Con-Way dispatchers tweak the routing plan
provided by the expert system and relay final routing specifications to field
personnel responsible for packing the trailers for their nighttime runs. Con-Way
recouped its $3 million investment in the system within two years by reducing
the number of drivers, packing more freight per trailer, and reducing damage
from rehandling. The system also reduces dispatchers’ arduous nightly tasks.
Although expert systems lack the robust and general intelligence of human
beings, they can provide benefits to organizations if their limitations are well
understood. Only certain classes of problems can be solved using expert
systems. Virtually all successful expert systems deal with problems of
classification in limited domains of knowledge where there are relatively few
alternative outcomes and these possible outcomes are all known in advance.
Expert systems are much less useful for dealing with unstructured problems
typically encountered by managers.
Many expert systems require large, lengthy, and expensive development
efforts. Hiring or training more experts may be less expensive than building an
expert system. Typically, the environment in which an expert system operates
is continually changing so that the expert system must also continually change.
Some expert systems, especially large ones, are so complex that in a few years
the maintenance costs equal the development costs.
ORGANIZATIONAL INTELLIGENCE: CASE-BASED
REASONING
Expert systems primarily capture the tacit knowledge of individual experts, but
organizations also have collective knowledge and expertise that they have built
up over the years. This organizational knowledge can be captured and stored
using case-based reasoning. In case-based reasoning (CBR), descriptions of
past experiences of human specialists, represented as cases, are stored in a
database for later retrieval when the user encounters a new case with similar
parameters. The system searches for stored cases with problem characteristics
similar to the new one, finds the closest fit, and applies the solutions of the old
case to the new case. Successful solutions are tagged to the new case and both
are stored together with the other cases in the knowledge base. Unsuccessful
solutions also are appended to the case database along with explanations as to
why the solutions did not work (see Figure 11-8).
Expert systems work by applying a set of IF-THEN-ELSE rules extracted
from human experts. Case-based reasoning, in contrast, represents knowledge
as a series of cases, and this knowledge base is continuously expanded and
refined by users. You’ll find case-based reasoning in diagnostic systems in
medicine or customer support where users can retrieve past cases whose
characteristics are similar to the new case. The system suggests a solution or
diagnosis based on the best-matching retrieved case.
FUZZY LOGIC SYSTEMS
Most people do not think in terms of traditional IF-THEN rules or precise
numbers. Humans tend to categorize things imprecisely using rules for making

Chapter 11 Managing Knowledge 435
decisions that may have many shades of meaning. For example, a man or a
woman can be strong or intelligent. A company can be large, medium, or small in
size. Temperature can be hot, cold, cool, or warm. These categories represent a
range of values.
Fuzzy logic is a rule-based technology that can represent such imprecision
by creating rules that use approximate or subjective values. It can describe a
particular phenomenon or process linguistically and then represent that
description in a small number of flexible rules. Organizations can use fuzzy
logic to create software systems that capture tacit knowledge where there is
linguistic ambiguity.
Let’s look at the way fuzzy logic would represent various temperatures in
a computer application to control room temperature automatically.
The terms (known as membership functions) are imprecisely defined so that,
for example, in Figure 11-9, cool is between 45 degrees and 70 degrees,
although the temperature is most clearly cool between about 60 degrees and
67 degrees. Note that cool is overlapped by cold or norm. To control the room
environment using this logic, the programmer would develop similarly
imprecise definitions for humidity and other factors, such as outdoor wind
and temperature. The rules might include one that says: “If the temperature
is cool or cold and the humidity is low while the outdoor wind is high and the
FIGURE 11-8 HOW CASE-BASED REASONING WORKS
Case-based reasoning represents knowledge as a database of past cases and their solutions.
The system uses a six-step process to generate solutions to new problems encountered by the user.

436 Part Three Key System Applications for the Digital Age
outdoor temperature is low, raise the heat and humidity in the room.”
The computer would combine the membership function readings in a
weighted manner and, using all the rules, raise and lower the temperature
and humidity.
Fuzzy logic provides solutions to problems requiring expertise that is difficult
to represent in the form of crisp IF-THEN rules. In Japan, Sendai’s subway
system uses fuzzy logic controls to accelerate so smoothly that standing
passengers need not hold on. Mitsubishi Heavy Industries in Tokyo has been
able to reduce the power consumption of its air conditioners by 20 percent by
implementing control programs in fuzzy logic. The autofocus device in cameras
is only possible because of fuzzy logic. In these instances, fuzzy logic allows
incremental changes in inputs to produce smooth changes in outputs instead of
discontinuous ones, making it useful for consumer electronics and engineering
applications.
Management also has found fuzzy logic useful for decision making and
organizational control. A Wall Street firm created a system that selects
companies for potential acquisition, using the language stock traders under-
stand. A fuzzy logic system has been developed to detect possible fraud in
medical claims submitted by health care providers anywhere in the United
States.
NEURAL NETWORKS
Neural networks are used for solving complex, poorly understood problems
for which large amounts of data have been collected. They find patterns and
relationships in massive amounts of data that would be too complicated and
difficult for a human being to analyze. Neural networks discover this knowl-
edge by using hardware and software that parallel the processing patterns of
the biological or human brain. Neural networks “learn” patterns from large
quantities of data by sifting through data, searching for relationships, building
models, and correcting over and over again the model’s own mistakes.
FIGURE 11-9 FUZZY LOGIC FOR TEMPERATURE CONTROL
The membership functions for the input called temperature are in the logic of the thermostat to control the room temperature. Membership
functions help translate linguistic expressions such as warm into numbers that the computer can manipulate.

Chapter 11 Managing Knowledge 437
A neural network has a large number of sensing and processing nodes that
continuously interact with each other. Figure 11-10 represents one type of
neural network comprising an input layer, an output layer, and a hidden
processing layer. Humans “train” the network by feeding it a set of training
data for which the inputs produce a known set of outputs or conclusions.
This helps the computer learn the correct solution by example. As the
computer is fed more data, each case is compared with the known outcome.
If it differs, a correction is calculated and applied to the nodes in the hidden
processing layer. These steps are repeated until a condition, such as correc-
tions being less than a certain amount, is reached. The neural network in
Figure 11-10 has learned how to identify a fraudulent credit card purchase.
Also, self-organizing neural networks can be trained by exposing them to
large amounts of data and allowing them to discover the patterns and
relationships in the data.
Whereas expert systems seek to emulate or model a human expert’s way of
solving problems, neural network builders claim that they do not program
solutions and do not aim to solve specific problems. Instead, neural network
designers seek to put intelligence into the hardware in the form of a generalized
capability to learn. In contrast, the expert system is highly specific to a given
problem and cannot be retrained easily.
Neural network applications in medicine, science, and business address
problems in pattern classification, prediction, financial analysis, and control
and optimization. In medicine, neural network applications are used for screen-
ing patients for coronary artery disease, for diagnosing patients with epilepsy
and Alzheimer’s disease, and for performing pattern recognition of pathology
images. The financial industry uses neural networks to discern patterns in vast
pools of data that might help predict the performance of equities, corporate
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.
There are many puzzling aspects of neural networks. Unlike expert
systems, which typically provide explanations for their solutions, neural
FIGURE 11-10 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.

438 Part Three Key System Applications for the Digital Age
networks cannot always explain why they arrived at a particular solution.
Moreover, they cannot always guarantee a completely certain solution, arrive
at the same solution again with the same input data, or always guarantee the
best solution. They are very sensitive and may not perform well if their
training covers too little or too much data. In most current applications,
neural networks are best used as aids to human decision makers instead of
substitutes for them.
The Interactive Session on Organizations describes computerized stock
trading applications based on a related AI technology called machine learning.
Machine learning focuses on algorithms and statistical methods that allow
computers to “learn” by extracting rules and patterns from massive data sets and
make predictions about the future. Both neural networks and machine learning
techniques are used in data mining. As the Interactive Session points out, the
use of machine learning in the financial industry for securities trading decisions
has had mixed results.
GENETIC ALGORITHMS
Genetic algorithms are useful for finding the optimal solution for a specific
problem by examining a very large number of possible solutions for that
problem. They are based on techniques inspired by evolutionary biology, such
as inheritance, mutation, selection, and crossover (recombination).
A genetic algorithm works by representing information as a string of 0s and
1s. The genetic algorithm searches 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 11-11, each string corresponds to one of the variables in the
problem. One applies a test for fitness, ranking the strings in the population
FIGURE 11-11 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.

On May 6, 2010, the U.S. stock markets were already
down and trending even lower. Concerns about
European debt, primarily the possibility of Greece
defaulting, added to existing investor uncertainties
about the markets and the economy at that time. But
at 2:42 PM, in a flash, the equity market took a
plunge so fast and so deep that it could not have
been motivated by investor uncertainty alone.
Before the plunge, the market was already down
300 points on the day. In less than five minutes
after 2:42, the Dow Jones Industrial Average
plummeted more than 600 points, representing a
loss of $1 trillion in market value. At its lowest
point, the Dow was down a whopping 998.50
points to 9869.62, a 9.2 percent drop from the day’s
opening. This represented the biggest intraday
decline in Dow history. Fortunately, this loss was
temporary, vanishing nearly as quickly as it
appeared. By 3:07 PM, the market had already
regained nearly all of the points it had lost, and
eventually closed down just 347.80 points that day
at 10,520.32. The hefty loss was still its worst Dow
percentage decline in over a year, but it certainly
could have been worse.
How could this “flash crash” have happened? It
now appears that the abrupt selling activities of a
single mutual fund company touched off a chain
reaction. A confluence of forces was unleashed by
the structural and organizational features of the
electronic trading systems that execute the majority
of trades on the Dow and the rest of the world’s
major stock exchanges. Electronic trading systems
offer considerable advantages over human brokers,
including speed, reduced cost, and more liquid
markets. High-frequency traders (HFTs) have taken
over many of the responsibilities once filled by stock
exchange specialists and market makers whose job
was to match buyers and sellers efficiently.
Many trading systems today, such as those used
by HFTs, are automated, using algorithms to place
their nearly instant trades. A number of the HFT
trading firms and hedge funds now use machine
learning to help their computer systems trade in
and out of stocks efficiently. Machine learning
programs are able to crunch vast amounts of data
in short periods, “learn” what works, and adjust
their stock trading strategies on the fly, based on
shifting dynamics in the market and broader
THE FLASH CRASH: MACHINES GONE WILD?
economy. This method is far beyond human
capability: As Michael Kearns, computer science
professor at University of Pennsylvania and expert
in AI investing, stated, “No human could do this.
Your head would blow off.” It would appear,
however, in situations like the flash crash, where a
computer algorithm is insufficient to handle the
complexity of the event in progress, electronic
trading systems have the potential to make a bad
situation much worse.
At 2:32 P.M. on May 6, Waddell & Reed Financial
of Overland Park, Kansas started to sell $4.1 billion
of futures contracts using a computer selling
algorithm that dumped 75,000 contracts onto the
market over the next 20 minutes. Normally, a sale of
that size would take as much as five hours, but on
that day, it was executed in 20 minutes. The
algorithm instructed computers to execute the trade
without regard to price or time, and thus continued
to sell as prices sharply dropped.
After Waddell & Reed started to sell, many of
the futures contracts were bought by HFTs. As the
HFTs realized prices were continuing to fall, they
began to sell what they had just bought very
aggressively, which caused the mutual fund’s
algorithm in turn to accelerate its selling. The HFT
computers traded contracts back and forth,
creating a “hot potato” effect. The selling pressure
was then transferred from the futures market to
the stock market. Frightened buyers pulled to the
sidelines. The markets were overwhelmed by sell
orders with no legitimate buyers available to meet
those orders.
The only buy orders available at all originated
from automated systems, which were submitting
orders known as “stub quotes.” Stub quotes are offers
to buy stocks at prices so low that they are unlikely
to ever be the sole buyers of that stock available;
during the unique conditions of the flash crash, they
were. When the only offer to buy available is a
penny-priced stub quote, a market order, by its
terms, will execute against the stub quote. In this
respect, automated trading systems will follow their
coded logic regardless of outcome, while human
involvement would likely have prevented these
orders from executing at absurd prices.
In the midst of the crisis, the New York Stock
Exchange activated circuit breakers, measures
I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S
Chapter 11 Managing Knowledge 439

440 Part Three Key System Applications for the Digital Age
according to their level of desirability as possible solutions. After the initial
population is evaluated for fitness, the algorithm then produces the next
generation of strings, consisting of strings that survived the fitness test plus
offspring strings produced from mating pairs of strings, and tests their fitness.
The process continues 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
1. Describe the conditions that preceded the flash
crash.
2. What are some of the benefits of electronic
trading?
3. What features of electronic trading and automated
trading programs contributed to the crash?
4. Could this crash have been prevented? Why or
why not?
intended to slow trading on stocks that have lost a
tenth or more of their value in a short time, and
routed all of their trading traffic to human brokers
in an effort to stop the downward spiral. (NYSE is
the only major exchange with the ability to execute
trades both via computers and via human brokers.)
But because of the enormous volume of orders, and
because other fully electronic exchanges lacked
similar circuit breakers, it may have had the reverse
effect in the short term. While computerized
systems simply continued to push the market lower,
humans were unable to react fast enough to the sit-
uation.
Regulators are considering several different
approaches to preventing future flash crashes, but it
may be that there is no satisfactory solution. The
Securities and Exchange Commission (SEC) may
attempt to standardize circuit breakers across all
financial markets, limit high-frequency trading,
overhaul the stub quoting system, or stipulate that all
buy and sell orders be limit orders, which places
upper and lower limits on the prices at which stocks
can be bought and sold. But it may be that events like
the flash crash are what author and hedge fund
adviser Nassim Taleb called “Black Swans” in his book
Use the Web to search for information on the Black
Monday crash of 1987. Then answer the following
questions:
1. What features of the Black Monday crash are
different from the 2010 flash crash?
2. How are the two crashes similar?
3. What measures did regulators take to ensure that
no future crashes would happen again?
4. How has the advent of electronic trading affected
those regulatory measures?
of the same name—unpredictable and uncontrollable
events under which we only have “the illusion of
control.”
After ‘Black Monday’ in 1987, the last crash of
similar size, it was thought that computer trading
prevented sudden drops in the market, but the flash
crash indicates that electronic trading simply allows
them to occur over a shorter time period, and may
even magnify these sudden market moves in either
direction because they can happen faster with less
chance of intervention. But, as the flash crash has
proven, if we rely solely on these automated
methods of electronic trading, we’ll still need to
worry about machines gone wild.
Sources: Graham Bowley, “Lone $4.1 Billion Sale Led to ‘Flash
Crash’ in May,” The New York Times, October 1, 2010; Aaron
Lucchetti, “Exchanges Point Fingers Over Human Hands,”
The Wall Street Journal, May 9, 2010; Scott Patterson, “Letting the
Machines Decide,” The Wall Street Journal, July 13, 2010; Scott
Patterson and Tom Lauricella, “Did a Big Bet Help Trigger ‘Black
Swan’ Stock Swoon?” The Wall Street Journal, May 10, 2010; Edward
Wyatt, “Regulators Vow to Find Way to Stop Rapid Dives,” The New
York Times, May 10, 2010; Kara Scannell and Fawn Johnson,
“Schapiro: Web of Rules Aided Fall,” The Wall Street Journal, May
12, 2010; Larry Harris, “How to Prevent Another Trading Panic,”
The Wall Street Journal, May 12, 2010; Scott Patterson, “How the
‘Flash Crash’ Echoed Black Monday,” The Wall Street Journal,
May 17, 2010.
C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N

Chapter 11 Managing Knowledge 441
problem must be one where the range of possible solutions can be
represented genetically and criteria can be established for evaluating fitness.
Genetic algorithms expedite the solution because they are able to evaluate
many solution alternatives quickly to find the best one. For example, General
Electric engineers used genetic algorithms to help optimize the design for jet
turbine aircraft engines, where each design change required changes in up to
100 variables. The supply chain management software from i2 Technologies
uses genetic algorithms to optimize production-scheduling models incorporat-
ing hundreds of thousands of details about customer orders, material and
resource availability, manufacturing and distribution capability, and delivery
dates.
HYBRID AI SYSTEMS
Genetic algorithms, fuzzy logic, neural networks, and expert systems can be
integrated into a single application to take advantage of the best features of
these technologies. Such systems are called hybrid AI systems. Hybrid appli-
cations in business are growing. In Japan, Hitachi, Mitsubishi, Ricoh, Sanyo,
and others are starting to incorporate hybrid AI in products such as home
appliances, factory machinery, and office equipment. Matsushita has devel-
oped a “neurofuzzy” washing machine that combines fuzzy logic with neural
networks. Nikko Securities has been working on a neurofuzzy system to
forecast convertible-bond ratings.
INTELLIGENT AGENTS
Intelligent agent technology helps businesses navigate through large amounts of
data to locate and act on information that is considered important. Intelligent
agents are software programs that work in the background without direct human
intervention to carry out specific, repetitive, and predictable tasks for an individ-
ual 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 e-mail, scheduling appointments, or traveling
over interconnected networks to find the cheapest airfare to California.
There are many intelligent agent applications today in operating systems,
application software, e-mail systems, mobile computing software, and network
tools. For example, the wizards found in Microsoft Office software tools have built-
in capabilities to show users how to accomplish various tasks, such as formatting
documents or creating graphs, and to anticipate when users need assistance.
Of special interest to business are intelligent agents for cruising networks,
including the Internet, in search of information. Chapter 7 describes how
shopping bots can help consumers find products they want and assist them in
comparing prices and other features.
Many complex phenomena can be modeled as systems of autonomous agents
that follow relatively simple rules for interaction. Agent-based modeling
applications have been developed to model the behavior of consumers, stock
markets, and supply chains and to predict the spread of epidemics (Samuelson
and Macal, 2006).
Procter & Gamble (P&G) used agent-based modeling to improve coordina-
tion among different members of its supply chain in response to changing busi-
ness conditions (see Figure 11-12). It modeled a complex supply chain as a
group of semiautonomous “agents” representing individual supply chain com-
ponents, such as trucks, production facilities, distributors, and retail stores. The

442 Part Three Key System Applications for the Digital Age
behavior of each agent is programmed to follow rules that mimic actual behav-
ior, 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 amount of lost sales, which
would more than make up for the higher distribution costs. Agent-based
modeling has saved P&G $300 million annually on an investment of less than
1 percent of that amount.
FIGURE 11-12 INTELLIGENT AGENTS IN P&G’S SUPPLY CHAIN NETWORK
Intelligent agents are helping P&G shorten the replenishment cycles for products such as a box of Tide.

Chapter 11 Managing Knowledge 443
11.5 HANDS-ON MIS PROJECTS
The projects in this section give you hands-on experience designing a
knowledge portal, applying collaboration tools to solve a customer retention
problem, using an expert system or spreadsheet tools to create a simple expert
system, and using intelligent agents to research products for sale on the Web.
M a n a g e m e n t D e c i s i o n P r o b l e m s
1. 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 the 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.
2. Sprint Nextel has the highest rate of customer churn (the number of customers
who discontinue a service) in the cell phone industry, amounting to 2.45
percent. Over the past two years, Sprint has lost 7 million subscribers.
Management wants to know why so many customers are leaving Sprint and
what can be done to woo them back. Are customers deserting because of poor
customer service, uneven network coverage, or the cost of Sprint cell phone
plans? How can the company use tools for online collaboration and communi-
cation to help find the answer? What management decisions could be made
using information from these sources?
I m p r o v i n g D e c i s i o n M a k i n g : B u i l d i n g a S i m p l e E x p e r t
S y s t e m f o r R e t i r e m e n t P l a n n i n g
Software skills: Spreadsheet formulas and IF function or expert system tool
Business skills: Benefits eligibility determination
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 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 20–25 years 50 percent of current annual salary 26 or more years 100 percent of current annual salary 444 Part Three Key System Applications for the Digital Age Using the information provided, build a simple expert system. Find a demon- stration 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.) I m p r o v i n g D e c i s i o n M a k i n g : U s i n g I n t e l l i g e n t A g e n t s f o r C o m p a r i s o n S h o p p i n g Software skills: Web browser and shopping bot software Business skills: Product evaluation and selection This project will give you experience using shopping bots to search online for products, find product information, and find the best prices and vendors. You have decided to purchase a new digital camera. Select a digital camera you might want to purchase, such as the Canon PowerShot S95 or the Olympus Stylus 7040. To purchase the camera as inexpensively as possible, try several of the shopping bot sites, which do the price comparisons for you. Visit My Simon (www.mysimon.com), BizRate.com (www.bizrate.com), and Google Product Search. Compare these shopping sites in terms of their ease of use, number of offerings, speed in obtaining information, thoroughness of information 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? LEARNING TRACK MODULE The following Learning Track provides content relevant to topics covered in this chapter: 1. Challenges of Knowledge Management Systems www.mysimon.com www.bizrate.com Review Summary 1. What is the role of knowledge management and knowledge management programs 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. Knowledge management promotes organizational learning by increasing the ability of the organiza- tion 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. 2. 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 semistructured knowledge, such as e-mail or rich media. Knowledge network systems provide directories and tools for locating firm employees with special expertise who are important sources of tacit knowledge. Often these systems include group collaboration tools (including wikis and social bookmarking), portals to simplify information access, search tools, and tools for classify- ing information based on a taxonomy that is appropriate for the organization. Enterprise-wide knowledge management systems can provide considerable value if they are well designed and enable employees to locate, share, and use knowledge more efficiently. 3. 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 hardware that can support software with intensive graphics, analysis, document management, and communica- tions capabilities; and a user-friendly interface. Computer-aided design (CAD) systems, augmented reality applications, and virtual reality systems, which create interactive simulations that behave like the real world, require graphics and powerful modeling capabilities. KWS for financial professionals provide access to external databases and the ability to analyze massive amounts of financial data very quickly. 4. What are the business benefits of using intelligent techniques for knowledge management? 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. Expert systems are most useful for problems of classification or diagnosis. Case-based reasoning represents organizational knowledge as a database of cases that can be continually expanded and refined. Fuzzy logic is a software technology for expressing knowledge in the form of rules that use approximate or subjective values. Fuzzy logic has been used for controlling physical devices and is starting to be used for limited decision-making applications. 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 without programming and to recognize patterns that cannot be easily described by humans. They are being used in science, medicine, and business to discriminate patterns in massive amounts of data. Genetic algorithms develop solutions to particular problems using genetically based processes such as fitness, crossover, and mutation. Genetic algorithms are beginning to be applied to problems involving optimization, product design, and monitoring industrial systems 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, repetitive, and predictable tasks for an individual user, business process, or software applica- tion. 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. Chapter 11 Managing Knowledge 445 446 Part Three Key System Applications for the Digital Age Key Terms Agent-based modeling, 441 Augmented reality (AR), 428 Artificial intelligence (AI), 431 Backward chaining, 432 Case-based reasoning (CBR), 434 Communities of practice (COPs), 421 Computer-aided design (CAD), 427 Data, 417 Digital asset management systems, 424 Enterprise content management systems, 423 Enterprise-wide knowledge management systems, 421 Expert systems, 432 Explicit knowledge, 417 Folksonomies, 425 Forward chaining, 432 Fuzzy logic, 435 Genetic algorithms, 438 Hybrid AI systems, 441 Inference engine, 432 Intelligent agents, 441 Review Questions 1. What is the role of knowledge management and knowledge management programs in business? • Define knowledge management and explain its value to businesses. • Describe the important dimensions of knowl- edge. • Distinguish between data, knowledge, and wisdom and between tacit knowledge and explicit knowledge. • Describe the stages in the knowledge man- agement value chain. 2. 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 sys- tems and explain how they provide value for businesses. • Describe the role of the following in facilitat- ing knowledge management: portals, wikis, social bookmarking, and learning manage- ment systems. Intelligent techniques, 422 Investment workstations, 431 Knowledge, 417 Knowledge base, 432 Knowledge discovery, 431 Knowledge management, 419 Knowledge network systems, 424 Knowledge work systems (KWS), 421 Learning Management System (LMS), 425 Machine learning, 438 Neural networks, 436 Organizational learning, 419 Social bookmarking, 424 Structured knowledge, 422 Tacit knowledge, 417 Taxonomy, 423 Virtual Reality Modeling Language (VRML), 430 Virtual reality systems, 428 Wisdom, 417 3. What are the major types of knowledge work systems and how do they provide value for firms? • Define knowledge work systems and describe the generic requirements of knowledge work systems. • Describe how the following systems support knowledge work: CAD, virtual reality, aug- mented reality, and investment workstations. 4. What are the business benefits of using intelligent techniques for knowledge manage- ment? • Define an expert system, describe how it works, and explain its value to business. • Define case-based reasoning and explain how it differs from an expert system. • Define a neural network, and describe how it works and how it benefits businesses. • Define and describe fuzzy logic, genetic algorithms, and intelligent agents. Explain how each works and the kinds of problems for which each is suited. Chapter 11 Managing Knowledge 447 Discussion Questions 1. Knowledge management is a business process, not a technology. Discuss. 2. Describe various ways that knowledge manage- ment systems could help firms with sales and marketing or with manufacturing and production. 3. Your company wants to do more witih knowledge management. Describe the steps it should take to develop a knowledge management program and select knowledge management applications. With a group of classmates, select two enterprise content management products, such as those from Open Text, IBM, EMC, or Oracle. Compare their features and capabilities. To prepare your analysis, use articles from computer magazines and the Web sites for the enterprise content management software vendors. If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a presentation of your find- ings for the class. Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. Collaboration and Teamwork: Rating Enterprise Content Management Systems 448 Part Three Key System Applications for the Digital Age San Francisco Public Utilities Commission Preser ves Expertise with Better Knowledge Management CASE STUDY A major challenge facing many companies and organizations is the imminent retirement of baby boomers. For certain organizations, this challenge is more daunting than usual, not only because of a larger spike in employee retirements, but also because of the business process change that must accompany significant shifts in any workforce. The San Francisco Public Utilities Commission (SFPUC) was one such organization. SFPUC is a department of the city and county of San Francisco that provides water, wastewater, and municipal power services to the city. SFPUC has four major divisions: Regional Water, Local Water, Power, and Wastewater (collection, treatment, and disposal of water). The organization has over 2,000 employ- ees and serves 2.4 million customers in San Francisco and the Bay Area. It is the third largest municipal utility in California. SFPUC’s Power division provides electricity to the city and county of San Francisco, including power used to operate electric streetcars and buses; the Regional and Local Water departments supply some of the purest drinking water in the world to San Francisco and neighboring Santa Clara and San Mateo counties; and the Wastewater division han- dles flushed and drained water to significantly reduce pollution in the San Francisco Bay and Pacific Ocean. The mission of this organization is to provide San Francisco and its Bay Area customers with reliable, high-quality, affordable water and wastewater treatment while efficiently and responsi- bly managing human, physical, and natural resources. SFPUC expected that a significant portion of its employees—about 20 percent—would retire in 2009. To make matters worse, the majority of these positions were technical, which meant that the training of new employees would be more complicated, and maintaining knowledge of the retiring workers would be critical to all areas of SFPUC’s business processes. To deal with this trend, companies and organiza- tions like SFPUC must rearrange their operations so that the generational swap doesn’t adversely affect their operational capability in the upcoming decades. In particular, the organization needed a way to capture the knowledge of its retiring employees of “baby boom” age in an efficient and cost-effective manner, and then communicate this knowledge successfully to the next generation of employees. The two major challenges SFPUC faced were successfully capturing, managing, and transferring this knowledge, and maintaining reliability and accountability despite a large influx of new workers. SFPUC met these challenges by implementing a business process management (BPM) and workflow solution from Interfacing Technologies Corporation to drive change efforts across the organization. The system, called Enterprise Process Center, or EPC, manages knowledge retention and establishes new ways of collaborating, sharing information, and defining roles and responsibilities. SFPUC saw the retirement of its baby boomers as an opportunity to implement a structure that would alleviate similar problems in the future. With EPC, SFPUC would be able to maintain continuity from older to newer employees more easily. SFPUC was impressed that the system would span all four of its major divisions, helping to standardize common processes across multiple departments, and that it would be easy to use and train employees. EPC sought to identify common processes, called “work crossovers,” by mapping business processes across each department. EPC is unique among BPM software providers in its visual representation of these processes. Using flow charts accessible via a Web portal to clearly depict the functions performed by each department, SFPUC was able to identify redundant and inefficient tasks performed by multiple departments. This visually oriented solution for optimizing business processes catered to both technology- savvy new employees and older baby boomers. Prior to the BPM overhaul, SFPUC employees had little incentive to share business process information. New environmental regulations were difficult to communicate. Certain inspection processes were conducted on an irregular basis, sometimes as infrequently as every 5 to 15 years. The knowledge required to execute these processes was especially valuable, because newer employees would have no Chapter 11 Managing Knowledge 449 way of completing these tasks without proper docu- mentation and process knowledge. SFPUC needed ways to easily find knowledge about processes that were performed daily, as well as every 15 years, and what’s more, that knowledge had to be up to date so that employees didn’t stumble across obsolete infor- mation. EPC solved that problem by creating work order flows for all tasks performed within the organization, defining the employee roles and responsibilities for each. For example, the work order flow for SFPUC’s wastewater enterprise displayed each step in the process visually, with links to manuals describing how to complete the task and the documents required to complete it. EPC also identified obsolete processes that were well suited to automation or totally superfluous. Automating and eliminating outdated tasks alleviated some of SFPUC’s budget and workload concerns, allowing the organization to divert extra resources to training and human resources. SFPUC management had anticipated that eliminating outdated tasks would have the added effect of keeping employees happy, which would help SFPUC’s performance by delaying retirement of older employees and increasing the likelihood that newer hires stayed at the company. EPC allowed employees to provide feedback on various tasks, helping to identify tasks that were most widely dis- liked. For example, the process for reimbursement of travel expenses was described as lengthy, highly labor-intensive, and valueless to the citizens of San Francisco. To be reimbursed for travel expenses, employees had to print a form, complete it by hand, attach travel receipts, and walk the documents over to their supervisors, who then had to manually review and approve each item and remit expenses for three additional levels of approval. Only then could the division controller issue the reimburse- ment. To address this need for sharing information and making documents available across the orga- nization, SFPUC started by using a wiki, but the documents lacked different levels of relevance. Critical information pertaining to everyday tasks took the same amount of time to find as informa- tion pertaining to an inspection performed every 15 years. EPC allowed users to assign levels of rel- evance to tasks and identify critical information so that critical information displays when employees search for certain items. For example, SFPUC employees must comply with various regulatory permits for water and air quality standards. Lack of awareness of these standards often leads to unintentional violations. The BPM tool helped users assign risks to various tasks so that when employees queried information, the relevant regulations displayed along with the requested documents. Identifying the experts on particular subjects for mission-critical processes is often challenging when compiling information on business processes across the enterprise. SFPUC anticipated this, using EPC to break down large-scale process knowledge into more manageable pieces, which allowed more users to contribute information. Users were reluctant to buy in to the BPM implementation at first, but management characterized the upgrade in a way that invited employees to share their thoughts about their least favorite processes and contribute their knowledge. The final product of the knowledge management overhaul took the form of a “centralized electronic knowledge base,” which graphically displays critical steps of each task and uses videos to gather informa- tion and show work being done. New employees quickly became confident that they could perform certain tasks because of these videos. The overall results of the project were overwhelmingly positive. EPC helped SFPUC take its baby boomers’ individual data and knowledge and turn them into usable and actionable information that was easily shared throughout the firm. SFPUC stayed much further under budget than other comparable governmental organizations. SFPUC’s new knowledge processes made many activities more paperless, reducing printing costs, time to distribute documents, and space required for document retention. Going paperless also sup- ported the organization’s mission to become more environmentally responsible. The addition of video technology to the process maps helped employees see how they could reduce energy consumption practices and electrical costs. By automating and redesigning the unwieldy travel reimbursement process described earlier, SFPUC reduced the time to process employee reimbursement requests by as much as 50 percent. Sources: “San Francisco Tackles Baby Boom Retirement Effect and is Selected as a Finalist for the Global Awards for Excellence in BPM-Workflow,” International Business Times, January 12, 2010; Interfacing Technologies, Canada, “San Francisco Public Utilities Commission USA;” Catherine Curtis, “SFPUC Delivers Workforce Development Presentation at WEFTEC Conference,” Wastewater Enterprise, October 2009; “SFPUC Water Enterprise Environmental Stewardship Policy,” San Francisco Public Utilities Commission, June 27, 2006. CASE STUDY QUESTIONS 1. What are the business goals of SFPUC? How is knowledge management related to those goals? 2. What were some of the challenges faced by SFPUC? What management, organization, and technology factors were responsible for those challenges? 3. Describe how implementing EPC improved knowledge management and operational effectiveness at SFPUC. 4. How effective was EPC as a solution for SFPUC? 450 Part Three Key System Applications for the Digital Age !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What are the different types of decisions and how does the decision-making process work? 2. How do information systems support the activities of managers and management decision making? 3. How do business intelligence and business analytics support decision making? 4. How do different decision-making constituencies in an organization use business intelligence? 5. What is the role of information systems in helping people working in a group make decisions more efficiently? CHAPTER OUTLINE 12.1 DECISION MAKING AND INFORMATION SYSTEMS Business Value of Improved Decision Making Types of Decisions The Decision-Making Process Managers and Decision Making in the Real World High-Velocity Automated Decision Making 12.2 BUSINESS INTELLIGENCE IN THE ENTERPRISE What Is Business Intelligence? The Business Intelligence Environment Business Intelligence and Analytics Capabilities Management Strategies for Developing BI and BA Capabilities 12.3 BUSINESS INTELLIGENCE CONSTITUENCIES Decision Support for Operational and Middle Management Decision Support for Senior Management: The Balanced Scorecard and Enterprise Performance Management Methods Group Decision-Support Systems (GDSS) 12.4 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using Pivot Tables to Analyze Sales Data Improving Decision Making: Using a Web-Based DSS for Retirement Planning LEARNING TRACK MODULE Building and Using Pivot Tables Chapter 12 Enhancing Decision Making Interactive Sessions: Data-Driven Schools Piloting Valero with Real Time Management 453 hat’s the best way to get a discount on your morning coffee at Starbucks? Well, if you live in Manhattan, you could get up an hour early and take the subway downtown to Brooklyn. A single expresso is 10 cents cheaper than in your neighborhood, as are a caffee latte and slice of lemon pound cake. But a muffin runs 10 cents more uptown in Marble Hill, and a tall Pike’s Place Roast costs $1.70 no mat- ter where you live. Starbucks is one of many retailers using sophisticated software to analyze, store by store and item by item, how demand responds to changes in price. What customers are willing to pay for certain items depends very much on the neighborhood or even the region of the country where they live. Shoppers in certain locations are willing to pay more. The Duane Reade drugstore chain, recently purchased by Walgreens, is also adept at adjusting prices. Software analyzing sales patterns found that parents of newborn babies are not as price-sensitive as those with toddlers, so the company was able to raise prices on diapers for newborn infants without losing sales. The chain’s information systems also showed how to adjust pricing based on location. Shoppers at the Duane Reade store near 86th Street and Lexington Avenue pay 20 cents more for a box of Kleenex and 50 cents more for a bottle of Pepto-Bismol than customers in Harlem. Business analytics software such as that used by Duane Reade typically analyzes patterns in sales data to create a “pricing profile.” A store near a big commuting hub might discount convenience items to present a low-cost image while one in a family neighborhood with many young children might discount baby items to get more people through the door. Analyzing large troves of digital sales and customer information from both online and physical stores also helps retailers decide what to sell as well. Fashion Web site HauteLook confirmed that Southerners buy more white, green, and pink than people from other regions, while ShopItToMe learned that the average woman spends less on fashion in Dallas than in Washington D.C. and that women are thinner on both coasts than in the U.S. heartland and wear more petite clothing and shoe sizes meant for smaller women. How much of a difference does this knowledge make? Lots. 1-800-Flowers, which sells flow- ers and gift baskets online, has used analytics software from SAS Inc. to tweak its online storefront and marketing activities. The software helped the company quickly record and analyze buyer profiles to help improve targeting of its product, determine what “specials” to WHAT TO SELL? WHAT PRICE TO CHARGE? ASK THE DATA W offer, and plan sales and mar- keting strategies based on an understanding of real cus- tomer needs. The company is able to quickly change prices and offerings on its Web site—often every hour. In the first half of 2010, 1-800- Flowers used more finely tar- geted Web pages and e-mail promotions to improve the conversion rate of Web site browsers to buyers by 20 per- cent. 454 Part Three Key System Applications for the Digital Age Sources: Anne Kadet, “Price-Point Politics,” The Wall Street Journal, July 24, 2010; Steve Lohr, “A Data Explosion Remakes Retailing,” and Christina Binkley, “Fashion Nation: What Retailers Know about Us,” The Wall Street Journal, July 28, 2010. The experiences of Starbucks, Duane Reade, and 1-800-Flowers are power-ful illustrations of how information systems improve decision making. Managers at these retail chains were unable to make good decisions about what prices to charge to improve profitability and what items to sell in stores to maximize sales at different locations and different time periods. They had access to customer purchase data, but they were unable to analyze millions of pieces of data on their own. Bad decisions about how much to charge and how to stock stores lowered sales revenue and prevented these companies from responding quickly to customer needs. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Starbucks, Duane Reade, and 1-800-Flowers started using business intelligence software, which is able to find patterns and trends in massive quantities of data. Information from these business intelligence systems helps managers at these companies make better decisions about pricing, shelf stocking, and product offerings. They are able to see where they can charge a higher price or where they must lower prices to maximize sales revenue, as well as what items to stock and when to change their merchandise mix. Better decision making using business intelligence has made all of these companies more profitable. Chapter 12 Enhancing Decision Making 455 12.1 DECISION MAKING AND INFORMATION SYSTEMS ecision making in businesses used to be limited to management. Today, lower-level employees are responsible for some of these decisions, as information systems 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 monetary value of improved decision making? Table 12-1 attempts to measure the monetary value of improved decision making for a small U.S. manufactur- ing firm with $280 million in annual revenue and 140 employees. The firm has identified a number of key decisions where new system investments might improve 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. 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, semistructured, and unstructured. D TABLE 12-1 BUSINESS VALUE OF ENHANCED DECISION MAKING ESTIMATED VALUE TO NUMBER OF FIRM OF A SINGLE EXAMPLE DECISION DECISION MAKER ANNUAL DECISIONS IMPROVED DECISION ANNUAL VAUE Allocate support to most Accounts manager 12 $ 100,000 $1,200,000 valuable customers Predict call center Call center management 4 150,000 600,000 daily demand Decide parts inventory Inventory manager 365 5,000 1,825,000 levels daily Identify competitive bids Senior management 1 2,000,000 2,000,000 from major suppliers Schedule production Manufacturing manager 150 10,000 1,500,000 to fill orders Allocate labor to Production floor manager 100 4,000 400,000 complete a job 456 Part Three Key System Applications for the Digital Age Unstructured decisions are those in which the decision maker must provide judgment, evaluation, and insight to solve the problem. Each of these decisions 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 involve 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 types of decisions and are semistructured, where only part of the problem has a clear-cut answer provided by an accepted procedure. In general, structured decisions are more prevalent at lower organizational levels, whereas unstruc- tured problems are more common at higher levels of the firm. Senior executives face many unstructured decision situations, such as establishing the firm’s five- or ten-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 management faces more structured decision scenarios but their decisions may include unstructured components. A typical middle-level management 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 distribution 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 employees and gather more unstructured infor- mation from external sources about local economic conditions or sales trends. 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. Chapter 12 Enhancing Decision Making 457 Operational management and rank-and-file employees tend to make more structured decisions. For example, a supervisor on an assembly line has to decide 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 routinely 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 prespecified criteria for granting credit, the account representative would grant that customer credit to make a purchase. In both instances, the decisions are highly structured and are routinely 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 different stages in decision making: intelligence, design, choice, and implementation (see Figure 12-2). FIGURE 12-2 STAGES IN DECISION MAKING The decision-making process is broken down into four stages. 458 Part Three Key System Applications for the Digital Age Intelligence consists of discovering, identifying, and understanding the problems 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 continu- ing 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 increases, managers would need to investigate whether the problem stems from poor product design, inadequate customer support, or a host of other causes that call for a different solution. MANAGERS AND DECISION MAKING IN THE REAL WORLD 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 all the different kinds of decisions taking place in an organization. Let’s examine the role of managers and decision making in organizations to see why this is so. M a n a g e r i a l R o l e s Managers play key roles in organizations. Their responsibilities range from making decisions, to writing reports, to attending meetings, to arranging birthday parties. We are able to better understand managerial functions and roles by examining classical and contemporary models of managerial behavior. The classical model of management, which describes what managers do, was largely unquestioned for the more than 70 years since the 1920s. Henri Fayol and other early writers first described the five classical functions of managers as planning, organizing, coordinating, deciding, and controlling. This description 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 address what exactly 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 state 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 differ 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. Second, managerial activities are fragmented; most activities 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 information (printed information often will be too old). Fourth, they prefer oral forms of Chapter 12 Enhancing Decision Making 459 communication to written forms because oral media provide greater flexibil- ity, 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, Mintzberg found that it could be classified into 10 managerial roles. Managerial roles are expectations of the activities that managers should perform in an organization. Mintzberg found that these managerial roles fell into three categories: interpersonal, informa- tional, 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 subordi- nates. 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 organizations, receiving the most concrete, up-to-date informa- tion and redistributing it to those who need to be aware of it. Managers are therefore information disseminators 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 distur- bances arising in the organization; they allocate resources to staff members who need them; and they negotiate conflicts and mediate between conflicting groups. Table 12-2, based on Mintzberg’s role classifications, is one look at where systems can and cannot help managers. The table shows that information sys- tems are now capable of supporting most, but not all, areas of management life. 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, ESS Disseminator Information E-mail, social networks Spokesperson processing Webinars, telepresence Decisional Roles Entrepreneur Decision None exist Disturbance handler making None exist Resource allocator Business intelligence, DSS systems Negotiator None exist Sources: Kenneth C. Laudon and Jane P. Laudon; and Mintzberg, 1971. 460 Part Three Key System Applications for the Digital Age R e a l - W o r l d D e c i s i o n M a k i n g We now see that information systems are not helpful for all managerial roles. And in those managerial roles where information systems might improve decisions, investments in information technology do not always produce positive results. There are three main reasons: information quality, manage- ment filters, and organizational culture (see Chapter 3). Information Quality. High-quality decisions require high-quality informa- tion. 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 has shown that corporate databases and files have varying levels of inaccuracy and incompleteness, which in turn will degrade the quality of decision making. Management Filters. Even with timely, accurate information, some man- agers make bad decisions. Managers (like all human beings) absorb information through a series of filters to make sense of the world around them. Managers have selective attention, focus on certain kinds of problems and solutions, and have a variety of biases that reject information that does not conform to their prior conceptions. 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 minimzed their importance. Some trading desks also oversimplified the information maintained about the mortgage securities to make them appear as simple bonds with higher ratings than were warranted by their underlying components (Hansell, 2008). Organizational Inertia and Politics. Organizations are bureaucracies with limited capabilities and competencies for acting decisively. When environ- ments change and businesses need to adopt new business models to survive, 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 Area data available when needed? Accessibility Are the data accessible, comprehensible, and usable? Chapter 12 Enhancing Decision Making 461 strong forces within organizations resist making decisions calling for major change. Decisions taken by a firm often represent 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 (John, Lang, Netter, et al., 1992). 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 average (500 milliseconds). Google indexes over 50 billion Web pages, although it does not search the entire index for every query it receives. The same is true of other search engines. The New York Stock Exchange is spending over $450 million in 2010–2011 to build a trading platform that can executes incoming orders in less that 50 milliseconds. High frequency traders at electronic stock exchanges exe- cute their trades in under 30 milliseconds. The class of decisions that are highly structured and automated is growing rapidly. What makes this kind of automated high-speed decision making possible are computer algorithms that precisely define the steps to be followed to produce a decision, very large databases, very high-speed processors, and software optimized to the task. In these situations, humans (including managers) are eliminated from the decision chain because they are too slow. This also means organizations in these areas are making decisions faster than what managers can monitor or control. Inability to control automated decisions was a major factor in the “Flash Crash” experienced by U.S. stock markets on May 6, 2010, when the Dow Jones Industrial Average fell over 600 points in a matter of minutes before rebounding later that day. The stock market was overwhelmed by a huge wave of sell orders triggered primarily by high-speed computerized trading programs within a few seconds, causing shares of some companies like Proctor & Gamble to sell for pennies. How does the Simon framework of intelligence-design-choice-implementa- tion work in high-velocity decision environments? Essentially, the intelligence, design, choice, and implementation parts of the decision-making process are captured by the software’s algorithms. The humans who wrote the software have already identified the problem, designed a method for finding a solution, defined a range of acceptable solutions, and implemented the solution. Obviously, with humans out of the loop, great care needs to be taken to ensure the proper oper- ation of these systems lest they do significant harm to organizations and humans. And even then additional safeguards are wise to observe the behavior of these systems, regulate their performance, and if necessary, turn them off. 12.2 BUSINESS INTELLIGENCE IN THE ENTERPRISE 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 business intelligence and business analytics infrastructure 462 Part Three Key System Applications for the Digital Age that supplies the data and the analytic tools for supporting decision making. In this section, we want to answer the following questions: • What are business intelligence (BI) and business analytics (BA) • Who makes business intelligence and business analytics hardware and software? • Who are the users of business intelligence? • What kinds of analytical tools come with a BI/BA suite? • How do managers use these tools? • What are some examples of firms who have used these tools? • What management strategies are used for developing BI/BA capabilities? WHAT IS BUSINESS INTELLIGENCE? When we think of humans as intelligent beings we often refer to their ability to take in data from their environment, understand the meaning and significance of the information, and then act appropriately. Can the same be said of business firms? The answer appears to be a qualified “yes.” All organizations, including business firms, do indeed take in information from their environ- ments, attempt to understand the meaning of the information, and then attempt to act on the information. Just like human beings, some business firms do this well, and others poorly. “Business intelligence” is a term used by hardware and software vendors and information technology consultants to describe the infrastructure for warehousing, integrating, reporting, and analyzing data that comes from the business environment. The foundation infrastructure collects, stores, cleans, and makes relevant information available to managers. Think databases, data warehouses, and data marts described in Chapter 6. “Business analytics” 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. So, stripped to its essentials, business intelligence and analytics are about integrating all the information streams produced by a firm into a single, coher- ent enterprise-wide set of data, and then, using modeling, statistical analysis tools (like normal distributions, correlation and regression analysis, Chi square analysis, forecasting, and cluster analysis), and data mining tools (pattern discovery and machine learning), to make sense out of all these data so managers can make better decisions and better plans, or at least know quickly when their firms are failing to meet planned targets. One company that uses business intelligence is Hallmark Cards. The company uses SAS Analytics software to improve its understanding of buying patterns that could lead to increased sales at more than 3,000 Hallmark Gold Crown stores in the United Sates. Hallmark wanted to strengthen its relation- ship with frequent buyers. Using data mining and predictive modeling, the company determined how to market to various consumer segments during holidays and special occasions as well as adjust promotions on the fly. Hallmark is able to determine which customer segments are most influenced by direct mail, which should be approached through e-mail, and what specific messages to send each group. Business intelligence has helped boost Hallmark sales to its loyalty program members by 5 to 10 percent. Chapter 12 Enhancing Decision Making 463 B u s i n e s s I n t e l l i g e n c e Ve n d o r s It is important to remember that business intelligence and analytics are products defined by technology vendors and consulting firms. They consist of hardware and software suites sold primarily by large system vendors to very large Fortune 500 firms. The largest five providers of these products are SAP, Oracle, IBM, SAS Institute, and Microsoft (see Table 12-4). Microsoft’s products are aimed at small to medium size firms, and they are based on desktop tools familiar to employees (such as Excel spreadsheet software), Microsoft Sharepoint collaboration tools, and Microsoft SQL Server database software. The size of the American BI and BA marketplace in 2010 is estimated to be $10.5 billion and growing at over 20% annually (Gartner, 2010). This makes business intelligence and business analytics one of the fastest-growing and largest segments in the U.S. software market. 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 mobile devices and the Internet. The data need to be integrated and orga- nized so that they can be analyzed and used by human decision makers. • Business intelligence infrastructure: The underlying foundation of busi- ness intelligence is a powerful database system that captures all the relevant data to operate the business. The data may be stored in transactional data- bases 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 soft- ware 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 mea- sured. These include business performance management and balanced score- card approaches focusing on key performance indicators and industry strate- gic analyses focusing on changes in the general business environment, with special attention to competitors. Without strong senior management over- TABLE 12-4 MARKET LEADERS AND SHARE FOR THE TOP BUSINESS INTELLIGENCE VENDORS VENDOR MARKET SHARE BUSINESS INTELLIGENCE SOFTWARE SAP 25% SAP BusinessObjects EPM Solutions SAS Institute 15% SAS Activity Based Management; financial, human capital, profitability, and strategy management Oracle 14% Enterprise Performance Management System IBM 11% IBM Cognos Microsoft 7% SQL Server with PowerPivot 464 Part Three Key System Applications for the Digital Age sight, 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. You need to remember that, so far, only humans can ask intelli- gent questions. • 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’ desktop or mobile platforms. • User interface: Business people are no longer tied to their desks and desk- tops. They often learn quicker from a visual representation of data than from a dry report with columns and rows of information. Today’s business analytics software suites emphasize visual techniques such as dashboards and score- cards. They also are able to deliver reports on Blackberrys, iPhones, and other mobile handhelds as well as on the firm’s Web portal. BA software is adding capabilities to post information on Twitter, Facebook, or internal social media to support decision 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 FIGURE 12-3 BUSINESS INTELLIGENCE AND ANALYTICS FOR DECISION SUPPORT Business intelligence and analytics requires a strong database foundation, a set of analytic tools, and an involved management team that can ask intelligent questions and analyze data. Chapter 12 Enhancing Decision Making 465 understand the information and take action. There are 5 analytic functionalities that BI systems deliver to achieve these ends: • Production reports: These are predefined reports based on industry-spe- cific requirements (see Table 12-5). • 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 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 12.3). • 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, what-if scenario analysis, and analyze data using standard statis- tical tools. W h o U s e s B u s i n e s s I n t e l l i g e n c e a n d B u s i n e s s A n a l y t i c s ? In previous chapters, we have described the different information constituen- cies 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). Over 80 percent of the audience for BI consists of casual users who rely largely on production reports. Senior executives tend 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 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. 466 Part Three Key System Applications for the Digital Age dimensions. Operational employees will, along with customers and suppliers, be looking mostly at prepackaged reports. E x a m p l e s o f B u s i n e s s I n t e l l i g e n c e A p p l i c a t i o n s The most widely used output of a BI suite of tools are pre-packaged production reports. Table 12-5 illustrates some common pre-defined reports from Oracle’s BI suite of tools. P r e d i c t i v e A n a l y t i c s Predictive analytics, which we introduced in Chapter 6, are being built into mainstream applications for everyday decision making by all types of employ- ees, especially in finance and marketing. For example, Capital One conducts more than 30,000 experiments each year using different interest rates, incen- tives, direct mail packaging, and other variables to identify the best potential customers for targeting its credit card offers. These people are most likely to sign up for credit cards and to pay back Capital One for the balances they ring up in their credit card accounts. Predictive analytics have also worked espe- cially well in the credit card industry to identify customers who are at risk for leaving. Dealer Services, which offers inventory financing for used-car dealers, is trying to use predictive analytics to screen potential customers. Thousands of used-car dealers, who were formerly franchisees for General Motors and Chrysler, are seeking financing from companies such as Dealer Services so that they can go into business on their own. Using WebFOCUS software from Information Builders, the company is building a model that will predict the best loan prospects and eliminate up to 10 of the 15 hours required to review a financing application. The model reviews data including dealer size and type, number of locations, payment patterns, histories of bounced checks, and inven- tory practices and is revalidated and updated as conditions change. FedEx is using SAS Institute’s Enterprise Miner and predictive analytic tools to develop models that predict how customers will respond to price changes and new services, which customers are most at risk of switching to competitors, and how much revenue will be generated by new storefront or drop-box loca- tions. The accuracy rate of the predictive analysis system ranges from 65 to 90 percent. FedEx is now starting to use predictive analytics in call centers to help TABLE 12-5 EXAMPLES OF BUSINESS INTELLIGENCE PRE-DEFINED 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 467 customer service representatives identify customers with the highest levels of dissatisfaction and take the necessary steps to make them happy. D a t a V i s u a l i z a t i o n a n d G e o g r a p h i c I n f o r m a t i o n S y s t e m s By presenting data in visual form, data visualization tools help users see patterns and relationships in large amounts of data that would be difficult to discern if the data were presented as traditional lists of text. For example, managers and employees of Day & Zimmermann, an industrial, defense, and workforce solutions provider, have detailed, real-time visibility into the company’s inventory of contractors and workers through a set of dashboards populated with real-time data from a SAP ERP Human Capital Management system. The dashboards make it much easier to understand the organization’s staffing levels than static paper reports. The real-time data indicate exactly what type of worker is available in what location and when a project is due to be completed. If a project is ahead of schedule, information from the dash- boards helps decision makers rapidly determine when and where to reassign its workers. Geographic information systems (GIS) help decision makers visualize problems requiring knowledge about the geographic distribution of people or other resources. Their software ties location data to points, lines, and areas on a map. Some GIS have modeling capabilities for changing the data and automati- cally revising business scenarios. GIS might be used to help state and local governments calculate response times to natural disasters and other emergen- cies or to help banks identify the best location for installing new branches or ATM terminals. For example, Columbia, South Carolina-based First Citizens Bank uses GIS software from MapInfo to determine which markets to focus on for retaining customers and which to focus on for acquiring new customers. MapInfo also lets the bank drill down into details at the individual branch level and individualize Somerset County, New Jersey, developed a GIS based on ESRI software to provide Web access to geospatial data about flood conditions. The system pro- vides information that helps emergency responders and county residents prepare for floods and enables emer- gency managers to make decisions more quickly. 468 Part Three Key System Applications for the Digital Age goals for each branch. Each branch is able to see whether the greatest revenue opportunities are from mining their database of existing customers or from find- ing new customers. With clearer branch segmentation and more focused service goals, the bank has moved from making cold sales calls to calls that are more service- and courtesy-oriented. B u s i n e s s I n t e l l i g e n c e i n t h e P u b l i c S e c t o r Business intelligence systems are also used in the public sector. The Interactive Session on Organizations describes a school district’s move to quantify and ana- lyze student performance data to make better decisions about how to allocate resources to enhance student and teacher performance. MANAGEMENT STRATEGIES FOR DEVELOPING BI AND BA CAPABILITIES There are two different strategies for adopting BI and BA capabilities for the organization: one-stop integrated solutions versus multiple best-of-breed vendor solutions. The hardware firms (IBM, HP, and now Oracle, which owns Sun Microsystems) want to sell your firm integrated hardware/software solutions that tend to run only on their hardware (the totally integrated solution). It’s called “one stop shopping.” The software firms (SAP, SAS, and Microsoft) encourage firms to adopt the “best of breed” software and that runs on any machine they want. In this strategy, you adopt the best database and data warehouse solution, and select the best business intelligence and analytics package from whatever vendor you believe is best. The first solution carries the risk that a single vendor provides your firm’s total hardware and software solution, making your firm dependent on its pric- ing power. It also offers the advantage of dealing with a single vendor who can deliver on a global scale. The second solution offers greater flexibility and inde- pendence, but with the risk of potential difficulties integrating the software to the hardware platform, as well as to other software. Vendors always claim their software is “compatible” with other software, but the reality is that it can be very difficult to integrate software from different vendors. Microsoft in particular emphasizes building on its desktop interface and operating system (Windows), which are familiar to many users, and developing server applications that run on Microsoft local area networks. But data from hardware and software pro- duced by different vendors will have to flow seamlessly into Microsoft worksta- tions to make this strategy work. This may not be adequate for Fortune 500 firms needing a global networking solution. Regardless of which strategy your firm adopts, all BI and BA systems lock the firm into a set of vendors and switching is very costly. Once you train thou- sands of employees across the world on using a particular set of tools, it is extremely difficult to switch. When you adopt these systems, you are in essence taking in a new partner. The marketplace is very competitive and given to hyperbole. One BI ven- dor claims “[Our tools] bring together a portfolio of services, software, hard- ware and partner technologies to create business intelligence solutions. By connecting intelligence across your company, you gain a competitive advan- tage for creating new business opportunities.” As a manager, you will have to critically evaluate such claims, understand exactly how these systems could improve your business, and determine whether the expenditures are worth the benefits. I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S As more and more reports suggest that American schoolchildren are falling behind those from other countries, improving our schools has become an increasingly urgent mission for the nation. Actually achieving that improvement is a difficult task. One approach gaining sway is more intensive use of information systems to measure educational performance at the individual and school district level and identify problem areas requiring additional resources and intervention. The 139,000-student Montgomery County public school system in Rockville, Maryland, is at the forefront of the push for data-driven DSS in schools. Forty employees at the school district’s Office of Shared Accountability generate reports on how many students take algebra in middle school or read below grade level. The district’s Edline and M-Stat systems alert principals to individuals with patterns of failing so they can receive extra resources, such as after-school tutoring, study sessions, and special meetings with parents. Earlier this decade, Montgomery County school superintendent Jerry Weast predicted that the increasing stratification between students in what he called the “green zone” (white and wealthy students) and students in the “red zone” (poor and minority students) would weigh down the school district as a whole. Having exhausted other options, administra- tors initiated a plan to create a data collection system for test scores, grades, and other data useful for identifying students with problems and speeding up interventions to improve their learning and educational performance. Principals access and analyze student perfor- mance data to help make instructional decisions over the course of the year, as opposed to only when annual standardized test data arrives. This way, teachers can meet the needs of students who require additional instruction or other types of intervention before they fall behind. Test scores, grades, and other data are entered into the system in real time, and can be accessed in real time. In the past, school data were disorganized, and trends in individual student performance as well as overall student body performance were difficult to diagnose. Kindergarten teachers are now able to monitor their students’ success in reading words, noting which words each student struggles with on a DATA-DRIVEN SCHOOLS handheld device like a Palm Pilot. The device calculates the accuracy with which the student reads each passage and, over time, provides information about what sorts of problems the student consis- tently encounters. Also, when students begin to deviate from their normal academic patterns, like getting a rash of poor grades, the system sends alerts to parents and school administrators. In many cases, this quicker response is enough to help the student reverse course before failing. Many parents in Montgomery County have expressed concern that the new systems are an excessive and unnecessary expenditure. In the short term, President Obama’s stimulus plan provides increased funding to schools over the next two years. Projects like these are likely to become more popular as it becomes clearer that a data-driven approach yields quantifiable results. But will they become the standard in American schools? The long-term sustainability of these systems is still unclear. In Montgomery County, one of the primary goals of the implementation of data-driven systems was to close the achievement gap between white and minority students in the lower grades. Teachers and administrators would use different types of information organized by the DSS to identify gifted students earlier and challenge them with a more appropriate course load of more advanced placement (AP) classes. Data collected on each child would offer teachers insight into what methods worked best for each individual. The results are very impressive. In Montgomery, 90 percent of kindergartners were able to read at the level required by standardized testing, with minimal differ- ences among racial and socioeconomic groups. These numbers are up from 52 percent of African-Americans, 42 percent of Latinos, and 44 percent of low-income students just seven years ago. Also, the system has effectively identified students with abilities at an earlier age. The number of African-American students who passed at least one AP test at Montgomery has risen from 199 earlier this decade to 1,152 this year; the number of Latino students went from 218 to 1,336. Some critics claim that the emphasis on closing the achievement gap between different student populations is shortchanging gifted students and those with disabilities. “Green zone” parents question whether their children are receiving enough attention Chapter 12 Enhancing Decision Making 469 C A S E S T U D Y Q U E S T I O N S 1. Identify and describe the problem discussed in the case. 2. How do business intelligence systems provide a solution to this problem? What are the inputs and outputs of these systems? 3. What management, organization, and technology issues must be addressed by this solution? 4. How successful is this solution? Explain your answer. 5. Should all school districts use such a data-driven approach to education? Why or why not? and resources with so much emphasis being placed on the improving the red zone. Green zone districts in Montgomery County receive $13,000 per student, compared with $15,000 in the red zone. Red zone classes have only 15 students in kindergarten and 17 in the first and second grates, compared with 25 and 26 in the green zone. School administrators counter that the system not only provides appropriate help for underperforming students, but also that it provides the additional challenges that are vital to a gifted child’s development. Other evidence suggests that the gains in reducing the achievement gap earlier in childhood erode as children get older. Among eighth graders in Montgomery County, approximately 90 percent of white and Asian eighth graders tested proficient or advanced in math on state tests, compared with only half of African-Americans and Hispanics. African- American and Hispanic SAT scores were over 300 points below those of whites and Asians. Still, the data-driven implementation has been responsible for some large improvements over past statistics. Some of the red zone schools have seen the most dramatic improvement in test scores and graduation rates. In many ways, the data-driven systems build from the wealth of standardized testing information created by the No Child Left Behind Act passed during the Bush presidency. Some parents and educators complain about the amount and frequency of standardized testing, suggesting that children should be spending more time on projects and creative tasks. But viable alternative strategies to foster improvement in struggling school districts are difficult to develop. It’s not just students that are subject to this data-driven approach. Montgomery County teachers have been enrolled in a similar program that identi- Explore the Web site of the Montgomery County, Maryland School District and then answer the follow- ing questions: 1. Select one of the district’s elementary, middle, or high schools and describe the data available on that particular school. What kinds of decisions do these data support? How do these data help school officials improve educational performance? 2. Select one of the district’s schools and then the School Survey Results. How do these surveys help decision makers improve educational quality? fies struggling teachers and supplies data to help them improve. In many cases, contracts and tenure make it difficult to dismiss less-effective teachers. To try and solve this problem, teachers unions and administrators have teamed up to develop a peer review program that pairs underperforming teach- ers with a mentor who provides guidance and sup- port. After two years, teachers who fail to achieve results appear before a larger panel of teachers and principals that makes a decision regarding their potential termination or extension of another year of peer review. But teachers are rarely terminated in the program—instead, they’re given tangible evidence of things they’re doing well and things they can improve based on data that’s been collected on their day-to-day performance, student achievement rates, and many other metrics. Not all teachers have embraced the data-driven approach. The Montgomery Education Association, the county’s main teachers’ union, estimates that keeping a “running record” of student results on reading assessments and other testing adds about three to four hours to teachers’ weekly workloads. According to Raymond Myrtle, principal of Highland Elementary in Silver Spring, “this is a lot of hard work. A lot of teachers don’t want to do it. For those who don’t like it we suggested they do something else.” To date, 11 of 33 teachers at Highland have left the district or are teaching at other Montgomery schools. Sources: www.montgomeryschoolsmd.org, accessed October 15, 2010; www.datadrivenclassroom.com, accessed October 15, 2010; John Hechinger, “Data-Driven Schools See Rising Scores,” The Wall Street Journal, June 12, 2009; and Daniel de Vise, “Throwing a Lifeline to Struggling Teachers,” Washington Post, June 29, 2009. M I S I N A C T I O N 470 Part Three Key System Applications for the Digital Age www.montgomeryschoolsmd.org www.datadrivenclassroom.com Chapter 12 Enhancing Decision Making 471 12.3 BUSINESS INTELLIGENCE CONSTITUENCIES There are many different constituencies that make up a modern business firm. Earlier in this text and in this chapter we identified three levels of manage- ment: lower supervisory (operational) management, middle management, and senior management (vice president and above, including executive or “C level” management, e.g. chief executive officer, chief financial officers, and chief operational officer.) Each of these management groups has different responsi- bilities and different needs for information and business intelligence, with deci- sions becoming less structured among higher levels of management (review Figure 12-1). 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 down-time of machines on a factory floor, to the daily or even hourly sales at franchise food stores, to the daily traffic at a company’s Web site. Most of the decisions they make are fairly structured. Management information systems (MIS) are typi- cally used by middle managers to support this type of decision making, and their primary output is a set of routine production reports based on data extracted and summarized from the firm’s underlying transaction processing systems (TPS). Increasingly, middle managers receive these reports online on the company portal, and are able to interactively query the data to find out why events are happening. To save even more analysis time, managers turn to excep- tion 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 applications. S u p p o r t f o r S e m i s t r u c t u r e d D e c i s i o n s 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 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. PharMark Extranet MIS identifies patients with drug-use patterns that place them at risk for adverse outcomes. 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. 472 Part Three Key System Applications for the Digital Age hypotheses. Decision support systems (DSS) are the BI delivery platform for this category of users, with the ability to support semi-structured decision mak- ing. 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 to test results to predict outcomes if changes occur in those 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 questions repeatedly to predict a range of outcomes when one or more variables are changed multiple times (see Figure 12-5). Backward sen- sitivity 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 one of the key business intelligence technologies. Spreadsheets have a similar feature for multidimensional analysis called a pivot table, which manager “super users” and analysts employ to identify and understand patterns in business informa- tion that may be useful for semistructured 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 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 region? 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 trans- actions for the online training company as we used in this discussion. The complete Excel file for these transactions is available in MyMISLab. We have also added a Learning Track on creating pivot tables using Excel 2010. In the past, much of this modeling was done with spreadsheets and small stand-alone databases. Today these capabilities are incorporated into large FIGURE 12-5 SENSITIVITY ANALYSIS This table 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?” Chapter 12 Enhancing Decision Making 473 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 earlier. 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 aged 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 simula- tion 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 affect the overall profitability and success of the firm. There are two parts to developing ESS. First, you will need a methodology for understand- ing exactly what is “the really important performance information” for a specific 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. 474 Part Three Key System Applications for the Digital Age 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, 2004; Kaplan and Norton, 1992). The balanced score card is a framework for operationalizing a firm’s strategic plan by focusing on measurable outcomes 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 indica- tors (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 cus- tomer 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 process performance is the length of time required to perform a basic function like creating a new customer account. 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 score- card 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. There are literally hundreds of consulting and 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 mea- sured using several KPIs. Chapter 12 Enhancing Decision Making 475 software firms that offer these capabilities, which are described below. 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 strate- gies (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 towards the targets. The firm’s performance is then measured with information drawn from the firm’s enter- prise database systems. BPM uses the same ideas as balanced scorecard but with a stronger strategy flavor (BPM Working Group, 2004). Corporate data for contemporary ESS are supplied by the firm’s existing enterprise applications (enterprise resource planning, supply chain manage- ment, and customer relationship management). ESS also provide access to news services, financial market databases, economic information, and whatever other external data senior executives require. ESS also have signifi- cant drill-down capabilities if managers need more detailed views of data. Well-designed ESS enhance management effectiveness by helping senior executives monitor organizational performance, track activities of competitors, recognize changing market conditions, and identify problems and opportuni- ties. Immediate access to data increases executives’ ability to monitor activities of lower units reporting to them. That very monitoring ability enables decision making to be decentralized and to take place at lower operating levels, increas- ing management’s span of control. Contemporary business intelligence and analytics technology has enabled a whole new style and culture of management called “information driven management” or “management by facts.” Here, information is captured at the factory floor (or sales floor) level, and immediately entered into enter- prise systems and databases, and then to corporate headquarters executive dashboards for analysis—not in a matter of months, days, weeks, but in hours and seconds. It’s real time management. You can see real-time management at work in hundreds of corporations in 2010, and many more are building this new decision support environment. Valero provides a good example in the Interactive Session on Management. GROUP DECISION-SUPPORT SYSTEMS (GDSS) The DSS we have just described focus primarily on individual decision making. However, so much work is accomplished in groups within firms that a special category of systems called group decision-support systems (GDSS) has been developed to support group and organizational decision making. A GDSS is an interactive computer-based system for facilitating the solution of unstructured problems by a set of decision makers working together as a group in the same location or in different locations. Collaboration systems and Web-based tools for videoconferencing and electronic meetings described earlier in this text support some group decision processes, but their focus is primarily on communication. GDSS, however, provide tools and technologies geared explicitly toward group decision making. GDSS-guided meetings take place in conference rooms with special hardware and software tools to facilitate group decision making. The hardware includes computer and networking equipment, overhead projectors, and display screens. Special electronic meeting software collects, documents, ranks, edits, I N T E R A C T I V E S E S S I O N : M A N A G E M E N T If you haven’t heard of Valero, don’t worry. It’s largely unknown to the public although investors rec- ognize it as one of the largest oil refiners in the United States. Valero Energy is a top-fifty Fortune 500 company headquartered in San Antonio, Texas, with annual revenues of $70 billion. Valero owns 16 refineries in the United States, Canada, and Aruba that produce gasoline, distillates, jet fuel, asphalt, petrochemicals, and other refined products. The com- pany also owns 10 ethanol plants located in the Midwest with a combined ethanol production capac- ity of about 1.1 billion gallons per year. In 2008, Valero’s chief operating officer (COO) called for the development of a Refining Dashboard that would display real-time data related to plant and equipment reliability, inventory management, safety, and energy consumption. Using a series of monitors on the walls of the headquarters operations center room, with a huge central monitor screen showing a live display of the company’s Refining Dashboard, the COO and other plant managers can review the performance of the firm’s 16 major refineries in the United States and Canada. The COO and his team review the performance of each refinery in terms of how each plant is perform- ing compared to the production plan of the firm. For any deviation from plan, up or down, the plant man- ager is expected to provide the group an explanation, and a description of corrective actions. The head- quarters group can drill down from executive level to refinery level and individual system-operator level displays of performance. Valero’s Refining Dashboard is available on the Web to plant managers in remote locations. The data are refreshed every five minutes. The dashboard taps directly into the firm’s SAP Manufacturing Integration and Intelligence application where each plant’s history of production and current production data is stored. Valero’s management estimates that the dashboards are saving $230 million per year at the 16 refineries where they are in use. Valero’s Refining Dashboard has been so success- ful that the firm is developing separate dashboards that show detailed statistics on power consumption for each unit of the firm, and each plant. Using the shared data, managers will be able to share best prac- tices with one another, and make changes in equipment to reduce energy consumption while PILOTING VALERO WITH REAL-TIME MANAGEMENT maintaining production targets. The dashboard system has the unintended consequence of helping managers learn more about how their company actually operates, and how to improve it. But how much do Valero’s executive dashboards really make a difference? One of the dangers of real time management is not measuring the right things. Dashboards that display information unrelated to the firm’s strategic goals might be largely irrelevant, although pretty to look at. Valero’s goals and measures of performance were inspired by Solomon benchmark performance studies used in the oil and gas industry. How helpful were they? Valero’s stock price fell from a high of $80 in June 2008, to about $20 in November 2010. As it turns out, Valero’s profits are not strongly related to small changes in its refining efficiency. Instead, its prof- itability is largely determined by the spread between the price of refined products and the price of crude oil, referred to as the “refined product margin.” The global economic slowdown beginning in 2008 and extending through 2010 weakened demand for refined petroleum products, which put pressure on refined product margins throughout 2009 and 2010. This reduced demand, combined with increased inventory levels, caused a significant decline in diesel and jet fuel profit margins. The price of crude and aggregate petroleum demand are largely beyond the control of Valero management. The cost of refining crude varies within a very narrow range over time, and there are no technological breakthroughs expected in refining technology. Although Valero’s dashboard focuses on one of the things management can control within a narrow range (namely refining costs), the dashboard does not display a number of strategic factors beyond its control, which nevertheless powerfully impact company performance. Bottom line: a powerful dashboard system does not turn an unprofitable operation into a profitable one. Another limitation of real-time management is that it is most appropriate for process industries such as oil refining where the process is relatively unchanging, well known and understood, and central to the revenues of a firm. Dashboard systems say nothing about innovation in products, marketing, sales, or any other area of the firm where innovation is important. Apple Corporation did not invent the 476 Part Three Key System Applications for the Digital Age C A S E S T U D Y Q U E S T I O N S 1. What management, organization, and technology issues had to be addressed when developing Valero’s dashboard? 2. What measures of performance do the dashboards display? Give examples of several management decisions that would benefit from the information provided by Valero’s dashboards. 3. What kinds of information systems are required by Valero to maintain and operate its refining dashboard? 4. How effective are Valero’s dashboards in helping management pilot the company? Explain your answer. 5. Should Valero develop a dashboard to measure the many factors in its environment that it does not control? Why or why not? Apple iPhone using a performance dashboard, although it might have such a dashboard today to monitor iPhone manufacturing and sales. Managers have to be sensitive to, and reflect upon, all the factors that shape the success of their business even if they are not reflected in the firm’s dashboards. 1. Visit Valero.com and click on its annual report in the Investor Relations section. On page 2 of the annual report you will find Valero’s corporate vision statement. Read its corporate vision state- ment of strategic objectives (especially vision statement #2). Based on the firm’s vision, what other corporate dashboards might be appropriate for senior management? 2. Read the annual report and develop a list of factors mentioned in the report that explain the company’s poor performance over the last two years. Devise a method for measuring these prof- itability factors, and then using electronic presen- tation software create a corporate profitability dashboard for senior managers. Sources: Chris Kahn, “Valero Energy Posts 3Q Profit, Reverses Loss,” Business Week, October 26, 2010; Valero Energy Corporation, Form 10K Annual Report for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission, February 28, 2010; and Doug Henderson, “Execs Want Focus on Goals, Not Just Metrics,” InformationWeek, Novemvber 13, 2009. M I S I N A C T I O N Chapter 12 Enhancing Decision Making 477 and stores the ideas offered in a decision-making meeting. The more elaborate GDSS use a professional facilitator and support staff. The facilitator selects the software tools and helps organize and run the meeting. A sophisticated GDSS provides each attendee with a dedicated desktop computer under that person’s individual control. No one will be able to see what individuals do on their computers until those participants are ready to share information. Their input is transmitted over a network to a central server that stores information generated by the meeting and makes it available to all on the meeting network. Data can also be projected on a large screen in the meeting room. GDSS make it possible to increase meeting size while at the same time increasing productivity because individuals contribute simultaneously rather than one at a time. A GDSS promotes a collaborative atmosphere by guarantee- ing contributors’ anonymity so that attendees focus on evaluating the ideas themselves without fear of personally being criticized or of having their ideas rejected based on the contributor. GDSS software tools follow structured meth- ods for organizing and evaluating ideas and for preserving the results of meet- ings, enabling nonattendees to locate needed information after the meeting. GDSS effectiveness depends on the nature of the problem and the group and on how well a meeting is planned and conducted. 478 Part Three Key System Applications for the Digital Age 12.4 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience analyzing opportuni- ties for DSS, using a spreadsheet pivot table to analyze sales data, and using online retirement planning tools for financial planning. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. Applebee’s is the largest casual dining chain in the world, with 1,970 locations throughout the United States and nearly 20 other countries worldwide. The menu features beef, chicken, and pork items, as well as burgers, pasta, and seafood. The 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 information systems 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? 2. During the 1990s, the Canadian Pacific Railway used a tonnage-based operating model in which freight trains ran only when there was sufficient traffic to justify the expense. This model focused on minimizing the total number of freight trains in service and maximizing the size of each train. However, it did not necessarily use crews, locomotives, and equipment efficiently, and it resulted in inconsistent transit times and delivery schedules. Canadian Pacific and other railroads were losing business to trucking firms, which offered more flexible deliveries that could be scheduled at the times most convenient for customers. How could a DSS help Canadian Pacific and other railroads compete with trucking firms more effectively? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g P i v o t Ta b l e s t o A n a l y z e S a l e s D a t a Software skills: Pivot tables Business skills: Analyzing sales data This project gives you an opportunity to learn how to use Excel’s PivotTable functionality to analyze a database or data list. Use the data list for Online Management Training Inc. (OMT) described ear- lier in the chapter. This is a list of the sales transactions at OMT for one day. You can find this spreadsheet file MyMISLab. 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 marketing and sales resources, or pitch different messages to different regions. • What form of payment is the most common? The answer might be used to emphasize in advertising the most preferred means of payment. • Are there any times of day when purchases are most common? Do people buy 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? Chapter 12 Enhancing Decision Making 479 Review Summary 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, semistructured, or unstructured, with structured decisions clustering at the operational level of the organization and unstructured decisions at the strategic level. Decision making can be performed by individuals or groups and includes employees as well as opera- tional, middle, and senior managers. There are four stages in decision making: intelligence, design, choice, and implementation. Systems to support decision making do not always produce better manager and employee decisions that improve firm performance because of problems with information quality, manage- ment filters, and organizational culture. 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, coordinating, 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. I m p r o v i n g D e c i s i o n M a k i n g : U s i n g a W e b - B a s e d D S S f o r R e t i r e m e n t P l a n n i n g Software skills: Internet-based software Business skills: Financial planning This project will help develop your skills in using Web-based DSS for financial planning. The Web sites for CNN Money and MSN Money Magazine 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 plan to retire in 16 years. You have one dependant and $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 benefit payments. • To calculate your estimated Social Security benefit, search for and use the Quick Calculator at the Social Security Administration Web site. • Use the Web site you have selected to determine how much money you need to save to help you achieve your retirement goal. • 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. LEARNING TRACK MODULE The following Learning Track provides content relevant to topics covered in this chapter: 1. Building and Using Pivot Tables 480 Part Three Key System Applications for the Digital Age 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 information, providing liaisons between organizational levels, and allocating resources. However, information systems are less successful at supporting unstructured decisions. Where information systems are useful, information quality, manage- ment filters, and organizational culture can degrade decision-making. 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 mak- ers, and the analytic tools help them quickly understand the information and take action. A business intelligence environment consists of data from the business environment, the BI infrastructure, a BA toolset, managerial users and methods, a BI delivery platform (MIS, DSS, or ESS), and the user interface. There are six analytic func- tionalities that BI systems deliver to achieve these ends: pre-defined 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 create forecasts. 4. How do different decision-making constituencies in an organization use business intelligence? 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) produc- ing routine production reports are typically used to support this type of decision making. For making unstructured decisions, middle managers and analysts will use decision-support systems (DSS) with power- ful analytics and modeling tools, including spreadsheets and pivot tables. Senior executives making unstruc- tured 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 designing executive support systems (ESS). 5. What is the role of information systems in helping people working in a group make decisions more efficiently? Group decision-support systems (GDSS) help people working together in a group arrive at decisions more efficiently. GDSS feature special conference room facilities where participants contribute their ideas using networked computers and software tools for organizing ideas, gathering information, making and setting priorities, and documenting meeting sessions. Key Terms Balanced scorecard method, 474 Behavioral models, 458 Business performance management (BPM), 475 Choice, 458 Classical model of management, 458 Data visualization, 467 Decisional role, 459 Design, 458 Drill down, 475 Geographic information systems (GIS), 467 Group decision-support systems (GDSS), 475 Implementation, 458 Informational role, 459 Intelligence, 458 Interpersonal role, 459 Key performance indicators (KPIs), 474 Managerial roles, 454 Pivot table, 472 Sensitivity analysis, 472 Semistructured decisions, 456 Structured decisions, 456 Unstructured decisions, 456 Chapter 12 Enhancing Decision Making 481 Review Questions 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 an unstructured, semistructured, and structured decision. • List and describe the stages in decision making. 2. How do information systems support the activities of managers and management decision making? • Compare the descriptions of managerial behav- ior in the classical and behavioral models. • Identify the specific managerial roles that can be supported by information systems. 3. How do business intelligence and business ana- lytics support decision making? • Define and describe business intelligence and business analytics. • List and describe the elements of a business intelligence environment. Discussion Questions 1. 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? 2. If businesses used DSS, GDSS, and ESS more widely, would managers and employees make better decisions? Why or why not? 3. How much can business intelligence and business analytics help companies refine their business strategy? Explain your answer. Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. • List and describe the analytic functionalities provided by BI systems. • Compare two different management strate- gies for developing BI and BA capabilities. 4. How do different decision-making constituencies in an organization use business intelligence? • List each of the major decision-making constituencies in an organization and describe 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 scorecard method and business performance manage- ment. 5. What is the role of information systems in help- ing people working in a group make decisions more efficiently? • Define a group decision-support system (GDSS) and explain how it differs from a DSS. • Explain how a GDSS works and how it provides value for a business. Collaboration and Teamwork: Designing a University GDSS team communication announcements, and work assignments; to brainstorm; and to work collabora- tively on project documents. Try to use Google Docs to develop a presentation of your findings for the class. With three or four of your classmates, identify several groups in your university that might benefit from a GDSS. Design a GDSS for one of those groups, describ- ing its hardware, software, and people elements. If possible, use Google Sites to post links to Web pages, Does CompStat Reduce Crime? CASE STUDY ompStat (short for COMPuter STATistics or COMParative STATistics) originated in the New York City Police Department (NYPD) in 1994 when William Bratton was police commissioner. CompStat is a comprehensive, city-wide database that records all reported crimes or complaints, arrests, and summonses issued in each of the city’s 76 precincts. City officials had previously believed that crime could not be prevented by better information and analytical tools but instead by using more foot patrols in neighborhoods along with the concept of “community policing” in which efforts were made to strengthen the involvement of commu- nity groups. In contrast, Bratton and Rudy Giuliani, then the mayor of New York City, believed that police could be more effective in reducing crime if operational decisions took place at the precinct level and if decision makers had better information. Precinct commanders were in a better position than police headquarters to understand the specific needs of the communities they served and to direct the work of the 200 to 400 police officers they managed. CompStat gave precinct commanders more authority and responsibility, but also more accountability. At weekly meetings, representatives from each of the NYPD’s precincts, service areas, and transit districts are put on the “hot seat” at police headquarters and required to provide a statistical summary of the week’s crime complaint, arrest, and summons activity, as well as significant cases, crime patterns, and police activities. Commanders must explain what has been done to reduce crime in the districts under their command, and if crime has gone up, they must explain why. Commanders are held directly accountable for reducing crime in their area of command. In the past, they were evaluated primarily on the basis of their adminis- trative skills, such as staying within budget and deploying resources efficiently. The data these commanders provide, including specific times and locations of crimes and enforcement activities, are forwarded to the NYPD’s CompStat Unit where they are loaded into a city-wide database. The system analyzes the data and produces a weekly CompStat report on crime complaint and arrest activity at the precinct, patrol borough, and city wide levels. The data are summa- rized by week, prior 30 days, and year-to-date for comparison with the previous year’s activity and for establishing trends. The CompStat Unit also issues weekly commander profile reports to measure the performance of precinct commanders. The weekly commander profile reports include information on the commander’s date of appoint- ment, years in rank, education and specialized training, most recent performance evaluation rat- ing, the units that person previously commanded, the amount of overtime generated by police under that commander, absence rates, community demo- graphics, and civilian complaints. Using MapInfo geographic information system (GIS) software, the CompStat data can be displayed on maps showing crime and arrest locations, crime “hot spots,” and other relevant information. Comparative charts, tables, and graphs can also be projected simultaneously. These visual presenta- tions help precinct commanders and members of the NYPD’s executive staff to quickly identify patterns and trends. Depending on the intelligence gleaned from the system, police chiefs and captains develop a targeted strategy for fighting crime, such as dispatching more foot patrols to high-crime neigh- borhoods, or issuing warnings to the public when a particular model of vehicle is susceptible to theft. During Bratton’s 27-month tenure, serious crime in New York dropped by 25 percent and homicides went down by 44 percent. Crime in New York City has dropped by 69 percent in the last 12 years. Skeptics do not believe that CompStat was responsi- ble for these results. They point to the decline in the number of young, poor men, an improved economy, programs that reduced welfare rolls while giving poor people access to better housing, increasing the size of the NYC police force, and giv- ing precinct commanders more decision-making responsibility and accountability. Nevertheless, Bratton, convinced that CompStat was the catalyst for New York’s drop in crime, implemented the system in Los Angeles to further prove its worth. Since the introduction of CompStat, combined violent and property crimes in Los Angeles dropped for six consecutive years. Yet the ratio of police officers to residents is only half that of New York and Chicago. CompStat has C 482 Part Three Key System Applications for the Digital Age also been adopted in Philadelphia, Austin, San Francisco, Baltimore, and Vancouver, British Columbia. Skeptics point out that crime has fallen in all urban areas in the United States since 1990 regardless of whether the cities used CompStat. In fact, a critical study of CompStat by the Police Foundation found that CompStat encouraged police to be only reactive rather than pro-active in fighting crime. Sending police to where crime has become a problem is, in other words, too late. CompStat encouraged what the Police Foundation called “whack-a-mole” theory of policing, similar to the game played in amusement parks. Rather than change police departments into nimble crime fighters, the Foundation found that a database had been attached to traditional organizations, which themselves remained unchanged. Because of the emphasis placed on reducing crime and because of the newfound importance of crime statistics to officers’ careers, CompStat has created pressure on some precinct commanders to manipulate crime statistics to produce favorable results. Officers must continue to improve their crime statistics, despite shrinking budgets and dwindling numbers of officers. A study conducted in 2009 via a questionnaire given to 1,200 retired police captains and more senior officers concluded that nearly a third of respondents were aware of unethical manipulation of crime data. More than 100 survey respondents said that intense pressure to produce annual crime reduc- tions led some supervisors and precinct commanders to manipulate crime statistics. For example, officers were known to check catalogs, eBay, and other sites for items similar to those reported stolen, looking for lower prices they could use to reduce the values of the stolen goods for record-keeping purposes. Grand larceny, a felony, is considered to be theft of goods valued at $1,000 or more, whereas theft of goods valued at less than $1,000 is only a misdemeanor. Using this method, precincts could reduce the number of felony thefts, considered an “index crime” and tracked by CompStat. Surveys and anecdotal evidence also indicated a lack of receptiveness on the part of police in some areas, possibly motivated by a desire to reduce the number of crime incidents reported. Some survey respondents stated that precinct commanders or aides dispatched to crime scenes sometimes tried to persuade victims not to file complaints or urged them to change their accounts of what happened in ways that could downgrade offenses to lesser crimes. Previous studies of CompStat encountered an unwillingness by the NYPD to disclose their data reporting methods. A professor performing a study that ultimately praised CompStat’s influence on crime in New York City was given full access to NYPD crime data, but the NYPD did not cooperate with the Commission to Combat Police Corruption (CCPC), an independent board that monitors police corruption. The commission sought subpoena power to demand the NYPD turn over its data and data col- lection procedures to uncover potential wrong doing by the police. Unfortunately, the commission was denied access to this data after strong police depart- ment opposition. On the other hand, versions of CompStat have been adopted by hundreds of other police depart- ments across the United States, and the CompStat approach has been credited with improving police work in many cities. In New York City itself, much of the public believes that crime is down, and that the city has become a safer and more pleasant place to live. Sources: William K. Rashbaum, “Retired Officers Raise Questions on Crime Data,” The New York Times, February 6, 2010; A.G. Sulzberger and Karen Zraick, “Forget Police Data, New Yorkers Rely on Own Eyes, The New York Times, February 7, 2010; Luis Garicano, “How Does Information Technology Help Police Reduce Crime?” TNIT Newsletter 3 (December, 2009); and New York City Police Department, “COMPSTAT Process,” www.nyc.gov/html/nypd/html, accessed October 9, 2006. CASE STUDY QUESTIONS 1. What management, organization, and technology factors make CompStat effective? 2. Can police departments effectively combat crime without the CompStat system? Is community polic- ing incompatible with CompStat? Explain your answer. 3. Why would officers misreport certain data to CompStat? What should be done about the misre- porting of data? How can it be detected? Chapter 12 Enhancing Decision Making 483 www.nyc.gov/html/nypd/html !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% P A R T F O U R Building and Managing Systems Chapter 13 Building Information Systems Chapter 14 Managing Projects Chapter 15 Managing Global Systems (available on the Web) Part Four focuses on building and managing systems in organizations. This part answers questions such as: What activities are required to build a new information system? What alternative approaches are available for building system solutions? How should information systems projects be managed to ensure that new systems provide genuine business benefits and work successfully in the organization? What issues must be addressed when building and managing global systems? LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. How does building new systems produce organizational change? 2. What are the core activities in the systems development process? 3. What are the principal methodolo- gies for modeling and designing systems? 4. What are the alternative methods for building information systems? 5. What are new approaches for system building in the digital firm era? CHAPTER OUTLINE 13.1 SYSTEMS AS PLANNED ORGANIZATIONAL CHANGE Systems Development and Organizational Change Business Process Redesign 13.2 OVERVIEW OF SYSTEMS DEVELOPMENT Systems Analysis Systems Design Completing the Systems Development Process Modeling and Designing Systems: Structured and Object-Oriented Methodologies 13.3 ALTERNATIVE SYSTEMS-BUILDING APPROACHES Traditional Systems Life Cycle Prototyping End-User Development Application Software Packages and Outsourcing 13.4 APPLICATION DEVELOPMENT FOR THE DIGITAL FIRM Rapid Application Development (RAD) Component-Based Development and Web Services 13.5 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using Database Software to Design a Customer System for Auto Sales Achieving Operational Excellence: Redesigning Business Processes for Web Procurement LEARNING TRACK MODULES Unified Modeling Language (UML) A Primer on Business Process Design and Documentation A Primer on Business Process Management Chapter 13 Building Information Systems Interactive Sessions: Can Business Process Management Make a Difference? Zimbra Zooms Ahead with OneView 487 IMB Group, headquartered in Kuala Lumpur, is Malaysia's second largest financial services provider and the third largest company on the Malaysian stock exchange. It offers a full range of financial products and services, including consumer banking, corporate and investment banking, insurance, and asset management, and its retail banking network of over 1,100 branches is the largest in Southeast Asia. What’s wrong with this? Not much, except management wants to do even better. The company launched a five-year information technology transformation initiative in January 2008 to align its information technology investments more closely with its resources. It used the ARIS business process management (BPM) tool from IDS Scheer to identify 25 different areas for improving technology, people, and processes. The ARIS software helped identify gaps and inefficiencies in existing processes. The process of opening an account at a retail branch was singled out as needing improve- ment. Improving this process was given high priority because it provided customers with their first impression of CIMB Group’s service and customer experience. The old account-opening process was cumbersome and time-consuming, requiring filling out four separate data entry screens for customer information, account details, name and address details, and details concerning the automated teller machine (ATM) card. New technology created opportunities for a short-cut. Malaysia has a compulsory identity card for its citizens and permanent residents known as the Government Multipurpose Card, or MyKad. It is the world’s first smart identity card, incorporating a microchip with identification data (such as name, address, gender, and religion) and capabilities for user authentication, govern- ment services, electronic payments, education, loyalty programs, mobile applications, and other conveniences. CIMB Group’s systems-building team modified the front end of the customer account sys- tem to reduce the number of data entry screens and to accept customer data obtained from scanning a MyKad card. By automatically extracting most of the identification data required to open an account from a MyKad card, CIMB only needs to use a single data entry screen to set up a new account. CIMB Group was thus able to streamline the account-opening process, reducing the time required to open a bank account by 56 percent. The experience became . CIMB GROUP REDESIGNS ITS ACCOUNT OPENING PROCESS C more personal and engaging for both the bank officer and the customer. Productivity has increased, lowering CIMB Group’s cost by 8 to 9 percent annually. Sources: Avanti Kumar, “Reaching for the Skies,” MIS Asia, April 16, 2010; www.ids-scheer.com, accessed October 5, 2010; and www.cimb.com, accessed October 5, 2010. www.ids-scheer.com www.cimb.com 488 Part Four Building and Managing Systems The experience of CIMB Group illustrates some of the steps required todesign and build new information systems. Building the new system entailed analyzing the organization’s problems with existing information systems, assessing people’s information requirements, selecting appropriate technology, and redesigning business processes and jobs. Management had to monitor the system-building effort and evaluate its benefits and costs. The new information system represented a process of planned organizational change. The chapter-opening diagram calls attention to important points raised by this case and this chapter. CIMB Group’s process for setting up a new account was excessively manual and inefficient, dragging down business operations and raising costs. It also detracted from the brand image the company wanted to project as a company with high-quality customer service. Management had an opportunity to use information technology and the information stored in MyKad smart cards to streamline and redesign this process. CIMB’s system-building team evaluated alternative system solutions. It selected a solution that replaces the process of entering customer and account data manually into a series of four data entry screens with one that obtains most of the same data by swiping a MyKad smart card. This solution did not replace CIMB’s existing banking system entirely, but enhanced it with a more efficient and streamlined user interface. These enhancements improved business operations by reducing the amount of time to open a new account with CIMB Group and making the customer experience more pleasant. Chapter 13 Building Information Systems 489 13.1 SYSTEMS AS PLANNED ORGANIZATIONAL CHANGE uilding 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, management, and organization. When we design a new informa- tion system, we are redesigning the organization. System builders must under- stand 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 structural organizational change that are enabled by information technology: (1) automation, (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 employees 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. B 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. 490 Part Four Building and Managing Systems A deeper form of organizational change—one that follows quickly from early automation—is rationalization of procedures. Automation frequently reveals new bottlenecks in production and makes the existing arrangement of proce- dures and structures painfully cumbersome. Rationalization of procedures is the streamlining of standard operating procedures. For example, CIMB Bank’s system for handling retail banking accounts is effective not only because it uses computer technology but also because the company simplified the business process for opening a customer account. CIMB streamlined its workflow to take advantage of the system’s new user interface and software for importing per- sonal data from MyKad. 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 manage- ment (TQM) makes achieving quality an end in itself and the responsibility of all people and functions within an organization. TQM derives from concepts developed by American quality experts such as W. Edwards Deming and Joseph Juran, but it was popularized by the Japanese. 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 ongo- ing 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 eliminate repetitive, paper-intensive tasks. (Sometimes the new design eliminates jobs as well.) It is much more ambitious than rational- ization of procedures, requiring a new vision of how the process is to be organized. A widely cited example of business process redesign is Ford Motor Company’s invoiceless processing, which reduced headcount in Ford’s North American Accounts Payable organization of 500 people by 75 percent. Accounts payable clerks used to spend most of their time resolving discrepancies between purchase orders, receiving documents, and invoices. Ford redesigned its accounts payable process so that the purchasing department enters a pur- chase order into an online database that can be checked by the receiving department when the ordered items arrive. If the received goods match the purchase order, the system automatically generates a check for accounts payable to send to the vendor. There is no need for vendors to send invoices. 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 systems to change its business model. Schneider created a new business managing 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 reengineering often fail because extensive organiza- tional 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. Chapter 13 Building Information Systems 491 BUSINESS PROCESS REDESIGN Like CIMB Group, described in the chapter-opening case, many businesses 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 provides a variety of tools and methodologies to analyze existing processes, design new processes, and optimize those processes. BPM is never concluded because process improvement requires continual 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 com- petitors who may have discovered the right business model. Considerable time and cost may also be spent improving business processes that have little impact on overall firm performance and revenue. Managers need to deter- mine what business processes are the most important and how improving these processes will help business performance. 2. Analyze existing processes: Existing business processes should be mod- eled and documented, noting inputs, outputs, resources, and the sequence of activities. The process design team identifies redundant steps, paper-inten- sive tasks, bottlenecks, and other inefficiencies. 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- 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. 492 Part Four Building and Managing Systems 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 cus- tomer, 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 unable 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. 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. Figure 13-3 illustrates how the book-purchasing process can be redesigned by taking advantage of the Internet. The customer accesses an online bookstore over the Internet from his or her computer. He or she searches the bookstore’s online catalog for the book he or she wants. If the book is available, the customer orders the book online, supplying credit card and shipping address information, and the book is delivered to the customer’s home. If the online bookstore does not carry the book, the customer selects another online book- store and searches for the book again. This process has far fewer steps than that 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 reduces 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, 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. 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 con- sumes fewer resources. Chapter 13 Building Information Systems 493 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 cus- tomer 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 main- taining a physical 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 receive the book in the mail and will have to pay a shipping charge. But the cus- tomer saves time and money by not having to travel to the bookstore or make additional 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. 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 recommend improve- ments. 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. Although many business process improvements are incremental and ongoing, there are occasions when more radical change must take place. Our example 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-reach- ing change. When properly implemented, business process redesign produces dramatic gains in productivity and efficiency, and may even change the way the business is run. In some instances, it drives a “paradigm shift” that trans- forms the nature of the business itself. This actually happened in book retailing when Amazon challenged tradi- tional physical bookstores with its online retail model. By radically rethinking the way a book can be purchased and sold, Amazon and other online book- stores 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). To o l s f o r B u s i n e s s P r o c e s s M a n a g e m e n t Over 100 software firms provide tools for various aspects of BPM, including IBM, Oracle, and TIBCO. These tools help businesses identify and document processes 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 provide analytics for verifying that process performance has been 494 Part Four Building and Managing Systems improved and for measuring the impact of process changes on key business performance indicators. Some BPM tools document and monitor business processes to help firms identify inefficiencies, using software to connect with each of the systems a company uses for a particular process to identify trouble spots. Canadian mutual fund company AIC used Sajus BPM monitoring software to check incon- sistencies in its process for updating accounts after each client transaction. Sajus specializes in “goal-based” process management, which focuses on finding the causes of organizational problems through process monitoring before apply- ing tools to address those problems. Another category of tools automate some parts of a business process and enforce business rules so that employees perform that process more consis- tently and efficiently. For example, American National Insurance Company (ANCO), which offers life insurance, medical insurance, property casualty insurance, and investment services, used Pegasystems BPM workflow software to streamline customer service processes across four business groups. The software built rules to guide customer service representatives through a single view of a customer’s information that was maintained in multiple systems. By eliminating the need to juggle multiple applications simultaneously to handle customer and agent requests, the improved process increased customer service representative workload capacity by 192 percent. A third category of tools helps businesses integrate their existing systems to support process improvements. They automatically manage processes across the business, extract data from various sources and databases, and generate transactions in multiple related systems. For example, the Star Alliance of 15 airlines, including United and Lufthansa, used BPM to create common processes shared by all of its members by integrating their existing systems. One project created a new service for frequent fliers on member airlines by consolidating 90 separate business processes across nine airlines and 27 legacy systems. The BPM software documented how each airline processed frequent flier information to help airline managers model a new business process that showed how to share data among the various systems. The Interactive Session on Organizations describes how several companies used similar tools for their business process management programs. As you read this case, think about the kinds of changes the companies using these BPM tools were able to make in the way they ran their businesses. 13.2 OVERVIEW OF SYSTEMS DEVELOPMENT New information systems are an outgrowth of a process 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 opportunities 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 activ- ities. These activities consist of systems analysis, systems design, program- ming, testing, conversion, and production and maintenance. If you’re a large successful company, business process management might be just what you’re looking for. AmerisourceBergen and Diebold Inc. are two examples. AmerisourceBergen is one of the world’s largest pharmaceutical services companies and a member of the Fortune 25, with $70 billion in revenue in 2009. It provides drug distribution and related services designed to reduce costs and improve patient outcomes, servicing both pharma- ceutical manufacturers and healthcare providers. Because it is so large, AmerisourceBergen has numerous and complicated relationships with manufacturers, pharmacies, and hospitals. Frequently changing business conditions cause contract prices to fluctuate. When they do, both the distributor and manufacturer need to analyze these changes and make sure they comply with their busi- ness rules and federal regulations. Managing these contract and pricing details associated with each of these relationships had been very time-consuming and paper-intensive, relying heavily on e-mail, telephone, fax, and postal mail. Many of these processes were redundant. AmerisourceBergen’s management believed the company had many old and inefficient business processes. After an extensive BPM vendor analysis, the company selected Metastorm BPM software. Metastorm BPM provides a complete set of tools for analyzing, managing, and redesigning business processes. Business professionals, managers, and information systems specialists are able to create rich graphical models of business processes as well as new user interfaces and business rules. Metastorm has an engine for deploying redesigned processes along with capabilities for integrating the processes it manages with external systems. For its first BPM project, AmerisourceBergen decided to automate and implement an online collaborative contract and chargeback process, which is responsible for a $10 billion annual cash flow. This process drives the establishment of pricing and terms with each of the company’s manufacturers and also controls compliance with pricing terms and the payment of rebates from the manufacturer if the company is forced to sell at a lower price to compete. Any disputes or inaccurate pricing data create costly delays in obtaining the refunds the company is owed. CAN BUSINESS PROCESS MANAGEMENT MAKE A DIFFERENCE? Metasource BPM makes it possible for all contract changes to be recorded into the system and vali- dated against internal business rules, and also enables AmerisourceBergen to link with its trading partners for collaborative BPM. All contract informa- tion is housed in a single repository, making it much easier to investigate chargebacks and communicate contract and pricing information with trading part- ners and among internal departments. The BPM project was successful and resulted in lower headcount, fewer disputes, more accurate pricing information, and a high return on invest- ment. This early success encouraged the company to expand BPM to other areas of the business and use it to support a broader business transformation program. AmerisourceBergen used Metastorm BPM to create six new specialized processes for managing and automating high-volume, highly specialized supplier credits which interface with its SAP enter- prise system. To meet federal and industry-specific regulations, AmerisourceBergen must carefully track and match all direct, indirect, and third-party credits with the appropriate product inflows and outflows. The company used Metastorm BPM to create specialized processes that interface with SAP, including the ability to receive, track, reconcile, and expedite all credit variances, such as discrepancies in invoices and purchase orders. After the SAP system identifies the variances, it passes credits to Metastorm BPM for exception handling, resolution, and reconciliation with master credit data. Reconciled credits are then returned to the SAP system. More than 1.2 million credit/debit adjustment documents and paper-based credits are seamlessly passed between Metastorm and SAP this way. To date, AmerisourceBergen has automated nearly 300 processes, benefiting from more efficient and accurate record tracking, faster turnaround times, greater management into key performance indicators, and an online audit trail of all activities. AmerisourceBergen’s BPM projects had such positive outcomes that the company won a Global Excellence in BPM and Workflow award in 2009. Diebold, Inc. is another recent convert to business process management. Diebold is a global leader in integrated self-service delivery and security systems I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S Chapter 13 Building Information Systems 495 1. Why are large companies such as AmerisourceBergen and Diebold good candidates for business process management? 2. What were the business benefits for each company from redesigning and managing their business processes? 3. How did BPM change the way these companies ran their businesses? 4. What might be some of the problems with extending BPM software across a large number of business processes? 5. What companies stand to gain the most by implementing BPM? and services, with 17,000 associates across 90 coun- tries. The company makes, installs, and services ATMs, vaults, currency-processing systems, and other security equipment used in financial, retail, and government markets. Diebold hoped to use busi- ness process management to understand and improve its order fulfillment process. The company selected Progress Savvion’s BusinessManager BPM solution for this task. BusinessManager provides a platform for defining an organization’s business processes and deploying those processes as Web-accessible applications. The platform gives managers real-time visibility to monitor, analyze, control, and improve the execution of those processes and can integrate these processes with existing operational systems. BusinessManager receives and organizes data from multiple sources to provide a more complete view of the Diebold order process. Diebold managers are able to track orders in Search online for “BPM software provider” or “enter- prise-wide BPM” and visit the Web site of a major BPM vendor not mentioned in this case. Then answer the following questions: 1. What types of companies have benefited from this software? 2. What are some of the important functionalities of the BPM products offered? 3. Would this company have been a better fit than Savvion or Metastorm for Diebold or AmerisourceBergen, respectively? Why or why not? real time at any step in the process and also predict future performance based on past data. Since the tool enables managers to learn how long each step of the process usually takes, they can forecast where orders ought to be and compare that with where the system says the orders actually are. BusinessManager can detect whether production of an item is complete and where specific items are located. Pleased with these capabilities, Diebold immedi- ately used BusinessManager for other processes, such as issue resolution. The system aggregates input from various sources, such as workers in the field and in factories. Diebold is now able to quickly identify issues raised by employees and customers and determine how long it takes to resolve them. Sources: Judith Lamont, “BPM, Enterprisewide and Beyond,” KMWorld, February 1, 2010; “Customer Success Story: AmerisourceBergen,” www.metastorm.com, accessed November 4, 2010; and www.progress.com, accessed November 4, 2010. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N 496 Part Four Building and Managing Systems Figure 13-4 illustrates the systems development process. The systems development activities depicted usually take place in sequential order. But some of the activities may need to be repeated or some may take place simultaneously, 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, www.metastorm.com www.progress.com Chapter 13 Building Information Systems 497 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 systems, identifying the primary owners and users of data along with existing hardware and software. The systems analyst then details the problems of existing systems. By examining documents, work papers, and procedures; observing system operations; and interviewing key users of the systems, the analyst can identify the problem areas and objectives a solution would achieve. Often the solution requires building a new information system or improving an existing one. The systems analysis also includes a feasibility study to determine whether that solution is feasible, or achievable, from a financial, technical, and organizational standpoint. The feasibility study determines whether the pro- posed 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 intro- duced 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 advan- tages and disadvantages, of each alternative. It is up to management to determine which mix of costs, benefits, technical features, and organizational impacts represents the most desirable alternative. E s t a b l i s h i n g I n f o r m a t i o n R e q u i r e m e n t s Perhaps the most challenging task of the systems analyst is to define the specific information requirements that must be met by the chosen system solu- tion. 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 develops a detailed description of the functions that the new sys- tem must perform. Faulty requirements analysis is a leading cause of systems failure and high systems development costs (see Chapter 14). A system FIGURE 13-4 THE SYSTEMS DEVELOPMENT PROCESS Building a system can be broken down into six core activities. 498 Part Four Building and Managing Systems designed around the wrong set of requirements will either have to be discarded because of poor performance or will need to undergo major modifications. Section 13.3 describes alternative 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 requirements, and systems design shows how the system will fulfill this objective. 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 specifications 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 address 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 designs. Each design represents a unique blend of all technical and organiza- tional components. What makes one design superior to others is the ease and efficiency with which it fulfills user requirements within a specific set of technical, organizational, financial, and time constraints. TABLE 13-1 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 File organization and design Record specifications PROCESSING Computations Program modules Required reports Timing of outputs 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 Transfer files Initiate new procedures Select testing method Cut over to new system TRAINING Select training techniques Develop training modules Identify training facilities ORGANIZATIONAL CHANGES Task redesign Job design Process design Organization structure design Reporting relationships Chapter 13 Building Information Systems 499 T h e R o l e o f E n d U s e r s 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 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 13.3 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 operational information system. These concluding steps consist of program- ming, testing, conversion, production, and maintenance. P r o g r a m m i n g 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 an application service provider, or outsourcing firms that develop custom application software for their clients (see Section 13.3). Te s t i n g Exhaustive and thorough testing must be conducted to ascertain whether the system produces the right results. Testing answers the question, “Will the system produce the desired results under known conditions?” As Chapter 5 noted, some companies are starting to use cloud computing services for this work. The amount of time needed to answer this question has been traditionally underrated in systems project planning (see Chapter 14). Testing is time- consuming: Test data must be carefully prepared, results reviewed, and correc- tions 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 activities: 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, 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 capabilities, 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 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. 500 Part Four Building and Managing Systems 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 screens maintained on a database (perhaps a PC database) that is ideally suited to this kind of application. Conversion is the process of changing from the old system to the new system. 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 functions 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 Chapter 13 Building Information Systems 501 introduced 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 organiza- tional unit, corporate headquarters might be converted first, followed by outlying operating 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 development process is very important. P r o d u c t i o n a n d M a i n t e n a n c e 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 original objectives and to decide whether any revisions or modifications are in order. In some instances, a formal postimplementation 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 requirements, or improve processing efficiency are termed maintenance. Approximately 20 percent of the time devoted to maintenance is used for debugging or correcting emergency production problems. Another 20 percent is concerned with changes in data, files, reports, hardware, or system software. But 60 percent of all maintenance work consists of making user enhancements, improving documentation, and recoding system components for greater processing efficiency. The amount of work in the third category of maintenance problems could be reduced significantly through better systems analysis and design practices. Table 13-2 summarizes the systems development activities. 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 testing Conversion Plan conversion Prepare documentation Train users and technical staff Production and maintenance Operate the system Evaluate the system Modify the system 502 Part Four Building and Managing Systems MODELING AND DESIGNING SYSTEMS: STRUCTURED AND OBJECT-ORIENTED METHODOLOGIES There are alternative methodologies for modeling and designing systems. Structured methodologies and object-oriented development are the most prominent. S t r u c t u r e d M e t h o d o l o g i e s Structured methodologies have been used to document, analyze, and design information systems since the 1970s. Structured refers to the fact that the techniques 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 distribute 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 diagram 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 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. Chapter 13 Building Information Systems 503 transformation of data. The square box represents an external entity, which is an originator or receiver of information located outside the boundaries of 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, 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 determines 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 identification 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 confirma- tion-of-registration 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 information about individual pieces of data and data groupings within a system (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 contain. 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 programs), or part of one program. O b j e c t - O r i e n t e d D e v e l o p m e n t 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 design (the structure chart). 504 Part Four Building and Managing Systems Object-oriented development addresses these issues. Object-oriented development 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 operations, or methods, associated with that object. Instead of passing data to procedures, 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 that 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 categories of similar objects, have the features of that class. Classes of objects in turn can inherit all the structure and behaviors of a more general class and then add variables and behaviors unique to each object. New classes of objects are created by choosing an 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, position, 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 showing 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 traditional structured development. During analysis, systems builders docu- ment the functional requirements of the system, specifying its most important properties and what the proposed system must do. Interactions between the system and its users are analyzed to identify objects, which include both data and processes. The object-oriented design phase describes how the objects will 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. Chapter 13 Building Information Systems 505 behave and how they will interact with one other. 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 program code, reusing classes that are already available in a library of reusable software objects and adding new ones created during the object-oriented design 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 potentially reduce the time and cost of writing software because organizations can 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. C o m p u t e r - A i d e d S o f t w a r e E n g i n e e r i n g Computer-aided software engineering (CASE)—sometimes called computer-aided systems engineering—provides software tools to automate the methodologies we have just described to reduce the amount of repetitive work the developer needs to do. CASE tools also facilitate the creation of clear documentation and the coordination of team development efforts. 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. 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 generators. In general, CASE tools try to increase productivity and quality by : FIGURE 13-8 CLASS AND INHERITANCE This figure illustrates how classes inherit the common features of their superclass. 506 Part Four Building and Managing Systems • Enforcing a standard development methodology and design discipline • Improving communication between users and technical specialists • Organizing and correlating design components and providing rapid access to them using a design repository • Automating tedious and error-prone portions of analysis and design • Automating code generation and testing and control rollout CASE tools contain features for validating design diagrams and specifica- tions. CASE tools thus support iterative design by automating revisions and changes and providing prototyping facilities. A CASE information repository stores all the information defined by the analysts during the project. The repos- itory includes data flow diagrams, structure charts, entity-relationship diagrams, data definitions, process specifications, screen and report formats, notes and comments, and test results. To be used effectively, CASE tools require organizational discipline. Every member of a development project must adhere to a common set of naming conventions and standards as well as to a development methodology. The best CASE tools enforce common methods and standards, which may discourage their use in situations where organizational discipline is lacking. 13.3 ALTERNATIVE SYSTEMS-BUILDING APPROACHES 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, 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, dividing systems development into formal stages. Systems development specialists have different opinions on how to partition the systems-building stages, but they roughly correspond to the stages of systems development that we have just described. The systems life cycle methodology maintains a very formal division of labor between end users and information systems specialists. Technical specialists, such as system 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 require a rigorous and formal requirements analysis, predefined specifica- tions, and tight controls over the system-building process. However, the systems life cycle approach can be costly, time-consuming, and inflexible. Although systems builders can go back and forth among stages in the life cycle, the systems life cycle is predominantly a “waterfall” approach Chapter 13 Building Information Systems 507 in which tasks in one stage are completed before work for the next stage begins. Activities can be repeated, but volumes of new documents must be generated and steps retraced if requirements and specifications 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 because 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 prototyp- ing replaces unplanned rework with planned iteration, with each version more accurately reflecting users’ requirements. S t e p s i n P r o t o t y p i n g Figure 13-9 shows a four-step model of the prototyping process, which consists of the following: Step 1: Identify the user’s basic requirements. The system designer (usually an information systems specialist) works with the user only long enough to capture the user’s basic information needs. Step 2: Develop an initial prototype. The system 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 prototype 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 applica- tion. Sometimes the prototype is adopted as the production version of the system. A d v a n t a g e s a n d D i s a d v a n t a g e s o f P r o t o t y p i n g Prototyping is most useful when there is some uncertainty about requirements or design solutions and 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 proto- typing encourages intense end-user involvement throughout the systems 508 Part Four Building and Managing 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 develop- ment. If the completed prototype works reasonably well, management 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 Some types of information systems can be developed by end users with little or no formal assistance from technical specialists. This phenomenon is called end-user development. A series of software tools categorized as fourth-gener- ation languages makes this possible. Fourth-generation languages are software tools that enable end users to create reports or develop software applications with minimal or no technical assistance. Some of these fourth- generation tools also enhance professional programmers’ productivity. Fourth-generation languages tend to be nonprocedural, or less procedural, than conventional programming languages. Procedural languages require specification of the sequence of steps, or procedures, that tell the computer what to do and how to do it. Nonprocedural languages need only specify what has to be accomplished rather than provide details about how to carry out the task. FIGURE 13-9 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. Chapter 13 Building Information Systems 509 Table 13-3 shows that there are seven categories of fourth-generation languages: PC software tools, query languages, report generators, graphics languages, application generators, application software packages, and very high-level programming languages. The table shows the tools ordered in terms of ease of use by nonprogramming end users. End users are most likely to work with PC software tools and query languages. Query languages are software tools that provide immediate online answers to requests for information that are not predefined, such as “Who are the highest-performing sales representa- tives?” Query languages are often tied to data management software and to database management systems (see Chapter 6). 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 system. However, fourth-generation tools still cannot replace conventional tools for some business applications because they cannot easily handle the processing of large numbers of transactions or applications with extensive procedural logic and updating requirements. TABLE 13-3 CATEGORIES OF FOURTH-GENERATION LANGUAGES FOURTH-GENERATION TOOL DESCRIPTION EXAMPLE PC software tools General-purpose application software packages WordPerfect for PCs. Microsoft Access Query language Languages for retrieving data stored in databases or SQL files. Capable of supporting requests for information that are not predefined. Report generator Extract data from files or databases to create Crystal Reports customized reports in a wide range of formats not routinely produced by an information system. Generally provide more control over the way data are formatted, organized, and displayed than query languages. Graphics language Retrieve data from files or databases and display SAS/GRAPH them in graphic format. Some graphics software Systat can perform arithmetic or logical operations on data as well. Application generator Contain preprogrammed modules that can generate WebFOCUS entire applications, including Web sites, greatly QuickBase speeding development. A user can specify what needs to be done, and the application generator will create the appropriate program code for input, validation, update, processing, and reporting. Application software Software programs sold or leased by commercial Oracle PeopleSoft HCM package vendors that eliminate the need for custom-written, mySAP ERP in-house software. Very high-level Generate program code with fewer instructions APL programming than conventional languages, such as COBOL or Nomad2 language FORTRAN. Designed primarily as productivity tools for professional programmers. Oriented toward end users Oriented toward IS professionals 510 Part Four Building and Managing Systems 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 methodol- ogy, testing and documentation may be inadequate. Control over data can be lost in systems outside the traditional information systems department. To help organizations maximize the benefits of end-user applications development, management 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 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 a soft- ware service provider, they can purchase a software package from a commer- cial vendor, or they can have a custom application developed by an outside out- sourcing firm. A p p l i c a t i o n S o f t w a r e P a c k a g e s During the past several decades, many systems have been built on an applica- tion software package foundation. Many applications are common to all business organizations—for example, payroll, accounts receivable, general ledger, or inventory control. For such universal functions with standard processes that do not change a great deal over time, a generalized system will fulfill the requirements of many organizations. If a software package 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, predesigned, pretested software programs from the package. Package vendors supply much of the ongoing maintenance and support for the system, including enhancements to keep the system in line with ongoing technical and business developments. If an organization has unique requirements that the package does not address, many packages include capabilities for customization. Customization features allow a software package to be modified to meet an organization’s unique requirements without destroying the integrity of the packaged software. 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. When a system is developed using an application software package, systems analysis will include a package evaluation effort. The most important evalua- tion criteria are the functions provided by the package, flexibility, user friendli- ness, hardware and software resources, database requirements, installation and maintenance efforts, documentation, vendor quality, and cost. The package evaluation process often is based on a Request for Proposal (RFP), which is a detailed list of questions submitted to packaged-software vendors. When a software package is selected, the organization no longer has total control over the system design process. Instead of tailoring the system design specifications directly to user requirements, the design effort will consist of try- ing to mold user requirements to conform to the features of the package. If the organization’s requirements conflict with the way the package works and the Chapter 13 Building Information Systems 511 package cannot be customized, the organization will have to adapt to the pack- age and change its procedures. The Interactive Session on Technology describes the experience of Zimbra, a software company that selected a software package solution for its new market- ing automation system. As you read this case, be aware of the management, technology, and organization issues that had to be addressed when the com- pany selected a new software package solution. O u t s o u r c i n g 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 SaaS providers, which we described in Chapter 5, are one form of outsourcing. Subscribing companies would 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 system on its own computers. The outsourcing vendor might be domestic or in another country. 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 software package, 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 tends to be much more cost-driven. A skilled programmer in India or Russia earns about USD $9,000 per year, compared to $65,000 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 faraway locations. In addition to cost savings, many offshore outsourc- ing 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. Nevertheless, there is a very strong chance that at some point in your career, you’ll be working with offshore outsourcers or global teams. Your firm is most likely to benefit from outsourcing if it takes the time to evaluate all the risks and to make sure outsourcing is appropriate for its particular needs. Any company that outsources its applications must thoroughly understand the project, including its requirements, method of implementation, anticipated benefits, cost components, and metrics for measuring performance. Many firms underestimate costs for identifying and evaluating vendors of information 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 obligations. Companies will need to allocate resources for documenting requirements, sending out RFPs, 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. 512 Part Four Building and Managing Systems I N T E R A C T I V E S E S S I O N : T E C H N O L O G Y Zimbra is a software company whose flagship product is its Zimbra Collaboration Suite (ZCS), an open source messaging and communications soft- ware package, that relies heavily on Ajax to provide a variety of business functions. Purchased by Yahoo in 2007, the company now has accumulated 50 million paid mailboxes. In addition to e-mail, ZCS combines contact lists, a shared calendar, instant messaging, hosted documents, search, and VoIP into one pack- age, and can be used from any mobile Web browser. As an open source software company, Zimbra uses viral marketing models, word-of-mouth marketing, and open standards to grow its business. Customers are as free to criticize Zimbra and ZCS as they are to praise the company and its flagship offering. For the most part, this strategy has proven very successful for the company thus far. Zimbra makes sales via its Web site and offers both free and commercial versions. Zimbra’s business model hinges on driving large numbers of visitors to its Web site, allowing them to try the most basic version of the software for free, and then persuading them to purchase one of its more full-featured commercial versions. Zimbra has over 200,000 visitors to its Web site each week. Zimbra’s sales process begins when one of these 200,000 weekly visitors downloads a 60-day trial version. Salespeople try to identify which people using the trial version are most likely to upgrade to one of its commercial versions and then contact them via e-mail and telephone to try to close the sale. To make this work, Zimbra’s sales team needs to be able to weed out the interested buyers from its huge volume of Web visitors. As Greg Armanini, Zimbra’s director of marketing, pointed out, the sales team will be overwhelmed with a large num- ber of unqualified leads unless sales and marketing automation tools are able to focus sales reps only on the leads that will generate revenue. Zimbra uses its Web site to track visitor activity and tie it to sales lead information in its Salesforce.com customer relationship management (CRM) system. Identifying sales prospects that visit the Web site regularly and alerting sales reps when those prospects are visiting the site helps the sales team select which prospects to contact by telephone and when to call them. ZIMBRA ZOOMS AHEAD WITH ONEVIEW Zimbra initially used marketing automation software from Eloqua, which had a large number of features but was too complicated for both marketing and sales staff to use. For example, the Eloqua system required salespeople to code conditional logic for any data field containing data they wanted to collect. Though doable, this task was a poor use of Zimbra’s sales staff time. Eloqua only worked with the Microsoft Internet Explorer Web browser, while two-thirds of Zimbra’s sales department used Mozilla Firefox. And Eloqua was expensive. Zimbra could only afford its entry-level package, which provided access to only five salespeople and one marketing person. Zimbra did not need many of Eloqua’s features, but it did need a more streamlined solution that focused on the core areas of its marketing strategy: lead generation, e-mail marketing, and Web analyt- ics. The new marketing automation system had to be easy to install and maintain. Many available options required several well-trained administrators, and Zimbra could not afford to allocate even one employee for this purpose. After examining several software products, Zimbra choose OneView, an on-demand marketing automa- tion solution from LoopFuse, a Georgia-based software company that specializes in sales and marketing automation. OneView was more highly targeted than the Eloqua software. Not only that, but much of OneView consists of automated processes that allowed Zimbra to quickly implement the solution and to maintain it without dedicating someone to the task full-time. The core functions of OneView include Web site visitor tracking, automated marketing program communication, customer activity alerts, and CRM integration. Zimbra was also pleased with LoopFuse’s conve- nient pricing options, including its “unlimited seating” and “pay-per-use” options, which allowed Zimbra to pay for only the services it needed for as many users as it required. Because of these options, Zimbra was able to deploy LoopFuse across almost its entire 30-person sales force. Other benefits of OneView include easy integra- tion with Salesforce.com, Zimbra’s preferred CRM solution, simplified reporting processes, and the ability to manage a larger number of leads thanks to having more salespeople and time to devote to Chapter 13 Building Information Systems 513 C A S E S T U D Y Q U E S T I O N S 1. Describe the steps in Zimbra’s sales process. How well did its old marketing automation system support that process? What problems did it create? What was the business impact of these problems? 2. List and describe Zimbra’s requirements for a new marketing software package. If you were preparing the RFP for Zimbra’s new system, what questions would you ask? 3. How did the new marketing system change the way Zimbra ran its business? How successful was it? demand generation. OneView works with multiple Web browsers, including Firefox. The old solution offered so many ways to handle and organize data that generating data reports could take a long time. With OneView’s simplified reporting processes, the sales staff can generate reports in a fraction of the time. Has OneView improved Zimbra’s bottom line? OneView reduced the amount of time Zimbra spent Visit the LoopFuse Web site and then answer the following questions: 1. List and describe each of the major features of LoopFuse OneView. 2. Select two of these features and describe how they would help Zimbra’s sales team. using and maintaining its marketing system by 50 percent. Zimbra reports that since changing vendors, it has witnessed a jump in its close rate on qualified sales leads from 10 to 15 percent, a huge increase. The answer appears to be a resounding “yes.” Sources: Jessica Tsai, “Less is More,” Customer Relationship Management, August 2009, www.destinationCRM.com; and “LoopFuse OneView helps Zimbra Raise Sales and Marketing Efficiency by 50 Percent,” www.loopfuse.com, May 2009. M I S I N A C T I O N Outsourcing offshore incurs additional costs for coping with cultural differences that drain productivity and dealing with human resources issues, such as terminating or relocating domestic employees. All of these hidden costs undercut some of the anticipated benefits from outsourcing. Firms should be especially cautious when using an outsourcer to develop or to operate applica- tions that give it some type of competitive advantage. Figure 13-10 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 by an extra 15 to 57 percent. Even with these extra costs, many firms will benefit from offshore outsourcing if they manage the work well. Under the worst-case scenario, a firm would still save about 15 percent. 13.4 APPLICATION DEVELOPMENT FOR THE DIGITAL FIRM In the digital firm environment, organizations need to be able to add, change, and retire their technology capabilities very rapidly to respond to new opportu- www.destinationCRM.com www.loopfuse.com 514 Part Four Building and Managing Systems nities. Companies are starting to use shorter, more informal development processes that provide fast solutions. In addition to using software packages and external service providers, businesses are relying more heavily on fast-cycle techniques such as rapid application development, joint application design, agile development, and reusable standardized software components that can be assembled into a complete set of services for e-commerce and e- business. RAPID APPLICATION DEVELOPMENT (RAD) Object-oriented software tools, reusable software, prototyping, and fourth- generation language tools are helping systems builders create working systems much more rapidly than they could using traditional systems-building methods and software tools. The term rapid application development (RAD) is used to describe this process of creating workable systems in a very short period of time. RAD can include the use of visual programming and other tools for building graphical user interfaces, iterative prototyping of key system elements, the 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 initial systems design. JAD brings end users and information systems specialists together in an interactive session to discuss the system’s design. Properly prepared 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 breaking a large project into a series of small subprojects that are completed in short periods of time using iteration and continuous feedback. Each FIGURE 13-10 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 under the best-case scenario. In the worst-case scenario, where there is a dramatic drop in productivity along with exceptionally high transition 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. Chapter 13 Building Information Systems 515 mini-project is worked on by a team as if it were a complete project, including planning, requirements analysis, design, coding, testing, and documentation. Improvement or addition of new functionality takes place within the next iteration as developers clarify requirements. This helps to minimize the overall risk, and allows the project to adapt to changes more quickly. Agile methods emphasize face-to-face communication over written documents, encouraging people to collaborate and make decisions quickly and effectively. COMPONENT-BASED DEVELOPMENT AND WEB SERVICES We have already described some of the benefits of object-oriented development for building systems that can respond to rapidly changing business environ- ments, 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 capability 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 software 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 components for shopping carts, user authentication, search engines, and catalogs with pieces of software for their own unique business requirements. W e b S e r v i c e s a n d S e r v i c e - O r i e n t e d C o m p u t i n g Chapter 5 introduced Web services as loosely coupled, reusable software compo- nents delivered using Extensible Markup Language (XML) and other open pro- tocols and standards that enable one application to communicate with another with no custom programming required to share data and services. In addition to supporting 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 proprietary 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 significant cost savings in systems building while opening up new opportuni- ties for collaboration with other companies. 516 Part Four Building and Managing Systems 13.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience analyzing business process problems, designing and building a customer system for auto sales, and redesigning business processes for a company that wants to purchase goods over the Web. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. A customer purchasing a Sears Roebuck appliance, such as a washing machine, can also purchase a three-year service contract for an additional fee. The con- tract 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 an appliance repaired, such as a washing machine, he or she calls the Sears Repairs & Parts department to schedule an appointment. The depart- ment 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 is carrying the part with him 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 for the first repair visit to occur, another two weeks to receive the ordered part, and another week for the second repair visit to occur in which the ordered part is installed. • Diagram the existing process. • What is the impact of the existing process on Sears’ 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 new improved process. 2. 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 production depart- ment 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 meeting 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 Chapter 13 Building Information Systems 517 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. I m p r o v i n g D e c i s i o n M a k i n g : U s i n g D a t a b a s e S o f t w a r e t o D e s i g n a C u s t o m e r S y s t e m f o r A u t o S a l e s Software skills: Database design, querying, reporting, and forms Business skills: Sales lead and customer analysis 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. The company advertises in local newspapers and is also listed as an authorized dealer on the Subaru Web site and other major auto-buyer Web sites. The com- pany benefits from a good local word-of-mouth reputation and name recogni- tion and is a leading source of information for Subaru vehicles in the Portland, Oregon, area. When a prospective customer enters the showroom, he or she is greeted by an Ace sales representative. The sales representative manually fills out a form with information such as the prospective customer’s name, address, telephone number, date of visit, and make and model of the vehicle in which the customer is interested. The representative also asks where the prospect heard about Ace—whether it was from a newspaper ad, the Web, or word of mouth—and this information is noted on the form also. If the customer decides to purchase an auto, the dealer fills out a bill of sale form. 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 greatest 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 newspa- per 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 implemented using PC database management software. The company has a PC with Internet access and the full suite of Microsoft Office desktop productivity tools. Then use database software to develop a sim- ple system solution. Your systems analysis report should include the following: • Description of the problem and its organizational and business impact • Proposed solution, solution objectives, and solution feasibility • Costs and benefits of the solution you have selected • Information requirements to be addressed by the solution • Management, organization, and technology issues to be addressed by the solution, including changes in business processes On the basis of the requirements you have identified, design the database and populate it with at least 10 records per table. Consider whether you can use or modify Ace’s existing customer database in your design. You can find this 518 Part Four Building and Managing Systems database on the myMISlab. Print out the database design. Then use the system you have created to generate queries and reports that would be most useful to management. Create several prototype data input forms for the system and review them with your instructor. Then revise the prototypes. A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : R e d e s i g n i n g B u s i n e s s P r o c e s s e s f o r W e b P r o c u r e m e n t Software skills: Web browser software Business skills: Procurement This project requires you to rethink how a business should be redesigned when it moves to the Web. You are in charge of purchasing for your firm and would like to use the Grainger (www.grainger.com) B2B e-commerce site for this purpose. Find out how to place an order for painting supplies by exploring the Catalog, Order Form, and Repair Parts Order capabilities of this site. Do not register at the site. Describe all the steps your firm would need to take to use this system to place orders online for 30 gallons of paint thinner. Include a diagram of what you think your firm’s business process for purchasing should be and the pieces of information required by this process. In a traditional purchase process, whoever is responsible for making the purchase fills out a requisition form and submits it for approval based on the company’s business rules. When the requisition is approved, a purchase order with a unique purchase order identification number is sent to the supplier. The purchaser might want to browse supplier catalogs to compare prices and features before placing the order. The purchaser might also want to determine whether the items to be purchased are available. If the purchasing firm were an approved customer, that company would be granted credit to make the purchase and would be billed for the total cost of the items purchased and shipped after the order was shipped. Alternatively, the purchasing company might have to pay for the order in advance or pay for the order using a credit card. Multiple payment options might be possible. How might this process have to change to make purchases electronically from the Grainger site? LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter: 1. Unified Modeling Language (UML) 2. A Primer on Business Process Design and Documentation 3. A Primer on Business Process Management www.grainger.com Chapter 13 Building Information Systems 519 Review Summary 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 (a) automation, (b) rationalization of procedures, (c) business process redesign, and (d) paradigm shift, with far-reaching changes carrying the greatest risks and rewards. Many organizations are using business process management to redesign work flows and business processes in the hope of achieving dramatic productivity break- throughs. Business process management is also useful for promoting, total quality management (TQM), six sigma, and other initiatives for incremental process improvement. 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 problems 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 organizational components fit together. 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 processes 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. 4. What are the alternative methods for building information systems? The oldest method for building systems is the systems life cycle, which requires that information 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 encour- ages 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. Using a software package reduces the amount of design, programming, testing, installation, and maintenance work required to build a system. Application software packages 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 fourth-generation software tools. However, end-user development may 520 Part Four Building and Managing Systems 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. 5. What are new approaches for system building in the digital firm era? Companies are turning to rapid application design, joint application design (JAD), agile develop- ment, and reusable software components to accelerate the systems development process. Rapid application development (RAD) uses object-oriented software, visual programming, prototyping, and fourth-generation 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 con- tinuous feedback. Component-based development expedites application development by grouping objects into suites of software components that can be combined to create large-scale business appli- cations. Web services provide a common set of standards that enable organizations to link their sys- tems regardless of their technology platform through standard plug- and-play architecture Review Questions 1. How does building new systems produce organiza- tional change? • Describe each of the four kinds of organiza- tional change that can be promoted with information technology. Key Terms Acceptance testing, 499 Agile development, 514 Automation, 489 Business process management, 491 Business process redesign, 490 Component-based development, 515 Computer-aided software engineering (CASE), 505 Conversion, 500 Customization, 510 Data flow diagram (DFD), 502 Direct cutover strategy, 500 Documentation, 501 End-user development, 508 End-user interface, 507 Feasibility study, 497 Fourth-generation languages, 508 Information requirements, 497 Iterative, 507 Joint application design (JAD), 514 Maintenance, 501 Object, 504 Object-oriented development, 504 Offshore outsourcing, 511 Paradigm shift, 490 Parallel strategy, 500 Phased approach strategy, 500 Pilot study strategy, 500 Postimplementation audit, 501 Process specifications, 503 Production, 501 Programming, 499 Prototype, 507 Prototyping, 507 Query languages, 509 Rapid application development (RAD), 514 Rationalization of procedures, 490 Request for Proposal (RFP), 510 Six sigma, 490 Structure chart, 503 Structured, 502 Systems analysis, 496 Systems design, 498 Systems development, 494 Systems life cycle, 506 System testing, 499 Test plan, 500 Testing, 499 Total quality management (TQM), 490 Unit testing, 499 • Define business process management and describe the steps required to carry it out. • Explain how information systems support process changes that promote quality in an organization. Chapter 13 Building Information Systems 521 Discussion Questions 1. Why is selecting a systems development approach an important business decision? Who should participate in the selection process? 2. Some have said that the best way to reduce systems development costs is to use application software packages or fourth-generation tools. Do you agree? Why or why not? 3. Why is is so important to understand how a business process works when trying to develop a new information system? 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 explain 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 systems development. 3. What are the principal methodologies for model- ing and designing systems? • Compare object-oriented and traditional structured approaches for modeling and designing systems. 4. What are the alternative methods for building information systems? • Define the traditional systems life cycle. Describe each of its steps and its advantages and disadvantages for systems building. Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. • 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 information systems. 5. What are new approaches for system building in the digital firm era? • Define rapid application development (RAD) and agile development 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. Collaboration and Teamwork: Preparing Web Site Design Specifications If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collab- oratively on project documents. Try to use Google Docs to develop a presentation of your findings for the class. With three or four of your classmates, select a system described in this text that uses the Web. Review the Web site for the system you select. Use what you have learned from the Web site and the description in this book to prepare a report describing some of the design specifications for the system you select. A r e E l e c t r o n i c M e d i c a l Re c o r d s a C u r e f o r H e a l t h C a r e ? CASE STUDY reating more efficient health care systems in the United States has been a pressing medical, social, and political issue for decades. Despite the fact that 15 percent of Americans are uninsured and another 20 percent on top of that are underinsured, or unable to pay for necessary health care, the U.S. spends more money per person on health care than any other country in the world. In 2009, the United States spent $2.5 trillion on health care, which was 17.6 percent of its gross domestic product (GDP). Approximately 12 percent of that figure was spent on administrative costs, most of which involve the upkeep of medical records. The astronomical health care spending figures in the United States are inflated by inefficiency, errors, and fraud. The good news is that information technology may present an opportunity for health care providers to save money and provide better care. Health care providers have begun to create electronic medical record (EMR) systems at the urg- ing of the government in an effort to eliminate much of the inefficiency inherent in paper-based record- keeping. Many insurance companies are also lending their support to the development of EMR systems. An electronic medical record system contains all of a person’s vital medical data, including personal information, a full medical history, test results, diagnoses, treatments, prescription medications, and the effect of those treatments. A physician would be able to immediately and directly access needed information from the EMR without having to pore through paper files. If the record holder went to the hospital, the records and results of any tests performed at that point would be immediately available online. Many experts believe that electronic records will reduce medical errors and improve care, create less paperwork, and provide quicker service, all of which will lead to dramatic savings in the future: an estimated $77.8 billion per year. The government’s short-term goal is for all health care providers in the United States to have functional EMR systems in place that meet a set of basic functional criteria by the year 2015. Its long-term goal is to have a fully functional nationwide electronic medical recordkeep- ing network. Evidence of EMR systems in use today suggests that these benefits are possible for doctors and hospi- tals, but the challenges of setting up individual sys- tems, let alone a nationwide system, are daunting. Even with stimulus money, many smaller practices are finding it difficult to afford the costs and time commitment for upgrading their recordkeeping sys- tems. In 2010, 80 percent of physicians and 90 per- cent of hospitals in the United States are still using paper medical records. It’s also unclear whether the systems being devel- oped and implemented in 2010 will be compatible with one another in 2015 and beyond, jeopardizing the goal of a national system where all health care providers can share information. And there are many other smaller obstacles that health care providers, health IT developers, and insurance com- panies need to overcome for electronic health records to catch on nationally, including patients’ privacy concerns, data quality issues, and resistance from health care workers. The government plans to pay out the stimulus money provided by the American Recovery and Reinvestment Act to health care providers in two ways. First, $2 billion will be provided up front to hospitals and physicians to help set up electronic records. Another $17 billion will also be available as a reward for providers that successfully implement electronic records by 2015. The stimulus specifies that to qualify for these rewards, providers must demonstrate “meaningful use” of electronic health record systems. The bill defines this as the successful implementation of certified e-record products, the ability to write at least 40 percent of their total prescriptions electronically, and the ability to exchange and report data to government health agencies. Individual practices can receive up to $64,000 for successful implementations, and hospitals can make as much as $11.5 million. But in addition to the reward of stimulus money, the government will also assess penalties on practices that fail to comply with the new electronic recordkeeping standards. Providers that cannot meet the standards by 2015 will have their Medicare and Medicaid reimbursements reduced by 1 percent per year until 2018, with further, more stringent penalties coming beyond that time if a sufficiently C 522 Part Four Building and Managing Systems low number of providers are using electronic health records. Electronic medical recordkeeping systems typically cost around $30,000 to $50,000 per doctor. While the stimulus money should eventually be enough to cover that cost, only a small amount of it is available up front. For many providers, especially medical practices with fewer than four doctors and hospitals with fewer than 50 beds, this creates a significant problem. The expenditure of overhauling recordkeeping systems represents a significant increase in the short-term budgets and workloads of smaller health care providers. Smaller providers are also less likely to have started digitizing their records compared to their larger counterparts. Many smaller practices and hospitals have balked at the transition to EMR systems for these reasons, but the evidence of these systems in action suggests that the move may be well worth the effort. The most prominent example of electronic medical records in use today is the Veterans Affairs (VA) system of doctors and hospitals. The VA system switched to digital records years ago, and far exceeds the private sector and Medicare in quality of preven- tive services and chronic care. The 1,400 VA facilities use VistA, record-sharing software developed by the government that allows doctors and nurses to share patient histories. A typical VistA record lists a patient’s health problems, weight and blood pressure since beginning treatment at the VA, images of the patient’s X-rays, lab results, and other test results, lists of medications, and reminders about upcoming appointments. But VistA is more than a database; it also has many features that improve quality of care. For example, nurses scan tags for patients and medica- tions to ensure that the correct dosages of medicines are going to the correct patients. This feature reduces medication errors, which is one of the most common and costly types of medical errors, and speeds up treatment as well. The system also generates automatic warnings based on specified criteria. It can notify providers if a patient’s blood pressure goes over a certain level or if a patient is overdue for a regularly scheduled procedure like a flu shot or a cancer screening. Devices that measure patients’ vital signs can automatically transmit their results into the VistA system, which automatically updates doctors at the first sign of trouble. The results suggest that electronic records offer significant advantages to hospitals and patients alike. The 40,000 patients in the VA’s in-home monitoring program reduced their hospital admissions by 25 percent and the length of their hospital stays by 20 percent. More patients receive necessary periodic treatments under VistA (from 27 percent to 83 per- cent for flu vaccines and from 34 percent to 84 per- cent for colon cancer screenings). Patients also report that the process of being treated at the VA is effortless compared to paper- based providers. That’s because instant processing of claims and payments are among the benefits of EMR systems. Insurance companies traditionally pay claims about two weeks after receiving them, despite quickly processing them soon after they are received. Additionally, today’s paper-based health care providers must assign the appropriate diagnostic codes and procedure codes to claims. Because there are thousands of these codes, the process is even slower, and most providers employ someone solely to perform this task. Electronic systems hold the promise of immediate processing, or real-time claims adjudication, just like when you pay using a credit card—claim data would be sent immediately, and diagnostic and procedure code information are auto- matically entered. VistA is far from the only option for doctors and hospitals starting the process of updating their records. Many health IT companies are eagerly awaiting the coming spike in demand for their EMR products and have developed a variety of different health record structures. Humana, Aetna, and other health insurance companies are helping to defray the cost of setting up EMR systems for some doctors and hospitals. Humana has teamed up with health IT company Athenahealth to subsidize EMR systems for approximately 100 primary care practices within Humana’s network. Humana pays most of the bill and offers further rewards to practices that meet governmental performance standards. Aetna and IBM, on the other hand, have launched a cloud- based system that pools patient records and is licensed to doctors both inside and outside of Aetna. There are two problems with the plethora of options available to health care providers. First, there are likely to be many issues with the sharing of medical data between different systems. While the majority of EMR systems are likely to satisfy the specified criteria of reporting data electronically to governmental agencies, they may not be able to report the same data to one another, a key require- ment for a nation-wide system. Many fledgling systems are designed using VistA as a guide, but many are not. Even if medical data are easily shared, it’s another problem altogether for doctors to actually locate the information they need quickly and easily. Chapter 13 Building Information Systems 523 Many EMR systems have no capacity to drill down for more specific data, forcing doctors to wade through large repositories of information to find the one piece of data they need. EMR vendors are devel- oping search engine technology intended for use in medical records. Only after EMR systems become more widespread will the extent of the problems with data sharing and accessibility become clearer. The second problem is that there is a potential conflict of interest for the insurance companies involved in the creation of health record systems. Insurers are often accused of seeking ways to avoid providing care for sick people. While most insurers are adamant that only doctors and patients will be able to access data in these systems, many prospective patients are skeptical. In 2009, a poll conducted for National Public Radio found that 59 percent of respondents said they doubted the confidentiality of online medical records; even if the systems are secure, the perception of poor privacy CASE STUDY QUESTIONS 1. What management, organization, and technology factors are responsible for the difficulties in building electronic medical record systems? Explain your answer. 2. What stages of system building will be the most difficult when creating electronic medical record systems? Explain your answer. 3. What is the business and social impact of not digitizing medical records (to individual physi- cians, hospitals, insurers, patients)? 4. What are the business and social benefits of digitizing medical recordkeeping? 5. Name two important information requirements for physicians, two for patients, and two for hospitals that should be addressed by electronic medical records systems. 6. Diagram the “as-is” and “to-be” processes for prescribing a medication for a patient before and after an EMR system is implemented. could affect the success of the system and quality of care provided. One in eight Americans have skipped doctor visits or regular tests, asked a doctor to change a test result, or paid privately for a test, motivated mostly by privacy concerns. A poorly designed EMR network would amplify these concerns. Sources: Katherine Gammon, “Connecting Electronic Medical Records,” Technology Review, August 9, 2010; Avery Johnson, “Doctors Get Dose of Technology From Insurers,” The Wall Street Journal, August 8, 2010; David Talbot, “The Doctor Will Record Your Data Now,” Technology Review, July 23, 2010; Tony Fisher and Joyce Norris-Montanari, “The Current State of Data in Health Care,” Information-Management.com, June 15, 2010; Laura Landro, “Breaking Down the Barriers,” The Wall Street Journal, April 13, 2010; Jacob Goldstein, “Can Technology Cure Health Care?”, The Wall Street Journal, April 13, 2010; Deborah C. Peel, “Your Medical Records Aren’t Secure,” The Wall Street Journal, March 23, 2010; Jane E. Brody, “Medical Paper Trail Takes Electronic Turn,” The New York Times, February 23, 2010; and Laura Landro, “An Affordable Fix for Modernizing Medical Records,” The Wall Street Journal, April 30, 2009. 524 Part Four Building and Managing Systems !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What are the objectives of project management and why is it so essential in developing information systems? 2. What methods can be used for selecting and evaluating informa- tion systems projects and aligning them with the firm’s business goals? 3. How can firms assess the business value of information systems projects? 4. What are the principal risk factors in information systems projects? 5. What strategies are useful for managing project risk and system implementation? CHAPTER OUTLINE 14.1 THE IMPORTANCE OF PROJECT MANAGEMENT Runaway Projects and System Failure Project Management Objectives 14.2 SELECTING PROJECTS Management Structure for Information Systems Projects Linking Systems Projects to the Business Plan Critical Success Factors Portfolio Analysis Scoring Models 14.3 ESTABLISHING THE BUSINESS VALUE OF INFORMATION SYSTEMS Information System Costs and Benefits Real Options Pricing Models Limitations of Financial Models 14.4 MANAGING PROJECT RISK Dimensions of Project Risk Change Management and the Concept of Implementation Controlling Risk Factors Designing for the Organization Project Management Software Tools 14.5 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using Spreadsheet Software for Capital Budgeting for a New CAD System Improving Decision Making: Using Web Tools for Buying and Financing a Home LEARNING TRACK MODULES Capital Budgeting Methods for Information System Investments Information Technology Investments and Productivity Enterprise Analysis (Business Systems Planning) Chapter 14 Managing Projects Interactive Sessions: DST Systems Scores with Scrum and Application Life Cycle Management Motorola Turns to Project Portfolio Management 527 he Coca-Cola Company is the world’s leading owner and marketer of nonalcoholic beverage brands and the world’s largest manufacturer, distributor, and marketer of concentrates and syrups used to produce nonalcoholic beverages. Coke sells its con- centrates to independent bottlers in 200 countries. Arguably, Coke is the most valuable brand in the world. In fact, Coke owns 12 brands that sell more than $1 billion a year. It’s corporate branding handle in 2010 is “Open happiness.” Coke revenues were $30.9 billion in 2009. Coca-Cola Bottling Co. Consolidated (“Coke Bottling”) is the second largest Coca-Cola bottler in the United States. The company operates in 11 states in the Southeast and has revenues of $1.5 billion. The company has hundreds of projects under management at any point in time. Coke Bottling had been using an older project management software tool to coordinate these projects, but by 2010 it lacked many of the features that good project managers want. Not all projects in the company used the system, and information about these projects was spread across many legacy systems. The software could not track cost elements, such as labor and material cost, in one repository. Senior management wanted cost details and capital require- ments for projects that could not be delivered. Project teams would typically need to go back and ask senior management for more money because projects routinely exceeded their budgets. Time and money were wasted gathering data from several locations and performing ad hoc analyses on spreadsheets. The software was unable to report on compliance of projects with various federal laws, including Sarbanes-Oxley. Management wanted a new project management tool that could track all projects in the firm, utilize existing SAP databases and reporting tools, and integrate with its Microsoft Server environment. Coke Bottling chose the Microsoft Office Enterprise Project Management (EPM) Solution, which includes Microsoft Office Project Portfolio Server 2007, Microsoft Office Project Server 2007, and Microsoft Office Project Professional 2007. The hope was to simplify the firm’s software footprint to consist primarily of SAP and Microsoft products and thereby reduce maintenance costs. The EPM is integrated with Windows SharePoint Services so that users can update project information, manage documents, and track risks and issues using common SharePoint sites, known as project workspaces. For training employees and help implementing the system, Coke Bottling hired Project Solutions Group, a consulting and training firm in Marlborough, Massachusetts. .COCA-COLA: “OPENING HAPPINESS” WITH A NEW PROJECT MANAGEMENT SYSTEM T A number of benefits have flowed from this choice of project management software. For the first time, the company has a centralized repository of the cash flow and capital requirements of projects. This helps reduce its financing costs. With the EPM solution, managers can request the amount of capital they need with a high degree of accuracy from the start of a project. The firm can manage its human resources and schedules more effectively because it now knows who is working on which projects. Based on the 528 Part Four Building and Managing Systems number of hours people spend on tasks, resource managers can see whether they have the right spread of resources, and they can take decisive and informed action by seeing where people are spending their time. The firm also implemented a Project Gate methodology that consists of five gates: qualify need, define, design, build/test, and deploy/measure. In the past, managers just used checklists to manage projects, and there was no consistency across projects or managers. The gate methodology ensures all projects go through the same management process. To ensure enterprise-wide implementa- tion of its new EPM solution, Coke Bottling created a new project management office to bring consistency and structure to all the firm’s projects. Sources: Microsoft Corporation, “Microsoft Case Studies. Coca-Cola Bottling Co. Improves Project Cost Reporting,” August 2009, www.microsoft.com/casestudies, accessed November 5, 2010; Microsoft Corporation, “Microsoft Enterprise Project Management (EPM) Solution.” www.microsoft.com/project., accessed November 5, 2010; and The Coca-Cola Company, Form 10K for the Fiscal Year Ending December 31, 2009, filed with the Securities and Exchange Commission, February 26, 2010. One of the principal challenges posed by information systems is ensuringthey deliver genuine business benefits. Many information systems pro- jects don’t succeed because organizations incorrectly assess their business value or because firms fail to manage the organizational change surrounding the introduction of new technology. Coke Bottling’s management knew this when it implemented its enterprise project management system. The new system involved an enterprise-wide change in management and organizational behavior, in addition to careful introduction of an entire set of software tools. Coke Bottling succeeded in this project because it took a balanced view of the management, organizational, and technical changes needed. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Coke Bottling manages several hundred projects each year. The existing software was unable to account for costs, predict financial needs, comply with federal regulations and due diligence requests, and allocate resources efficiently. This increased the likelihood of project failure, and raised the costs of company operations. The company was able to improve project inventory man- agement by implementing an enterprise-wide project management software tool that was tightly integrated with its existing enterprise database environment and its desktop software. Management was wise enough to also change the organiza- tion by creating a Project Management Office, and develop a new set of manage- ment practices to ensure the software performed up to expectations. www.microsoft.com/casestudies www.microsoft.com/project 14.1 THE IMPORTANCE OF PROJECT MANAGEMENT here 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 essential 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 underestimated by one-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). The Standish Group consultancy, which monitors IT project success rates, found that only 29 percent of all technology investments were completed on time, on budget, and with all features and functions originally specified (Levinson, 2006). A 2007 Tata Consultancy Services study of IT effectiveness reported sim- ilar findings (Blair, 2010). Between 30 and 40 percent of all software projects are “runaway” projects that far exceed the original schedule and budget projections and fail to perform as originally specified. 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 they are not used at all. Users often have to develop parallel manual systems to make these systems work. The actual design of the system may fail to capture essential business requirements 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. Chapter 14 Managing Projects 529 T 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 most likely is technically inferior and may not be able to demonstrate any benefits to the organization. 530 Part Four Building and Managing Systems 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. Web sites 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 inconsistency. The information in certain fields may be erroneous or ambigu- ous, 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 business objective. Information systems projects include the development of new information systems, enhancement of existing systems, or upgrade or replacement 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, assessing risk, estimating resources required to accomplish the work, organizing the work, acquiring human and material resources, assigning tasks, directing activities, controlling project execution, reporting progress, and analyzing the results. As in other areas of business, project management for information systems 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 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, distrib- ution, 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 management 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 management 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 projects usually boils down to improved organizational performance and decision making. Quality also considers the accuracy and timeliness of information produced by the new system and ease of use. Chapter 14 Managing Projects 531 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 prevent- ing the project from being completed altogether. Section 14.3 describes the most important risk factors for information systems. 14.2 SELECTING PROJECTS Companies typically are presented with many different projects for solving problems and improving performance. There are far more ideas for systems projects than there are resources. Firms will need to select from this group the projects that promise the greatest benefit to the business. Obviously, the firm’s overall business strategy should drive project selection. 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 information system steering committee. The corporate strategic planning group is responsible for developing the firm’s strategic plan, which may require the development of new systems. The information systems steering committee is the senior management group with responsibility for systems development and operation. It is composed of 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. 532 Part Four Building and Managing Systems department heads from both end-user and information systems areas. The steer- ing committee reviews and approves plans for systems in all divisions, seeks to coordinate and integrate systems, and occasionally becomes involved in select- ing specific information systems projects. The project team is supervised by a project management group composed of information systems managers and end-user managers responsible for oversee- ing several specific information systems projects. The project team is directly responsible for the 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 current systems/situation, new developments to consider, the management strategy, the implementation plan, and the budget (see Table 14-1). 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 concerning hardware acquisition; telecommunications; centralization/decen- tralization of authority, data, and hardware; and required organizational change. Organizational changes are also usually described, including manage- ment and employee training requirements, recruiting efforts, changes in busi- ness processes, and changes in authority, structure, or management practice. In order to plan effectively, firms will need to inventory and document all of their information system applications and IT infrastructure components. For projects in which benefits involve improved decision making, managers should try to identify the decision 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). CRITICAL SUCCESS FACTORS To develop an effective information systems plan, the organization must have a clear understanding of both its long- and short-term information requirements. The strategic analysis, or critical success factors, approach argues that an organization’s information requirements are determined by a small number of critical success factors (CSFs) of managers. If these goals can be attained, success of the firm or organization is assured (Rockart, 1979; Rockart and Treacy, 1982). CSFs are shaped by the industry, the firm, the manager, and the broader environment. For example, CSFs for the automobile industry might include styling, quality, and cost to meet the goals of increasing market share and raising profits. New information systems should focus on providing infor- mation that helps the firm meet these goals. Chapter 14 Managing Projects 533 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 Telecommunications and Internet Difficulties meeting business requirements Anticipated future demands 4. New Developments New system projects Project descriptions Business rationale Applications’ role in strategy New infrastructure capabilities required Hardware Software Database Telecommunications and Internet 5. Management Strategy Acquisition plans Milestones and timing Organizational realignment Internal reorganization Management controls Major training initiatives Personnel strategy 6. Implementation Plan Anticipated difficulties in implementation Progress reports 7. Budget Requirements Requirements Potential savings Financing Acquisition cycle 534 Part Four Building and Managing Systems The principal method used in CSF analysis is personal interviews—three or four—with a number of top managers identifying their goals and the resulting CSFs. These personal CSFs are aggregated to develop a picture of the firm’s CSFs. Then systems are built to deliver information on these CSFs. (For the method of developing CSFs in an organization, see Figure 14-3.) Only top managers are interviewed, and the questions focus on a small number of CSFs rather than requiring a broad inquiry into what information is used in the organization. It is especially suitable for top management and for the development of decision-support systems (DSS) and executive support systems (ESS). The CSF method focuses organizational attention on how information should be handled. The method’s primary weakness is that there is no particularly rigorous way in which individual CSFs can be aggregated into a clear company pattern. In addi- tion, interviewees (and interviewers) often become confused when distinguishing between individual and organizational CSFs. These types of CSFs are not necessar- ily the same. What may be considered critical to a manager may not be important for the organization as a whole. This method is clearly biased toward top man- agers, although it could be extended to elicit ideas for promising new systems from lower-level members of the organization (Peffers and Gengler, 2003). PORTFOLIO ANALYSIS Once strategic analyses have determined the overall direction of systems devel- opment, portfolio analysis can be used to evaluate alternative system projects. Portfolio analysis inventories all of the organization’s information systems projects and assets, including infrastructure, outsourcing contracts, FIGURE 14-3 USING CSFs TO DEVELOP SYSTEMS The CSF approach relies on interviews with key managers to identify their CSFs. Individual CSFs are aggregated to develop CSFs for the entire firm. Systems can then be built to deliver information on these CSFs. Chapter 14 Managing Projects 535 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 14-4) 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 balancing 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 rebuild- ing and replacing them with more desirable systems having higher benefits. By using portfolio analysis, management can determine the optimal mix of invest- ment 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 align- ment 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 calculates 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 criteria 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 warehousing. The second column in Table 14-2 lists the weights that decision FIGURE 14-4 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. 536 Part Four Building and Managing Systems makers attached to the decision criteria. Columns 3 and 5 show the percentage of requirements for each function that each alternative ERP system can provide. 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. As with all “objective” techniques, there are many qualitative judgments involved in using the scoring model. This model requires experts who under- stand 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 ESTABLISHING THE BUSINESS VALUE OF INFORMATION SYSTEMS Even if a system project supports a firm’s strategic goals and meets user information requirements, it needs to be a good investment for the firm. The TABLE 14-2 EXAMPLE OF A SCORING MODEL FOR AN ERP SYSTEM ERP ERP ERP ERP SYSTEM A SYSTEM A SYSTEM B SYSTEM B CRITERIA WEIGHT % SCORE % 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 Chapter 14 Managing Projects 537 value of systems from a financial perspective essentially revolves around the issue of return on invested capital. Does a particular information system invest- ment 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 making, cannot be immediately quantified but may lead to quantifi- able gains in the long run. Transaction and clerical systems that displace labor and save space always produce more measurable, tangible benefits than management information systems, decision-support systems, and computer- supported collaborative work systems (see Chapters 2 and 11). TABLE 14-3 COSTS AND BENEFITS OF INFORMATION SYSTEMS COSTS Hardware Telecommunications 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 538 Part Four Building and Managing Systems 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 strategic factors discussed later in this section. C a p i t a l B u d g e t i n g f o r I n f o r m a t i o n S y s t e m s 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 finan- cial 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) or reduced costs in production and operations. The difference between cash out- flows 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 pre- sent 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 investments in the Learning Tracks for this chapter. REAL OPTIONS PRICING MODELS Some information systems projects are highly uncertain, especially invest- ments in IT infrastructure. Their future revenue streams are unclear and their up-front costs are high. Suppose, for instance, that a firm is considering a $20 million investment to upgrade its IT infrastructure—its hardware, software, data management tools, and networking technology. If this upgraded infra- structure were available, the organization would have the technology capabili- ties to respond more easily to future problems and opportunities. Although the costs of this investment can be calculated, not all of the benefits of making this investment can be established in advance. But if the firm waits a few years until the revenue potential becomes more obvious, it might be too late to make the infrastructure investment. In such cases, managers might benefit from using real options pricing models to evaluate information technology investments. Real options pricing models (ROPMs) use the concept of options valuation borrowed from the financial industry. An option is essentially the right, but not the obligation, to act at some future date. A typical call option, for instance, is a financial option in which a person buys the right (but not the obligation) to purchase an underlying asset (usually a stock) at a fixed price (strike price) on or before a given date. Chapter 14 Managing Projects 539 For instance, let’s assume that on October 15, 2010, you could purchase a call option for $14.25 that would give you the right to buy a share of P&G com- mon stock for $50 per share on a certain date. Options expire over time, and this call option has a maturity date in December. If the price of P&G stock does not rise above $50 per share by the end of December, you would not exercise the option, and the value of the option would fall to zero on the strike date. If, however, the price of P&G common stock rose to, say, $100 per share, you could purchase the stock for the strike price of $50 and retain the profit of $50 per share minus the cost of the option. (Because the option is sold as a 100-share contract, the cost of the contract would be 100 ! $14.25 before com- missions, or $1,425, and you would be purchasing and obtaining a profit from 100 shares of Procter & Gamble.) The stock option enables the owner to ben- efit from the upside potential of an opportunity while limiting the downside risk. ROPMs value information systems projects similar to stock options, where an initial expenditure on technology creates the right, but not the obligation, to obtain the benefits associated with further development and deployment of the technology as long as management has the freedom to cancel, defer, restart, or expand the project. ROPMs give managers the flexibility to stage their IT invest- ment or test the waters with small pilot projects or prototypes to gain more knowledge about the risks of a project before investing in the entire implemen- tation. The disadvantages of this model are primarily in estimating all the key variables affecting option value, including anticipated cash flows from the underlying asset and changes in the cost of implementation. Models for determining option value of information technology platforms are being devel- oped (Fichman, 2004; McGrath and MacMillan, 2000). 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 information systems that may affect the true costs and benefits of the invest- ment. Many companies’ information systems investment decisions do not adequately 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. 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 (Ryan, Harrison, and Schkade, 2002). 14.4 MANAGING PROJECT RISK We have already introduced the topic of information system risks and risk assessment in Chapter 8. In this chapter, we describe the specific risks to information 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 organi- zational and technical components. Some systems development projects are 540 Part Four Building and Managing Systems 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—contribute to the complexity of large-scale systems projects just as much as technical characteristics, such as the number of lines of program code, length of project, and budget (Xia and Lee, 2004; Concours Group, 2000; Laudon, 1989). In addi- tion, 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 undefined, 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 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 behavioral and organizational impact. Changes in the way that information is defined, 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. T h e C o n c e p t o f I m p l e m e n t a t i o n 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 Chapter 14 Managing Projects 541 information 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 relation- ships 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 created by a new system. The change agent communicates with users, mediates between competing interest groups, and ensures that the organizational adjustment to such changes is complete. T h e R o l e o f E n d U s e r s System implementation generally benefits from high levels of user involve- ment and management support. User participation in the design and operation 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 participants 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 com- munications gap. These differences lead to divergent organizational loyalties, 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 sophisti- cated technical solutions in which hardware and software efficiency is optimized at the expense of ease of use or organizational effectiveness. Users prefer systems that are oriented toward solving business problems or facilitat- ing 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 concerns of end users and technical specialists (information systems designers) regarding the development of a new information system. Communication problems between end users and designers are a major reason why user requirements 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 TABLE 14-4 THE USER-DESIGNER COMMUNICATIONS GAP USER CONCERNS DESIGNER CONCERNS Will the system deliver the information I need for my work? How much disk storage space will the master file consume? How quickly can I access the data? How many lines of program code will it take to perform this function? How easily can I retrieve the data? How can we cut down on CPU time when we run the system? How much clerical support will I need to enter data into the system? What is the most efficient way of storing these data? How will the operation of the system fit into my daily business schedule? What database management system should we use? 542 Part Four Building and Managing Systems driven away from the project. Because they cannot comprehend what the tech- nicians are saying, users conclude that the entire project is best left in the hands of the information specialists alone. M a n a g e m e n t S u p p o r t a n d C o m m i t m e n t If an information systems project has the backing and commitment of manage- ment 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 associated with a new system depend on man- agement backing. If a manager considers a new system a priority, the system will more likely be treated that way by his or her subordinates. C h a n g e M a n a g e m e n t C h a l l e n g e s f o r B u s i n e s s P r o c e s s R e e n g i n e e r i n g , E n t e r p r i s e A p p l i c a t i o n s , a n d M e r g e r s a n d A c q u i s i t i o n s 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 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 under- mined 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 managers, 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 different 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 method- ologies have been developed for specific categories of implementation Chapter 14 Managing Projects 543 problems. Strategies have also been devised for ensuring that users play appro- priate 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 implemen- tation problems 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 (Schmidt et al., 2001). Implementers can then handle each project with the tools and risk-management approaches geared to its level of risk (Iversen, Mathiassen, and Nielsen, 2004; Barki, Rivard, and Talbot, 2001; McFarlan, 1981). M a n a g i n g Te c h n i c a l C o m p l e x i t y Projects with challenging and complex technology for users 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. Fo r m a l P l a n n i n g a n d C o n t r o l To o l s 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 represents the timing and duration of different tasks in a development project as well as their human resource requirements (see Figure 14-5). 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 interrelationships. 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 14-6. 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 comple- tion 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 14-6, the tasks in nodes 2, 3, and 4 are not depen- dent on each other and can be undertaken simultaneously, but each is depen- dent 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- 544 Part Four Building and Managing Systems FIGURE 14-5 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. Chapter 14 Managing Projects 545 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. I n c r e a s i n g U s e r I n v o l v e m e n t a n d O v e r c o m i n g U s e r R e s i s t a n c e Projects with relatively little structure and many undefined 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 imple- mentation team to users at all organizational levels. For instance, users can become active members 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 showing their willingness to help (Gefen and Ridings, 2002). 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, FIGURE 14-6 A PERT CHART This is a simplified PERT chart for creating a small Web site. It shows the ordering of project tasks and the relationship of a task with preceding and succeeding tasks. 546 Part Four Building and Managing Systems others may resist these changes because they believe the shifts are detrimental to their interests. 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 (Keen, 1981). Counterimplementation is a deliberate strategy to thwart the implementation of an information system or an innovation in an organization. Strategies to overcome user resistance include user participation (to elicit commitment as well as to improve design), user education and training, management edicts and policies, and better incentives for users who cooperate. The new system can be made more user friendly by improving the end-user interface. Users will be more cooperative if organizational problems are solved prior to introducing the new system. The Interactive Session on Organizations illustrates some of these issues at work. Software firm DST Systems had trouble managing its projects because it had a high level of technical complexity and needed more powerful tools for planning and control. DST also needed buy-in from end users. As you read this case, try to determine how DST’s selection of software development methods addressed these problems. 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 installation of intranets, extranets, and Web applications. In addition to proce- dural changes, transformations 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. 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 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 Companies like DST Systems have recognized the value in Scrum development to their bottom lines, but making the transition from traditional develop- mental methods to Scrum development can be challenging. DST Systems is a software development company whose flagship product, Automated Work Distributor (AWD), increases back-office efficiency and helps offices become paperless. DST was founded in 1969 and its headquarters are in Kansas City, Missouri. The company has approximately 10,000 employees, 1,200 of whom are software devel- opers. This development group had used a mixture of tools, processes, and source code control systems without any unified repository for code or a stan- dardized developer tool set. Different groups within the organization used very different tools for soft- ware development, like Serena PVCS, Eclipse, or other source code software packages. Processes were often manual and time-consuming. Managers were unable to easily determine how resources were being allocated, which of their employees were working on certain projects, and the status of spe- cific assets. All of this meant that DST struggled to update its most important product, AWD, in a timely fashion. Its typical development schedule was to release a new version once every two years, but competitors were releasing versions faster. DST knew that it needed a better method than the traditional “water- fall” method for designing, coding, testing, and integrating its products. In the waterfall model of software development, progression flows sequen- tially from one step to the next like a waterfall, with each step unable to start until the previous step has been completed. While DST had used this method with great success previously, DST began searching for viable alternatives. The development group started exploring Scrum, a framework for agile software development in which projects progress via a series of iterations called sprints. Scrum projects make progress in a series of sprints, which are timeboxed iterations no more than a month long. At the start of a sprint, team members commit to delivering some number of features that were listed on a project’s product DST SYSTEMS SCORES WITH SCRUM AND APPLICATION LIFE CYCLE MANAGEMENT backlog. These features are supposed to be com- pleted by the end of the sprint—coded, tested, and integrated into the evolving product or system. At the end of the sprint, a sprint review allows the team to demonstrate the new functionality to the product owner and other interested stakeholders who provide feedback that could influence the next sprint. Scrum relies on self-organizing, cross-functional teams supported by a ScrumMaster and a product owner. The ScrumMaster acts as a coach for the team, while the product owner represents the business, customers, or users in guiding the team toward building the right product. DST tried Scrum with its existing software development tools and experienced strong results. The company accelerated its software development cycle from 24 to 6 months and developer productiv- ity increased 20 percent, but Scrum didn’t work as well as DST had hoped with its existing tools. Processes broke down and the lack of standardiza- tion among the tools and processes used by DST prevented Scrum from providing its maximum benefit to the company. DST needed an application life cycle management (ALM) product that would unify its software development environment. DST set up a project evaluation team to identify the right development environment for them. Key factors included cost-effectiveness, ease of adoption, and feature-effectiveness. DST wanted the ability to use the new software without significant training and software they could quickly adopt without jeopardizing AWD’s development cycle. After considering several ALM products and running test projects with each one, DST settled on CollabNet’s offering, TeamForge, for its ALM platform. CollabNet specializes in software designed to work well with agile software development methods such as Scrum. Its core product is TeamForge, an integrated suite of Web-based development and collaboration tools for agile software development that centralizes management of users, projects, processes, and assets. DST also adopted CollabNet’s Subversion product to help with the management and control of changes to project documents, programs, and other information stored as computer I N T E R A C T I V E S E S S I O N : O R G A N I Z A T I O N S Chapter 14 Managing Projects 547 1. What were some of the problems with DST Systems’ old software development environment? 2. How did Scrum development help solve some of those problems? 3. What other adjustments did DST make to be able to use Scrum more effectively in its software pro- jects? What management, organization, and tech- nology issues had to be addressed? files. DST’s adoption of CollabNet’s products was fast, requiring only 10 weeks, and DST developers now do all of their work within this ALM platform. TeamForge was not forced on developers, but the ALM platform was so appealing compared to DST’s previous environment that developers adopted the product virally. Jerry Tubbs, the systems development manager at DST Systems, says that DST was successful in its attempts to revamp its software group because of a few factors. First, it looked for simplicity rather than complicated, do-everything offerings. Simpler wasn’t just better for DST—it was also less expensive than some of the alternatives. DST also involved developers in the decision-making process to ensure Search the Internet for videos or Web sites explaining Scrum or agile development. Then answer the following questions: 1. Describe some of the benefits and drawbacks of Scrum development. 2. How does Scrum differ from other software development methodologies? 3. What are the potential benefits to companies using Scrum development? that changes would be greeted enthusiastically. Last, by allowing developers to adopt ALM software on their own, DST avoided the resentment associated with mandating unwelcome change. DST’s move from waterfall to Scrum development was a success because the company selected the right development framework as well as the right software to make that change a reality and skillfully managed the change process. Sources: Jerry Tubbs, “Team Building Goes Viral,” Information Week, February 22, 2010; www.collab.net, accessed August 2010; Mountain Goat Software, “Introduction to Scrum - An Agile Process,” www.mountaingoatsoftware.com/topics/scrum, accessed August 2010. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N 548 Part Four Building and Managing Systems affect organizational structure, attitudes, decision making, and operations. To integrate information systems successfully with the organization, thorough and fully documented organizational impact assessments must be given more attention in the development effort. S o c i o t e c h n i c a l D e s i g n 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 design 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 techni- cal objectives is selected for the final design. The resulting sociotechnical design is expected to produce an information system that blends technical efficiency with sensitivity to organizational and human needs, leading to higher job satisfaction and productivity. www.collab.net www.mountaingoatsoftware.com/topics/scrum Chapter 14 Managing Projects 549 PROJECT MANAGEMENT SOFTWARE TOOLS Commercial software tools that automate many aspects of project management facilitate the project management process. Project management software typically features capabilities for defining and ordering tasks, assigning resources to tasks, establishing starting and ending dates to tasks, tracking progress, and facilitating modifications to tasks and resources. Many automate the creation of Gantt and PERT charts. 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 complex relation- ships. Microsoft Office Project 2010 has become the most widely used project management software today. It is PC-based, with capabilities for producing PERT and Gantt charts and for supporting critical path analysis, resource allocation, project tracking, and status reporting. Project also tracks the way changes in one aspect of a project affect others. Project Professional 2010 provides collaborative project management capabilities when used with Microsoft Office Project Server 2010. Project Server stores project data in a central SQL Server database, enabling authorized users to access and update the data over the Internet. Project Server 2010 is tightly integrated with the Microsoft Windows SharePoint Services collaborative workspace platform. These features help large enterprises manage projects in many different locations. Products such as EasyProjects .NET and Vertabase are also useful for firms that want Web-based project management tools. Going forward, delivery of project management software as a software service (SaaS) will make this technology accessible to more organizations, especially smaller ones. Open source versions of project management software such as Project Workbench and OpenProj will further reduce the total cost of ownership and attract new users. Thanks to the popularity of social media such as Facebook and Twitter, project management software is also likely to become more flexible, collaborative, and user-friendly. 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. The Interactive Session on Management describes how Hewlett-Packard’s project portfolio management software helped Motorola Inc. coordinate projects and determine the right mix of projects and resources to accomplish its strategic goals. INTERACTIVE SESSION: MANAGEMENT Motorola Inc. is a large multinational technology company based in Schaumburg, Illinois, specializing in broadband communications infrastructure, enterprise mobility, public safety solutions, high- definition video, mobile devices, and a wide variety of other mobile technologies. Motorola earned $22 billion in revenue in 2009, with 53,000 employees worldwide. Motorola has grown organically through mergers and acquisitions, and consequently has thousands of systems performing various functions throughout the business. Motorola knew that if it could better manage its systems and its projects, it could drastically lower its operating costs. In today’s weakened economic climate, saving money and increasing efficiency have become more important than ever. Motorola is organized into three major segments. The Mobile Devices segment of the business designs, manufactures, sells, and services wireless handsets, including smartphones. Motorola expects to face increasingly intense competition in this segment from a growing number of challengers hoping to cash in on the smartphone craze. Motorola’s Home and Networks segment develops infrastructure and equipment used by cable television operators, wire- less service providers, and other communications providers, and its Enterprise Mobility Solutions seg- ment develops and markets voice and data commu- nications products, wireless broadband systems, and a host of applications and devices to a variety of enterprise customers. Weak economic conditions had driven Motorola’s numbers down across all major segments of the busi- ness. The company used the downturn to review its business in depth to locate areas where it could become more efficient. Motorola first analyzed each of its business functions in terms of its importance and value to the business. Then, it analyzed the com- plexity and cost of that function. For example, engi- neering at Motorola is very important to the com- pany’s success, and differentiates it from its competitors. Engineering is also one of Motorola’s most complicated and costly business functions. Motorola repeated this analysis for all of its busi- ness functions, and then determined which areas required adjustment. Processes that were not as critical to the company’s success, but were still highly complex and costly became candidates to be MOTOROLA TURNS TO PROJECT PORTFOLIO MANAGEMENT scaled down. Processes that were critical to the company but poorly funded were candidates for better support. After performing this exercise, Motorola hoped to automate many of the manage- ment tasks that it had classified as less complex, but the sheer size of the company made automation challenging. Motorola has 1,800 information systems and 1,500 information systems employees who are responsible for 1,000 projects per year. The company also outsources much of its IT work to outside contrac- tors, further increasing the number of regular users of its systems. Managing that many workers is difficult and often leads to inefficiency. Many of the company’s employees were working on similar projects or compiling the same data sets, unaware that other groups within the company were doing the same work. Motorola hoped to identify and eliminate these groups, also known as “redundant silos” of activity within the company, both to cut costs and increase productivity. Management also hoped to prioritize resource usage so that projects that were most valuable to the company received the resources they needed to be successful first. Motorola’s managers hoped to achieve their goals of automating processes and lowering operating costs by adopting HP’s Project and Portfolio Management Center software, or HP PPM. This soft- ware helps managers compare proposals, projects, and operational activities against budgets and resource capacity levels. All of the information Motorola gathered from its process analysis is located in a central location with HP PPM, which also serves as the centralized source of other critical information such as the amount of investment dollars used by a process and the priorities of business requests coming through Motorola’s systems. HP PPM allows Motorola’s IT employees and managers quick and easy access to any and all data pertaining to the company’s business processes. HP PPM allows Motorola to govern its entire IT portfolio using a broad array of tools, including objective prioritization; multiple levels of input, review, and approval; and. real-time visibility into all areas of the business. HP PPM users have up-to-the- minute data on resources, budgets, forecasts, costs, programs, projects, and overall IT demand. HP PPM 550 Part Four Building and Managing Systems C A S E S T U D Y Q U E S T I O N S 1. What are some of the challenges Motorola faces as a business? Why is project management so critical at this company? 2. What features of HP PPM were most useful to Motorola? 3. What management, organization, and technology factors had to be addressed before Motorola could implement and successfully use HP PPM? 4. Evaluate the business impact of adopting HP PPM at Motorola. can be accessed by Motorola employees on the premises or as software as a service (SaaS). Motorola used the on-site version, but converted to SaaS with no effect on usability. Motorola employees rave that HP has been responsive and reliable with its service and customer support. Using SaaS reduces Motorola’s support costs by approximately 50 percent. HP PPM uses a series of graphical displays and highly targeted data to effectively capture real-time IT program and project status. It also features what-if scenario planning that automatically creates an optimal mix of projects, proposals, and assets. This means that users can use HP PPM to perform a similar analysis of business processes that Motorola initially made by hand to begin its IT overhaul and to generate recommendations based on that analysis. Users can also use the what-if scenario planning Use a search engine to search for “IT portfolio management software” or “IT project management software” and find a competing offering to HP PPM. Then answer the following questions: 1. What makes this solution different from HP PPM? 2. What types of companies is this solution best geared towards? 3. Find a case study of this solution in action. Did the company described in the case realize similar benefits to Motorola? tools to predict the value and usefulness of new projects. The results have been just what Motorola had hoped for. In two years, the company reduced its cost structure by 40 percent, and on larger projects using HP PPM, Motorola has achieved an average of 150 percent ROI. Motorola’s IT support costs decreased by 25 percent. The redundant silos of workers performing the same tasks were all but elim- inated, removing 25 percent of the company’s “wasted work.” Motorola also hopes to use HP PPM for resource management and application support. Sources: HP, “Motorola: Excellence in Cost Optimization” (2010) and “HP Project and Portfolio Management (PPM) Portfolio Management Module Data Sheet, ”www.hp.com, accessed November 9, 2010; Dana Gardner, “Motorola Shows Dramatic Savings in IT Operations Costs with ‘ERP for IT’ Tools,” ZD Net, June 18, 2010; “Motorola Inc. Form 10-K”, for the fiscal year ended Dec 31, 2009, accessed via www.sec.gov. M I S I N A C T I O N Chapter 14 Managing Projects 551 www.hp.com www.sec.gov 552 Part Four Building and Managing Systems 14.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience evaluating informa- tion systems projects, using spreadsheet software to perform capital budgeting analyses for new information systems investments, and using Web tools to analyze the financing for a new home. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. In 2001, McDonald’s Restaurants undertook a project called Innovate to create an intranet connecting headquarters with its 30,000 restaurants in 120 coun- tries to provide detailed operational information in real time. The new system would, for instance, inform a manager at the company’s Oak Brook, Illinois, headquarters immediately if sales were slowing at a franchise in London, or if the grill temperature in a Rochester, Minnesota, restaurant wasn’t hot enough. The idea was to create a global ERP application touching the workings of every McDonald’s restaurant. Some of these restaurants were in countries that lacked network infrastructures. After spending over $1 billion over several years, including $170 million on consultants and initial implementation planning, McDonalds terminated the project. What should management have known or done at the outset to prevent this outcome? 2. Caterpillar is the world’s leading maker of earthmoving 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 out of date, 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? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g S p r e a d s h e e t S o f t w a r e f o r C a p i t a l B u d g e t i n g f o r a N e w C A D S y s t e m Software skills: Spreadsheet formulas and functions Business skills: Capital budgeting This project provides you with an opportunity to use spreadsheet software to use the capital budgeting models discussed in this chapter to analyze the return on an investment for a new CAD system. Your company would like to invest in a new CAD system that requires purchasing hardware, software, and networking technology, as well as expendi- tures for installation, training, and support. MyMISlab contains tables showing each cost component for the new system as well as annual maintenance costs over a five-year period. It also features a Learning Track on capital budgeting models. You believe the new system will produce annual savings by reducing the amount of labor required to generate designs and design specifications, thus 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 Chapter 14 Managing Projects 553 the investment using the capital budgeting models presented in this chap- ter’s Learning Track. • Is this investment worthwhile? Why or why not? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g W e b To o l s f o r B u y i n g a n d F i n a n c i n g a H o m e Software skills: Internet-based software Business skills: Financial planning This project will develop your skills using Web-based software for searching for a home and calculating mortgage financing for that home. You have found a new job in Denver, Colorado, and would like to purchase a home in that area. Ideally, you would like to find a single-family house with at least three bedrooms and one bathroom that costs between $150,000 and $225,000 and finance it 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. You would also like to see how much of your mortgage payment represents principal and how much represents interest. Use the Yahoo! Real Estate Web site to help you with the following tasks: • Locate homes in your price range in Denver, Colorado. Find out as much information as you can about the houses, including the real estate listing agent, condition of the house, number of rooms, and school district. • 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. • Calculate the monthly payment for the mortgage you select. • Calculate how much of your monthly mortgage payment represents principal and how much represents interest, assuming you do not plan to make any extra payments on the mortgage. 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, the breadth of choice of homes and mortgages, and how helpful the whole process would have been for you if you were actually in the situation described in this project. LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter: 1. Capital Budgeting Methods for Information System Investments 2. Information Technology Investments and Productivity 3. Enterprise Analysis (Business Systems Planning) 554 Part Four Building and Managing Systems Review Summary 1. What are the objectives of project management and why is it so essential in developing infor- mation systems? Good project management is essential for ensuring that systems are delivered on time, on budget, 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. 2. What methods can be used for selecting and evaluating information systems projects and aligning them with the firm’s business goals? Organizations need an information systems plan that describes how information technology supports the attainment of their business goals and documents all their system applications and IT infrastructure components. Large corporations will have a management structure to ensure the most important sys- tems projects receive priority. Critical success factors, portfolio analysis, and scoring models can be used to identify and evaluate alternative information systems projects. 3. How can firms assess the business value of information systems projects? To determine whether an information systems project is a good investment, one must calculate its costs and benefits. Tangible benefits are quantifiable, and intangible benefits that cannot be immedi- ately 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. Real options pricing models, which apply the same techniques for valuing financial options to systems investments, can be useful when considering highly uncertain IT invest- ments. 4. What are the principal risk factors in information systems projects? 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 insuffi- cient 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. 5. What strategies are useful for managing project risk and system implementation? Implementation refers to the entire process of organizational change surrounding the introduc- tion of a new information system. User support and involvement and management support and con- trol 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 contin- gency 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. Key Terms Capital budgeting, 538 Change agent, 541 Change management, 540 Counterimplementation, 546 Critical success factors (CSFs), 533 Ergonomics, 546 External integration tools, 545 Formal control tools, 543 Formal planning tools, 543 Gantt chart, 543 Implementation, 540 Information systems plan, 532 Intangible benefits, 537 Internal integration tools, 543 Organizational impact analysis, 546 PERT chart, 543 Portfolio analysis, 534 Project, 530 Project management, 530 Real options pricing models (ROPMs), 538 Scope, 530 Scoring model, 535 Sociotechnical design, 548 Tangible benefits, 537 User-designer communications gap, 541 User interface, 530 Chapter 14 Managing Projects 555 Review Questions 1. What are the objectives of project management and why is it so essential in developing informa- tion systems? • Describe information system problems resulting from poor project management. • Define project management. List and describe the project management activities and variables addressed by project management. 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 systems projects. • Describe the purpose of an information systems plan and list the major categories in the plan. • Explain how critical success factors, portfolio analysis, and scoring models can be used to select information systems projects. 3. How can firms assess the business value of information systems projects? • List and describe the major costs and benefits of information systems. • Distinguish between tangible and intangible benefits. • Explain how real options pricing models can help manages evaluate information technol- ogy investments. 4. What are the principal risk factors in information systems projects? • 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 management 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 enterprise applications, business process reengineering, and mergers and acquisitions. 5. What strategies are useful for managing project risk and system implementation? • Identify and describe the strategies for controlling project risk. • Identify the organizational considerations that should be addressed by project planning and implementation. • Explain how project management software tools contribute to successful project management. Discussion Questions 1. How much does project management impact the success of a new information system? 2. It has been said that most systems fail because systems builders ignore organizational behavior problems. Why might this be so? 3. What is the role of end users in information systems project management? Form a group with two or three 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 possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a presentation of your findings for the class. Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos. Collaboration and Teamwork: Identifying Implementation Problems J e t B l u e a n d We s t J e t : A Ta l e o f Tw o I S P r o j e c t s CASE STUDY n recent years, the airline industry has seen sev- eral low-cost, high-efficiency carriers rise to prominence using a recipe of extremely competitive fares and outstanding customer ser- vice. Two examples of this business model in action are JetBlue and WestJet. Both companies were founded within the past two decades and have quickly grown into industry powerhouses. But when these companies need to make sweeping IT upgrades, their relationships with customers and their brands can be tarnished if things go awry. In 2009, both airlines upgraded their airline reservation systems, and one of the two learned this lesson the hard way. JetBlue was incorporated in 1998 and founded in 1999 by David Neeleman. The company is headquar- tered in Queens, New York. Its goal is to provide low- cost travel along with unique amenities like TV in every seat, and its development of state-of-the-art IT throughout the business was a critical factor in achiev- ing that goal. JetBlue met with early success, and the airline was one of the few that remained profitable in the wake of the 9/11 attacks. JetBlue continued to grow at a rapid pace, remaining profitable throughout, until 2005, when the company lost money in a quar- ter for the first time since going public. Undaunted, the airline quickly returned to profitability in the next year after implementing its “Return to Profitability” plan, and consistently ranks at the top of customer satisfaction surveys and rankings for U.S. airlines. Headquartered in Calgary, Canada, WestJet was founded by a group of airline industry veterans in 1996, including Neeleman, who left to start JetBlue shortly thereafter. The company began with approxi- mately 40 employees and three aircraft. Today, the company has 7,700 employees and operates 380 flights per day. Earlier in this decade, WestJet under- went rapid expansion spurred by its early success and began adding more Canadian destinations and then U.S. cities to its flight schedule. By 2010, WestJet held nearly 40 percent of the Canadian airline mar- ket, with Air Canada dropping to 55 percent. JetBlue is slightly bigger, with 151 aircraft in use compared to WestJet’s 88, but both have used the same low-cost, good-service formula to achieve prof- itability in the notoriously treacherous airline mar- ketplace. The rapid growth of each airline rendered their existing information systems obsolete, includ- ing their airline reservation systems. Upgrading a reservation system carries special risks. From a customer perspective, only one of two things can happen: Either the airline successfully completes its overhaul and the customer notices no difference in the ability to book flights, or the implementation is botched, angering customers and damaging the airline’s brand. The time had come for both JetBlue and WestJet to upgrade their reservation systems. Each carrier had started out using a system designed for smaller start-up airlines, and both needed more processing power to deal with a far greater volume of customers. They also needed features like the ability to link prices and seat inventories to other airlines with whom they cooperated. Both JetBlue and WestJet contracted with Sabre Holdings, one of the most widely used airline IT providers, to upgrade their airline reservation systems. The difference between WestJet and JetBlue’s implementation of Sabre’s SabreSonic CSS reservation system illustrates the dangers inherent in any large-scale IT overhaul. It also serves as yet another reminder of how successfully planning for and implementing new technology is just as valuable as the technology itself. SabreSonic CSS performs a broad array of services for any airline. It sells seats, collects payments, allows customers to shop for flights on the airline’s Web site, and provides an interface for communica- tion with reservation agents. Customers can use it to access airport kiosks, select specific seats, check their bags, board, rebook, and receive refunds for flight cancellations. All of the data generated by these transactions are stored centrally within the sys- tem. JetBlue selected SabreSonic CSS over its legacy system developed by Sabre rival Navitaire, and WestJet was upgrading from an older Sabre reserva- tion system of its own. The first of the two airlines to implement SabreSonic CSS was WestJet. When WestJet went live with the new system in October 2009, cus- tomers struggled to place reservations, and the WestJet Web site crashed repeatedly. WestJet’s call centers were also overwhelmed, and customers experienced slowdowns at airports. For a company that built its business on the strength of good customer service, this was a nightmare. How did WestJet allow this to happen? I 556 Part Four Building and Managing Systems The critical issue was the transfer of WestJet’s 840,000 files containing data on transactions for past WestJet customers who had already purchased flights, from WestJet’s old reservation system servers in Calgary to Sabre servers in Oklahoma. The migra- tion required WestJet agents to go through complex steps to process the data. WestJet had not anticipated the transfer time required to move the files and failed to reduce its passenger loads on flights operat- ing immediately after the changeover. Hundreds of thousands of bookings for future flights that were made before the changeover were inaccessible during the file transfer and for a period of time thereafter, because Sabre had to adjust the flights using the new system. This delay provoked a deluge of customer dissatis- faction, a rarity for WestJet. In addition to the increase in customer complaint calls, customers also took to the Internet to express their displeasure. Angry flyers expressed outrage on Facebook and flooded WestJet’s site, causing the repeated crashes. WestJet quickly offered an apology to customers on its site once it went back up, explaining why the errors had occurred. WestJet employees had trained with the new system for a combined 150,000 hours prior to the upgrade, but WestJet spokesman Robert Palmer explained that the company “encounter(ed) some problems in the live environment that simply did not appear in the test environment,” foremost among them the issues surrounding the massive file transfer. WestJet’s latest earnings reports show that the company weathered the storm successfully and remained profitable, but the incident forced the airline to scale back its growth plans. WestJet has put its frequent flyer program and co-branded credit card, the RBC WestJet MasterCard, on hold, in addi- tion to code-sharing plans with other airlines includ- ing Southwest, KLM, and British Airways. These plans would allow one airline to sell flights under its own name on aircraft operated by other airlines. For the time being, WestJet is hoping to return to growth before pursuing these measures. In contrast, JetBlue had the advantage of seeing WestJet begin its implementation months before, so it was able to avoid many of the pitfalls that WestJet endured. For example, they built a backup Web site to prepare for the worst-case scenario. The company also hired 500 temporary call center workers to man- age potential spikes in customer service calls. (WestJet also ended up hiring temporary offshore call center workers, but only after the problem had gotten out of hand.) JetBlue made sure to switch its files over to Sabre’s servers on a Friday night, because Saturday flight traffic is typically very low. JetBlue also sold smaller numbers of seats on the flights that did take off that day. JetBlue experienced a few glitches—call wait times increased, and not all airport kiosks and ticket printers came online right away. In addition, JetBlue needed to add some booking functions. But compared to what WestJet endured, the company was extremely well prepared to handle these problems. JetBlue ended up using its backup site several times. However, JetBlue had also experienced its own customer service debacles in the past. In February 2007, JetBlue tried to operate flights during a bliz- zard when all other major airlines had already can- celed their flights. This turned out to be a poor deci- sion, as the weather conditions prevented the flights from taking off and passengers were stranded for as long as 10 hours. JetBlue had to continue canceling flights for days afterwards, reaching a total of 1,100 flights canceled and a loss of $30 million. JetBlue management realized in the wake of the crisis that the airline’s IT infrastructure, although sufficient to deal with normal day-to-day conditions, was not robust enough to handle a crisis of this magnitude. This experience, coupled with the observation of WestJet’s struggles when implementing its new system, motivated JetBlue’s cautious approach to its own IT implementation. Sources: Susan Carey, “Two Paths to Software Upgrade,” The Wall Street Journal, April 13, 2010; Aaron Karp, “WestJet Offers ‘Heartfelt Apologies’ on Res System Snafus; Posts C$31 Million Profit,”Air Transport World, November 5, 2009; Ellen Roseman, “WestJet Reservation Change Frustrates,” thestar.com, December 2, 2009; Calgary Herald, “WestJet Reservation-System Problems Affecting Sales,” Kelowna.com; “JetBlue Selects SabreSonic CSS for Revenue and Operational Systems,” Shepard.com, February 17, 2009; “Jilted by JetBlue for Sabre,” Tnooz.com, February 5, 2010. CASE STUDY QUESTIONS 1. How important is the reservation system at airlines such as WestJet and JetBlue? How does it impact operational activities and decision making? 2. Evaluate the key risk factors of the projects to upgrade the reservation systems of WestJet and JetBlue. 3. Classify and describe the problems each airline faced in implementing its new reservation system. What management, organization, and technology factors caused those problems? 4. Describe the steps you would have taken to control the risk in these projects. Chapter 14 Managing Projects 557 LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What major factors are driving the internationalization of business? 2. What are the alternative strategies for developing global businesses? 3. How can information systems support different global business strategies? 4. What are the challenges posed by global information systems and management solutions for these challenges? 5. What are the issues and technical alternatives to be considered when developing international informa- tion systems? CHAPTER OUTLINE 15.1 THE GROWTH OF INTERNATIONAL INFORMATION SYSTEMS Developing an International Information Systems Architecture The Global Environment: Business Drivers and Challenges State of the Art 15.2 ORGANIZING INTERNATIONAL INFORMATION SYSTEMS Global Strategies and Business Organization Global Systems to Fit the Strategy Reorganizing the Business 15.3 MANAGING GLOBAL SYSTEMS A Typical Scenario: Disorganization on a Global Scale Global Systems Strategy The Management Solution: Implementation 15.4 TECHNOLOGY ISSUES AND OPPORTUNITIES FOR GLOBAL VALUE CHAINS Computing Platforms and Systems Integration Connectivity Software Localization 15.5 HANDS-ON MIS PROJECTS Management Decision Problems Achieving Operational Excellence: Building a Job Database and Web Page for an International Consulting Firm Improving Decision Making: Conducting International Marketing and Pricing Research Chapter 15 Managing Global Systems Interactive Sessions: Fonterra: Managing the World’s Milk Trade How Cell Phones Support Economic Development 559 M is a diversified technology company with a global presence. Its products are available in 200 countries, it has operations in 62 counties, and it produces over 55,000 products. In 2009, the company generated $23.1 billion in revenue, down from $25.6 billion (8 percent) in 2008 as the global recession slowed business activity. The company employs 76,000 people. 3M, headquartered in St. Paul, Minnesota, is the poster-child for global American firms: 63 percent of its revenue comes from offshore sales (14.6 billion), and 58 percent of its employees are international. 3M’s core competencies historically have been sticky films and scratchy papers (sandpa- per), and, since its founding in 1902, has continuously demonstrated through new products just how much the world depends on these competencies. 3M is organized into six largely independent divisions: Industrial and Transportation (tapes, abrasives, and adhesives); Health Care (surgical tapes to dental inserts); Consumer and Office (furnace filters to Post-it notes and Scotchbrite pads); Safety, Security, and Protection Services (respirators to Thinsulite insu- lation and RFD equipment); Display and Graphics (LCD monitors to highway reflective tape) ; and Electro and Communications (insulating materials to disk drive lubricants). 3M is among the leading manufacturers of products for many of the markets it serves. With such a large global presence, with many of its foreign operations the results of purchases, the company was until recently a collection of legacy applications spread across the globe. 3M inherited the hardware and software of acquired companies, from the shop floor, to supply chain, sales, office, and reporting systems. Even where 3M expanded organically by moving into new countries, each of the six divisions, and thousands of their smaller operations, developed their own information and reporting systems with very little corporate, global oversight. As one manager noted, if 3M continued to operate its business with an accumulation of disaggregated solutions, the company would not be able to efficiently operate in the current recession, or support future growth. In 2008, 3M began a series of restructurings of its operations, including a review of its global systems. In 2010, 3M adopted SAP’s Business Suite Applications to replace all of its legacy software around the world. The intent is to transform its business processes on a global scale, and force independent divisions to adopt common software tools and, more importantly, com- .3M: STICKY FILM AND SCRATCHY THINGS THAT SELL AROUND THE WORLD 3 mon business processes. The price tag is also global: licens- ing fees paid to SAP are reported as somewhere between $35 million to $75 mil- lion. Business Suite 7 is SAP’s brand of enterprise systems. It consists of five integrated mod- ules that can be run on a wide variety of hardware platforms, and which work well with soft- ware from other vendors. The core business process and soft- ware modules are customer relationship management (CRM), enterprise resource planning (ERP), product lifecy- cle management, supply chain 560 Part Four Building and Managing Systems management (SCM), and supplier relationship management. Each module has pre-defined business processes, and the software needed to support these processes. Firms adapt their own business processes to these “industry best- practice modules,” or make changes in the SAP software to fit their business models. Business Suite is built on a service-oriented architecture (SOA), which means it can work well with data from legacy database systems and offers lower implementation costs. In implementing SAP’s Business Suite, 3M is not following in the footsteps of some ill-fated global system initiatives by other Fortune 500 companies. Rather than do a “rip, burn, replace” of all its old software, 3M is rolling out the SAP enterprise software in phased and modular stages. Following a piecemeal approach, it is rolling out a demand forecasting and supply planning module in Europe first, and then once the concept is validated, additional rollouts will follow around the world. In Asia-Pacific, 3M is implementing its ERP system over the next several years. In the past, executive managers in the United States did not have timely, accurate, or consistent information on how all the firms business units, regions, and products were performing. To a large extent, 3M was not manageable or governable prior to the current effort to rationalize its sys- tems. One solution will be SAP’s business intelligence (BI) software which will enable 3M’s management to access accurate and timely data on business perfor- mance across its divisions to support informed decision making. The SAP soft- ware agreement enables 3M to integrate the best practices it has gained with its existing BI deployments from the SAP BusinessObject portfolio in the United States and in other regions into the global rollout template. One advantage of having integrated global systems is the ability to transfer what you learn in one region to another region. In a further sign that 3M management has a keen understanding of corporate structure and strategy, the firm plans to maintain a large measure of independence among the six divisions because their histories and products are so different. It will not force the divisions to adopt a single instance of the SAP products but instead will allow substantial variation among divisions, what one wag called “virtual instances” of the software that reflect the needs of customers served by the various divisions. Sources: Chris Chiappinelli, “3M Selects SAP Business Suite in Effort to Unify Its Core Processes,” Managing Automation, April 4, 2010; Doug Henschen, “SAP ERP Software Tapped by 3M,” Information Week, March 1, 2010; “SAP Gains 3M as New Customer,” www.sap.com, March 1, 2010; 3M, Form 10K For the Fiscal Year Ended December 31, 2009, filed with the Securities and Exchange Commission February 16, 2010. 3M’s efforts to create a global IT infrastructure identifies some of the issuesthat truly global organizations need to consider if they want to operate across the globe. Like many large, multinational firms, 3M grew rapidly by pur- chasing other businesses in foreign countries, as well as through expanding domestic operations to foreign countries In the process, 3M inherited hundreds of legacy software systems, and developed new systems, few of which could share information with one another, or report consistent information to corpo- rate headquarters. 3M’s legacy information systems simply could not support timely management decision making on a global scale. The chapter-opening diagram calls attention to important points raised by this case and this chapter. To solve its global management and business challenges, 3M adopted an integrated suite of software applications from SAP, one of the world’s largest software firms. 3M had to devise a flexible, modular implementation strategy that integrated both the existing legacy systems, and preserved some measure of autonomy for the six divisions that are the basis of the company. 3M is now able to respond to changes in business conditions around the globe and around the clock. www.sap.com 15.1 THE GROWTH OF INTERNATIONAL INFORMATION SYSTEMS n earlier chapters, we describe the emergence of a global economic sys- tem and global world order driven by advanced networks and information systems. The new world order is sweeping away many national corpora- tions, 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. Today, the production and design of many electronic products are parceled out to a number of different countries. Consider the path to market for a Hewlett-Packard (HP) laptop computer, which is illustrated in Figure 15-1. Chapter 15 Managing Global Systems 561 I FIGURE 15-1 AN HP LAPTOP’S PATH TO MARKET HP and other electronics companies assign distribution and production of their products to a number of different countries. 562 Part Four Building and Managing Systems The idea for the product and initial design came from HP’s Laptop Design Team in the United States. HP headquarters in Houston approved the concept. Graphics processors were designed in Canada and manufactured in Taiwan. Taiwan and South Korea provided the liquid-crystal display (LCD) screens and many of the memory chips. The laptop’s hard disk drive came from Japan. Sources in China, Japan, Singapore, South Korea, and the United States sup- plied other components. Laptop assembly took place in China. Contractors in Taiwan did the machine’s engineering design and collaborated with the Chinese manufacturers. 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 interna- tional 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 depicts the major dimensions of an international information systems architecture. The basic strategy to follow when building an international system is to understand 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 environment 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 devel- opment of a global business. Once you have examined the global environment, you will need to consider a corporate strategy for competing in that environ- 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 organization, the management and business processes, and the technology platform. Chapter 15 Managing Global Systems 563 ment. How will your firm respond? You could ignore the global market and focus on domestic competition only, sell to the globe from a domestic base, or organize production 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 division of labor across a global environment? Where will production, adminis- tration, accounting, marketing, and human resource functions be located? Who will handle the systems function? Next, you must consider the management issues in implementing your strategy and making the organization design come alive. Key here will be the design of business processes. How can you discover and manage user require- ments? How can you induce change in local units to conform to international requirements? 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, communica- tion, 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 and not much more expensive than communica- tion 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 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 564 Part Four Building and Managing Systems globally shared media such as movies now permits different cultures and peoples to develop common expectations about right and wrong, desirable and undesirable, heroic and cowardly. The collapse of the Eastern bloc has speeded the growth of a world culture enormously, increased support for capitalism and business, and reduced the level of cultural conflict considerably. 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, India, southern Asia, and eastern Europe have devel- oped powerful 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 consuming similar products that are culturally approved. Coca-Cola, American sneakers (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 central headquarters thousands of miles away. At Sealand Transportation, a major global shipping company based in Newark, New Jersey, shipping managers in Newark can watch the loading of ships in Rotterdam online, check trim and ballast, and trace packages to specific ship locations as the activity proceeds. This is all possible through an international satellite link. The new global markets and pressure toward global production and opera- tion have called forth whole new capabilities for global coordination. Production, accounting, 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 system in the United States and, once provided, may try the same techniques and technologies in Spain. Micromarketing—marketing to very small geo- graphic and social units—no longer means marketing to neighborhoods in the United States, but to neighborhoods throughout the world! These new levels of global coordination permit for the first time in history the location 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 Chapter 15 Managing Global Systems 565 and highly inefficient. However, the localism of services is breaking down in telecommunications, entertainment, transportation, finance, law, and general business. Clearly, those firms within an industry that can understand the inter- nationalization of the industry and respond appropriately will reap enormous gains in productivity and stability. B u s i n e s s C h a l l e n g e s 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 challenges 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, nation- alistic, 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 different countries of the world are different laws governing the movement of information, information privacy of their citizens, origins of software and hardware 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 considered when building global systems. For instance, European countries have very strict laws concerning transbor- der data flow and privacy. Transborder data flow is defined as the movement of information across international boundaries in any form. Some European countries prohibit the processing of financial information outside their boundaries or the movement of personal information to foreign countries. The European Union Data Protection Directive, which went into effect in October 1998, restricts the flow of any information to countries (such as the United States) that do not meet strict European information laws on personal informa- tion. Financial services, travel, and health care companies are often directly affected. In response, most multinational firms develop information systems within each European country to avoid the cost and uncertainty of moving information across national boundaries. TABLE 15-2 CHALLENGES AND OBSTACLES TO GLOBAL BUSINESS SYSTEMS GLOBAL SPECIFIC Cultural particularism: Regionalism, Standards: Different Electronic Data Interchange (EDI), nationalism, language differences e-mail, telecommunications standards Social expectations: Brand-name Reliability: Phone networks not uniformly reliable expectations, work hours Political laws: Transborder data and Speed: Different data transfer speeds, many slower than privacy laws, commercial regulations United States Personnel: Shortages of skilled consultants 566 Part Four Building and Managing Systems Cultural and political differences profoundly affect organizations’ business processes and applications of information technology. A host of specific barriers arise from the general cultural differences, everything from different reliability of phone networks to the shortage of skilled consultants. National laws and traditions have created disparate accounting practices in various countries, which impact 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 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 reports 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 concepts of information processing developed in the 1960s—batch-oriented reporting from independent foreign divisions to corporate headquarters, manual entry of data from one legacy system to another, with little online control and communication. Corporations in this situation increasingly face powerful competitive challenges in the marketplace from firms that have ratio- nally designed truly international systems. Still other companies have recently built technology platforms for international systems but have nowhere to go because they lack global strategy. As it turns out, there are significant difficulties in building appropriate international architectures. The difficulties involve planning a system appro- priate 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. Chapter 15 Managing Global Systems 567 15.2 ORGANIZING INTERNATIONAL INFORMATION SYSTEMS Three organizational issues face corporations seeking a global position: choos- ing a strategy, organizing the business, and organizing the systems manage- ment area. The first two are closely connected, so we discuss them together. GLOBAL STRATEGIES AND BUSINESS ORGANIZATION Four main global strategies form the basis for global firms’ organizational structure. These are domestic exporter, multinational, franchiser, and transna- tional. Each of these strategies is pursued with a specific business organizational 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 confederacy 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 companies begin this way, and some move on to other forms. Production, finance/accounting, sales/marketing, human resources, and strategic manage- ment are set up to optimize resources in the home country. International sales are sometimes dispersed using agency agreements or subsidiaries, but even here, foreign marketing relies on the domestic home base for marketing themes and strategies. Caterpillar Corporation and other heavy capital-equipment man- ufacturers fall into this category of firm. The multinational strategy concentrates financial management and con- trol out of a central home base while decentralizing production, sales, and marketing operations to units in other countries. The products and services on sale in different countries are adapted to suit local market conditions. The organization becomes a far-flung confederation of production and marketing facilities in different countries. Many financial service firms, along with a host of manufacturers, such as General Motors, Chrysler, 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 personnel for further production, marketing, and human resources. Food franchisers such 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 568 Part Four Building and Managing Systems as McDonald’s, Mrs. Fields Cookies, 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. 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 headquarters 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 wherever they appear, and taking advantage of any local competitive advan- tages. 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 making, but considerable dispersal of power and financial muscle throughout the global divisions. Few companies have actually attained transnational status, but Citicorp, Sony, Ford, and others are attempting this transition. 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 decentralization 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 giving international firms more flexibility to shape their global strategies. The configuration, 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 informa- tion 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 systems. Networked systems are those in which systems development and operations occur in an integrated and coordinated fashion across all units. Chapter 15 Managing Global Systems 569 As can be seen in Figure 15-3, domestic exporters tend to have highly centralized 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 excep- tions being financial reporting and some telecommunications applications). Franchisers have the simplest 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 ambitious form of systems development is found in transnational firms: Networked systems are those in which there is a solid, singular global environment for developing and operating systems. This usually presupposes a powerful telecommunications 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 telecommunications and systems development across national bound- aries that take place within major geographic regions (European, Asian, American). Transnational 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). FIGURE 15-3 GLOBAL STRATEGY AND SYSTEMS CONFIGURATIONS The large Xs show the dominant patterns, and the small Xs show the emerging patterns. For instance, domestic exporters rely predominantly on centralized systems, but there is continual pressure and some development of decentralized systems in local marketing regions. 570 Part Four Building and Managing Systems 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 MANAGING GLOBAL SYSTEMS Table 15-4 lists the principal management problems posed by developing international 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. 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 expand into Asian markets and knows that it must develop a transnational strategy and a supportive information systems structure. Like most multination- als, 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 e-mail 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. The central systems group at headquarters in the United States recently was decimated and dis- 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 571 persed to the U.S. local sites in the hope of serving local needs better and reducing costs. What do you recommend to the senior management leaders of this company, who now want to pursue a transnational strategy and develop an information 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 American 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 performance. After all, local managers are rewarded in this company for meeting local objectives of their division or plant. Finally, it will be difficult to coordinate development of projects around the world in the absence of a powerful telecommunications network and, therefore, difficult to encourage local users to take on owner- ship 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 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, © 1993. Adapted by permission of Prentice Hall, Inc., Upper Saddle River, N.J. 572 Part Four Building and Managing Systems systems are truly worth sharing from a cost and feasibility point of view. Core systems support functions that are absolutely critical to the organization. Other systems should be partially coordinated because they share key elements, but they do not have to be totally common across national boundaries. For such sys- tems, 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 critical core business processes. Business processes are defined and described in Chapter 2, which you should review. Briefly, business processes are sets of logically related tasks to produce specific business results, such as shipping out correct 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, how are they shipped to the customers? What about suppliers? Do they have access to manufacturing resource planning 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 customer 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 business, 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, centrally coordinated, designed, and implemented around the globe, and which should be regional and local. At the same time, by identifying the critical business 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 political costs of defining and implementing transnational systems are extremely high. Therefore, keep the list to an absolute minimum, letting experi- ence 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 periph- eral systems 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 Chapter 15 Managing Global Systems 573 transnational development, and lack of power to convince senior manage- ment that the transnational systems are worth it. Likewise, avoid grand design approaches 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 huge resources. An alternative approach is to evolve transna- tional applications incrementally from existing applications with a precise and clear vision 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 benefits 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 cannot 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 region 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 suppli- ers and a global distribution network. For the first time, senior managers can locate value-adding activities in regions where they are most economically performed. 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 surplus 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 managers developing the global information systems architectures that were described in Table 15-4. Agreeing on Common User Requirements Establishing a short list of the core business processes and core support systems 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). 574 Part Four Building and Managing Systems 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 compe- tence, 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 convinc- ing 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 coordination costs. C o o r d i n a t i n g S o f t w a r e R e l e a s e s 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. E n c o u r a g i n g L o c a l U s e r s t o S u p p o r t G l o b a l S y s t e m s 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 transnational company is cooptation. Cooptation is defined as bringing the opposition into the process of designing and implementing the solution without giving up control over the direction and nature of the change. As much 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 exam- ple, 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 worldwide management. Centers of excellence perform the initial identification and specification of business processes, define the information requirements, perform 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 excellence helps send the message that all significant groups are involved in the design and will have an influence. INTERACTIVE SESSION: MANAGEMENT While global trade has expanded at over 9 percent a year in the last 20 years, many international compa- nies still rely on outdated manual processes and paperwork for conducting their international trade business. In 2010, global trade of goods and services will amount to a staggering $15 trillion. That’s a lit- tle bigger than the entire United States economy ($14 trillion). There are many complex challenges that managers face when conducting business on an international scale. Chief among these challenges is managing the import and export business process. Managing an import/export business involves man- aging three processes: compliance with foreign and domestic laws, customs clearance procedures, and risk management. Each country you export to has different laws governing imported products and dif- ferent customs procedures. Trading across bound- aries raises financial and contractual risks. What if you export to a foreign company and it doesn’t pay you? What kinds of credit assessments can you perform in various countries? What if your goods are stalled at a foreign port for lack of proper documents? What are the proper documents? The potential pitfalls are numerous. In the past, time-consuming and error-prone man- ual methods were incapable of handling the complex challenges of global trade. To conduct business in other countries, your company must comply with local laws, satisfy trade security measures, meet doc- umentation requirements, understand complicated tariffs and duties, and coordinate the involvement of all parties. Handling these responsibilities manually increases the risk of errors. According to a United Nations study, the inefficient administration of cus- toms regulations and documents accounts for 7 per- cent of the cost of international trade. That’s $1 tril- lion lost annually on a global basis to inefficient handling of customs documents. Poor management of compliance and risk accounts for even more losses. Increasingly, international firms are turning to enterprise software and business intelligence applications to manage their import/export business processes on a global scale. One world, one business, one set of software tools with pre-defined business processes that are the same the world over. That’s the dream. Fonterra provides an example of a firm FONTERRA: MANAGING THE WORLD’S MILK TRADE (actually a cooperative) that is implementing an import/export process control system. Fonterra is the world’s leading exporter of dairy products. Owned by 11,000 New Zealand dairy farmers, Fonterra is a cooperative that exports 95 percent of its products to 140 countries—of all the dairy goods it manufactures, only 5 percent are consumed within its domestic market. Fonterra is primarily an exporting firm. Fonterra has $10 billion in assets, annual revenues of $12.1 billion, and produces 3.6 billion gallons of milk each year. If you wonder how that’s possible, the answer is Fonterra relies on the contributions of 4.3 million New Zealand cows, and over 15,000 employees. Fonterra accounts for over 25 percent of New Zealand’s export trade, and about 30 percent of all global trade in milk and milk products. Fonterra’s operations generate a substantial amount of transactional data. “The volume going through this platform is quite significant in both dollar and transactional terms,” says Clyde Fletcher, Documentation Center Manager at Fonterra. “But we don’t just rely on New Zealand. We procure our products from multiple countries to try to spread the risk. We also export out of Australia, the United States, Latin America, Europe, and Asia.” This data needs to be captured in an enterprise database, then moved into a data warehouse so management can monitor the firms operations. To handle more complex import/export processes, Fonterra turned to the SAP BusinessObjects Global Trade Services solution. SAP Global Trade Services (SAP GTS) automates import/export processes, while ensuring that transactions comply with all customs and security regulations. SAP GTS helps companies standardize and streamline trade processes across their entire enterprise and business units. And it fosters use of shared data and shared collaboration knowledge, replacing high-maintenance manual processes. With SAP GTS, Fonterra has been able to lower the cost, and reduce the risk, of doing business interna- tionally. To date, SAP GTS has helped Fonterra stan- dardize and streamline trade processes across its entire enterprise and business units. And it has fos- tered the sharing of data, greater collaboration, and sharing of knowledge throughout the firm. SAP GTS manages the complexities of global trade and ensures Chapter 15 Managing Global Systems 575 C A S E S T U D Y Q U E S T I O N S 1. Describe the various capabilities of SAP GTS. How does using this software help Fonterra manage its export trade? What quantifiable benefits does this system provide? 2. How would you characterize Fonterra’s global business strategy and structure (review Table 15-3). What kind of a global business is it? Has Fonterra’s structure and strategy shaped its uses of SAP GTS? Would a transnational company choose a different solution? 3. What influence does the global business environ- ment have on firms like Fonterra, and how does that influence their choice of systems? full regulatory compliance. The solution helps reduce buffer stock by improving transparency throughout the supply chain—sharing cross-border trade information will all partners, including freight forwarders, insurance agencies, banks, and regula- tory entities. SAP GTS has helped Fonterra avoid sup- ply chain bottlenecks, costly production downtime, Explore Fonterra’s Web site (Fonterra.com) and then answer the following questions: 1. Go the Web site SAP.com and search on “GTS.” Click on the article entitled “SAP GRC Global Trade Services: Streamline and Secure Your Global Supply Chain.” What benefits does SAP promise to deliver for global trading companies? Create a summary table for your class. 2. Visit SAP’s largest competitor, Oracle.com, and identify similar applications provided by Oracle. What do you think are the most important management and business considerations in deciding between Oracle and SAP solutions for global projects? Discover one global firm that uses Oracle’s global trade offerings, and compare that firm to Fonterra. and errors that can result in expensive penalties— and even revoked import/export privileges. Sources: David Barboza, “Supply Chain for iPhone Highlights Costs in China,” New York Times, July 5, 2010; Lauren Bonneau, “Mastering Global Trade at Fonterra,” CustomProfiles, SAP.com, July 1, 2010; Kevin Keller, “iPhone Carries Bill of Materials of $187.51,” iSuppli.com/Teardowns, June 28, 2010. M I S I N A C T I O N 576 Part Four Building and Managing Systems Even with the proper organizational structure and appropriate management choices, it is still possible to stumble over technology issues. Choices of tech- nology platforms, networks, hardware, and software are the final element in building transnational information systems architectures. 15.4 TECHNOLOGY ISSUES AND OPPORTUNITIES FOR GLOBAL VALUE CHAINS 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, software, 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 software applications that are user friendly and that truly enhance the produc- Chapter 15 Managing Global Systems 577 tivity 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 throughout the global organization because not all business units use the same applications, 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 incompatible with American headquarters teams, which use Lotus Notes. Overcoming these challenges requires systems integra- tion 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 systems will fit in with the existing suite of applications developed around the globe by different divisions, 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 development 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, Sun, HP, and other hardware in many different operating units in many different 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 between systems, communication speeds and architectures, and network software. CONNECTIVITY Truly integrated global systems must have connectivity—the ability to link together 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 connectivity among the dispersed units of global firms. However, many issues remain. The public Internet does not guarantee any level of service (even in the U.S.). Few global corporations trust the security of the Internet and generally use private networks to communicate sensitive data, and Internet virtual private networks (VPNs) for communications that require less security. Not all coun- tries support even basic Internet service that requires obtaining reliable circuits, coordinating among different carriers and the regional telecommunications authority, and obtaining standard agreements for the level of telecommunica- tions service provided. Table 15-5 lists the major challenges posed by interna- tional networks. 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 578 Part Four Building and Managing Systems 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. The high cost of PCs, and low incomes, limit access to Internet service in many developing countries (see Figure 15-5). Where an Internet infrastructure exists in less-developed countries, 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. In addition, many countries monitor transmis- TABLE 15-5 PROBLEMS OF INTERNATIONAL NETWORKS Quality of service Security Costs and tariffs Network management Installation delays Poor quality of international service Regulatory constraints Network capacity FIGURE 15-5 INTERNET PENETRATION BY REGION The percentage of the total population using the Internet in developing countries is much smaller than in the United States and Europe, but the fastest growth is in Asia. Source: Internetworldstats.com, 2010. Chapter 15 Managing Global Systems 579 sions. Governments in China, Singapore, Iran, and Saudi Arabia monitor Internet traffic and block access to Web sites considered morally or politically offensive. On the other hand, the rate of growth in the Internet population is far faster in Asia, Africa, and the Middle East than in North America and Europe, where the Internet population is growing slowly if at all. In 2010, China, for instance, has more than 420 million Internet users compared to the United States with about 221 million. Therefore, in the future, Internet connectivity 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. The Interactive Session on Organizations describes how cell phones provide a partial solution to this problem. Their use is mushrooming in developing countries, and they are starting to become engines for economic development. SOFTWARE LOCALIZATION The development of core systems poses unique challenges for application software: How will the old systems interface with the new? Entirely new interfaces 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 software must be created, another challenge is to build software that can be realistically used by multiple business units from different countries given that business units are accustomed to their unique business processes and def- initions 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. Graphical user interfaces are This page from the Pearson Prentice Hall Web site was translated into Japanese. Web sites and software interfaces for global systems may have to be translated into multiple languages to accommodate users in other parts of the world. As cell phones, the Internet, high-speed Internet connections, and other information and communica- tion technologies become increasingly widespread, more and more people are experiencing the benefits each technology has to offer. Many of these tech- nologies have not yet closed the “digital divide” separating the world’s well-developed and underde- veloped nations. Some countries, like the United States, have access to most new technologies, but most residents of poorer countries still struggle with challenges like obtaining reliable electricity and abject poverty. Recent trends in cell phone design and consumer research indicate that cellular phones are crossing the digital divide and are becoming a truly ubiquitous technology (far more so than personal computers), enhancing the quality of life for millions of people while also increasing the strength of the global economy. As in the United States, by 2015, cell phones will be the primary means of access to the Internet in the developing world. For instance, mobile phone use in Africa is booming. Despite their high costs (the price of a phone in Niger is equal to five days of income), mobile phone subscriptions in Africa have risen from 16 million in 2000, to 376 million in 2008. Sixty-eight percent of the world’s mobile phone subscriptions are in developing countries, compared with 20 percent of the world’s Internet users. Because cell phones combine features of watches, alarm clocks, cameras and video cameras, stereos, televisions, and perhaps even wallets soon due to the growing popularity of mobile banking, they are growing in usefulness even as they decrease in price. Most importantly, cell phones are increasingly becoming the most convenient and affordable way to connect to the Internet and perform other tasks traditionally associated with computers. And cell phones are much less costly than personal comput- ers. The possession of a cell phone greatly increases efficiency and quality of life, so the global economy would stand to benefit on a proportionally large scale. Many economists believe that widespread cell phone usage in developing countries is having a profound and revolutionary effect on their economic well-being in a way that traditional methods of foreign aid have failed to achieve. HOW CELL PHONES SUPPORT ECONOMIC DEVELOPMENT Cellular phone companies such as Nokia are sending what they call “human-behavior researchers” or “user anthropologists” to gather as much useful information as they can about con- sumer habits and the lives of potential cell phone buyers. They pass on that information to cell phone designers and technology architects. This process represents a new approach to designing phones known as “human-centered design”. Human-cen- tered design is important to high-tech companies trying to build products that people find appealing and easy to use, and are thus more likely to be bought. Nokia and other companies face significant challenges in marketing their phones to the poorest segment of Africa and Asia’s populations. Barriers include lack of electricity in many areas, incomes too low to afford a cell phone, and potential lack of service in non-urban areas. India currently leads the way in cell phone subscriptions, with an astounding 756 million (63 percent of its total population), but many other countries lag far behind both in cell phone usage and rates of Internet access. For example, Morocco, one of Africa’s leaders in cell phone and Internet usage, boasts 20 million Internet users, or 58 percent of its total population. By comparison, the United States. has over 221 million Internet users of all ages, or 79 percent of its total population. The World Resources Institute published a report detailing how the poor in developing countries allocate their money. Even the poorest families dedi- cated significant portions of their small budgets to communication technologies such as cell phones. Having a cell phone is a tremendous advantage for members of populations that are constantly on the move due to war, drought, natural disasters, or extreme poverty, primarily because it allows people to remain reachable under practically any circum- stances. Cell phones also have implications for medi- cine in these countries: patients can more easily reach doctors, and doctors can more easily acquire information pertaining to diseases and ailments they may need to treat. In addition to the benefit of being able to stay in touch with others, cell phones are also useful as a business tool. Evidence suggests that possession of a cell phone increases profits on an individual level, INTERACTIVE SESSION: ORGANIZATIONS 580 Part Four Building and Managing Systems 1. What strategies are cell phone companies using to ‘close the digital divide’ and market phones to the poorest segment of the world’s population? 2. Why do economists predict that widespread cell phone usage in developing countries would have an unprecedented effect on the growth of those countries? 3. What are some examples of how cell phones might increase quality of life for residents of developing countries? 4. Do you believe that cell phones will proliferate widely through Africa and Asia? Why or why not? allowing people to more easily identify and take advantage of business opportunities. A recent study by the Centre for Economic Policy Research also showed that for every additional 10 cellular phones per 100 people a country acquires, that country’s gross domestic product (GDP) rises 0.5 percent. In Niger, millet is a household staple sold in traditional village markets across thousands of square miles. According to economists, the growth of mobile phone coverage reduced grain price differences across markets by 15 percent between 2001 and 2007, with a greater impact on markets isolated by distance and poor-quality roads. Traders could respond to surpluses and shortages in the mar- ket, making better decisions about price and deliv- ery. As a result, trader profits rose and prices fell. Harvard economist Robert Jensen discovered that the introduction of mobile phones in the Indian coastal state of Kerala reduced price differences across fish markets by almost 60 percent between 1997 and 2001, providing an almost-perfect example of the “Law of One Price”: when markets work efficiently, identi- cal goods have the same price. In addition, mobile phones almost completely eliminated waste—the catch left unsold at the end of the day—by allowing Explore the Web site for One Laptop Per Child (www.laptop.org) and then answer the following questions: 1. What are the capabilities of the XO laptop (especially the latest version, XO-3) ? How well- suited is this machine for developing countries? 2. How would use of the XO laptop narrow the global digital divide? Compare the potential impact of this machine to that of cell phones in developing nations. fishermen to call around to different markets while at sea, choose the market with the best price, and sell accordingly. Mobile phones resulted in financial improvements for both fishermen and consumers: fishermen’s profits increased by 8 percent, and con- sumer prices declined by 4 percent. Economists and others who believe that poor countries need to radically change their economic structure in order to develop, and who also discour- age reliance on international aid given to failing economies, are enthusiastic about the positive impact that cell phones and other information tech- nologies can have on underdeveloped countries. Access to the Internet via cell phones also promises to bring about societal and political change in devel- oping countries in which repressive governments exert control over all forms of media. Sources: Worldwide Worx, “Businesses Across Africa Are Expecting a Revolution in Internet Access, Technology and Costs as a Result of the Rush of New Undersea Cables Connecting the Continent,” Telecom Trends in Africa Report 2010, September 16, 2010; Jenny C. Aker and Isaac M. Mbiti, “Mobile Phones and Economic Development in Africa,” Center for Global Development, June 1, 2010; Jenny Aker and Isaac Mbiti, “Africa Calling: Can Mobile Phones Make a Miracle,” Boston Review, March/April 2010; “Top 20 Countries—Internet Usage,” Internetworldstats.com, November 2010. C A S E S T U D Y Q U E S T I O N S M I S I N A C T I O N Chapter 15 Managing Global Systems 581 ideal for this but presuppose a common language—often English. 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. www.laptop.org 582 Part Four Building and Managing Systems 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 systems to standardize their business processes on a global basis and to create coordinated global supply chains. However, these cross-functional systems are not always compatible with differences in languages, cultural heritages, and business processes in other countries (Martinons, 2004; Liang et al., 2004; Davison, 2002). 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 systems, e-mail, and videoconferenc- ing are especially important worldwide collaboration tools for knowledge- and data-based firms, such as advertising firms, research-based firms in medicine and engineering, and graphics and publishing firms. Internet-based tools will be increasingly employed for such purposes. 15.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience analyzing interna- tional systems issues for an expanding business, conducting international mar- ket research, and building a job posting database and Web page for an interna- tional company. M a n a g e m e n t D e c i s i o n P r o b l e m s 1. 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 Driver Information Acquisition Device for capturing package delivery data. UPS wants to make its WorldShip, CampusShip, 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? 2. Your company manufactures and sells tennis rackets 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, which of these countries would you target first? What criteria would you use? What other considerations should you address in your Web strategy? What features would you put on your Web site to attract buyers from the countries you target? Chapter 15 Managing Global Systems 583 A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : B u i l d i n g a J o b D a t a b a s e a n d W e b P a g e f o r a n I n t e r n a t i o n a l C o n s u l t i n g F i r m Software skills: Database and Web page design Business skills: Human resources internal job postings 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 special- izes in designing, developing, 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, he or she contacts the human resources department for a list of KTP job vacancies. KTP also posts its employment opportunities on the company Web site. 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. Send a copy of the KTP database and Web page to your professor. I m p r o v i n g D e c i s i o n M a k i n g : C o n d u c t i n g I n t e r n a t i o n a l M a r k e t i n g a n d P r i c i n g R e s e a r c h Software skills: Internet-based software Business skills: International pricing and marketing When companies sell overseas, it’s important to determine whether their products are priced properly for non-domestic markets. 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 office furniture that has decided to enter the international market. You have been given the name of Sorin SRL, a major Italian office furniture retailer, but your source had no other information. You want to test the market by contacting this firm to offer it a specific desk chair that you have to sell at about $125. Using the Web, locate the information needed to contact this firm and to find out how many European euros you would need to get for the chair in the current market. One source for locating European companies is the Europages Business Directory (www.europages.com). In addition, consider using the Universal Currency Converter Web site (www.xe.net/ucc/), which deter- mines the value of one currency expressed in other currencies. Obtain both the information needed to contact the firm and the price of your chair in their local currency. Then locate and obtain customs and legal restrictions on the products you will export from the United States and import into Italy. Finally, locate a company that will represent you as a customs agent and gather information on shipping costs. www.europages.com www.xe.net/ucc/ 584 Part Four Building and Managing Systems Review Summary 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. 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. 3. How can information systems support different global business strategies? There is a connection between firm strategy and information systems design. Transnational firms must develop networked system configurations and permit considerable decentralization of develop- ment 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. 4. 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 processes and focus on building systems to support these processes. Tactically, managers will have to coopt widely dispersed foreign units to participate in the development and operation of these systems, being careful to maintain overall control. 5. 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 business 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 proprietary architec- ture 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 cultural, language, and organizational frameworks. Key Terms Business driver, 562 Cooptation, 574 Core systems, 572 Domestic exporter, 567 Franchisers, 567 Global culture, 563 International information systems architecture, 562 Legitimacy, 574 Multinational, 567 Particularism, 565 Software localization, 581 Transborder data flow, 565 Transnational, 568 Chapter 15 Managing Global Systems 585 Review Questions 1. What major factors are driving the international- ization 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. 2. What are the alternative strategies for developing global businesses? • Describe the four main strategies for global business and organizational structure. 3. How can information systems support different global business strategies? • Describe the four different system configura- tions that can be used to support different global strategies. 4. What are the challenges posed by global informa- tion systems and management solutions for these challenges? • List and describe the major management issues 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 management strategy for developing and implementing global systems. • Define cooptation and explain how can it be used in building global systems. 5. 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 1. If you were a manager in a company that oper- ates 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? 2. Describe ways the Internet can be used in international information systems. Video Cases You will find Video Cases illustrating some of the concepts in this chapter on the Laudon Web site along with questions to help you analyze the cases. 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 an area such as digital telecommunications (e.g., e-mail, wireless communications, virtual private networks), enterprise systems, collaboration soft- ware, or the Web. It will be necessary to choose 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 Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work col- laboratively on project documents. Try to use Google Docs to develop a presentation of your find- ings for the class. Collaboration and Teamwork: Identifying Technologies for Global Business Strategies WR Grace Consolidates its General Ledger System CASE STUDY R Grace is a chemical manufacturer headquartered in Columbia, Maryland. Founded in 1854, the company develops and sells specialty chemicals and con- struction products and has been a worldwide leader in those fields. Grace has over 6,300 employees and earned $2.8 billion in revenues in 2009. The com- pany has two operating segments: Grace Davison, which focuses on specialty chemicals and formula- tion technologies, and Grace Construction Products, which focuses on specialty construction materials, systems, and services. Between these two divisions, there are over 200 separate subsidiaries and several different legal entities that comprise the full com- pany. Grace has operations in 45 countries around the world. Though Grace is a strong and successful company, global companies with separate divisions often strug- gle to unify their information systems. Grace is not a single, cohesive business unit—it’s an amalgam of many operating divisions, subsidiaries, and business units, all of which use different financial data, reports, and reconciliation methods. Though this “fractured” structure is common to most global com- panies, it created problems for the company’s general ledger. The general ledger of a business is its main accounting record. General ledgers use double-entry bookkeeping, which means that all of the transactions made by a company are entered into two different accounts, debits and credits. General ledgers include accounts for current assets, fixed assets, liabilities, revenues and expense items, gains, and losses. It’s no surprise that a global company that earns several billion dollars in revenues would have a complicated ledger system, but Grace’s general ledger setup was more than just complicated. It was a disorganized tangle of multiple ledgers, redundant data, and inefficiency processes. The company had three separate ledger systems from SAP: one for its legal reporting requirements team, and two more for each of its two major operating segments, Grace Davison and Grace Construction Products. But each of the three implementations for these systems occurred several years apart, so the differences between the ledgers were substantial. All three ledgers had different configurations and different levels of granularity within the reporting functional- ity, and all three of the ledgers were driven by separate data sources. The “classic” general ledger is used for reporting revenues and expenditures for all subsidiaries, accounts, and business areas. The Grace Davison ledger stored information on company codes (subsidiary ID numbers), accounts, profit centers, plants, and trading partners. The Grace Construction Products management ledger stored information on company codes, accounts, business areas, profit centers, trading partners, and destination countries. Grace Davison used profit-center accounting for its management reporting, and Grace Construction Products used special-purpose ledgers to gather the same financial information. If this sounds like a confusing arrangement, that’s because it was. Consolidating this data across the two divisions and across its many subdivisions proved difficult, and compiling company financial reports was a painstaking and time-consuming task. Reconciling the financial data from each of the three reporting sources resulted in lengthy financial close cycles and consumed excessive amounts of employee time and resources. Michael Brown, director of finance productivity at Grace, said that “from a financials point of view, we were basically three different companies.” Grace management decided that the company needed to eliminate the financial reporting ‘silos’ and create a system that served all parts of Grace’s business. WR Grace hoped to create a global financial standard for its financial reporting system, using the slogan “one Grace” to rally the company to work towards that standard. SAP General Ledger was the most important factor in Grace’s ability to accomplish its goal. SAP General Ledger was attractive to Grace because of its many unique and useful features. It has the ability to automatically and simultaneously post all sub-ledger items in the appropriate general accounts, simultaneously update general ledger and cost accounting areas, and evaluate and report on current accounting data in real time. Grace also liked SAP’s centralized approach to general ledger, up-to- date references for the rendering of accounts across all of its divisions. Consolidating multiple ledgers is a difficult task. SAP General Ledger helped Grace to simplify the W 586 Part Four Building and Managing Systems process. SAP Consulting and an SAP General Ledger migration team assisted the company along the way. SAP implementations feature an SAP team leader and project manager as well as a migration cockpit. The migration cockpit is a feature of SAP implemen- tations that offers a graphical representation and overview of the general ledger migration process. The cockpit displays steps of the migration in sequence and manages logs, attachments, and other materials important to the general ledger. The migra- tion cockpit helps to ensure that sufficient planning goes into the general ledger consolidation process, and that the necessary business process changes accompany the technical changes of implementing a unified general ledger. SAP and Grace split the project into two main com- ponents: General Ledger Data Migration, and Business Process Testing. General Ledger Data Migration involved acquiring all of the relevant data from Grace’s three separate ledgers, combining it and eliminating redundancies, and supplying it to the SAP General Ledger. A small team executed this half of the project. Grace decided to standardize its reporting processes around profit-center accounting and built its general ledger design with that standard in mind. Business Process Testing was completed by a global SAP team performing multiple full-cycle tests. In other words, SAP testers accessed the system remotely and tested all of the functions of SAP General Ledger to ensure that the system would work as planned. The SAP General Ledger project manager oversaw both components of the project. During the testing process, SAP testers used a technique called “unit testing,” common to many system upgrades of this type. The testers set up a “dummy” system with a prototype version of the general ledger and used it to test different types of accounting documents. Grace wanted to modify the configuration of the general ledger to conform to the company’s unique needs and circumstances, and made sure that the people who knew what was needed were building the system and designing its specifications. Because of these adjustments, unit testing was critical to ensure that configuration changes had not affected the overall integrity of the system. SAP testers also performed basic scenario tests, complex scenario tests, and tests on special account- ing document types in an effort to ensure that the general ledger was equipped to handle all of the tasks Grace expected it to perform. They also tested inbound finance interfaces, such as the HR interface, bank statements, and upload programs, as well as special document types used by those interfaces. SAP and Grace both knew that a significant effort would be required to properly test the general ledger, and SAP’s experience with similar upgrades in the past was helpful in ensuring that SAP performed the proper amount of tests. After the data migration was completed, Grace still had to decommission its old ledgers, which were still pivotal sources for many of the custom reports that the company was generating on a regular basis. For example, reports are automatically generated from the special-purpose ledger, or reports that group all the transactions that took place within a particu- lar country in the past year, and so on. To decommis- sion its old ledgers, Grace had to eliminate as many of those custom reports as it could, and move the essential ones over to the new general ledger. Grace recruited employees from all areas of their financial division to identify the most critical reports. With the general ledger migration completed, all of WR Grace shares a common accounting infrastructure, management can quickly develop an overall picture of the company’s financial status, and most of the ledger can be accessed or updated in real time. The financial reconciliation processes at the end of each reporting period were totally eliminated, allowing Grace to devote less energy on managing its ledgers and more on actually running its business. The eventual savings in all areas of the business figure to pay for the installa- tion in short order. Grace’s accountants and financial planners will be much more efficient. Managers will spend less time getting the information they need. IT costs for maintaining a single ledger will total far less than the costs for maintaining three, and fewer errors will make their way into the general ledger system. Best of all for Grace, the implementation was com- pleted on time and under budget. Grace hopes to use the General Ledger platform to continue making other improvements with SAP. Grace plans to upgrade its consolidation systems, financial planning, and analytics functions to SAP systems. Grace already had a strong relationship with SAP. In 1997, Grace installed SAP software for the first time, and prior to the general ledger migration, Grace was already using SAP Business Information Warehouse and NetWeaver Portal globally. This pre-existing relationship made the process of imple- menting SAP General Ledger much easier. It’s also the reason why Grace is so optimistic that it will achieve similar gains in other areas of its business by switching to SAP solutions. Chapter 15 Managing Global Systems 587 588 Part Four Building and Managing Systems Sources: Christ Maxcer, “Global Enterprise Unites as One: W.R. Grace Migrates to SAP General Ledger,” insiderPROFILES 5, no. 1, January 2, 2009; SAP AG, “One Grace Project Builds Single Source of Truth Using SAP General Ledger,” 2008; and Ed Taylor, “The Business Benefits of a General Ledger Migration at W.R. Grace & Co.” May 6, 2008. CASE STUDY QUESTIONS 1. Why did WR Grace’s general ledger system need an overhaul? 2. What made SAP a logical partner for Grace’s upgrade? 3. What obstacles did SAP and Grace face in their attempts to consolidate Grace’s ledgers? 4. How successful was the general ledger migration? 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Journal of Management Information Systems 13, no. 4 (Spring 1997) R 16 References G 1 Glossary 3G networks Cellular networks based on packet-switched technology with speeds ranging from 144 Kbps for mobile users to over 2 Mbps for stationary users, enabling users to transmit video, graphics, and other rich media, in addition to voice. 4G networks The next evolution in wireless communication is entirely packet switched and capable of providing between 1 Mbps and 1 Gbps speeds; up to ten times faster than 3G networks. Not widely deployed in 2010. acceptable use policy (AUP) Defines acceptable uses of the firm’s information resources and computing equipment, including desktop 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. accumulated balance digital payment systems Systems enabling users to make micropayments and purchases on the Web, accumulating a debit balance on their credit card or telephone bills. affiliate revenue model an e-commerce revenue model in which Web sites are paid as "affiliates" for sending their visitors to other sites in return for a referral fee. agent-based modeling Modeling complex phenomena as systems of autonomous agents that follow relatively simple rules for interaction. agency theory Economic theory that views the firm as a nexus of contracts among self-interested individuals who must be supervised and managed. 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. Ajax Development technique for creating interactive Web applications capable of updating the user interface without reloading the entire browser page. analog signal A continuous waveform that passes through a communications medium; used for voice communications. 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. antivirus software Software designed to detect, and often eliminate, computer viruses 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. application software package A set of prewritten, precoded application software programs that are commercially available for sale or lease. application software Programs written for a specific application to perform functions specified by end users. 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) The effort to develop computer-based systems that can behave like humans, with the ability to learn languages, accomplish physical tasks, use a perceptual apparatus, and emulate human expertise and decision making. attribute A piece of information describing a particular entity. augmented reality 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. authorization management systems Systems for allowing each user access only to those portions of a system or the Web that person is permitted to enter, based on information established by a set of access rules. authorization policies Determine differing levels of access to information assets for different levels of users in an organization. automation Using the computer to speed up the performance of existing tasks. autonomic computing Effort to develop systems that can manage themselves without user intervention. 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 hypothesis is either proved or disproved. balanced scorecard method Framework for operationalizing a firms strategic plan by focusing on measurable financial, business 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. banner ad A graphic display on a Web page used for advertising. The banner is linked to the advertiser’s Web site so that a person clicking on it will be transported to the advertiser’s Web site. batch processing A method of collecting and processing data in which transactions are accumulated and stored until a specified time when it is convenient or necessary to process them as a group. baud A change in signal from positive to negative or vice versa that is used as a measure of transmission speed. behavioral models Descriptions of management based on behavioral scientists’ observations of what managers actually do in their jobs. behavioral targeting Tracking the click-streams (history of clicking behavior) of individuals across multiple Web sites for the purpose of understanding their interests and intentions, and exposing them to advertisements which are uniquely suited to their interests. benchmarking Setting strict standards for products, services, or activities 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. G 2 Glossary 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 computer system. It can only have one of two states, representing 0 or 1. blade server Entire computer that fits on a single, thin card (or blade) and that is plugged into a single chassis to save space, power and complexity. blog Popular term for Weblog, designating an informal yet structured Web site where individuals can publish stories, opinions, and links to other Web sites of interest. blogosphere Totality of blog-related Web sites. 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 channels 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. bus topology Network topology linking a number of computers by a single circuit with all messages broadcast to the entire network. business continuity planning Planning that focuses on how the company can restore business operations after a disaster strikes. 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 service 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 Attempts to systematically translate a firm’s strategies (e.g., differentiation, low-cost producer, market share growth, and scope of operation) into operational targets. business process management Business process management (BPM) is an approach to business which 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 coordinate 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. byte A string of bits, usually eight, used to store one number or character in a computer system. cable Internet connections Internet connections that use digital cable lines to deliver high-speed Internet access to homes and businesses. call center An organizational department responsible for handling customer service issues by telephone and other channels. capacity planning The process of predicting when a computer hardware system becomes saturated to ensure that adequate computing resources are available for work of different priorities and that the firm has enough computing power for its current and future needs. 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 structure produces pain. case-based reasoning (CBR) Artificial intelligence technology that represents knowledge as a database of cases and solutions. cell phone A device that transmits voice or data, using radio waves to communicate with radio antennas placed within adjacent geographic areas called cells. centralized processing Processing that is accomplished by one large central computer. change agent In the context of implementation, the individual acting 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 information system. channel conflict Competition between two or more different distribution chains used to sell the products or services of the same company. channel The link by which data or voice are transmitted between sending and receiving devices in a network. chat Live, interactive conversations over a public network. 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 using 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 management 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. clicks-and-mortar Business model where the Web site is an extension of a traditional bricks-and-mortar business. clickstream tracking Tracking data about customer activities at Web sites and storing them in a log. 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 processing between clients and servers on a network, assigning functions to the machine most able to perform the function. cloud computing Web-based applications that are stored on remote servers and accessed via the "cloud" of the Internet using a standard Web browser. coaxial cable A transmission medium consisting of thickly insulated copper wire; can transmit large volumes of data quickly. Code Division Multiple Access (CDMA) Major cellular transmission standard in the United States that transmits over Glossary G 3 several frequencies, occupies the entire spectrum, and randomly assigns users to a range of frequencies over time. collaboration Working with others to achieve shared and explicit goals. collaborative commerce The use of digital technologies to enable multiple organizations to collaboratively design, develop, build and manage products through their life cycles. collaborative filtering Tracking users’ movements on a Web site, comparing the information gleaned about a user’s behavior against data about other customers with similar interests to predict what the user would like to see next. collaborative planning, forecasting, and replenishment (CPFR) Firms collaborating with their suppliers and buyers to formulate demand forecasts, develop production plans, and coordinate shipping, warehousing, and stocking activities. co-location a kind of Web site hosting in which firm purchase or rent a physical server computer at a hosting company's location in order to operate a Web site. community provider a Web site 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 personalities 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 pre-existing software components. computer Physical device that takes data as an input, transforms the data by executing stored instructions, and outputs information to a number of devices. 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, 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. computer hardware Physical equipment used for input, processing, and output activities in an information system. computer literacy Knowledge about information technology, focusing on understanding of how computer-based technologies work. computer software Detailed, preprogrammed instructions that control 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-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 development to reduce the amounts of repetitive work the developer needs to do. computer-based information systems (CBIS) Information systems that rely on computer hardware and software for processing and disseminating information. connectivity The ability of computers and computer-based devices to communicate with each other and share information in a meaningful way without human intervention.. consumer-to-consumer (C2C) electronic commerce Consumers selling goods and services electronically to other consumers. 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 Web sites. Used to identify the visitor and track visits to the Web site. cooptation Bringing the opposition into the process of designing and implementing a solution without giving up control of the direction and nature of the change. copyright A statutory grant that protects creators of intellectual property against copying by others for any purpose for a minimum 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. critical success factors (CSFs) A small number of easily identifiable operational goals shaped by the industry, the firm, the manager, and the broader environment that are believed to assure the success of an organization. Used to determine the information requirements of 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 produce 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 marketing over the lifetime of the customer relationship, expressed in today’s dollars. customer relationship management (CRM) Business and technology 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 package software’s integrity. cybervandalism Intentional disruption, defacement, or destruction of a Web site or corporate information system. data Streams of raw facts representing events occurring in organizations 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 database 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 organizing information about the data maintained in a database. data-driven DSS A system that supports decision making by allowing users to extract and analyze useful information that was previously buried in large databases. 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 availability, usability, integrity, and security of the firm’s data. data inconsistency The presence of different values for same attribute when the same data are stored in multiple locations. data management software Software used for creating and manipulating lists, creating files and databases to store data, and combining information for reports. 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 accuracy 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 systems 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 managing data so that they appear to be in one location. database administration Refers to the more technical and operational 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 applications to extract the data they need without having to create separate 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. dataconferencing Teleconferencing in which two or more users are able to edit and modify data files simultaneously. 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 organization’s management level that combine data and sophisticated analytical models or data analysis tools to support semistructured and unstructured decision making. dedicated lines Telephone lines that are continuously available for transmission by a lessee. Typically conditioned to transmit data at high speeds for high-volume applications. 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. Descartes’ rule of change A principle that states that if an action cannot be taken repeatedly, then it is not right to be taken at any time. design Simon’s second stage of decision making, when the individual conceives of possible alternative solutions to a problem. 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 checking Systems that extend the functionality of existing checking accounts so they can be used for online shopping payments. digital credit card payment system Secure services for credit card payments on the Internet that protect information transmitted among users, merchant sites, and processing banks. digital dashboard Displays all of a firm’s key performance indicators 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 Internet 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 market A marketplace that is created by computer and communication technologies that link many buyers and sellers. 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 copy- righted materials. digital signal A discrete waveform that transmits data coded into two discrete states as 1-bits and 0-bits, which are represented as on-off electrical pulses; used for data communications. digital subscriber line (DSL) A group of technologies providing high-capacity transmission over existing copper telephone lines. digital wallet Software that stores credit card, electronic cash, owner identification, and address information and provides this data automatically during electronic commerce purchase transactions. direct cutover A risky conversion approach where the new system completely replaces the old one on an appointed day. 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. distance learning Education or training delivered over a distance to individuals in one or more locations. distributed database A database that is stored in more than one physical location. Parts or copies of the database are physically stored in one location, and other parts or copies are stored and maintained in other locations. distributed denial-of-service (DDoS) attack Numerous computers inundating and overwhelming a network from numerous launch points. G 4 Glossary distributed processing The distribution of computer processing work among multiple computers linked by a communications network. 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. downsizing The process of transferring applications from large computers to smaller ones. 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. 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 digitally enable government and public sector agencies’ relationships with citizens, businesses, and other arms of government. e-learning Instruction delivered through purely digital technology, such as CD-ROMs, the Internet, or private networks. efficient customer response system System that directly links consumer behavior back to distribution, production, and supply chains. electronic billing and payment presentation system Systems used for paying routine monthly bills that allow users to view their bills electronically and pay them through electronic funds transfers from banks or credit card accounts. electronic business (e-business) The use of the Internet and digital technology to execute all the business processes in the enterprise. 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 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 transactions, such as orders, shipment instructions, or payments. electronic payment system The use of digital technologies, such as credit cards, smart cards and Internet-based payment systems, to pay for products and services electronically. e-mail 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 on-line 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 systems Help organizations manage structured and semistructured knowledge, providing corporate repositories of documents, reports, presentations, and best practices and capabilities for collecting and organizing e-mail and graphic objects. enterprise portal Web interface providing a single entry point for accessing organizational information and services, including information from various enterprise applications and in-house legacy systems so that information appears to be coming from a single source. 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 Web sites where retail goods are sold. ethical “no free lunch” rule Assumption that all tangible and intangible 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 individuals acting as free moral agents to make choices to guide their behavior. evil twins Wireless networks that pretend to be legitimate to entice participants to log on and reveal passwords or credit card numbers. 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 unstructured 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. Glossary G 5 fault-tolerant computer systems Systems that contain extra hardware, 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 organization’s resources and constraints. feedback Output that is returned to the appropriate members of the organization to help them evaluate or correct input. fiber-optic cable A fast, light, and durable transmission medium consisting of thin strands of clear glass fiber bound into cables. Data are transmitted as light pulses. 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 transfer protocol (FTP) Tool for retrieving and transferring files from a remote computer. file A group of records of the same type. firewall Hardware and software placed between an organization’s internal network and an external network to prevent outsiders from invading private networks. focused differentiation Competitive strategy for developing new market niches for specialized products or services where a business can compete in the target area better than its competitors. folksonomies User-created taxonomies for classifying and sharing information. 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 structures 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. fourth-generation language A programming language that can be employed directly by end users or less-skilled programmers to develop computer applications more rapidly than conventional programming languages. 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 foreign 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 charging a premium for advanced or high value features. fuzzy logic Rule-based AI that tolerates imprecision by using nonspecific terms called membership functions to solve problems. Gantt chart Visually representats 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 technology infrastructure. genetic algorithms Problem-solving methods that promote the evolution of solutions to specified problems using the model of living organisms adapting to their environment. geographic information system (GIS) System with software that can analyze and display data using digitized maps to enhance planning and decision-making. global culture The development of common expectations, shared artifacts, and social norms among different cultures and peoples global positioning system (GPS) Worldwide satellite navigational system. graphical user interface (GUI) The part of an operating system users interact with that uses graphic icons and the computer mouse to issue commands and make selections. Gramm-Leach-Bliley Act Requires financial institutions to ensure the security and confidentiality of customer data. green computing Refers to practices and technologies for designing, manufacturing, using, and disposing of computers, servers, and associated devices such as monitors, printers, storage devices, and networking and communications systems to minimize impact on the environment. grid computing Applying the resources of many computers in a network to a single problem. 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 network for profit, criminal mischief, or personal pleasure. hertz Measure of frequency of electrical impulses per second, with 1 Hertz equivalent to 1 cycle per second. high-availability computing Tools and technologies ,including backup hardware resources, to enable a system to recover quickly from a crash. HIPAA Law outlining rules for medical security, privacy, and the management of health care records. hotspot A specific geographic location in which an access point provides public Wi-Fi network service. hubs Very simple devices that connect network components, sending a packet of data to all other connected devices. hybrid AI systems Integration of multiple AI technologies into a single application to take advantage of the best features of these technologies. hypertext markup language (HTML) Page description language for creating Web pages and other hypermedia documents. hypertext transfer protocol (HTTP) The communications standard 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 access to system resources. identity theft Theft of key pieces of personal information, such as credit card or Social Security numbers, in order to obtain merchandise 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 Simon’s final stage of decision-making, when the individual puts the decision into effect and reports on the progress of the solution. industry structure The nature of participants in an industry and their relative bargaining power. Derives from the competitive forces and establishes the general business environment in an industry and the overall profitability of doing business in that environment. inference engine The strategy used to search through the rule base in an expert system; can be forward or backward chaining. information Data that have been shaped into a form that is meaningful 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. G 6 Glossary information density The total amount and quality of information available to all market participants, consumers, and merchants. information policy Formal rules governing the maintenance, distribution, and use of information in an organization. information requirements A detailed statement of the information 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 visualization in an organization. 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 technologies 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 organization 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 on-line 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 application. 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 Protocol (IP) address Four-part numeric address indicating a unique computer location on the Internet. Internet Service Provider (ISP) A commercial organization with a permanent connection to the Internet that sells temporary connections to subscribers. Internet telephony Technologies that use the Internet Protocol’s packet-switched connections for voice service. 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 organization. intranet An internal network based on Internet and World Wide Web technology and standards. intrusion detection system Tools to monitor the most vulnerable points in a network to detect and deter unauthorized intruders. investment workstation Powerful desktop computer for financial specialists, which is optimized to access and manipulate massive amounts of financial data. IT governance Strategy and policies for using information technology 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 generation of information requirements by having end users and information systems specialists work together in intensive interactive design sessions. just-in-time 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 assembly 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 management for understanding how well the firm is performing along specified dimensions. keylogger Spyware that records every keystroke made on a computer to steal personal information or passwords or to launch Internet attacks. knowledge Concepts, experience, and insight that provide a framework for creating, evaluating, and using information. knowledge—and information-intense products Products that require a great deal of learning and knowledge to produce. 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. knowledge management systems Systems that support the creation, capture, storage, and dissemination of firm expertise and knowledge. knowledge network system Online directory for locating corporate experts in well-defined knowledge domains. knowledge workers People such as engineers or architects who design products or services and create knowledge for the organization. Glossary G 7 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. Making judgments and taking actions on the basis of narrow or personal characteristics. 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 alternative to UNIX and Windows NT. local area network (LAN) A telecommunications network that requires its own dedicated channels and that encompasses a limited distance, usually one building or several buildings in close proximity. 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 segements (people who fall into the long tail ends of a Bell curve). 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 provides security management services for subscribing clients. management information systems (MIS) The study of information systems focusing on their use in business and management.. management-level systems Information systems that support the monitoring, controlling, decision-making, and administrative activities of middle managers. managerial roles Expectations of the activities that managers should perform in an organization. man-month The traditional unit of measurement used by systems designers to estimate the length of time to complete a project. Refers to the amount of work a person can be expected to complete in a month. market creator An e-commerce business model in which firms provide a digital online environment where buyers and sellers can meet, search for products, and engage in transactions. 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 products or services using mass production resources.. megahertz A measure of cycle speed, or the pacing of events in a computer; one megahertz equals one million cycles per second. menu costs Merchants’ costs of changing prices. metric A standard measurement of performance. metropolitan area network (MAN) Network that spans a metropolitan area, usually a city and its major suburbs. Its geographic scope falls between a WAN and a LAN. microbrowser Web browser software with a small file size that can work with low-memory constraints, tiny screens of handheld wireless devices, and low bandwidth of wireless networks. micropayment Payment for a very small sum of money, often less than $10. microprocessor Very large scale integrated circuit technology that integrates the computer’s memory, logic, and control on a single chip. microwave A high-volume, long-distance, point-to-point transmission in which high-frequency radio signals are transmitted through the atmosphere from one terrestrial transmission station to another. middle management People in the middle of the organizational hierarchy who are responsible for carrying out the plans and goals of senior management. midrange computer Middle-size computer that is capable of supporting the computing needs of smaller organizations or of managing networks of other computers. minicomputer Middle-range computer used in systems for universities, factories, or research laboratories. MIS audit Identifies all the controls that govern individual information systems and assesses their effectiveness. mobile commerce (m-commerce) The use of wireless devices, such as cell phones or handheld digital information appliances, to conduct both business-to-consumer and business-to-business e- commerce transactions over the Internet. mobile wallets (m-wallets) Store m-commerce shoppers’ personal information and credit card numbers to expedite the purchase process. moblog Specialized blog featuring photos with captions posted from mobile phones. model An abstract representation that illustrates the components or relationships of a phenomenon. model-driven DSS Primarily stand-alone system that uses some type of model to perform “what-if” and other kinds of analyses. modem A device for translating a computer’s digital signals into analog form for transmission over ordinary telephone lines, or for translating analog signals back into digital form for reception by a computer. module A logical unit of a program that performs one or several functions. Moore’s Law Assertion that the number of components on a chip doubles each year MP3 (MPEG3) Compression standard that can compress audio files for transfer over the Internet with virtually no loss in quality. multicore processor Integrated circuit to which two or more processors have been attached for enhanced performance, reduced power consumption and more efficient simultaneous processing of multiple tasks. multimedia The integration of two or more types of media such as text, graphics, sound, voice, full-motion video, or animation into a computer-based application. multinational Form of business organization that concentrates financial management and control out of a central home base while decentralizing multiplexing Ability of a single communications channel to carry data transmissions from multiple sources simultaneously. multitiered (N-tier) client/server architecture Client/server network which the work of the entire network is balanced over several different levels of servers. nanotechnology Technology that builds structures and processes based on the manipulation of individual atoms and molecules. natural language Nonprocedural language that enables users to communicate with the computer using conversational commands resembling human speech. net marketplace A single digital marketplace based on Internet technology linking many buyers to many sellers. netbook Small low-cost, lightweight subnotebook optimized for wireless communication and Internet access. network The linking of two or more computers to share data or resources, such as a printer. G 8 Glossary 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. network interface card (NIC) Expansion card inserted into a computer to enable it to connect to a network. network operating system (NOS) Special software that routes and manages communications on the network and coordinates network resources. networking and telecommunications technology Physical devices and software that link various computer hardware components and transfer data from one physical location to another. neural network Hardware or software that attempts to emulate the processing patterns of the biological brain. 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 procedures acting on the data. object-oriented DBMS An approach to data management that stores both data and the procedures acting on the data as objects that can be automatically retrieved and shared; the objects can contain multimedia. 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 o objects and the relationship between them. object-oriented programming An approach to software development that combines data and procedures into a single object. object-relational DBMS A database management system that combines the capabilities of a relational DBMS for storing traditional information and the capabilities of an object-oriented DBMS for storing graphics and multimedia. Office 2010 The latest version of Microsoft desktop software suite with capabilities for supporting collaborative work on the Web or incorporating information from the Web into documents. 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 computing power to remote, large-scale data processing centers, investing just enough to handle average processing loads and paying for only as much additional computing power as the market demands. Also called utility computing. on-line analytical processing (OLAP) Capability for manipulating and analyzing large volumes of data from multiple perspectives. online processing A method of collecting and processing data in which transactions are entered directly into the computer system and processed immediately. online transaction processing Transaction processing mode in which transactions entered on-line are immediately processed by the computer. open-source software Software that provides free access to its program code, allowing users to modify the program code to make improvements or fix errors. operating system Software that manages the resources and activities of the computer. operational CRM Customer-facing applications, such as sales force automation, call center and customer service support, and marketing automation. operational management People who monitor the day-to-day activities of the organization. operational-level systems Information systems that monitor the elementary activities and transactions of the organization. opt-in Model of informed consent permitting prohibiting an organization from collecting any personal information unless the individual specifically takes action to approve information collection and use. opt-out Model of informed consent permitting the collection of personal information until the consumer specifically requests that the data not be collected. organization (behavioral definition) A collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution. organization (technical definition) A stable, formal, social structure that takes resources from the environment and processes them to produce outputs. organizational and management capital Investments in organization and management such as new business processes, management 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 procedures and business processes that reflect organizations’ experience. 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. P3P Industry standard designed to give users more control over personal information gathered on Web sites they visit. Stands for Platform for Privacy Preferences Project. 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 business 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. 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 monopoly on the ideas behind an invention for 17 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 computers on the network; used primarily in small networks. personal area network (PAN) Computer network used for communication among digital devices (including telephones and PDAs) that are close to one person. personal digital assistant (PDA) Small, pen-based, handheld computer with built-in wireless telecommunications capable of entirely digital communications transmission. 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 interrelationships. Glossary G 9 pharming Phishing technique that redirects users to a bogus Web page, even when an individual enters the correct Web page address. phased approach Introduces the new system in stages either by functions or by organizational units. phishing Form of spoofing involving setting up fake Web sites or sending e-mail messages that resemble those of legitimate businesses that ask users for confidential personal data. pilot study A strategy to introduce the new system to a limited area of the organization until it is proven to be fully functional; 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. podcasting Publishing audio broadcasts via the Internet so that subscribing users can download audio files onto their personal computers or portable music players. pop-up ad Ad that opens automatically and does not disappear until the user clicks on it. portal Web interface for presenting integrated personalized content from a variety of sources. Also refers to a Web site service that provides an initial point of entry to the Web. portfolio analysis An analysis of the portfolio of potential applications within a firm to determine the risks and benefits, and to select among alternatives for information systems. 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. prediction markets An analysis of the portfolio of potential applications within a firm to determine the risks and benefits, and to select among alternatives for information systems. predictive analytics The use of data mining techniques, historical data, and assumptions about future conditions to predict outcomes of events, such as the probability a customer will respond to an offer or purchase a specific product. 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 surveillance 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. procurement Sourcing goods and materials, negotiating with suppliers, paying for goods, and making delivery arrangements. 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 conversion 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 computer 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 techniques to achieve specific targets within a specified budget and time period. protocol A set of rules and procedures that govern transmission between the components in a network. prototype The preliminary working version of an information system 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, accessed 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 certificates 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. pure-play Business models based purely on the Internet. push-based model Supply chain driven by production master schedules based on forecasts or best guesses of demand for products, and products are “pushed” to customers. query language Software tool that provides immediate online answers 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. Rapid Application Development (RAD) Process for developing systems in a very short time period by using prototyping, fourth- generation tools, and close teamwork among users and systems specialists. rational model Model of human behavior based on the belief that people, organizations, and nations engage in basically consistent, value-maximizing calculations. rationalization of procedures The streamlining of standard operating procedures, eliminating obvious bottlenecks, so that automation makes operating procedures more efficient. real options pricing models Models for evaluating information technology investments with uncertain returns by using techniques for valuing financial options. record A group of related fields. recovery-oriented computing Computer systems designed to recover rapidly when mishaps occur. 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. G 10 Glossary 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 requirements. resource allocation The determination of how costs, time, and personnel are assigned to different phases of a systems development project. responsibility Accepting the potential costs, duties, and obligations for the decisions one makes. revenue model A description of how a firm will earn revenue, generate 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. ring topology A network topology in which all computers are linked by a closed loop in a manner that passes data in one direction from one computer to another. risk assessment Determining the potential frequency of the occurrence 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. 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. RSS Technology using aggregator software to pull content from Web sites and feed it automatically to subscribers’ computers. SaaS (Software as a Service) Services for delivering and providing access to software remotely as a Web-based service. safe harbor Private self-regulating policy and enforcement mechanism that meets the objectives of government regulations but does not involve government regulation or enforcement. Sarbanes-Oxley Act Law passed in 2002 that imposes responsibility 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 systems 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 communicate with each other during a secure Web session. security Policies, procedures, and technical measures used to prevent 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 Web Ways of making the Web more "intelligent," with machine-facilitated understanding of information so that searches can be more intuitive, effective, and executed using intelligent software agents. semistructured 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. server Computer specifically optimized to provide software and other resources to other computers over a network. server farm Large group of servers maintained by a commercial vendor and made available to subscribers for electronic commerce and other activities requiring heavy use of servers. service level agreement (SLA) Formal contract between customers and their service providers that defines the specific responsibilities of the service provider and the level of service expected by the customer. service platform Integration of multiple applications from multiple business functions, business units, or business partners to deliver a seamless experience for the customer, employee, manager, or business partner. service-oriented architecture 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. Simple Object Access Protocol (SOAP) Set of rules that allows Web services applications to pass data and instructions to one another. 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 information and that can be used for electronic payments in place of cash. smartphone Wireless phone with voice, text, and Internet capabilities. sniffer Type of eavesdropping program that monitors information traveling over a network. social bookmarking Capability for users to save their bookmarks to Web pages on a public Web site and tag these bookmarks with keywords to organize documents and share information with others. social engineering Tricking people into revealing their passwords by pretending to rrbe legitimate users or members of a company in need of information. social networking sites Online community for expanding users’ business or social contacts by making connections through their mutual business or personal connections. social shopping Use of Web sites 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 localization Process of converting software to operate in a second language. Glossary G 11 software package A prewritten, precoded, commercially available set of programs that eliminates the need to write software programs for certain functions. spam Unsolicited commercial e-mail. spamming Form of abuse in which thousands and even hundreds of thousands of unsolicited e-mail and electronic messages are sent out, creating a nuisance for both businesses and individual users. spyware Technology that aids in gathering information about a person or organization without their knowledge. SQL injection attack Attacks against a Web site that take advantage of vulnerabilities in poorly coded SQL (a standard and common database software application) applications in order to introduce malicious program code into a company's systems and networks. star topology A network topology in which all computers and other devices are connected to a central host computer. All communications between network devices must pass through the host computer. storage area network (SAN) A high-speed network dedicated to storage that connects different kinds of storage devices, such as tape libraries and disk arrays so they can be shared by multiple servers. storage technology Physical media and software governing the storage and organization of data for use in an information system. stored value payment systems Systems enabling consumers to make instant on-line payments to merchants and other individuals based on value stored in a digital account. strategic information systems Computer systems at any level of the organization that change goals, operations, products, services, or environmental relationships to help the organization gain a competitive advantage. strategic transitions A movement from one level of sociotechnical system to another. Often required when adopting strategic systems 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 design, 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, routine, and have a definite procedure for handling them. structured knowledge Knowledge in the form of structured documents and reports. Structured Query Language (SQL) The standard data manipulation language for relational database management systems. supply chain Network of organizations and business processes for procuring materials, transforming raw materials into intermediate 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 efficient manner. supply chain management Integration of supplier, distributor, and customer logistics requirements into one cohesive process. supply chain management systems Information systems that automate 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 generate 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 primary activities possible. Consist of the organization’s infrastructure, human resources, technology, and procurement. switch Device to connect network components that has more intelligence 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 supplier or system to a competing supplier or system. syndicator Business aggregating content or applications from multiple sources, packaging them for distribution, and reselling them to third-party Web sites. 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 process into formal stages that must be completed sequentially with a very formal division of labor between end users and information systems specialists. T lines High-speed data lines leased from communications providers, such as T-1 lines (with a transmission capacity of 1.544 Mbps). tacit knowledge Expertise and experience of organizational members 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 Teams are 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. technostress Stress induced by computer use; symptoms include aggravation, hostility toward humans, impatience, and enervation. telecommunications system A collection of compatible hardware and software arranged to communicate information from one location to another. teleconferencing The ability to confer with a group of people simultaneously using the telephone or electronic-mail group communication software. 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. G 12 Glossary text mining Discovery of patterns and relationships from large sets of unstructured data. token Physical device similar to an identification card that is designed to prove the identity of a single user. touch point Method of firm interaction with a customer, such as telephone, e-mail, customer service desk, conventional mail, or point-of-purchase. topology The way in which the components of a network are connected. 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 control a responsibility to be shared by all people in an organization. trade secret Any intellectual work or product used for a business purpose that can be classified as belonging to that business, provided it is not based on information in the public domain. transaction costs Costs incurred when a firm buys on the marketplace 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 international boundaries in any form. Transmission Control Protocol/Internet Protocol (TCP/IP) Dominant model for achieving connectivity among different networks. Provides a universally agree-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 contains a second hidden function that may cause damage. tuple A row or record in a relational database. twisted wire A transmission medium consisting of pairs of twisted copper wires; used to transmit analog phone conversations but can be used for data transmission. Unified communications Integrates disparate channels for voice communications, data communications, instant messaging, e- mail, and electronic conferencing into a single experience where users can seamlessly switch back and forth between different communication modes. Unified Modeling Language (UML) Industry standard methodology for analysis and design of an object-oriented software system. unified threat management (UTM) Comprehensive security management tool that combines multiple security tools, 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 making such decisions. Usenet Forums in which people share information and ideas on a defined topic through large electronic bulletin boards where anyone can post messages on the topic for others to see and to which others can respond. 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 backgrounds, 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 and understand the consequences of various courses of action. utility computing Model of computing in which companies pay only for the information technology resources they actually use during a specified time period. Also called on-demand computing or usage-based pricing. value chain model Model that highlights the primary or support activities that add a margin of value to a firm’s products or services 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 collectively produce a product or service for a market. Value-Added Network (VAN) Private, multipath, data-only, third- party-managed network that multiple organizations use on a subscription basis. videoconferencing Teleconferencing in which participants see each other over video screens. 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 Modeling Language (VRML) A set of specifications for interactive three-dimensional modeling on the World Wide Web. virtual reality systems Interactive graphics software and hardware that create computer-generated simulations that provide sensations that emulate real-world activities. virtual world Computer-based simulated environment intended for its users to inhabit and interact via graphical representations called avatars. 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. 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 2.0 Second-generation, interactive Internet-based services that enable people to collaborate, share information, and create new services online, including mashups, blogs, RSS, and wikis. Web 3.0 Future vision of the Web where all digital information is woven together with intelligent search capabilities. Glossary G 13 Web beacons Tiny objects invisibly embedded in e-mail messages and Web pages that are designed to monitor the behavior of the user visiting a Web site or sending e-mail. Web browser An easy-to-use software tool for accessing the World Wide Web and the Internet. Web bugs Tiny graphic files embedded in e-mail messages and Web pages that are designed to monitor online Internet user behavior. Web hosting service Company with large Web server computers to maintain the Web sites of fee-paying subscribers. Web mining Discovery and analysis of useful patterns and information 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 without time-consuming custom coding. Used for linking systems of different organizations or for linking disparate systems within the same organization. Web site All of the World Wide Web pages maintained by an organization or an individual. Wi-Fi Standards 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 Web site where visitors can add, delete, or modify content, including the work of previous authors. WiMax Popular term for IEEE Standard 802.16 for wireless networking 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. The most recent version is Windows Vista. Windows 7 The successor to Microsoft Windows Vista operating system released in 2009. Wintel PC Any computer that uses Intel microprocessors (or compatible processors) and a Windows operating system. wireless portals Portals with content and services optimized for mobile devices to steer users to the information they are most likely to need. 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 knowledge 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 (first proposed in a book by James Surowiecki). WML (Wireless Markup Language) Markup language for Wireless Web sites; based on XML and optimized for tiny displays. workflow management The process of streamlining business procedures so that documents can be moved easily and efficiently from one location to another. 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 supports links to multiple documents, allowing data to be manipulated by the computer. Used for both Web and non-Web applications. G 14 Glossary P 1 P h o t o a n d S c r e e n S h o t C r e d i t s Page Photographer/Source C H A P T E R 1 3 Public domain 10 Courtesy of Apple, Inc. 24 Peter Marlow/ Magnum Photos, Inc. C H A P T E R 2 41 Gilles Martin-Raget/BMW ORACLE Racing 50 Dundas Data Visualization, Inc. 58 Courtesy of Socialtext C H A P T E R 3 79 iStockphoto.com 2010 97 iStockphoto.com 2010 C H A P T E R 4 121 iStockphoto.com 2010 127 iStockphoto.com 2010 138 InterContinental Hotels 144 iStockphoto.com 2010 149 iStockphoto.com 2010 C H A P T E R 5 163 iStockphoto.com 2010 171 Intel Inc. 2004 172 Intel Inc. 2004 172 IBM 173 Raymond Kurzweil C H A P T E R 6 207 iStockphoto 2010 245 iStockphoto 2010 C H A P T E R 8 291 iStockphoto 2010 314 iStockphoto 2010 C H A P T E R 9 335 iStockphoto 2010 C H A P T E R 1 0 371 4Food.com 2010 C H A P T E R 1 1 411 iStockphoto 2010 428 iStockphoto 2010 C H A P T E R 1 2 453 iStockphoto 2010’ 467 Public domain C H A P T E R 1 3 487 Corbis 2010 C H A P T E R 1 4 527 iStockphoto 2010 C H A P T E R 1 5 559 iStockphoto 2010 !"#$%&'()%#*+)*+#,*'--.%-)/+%0-'*1% I 1 I n d e x Name Index A Abdulmutallab, Umar Farouk, 242 Aleynikov, Sergey, 300 Anderson, John, 241 B Benioff, Marc, 203, 204 Berman, Craig, 411 Berson, Anthony M., 157 Bertarelli, Ignacio, 41 Bewkes, Jeff, 119 Bezos, Jeff, 411 Bratton, William, 482 Brin, Sergey, 270 C Casey, Jim, 22 Childs, Timothy, 9 Columbus, Christopher, 8 D Deming, W. Edwards, 490 DeWalt, David, 305 DiSisto, Rob, 205 E Ellison, Larry, 41, 42 F Fathi, David, 241 Fayol, Henri, 458 Filo, David, 270 Fine, Glenn A., 242 Flax, Daniel, 321 Fletcher, Clyde, 575 Ford, Henry, 57 Friedman, Thomas, 8 G Gates, Bill, 57 Gates, Robert, 330 Gonzalez, Alberto, 301 Gosling, James, 188 H Hawiger, Marcel, 37 Heltsley, Laurie, 76 Hicks, Michael, 241 Horan, Tim, 119 I Iqbal, Asif, 241 J Jensen, Robert, 581 Jeppsen, Bryan, 227 Jerome-Parks, Scott, 157, 158 Jn-Charles, Alexandra, 157, 158 Jobs, Steve, 57, 103, 178, 288 Juran, Joseph, 490 K Kalach, Nina, 157 Kant, Immanuel, 130 Kearns, Michael, 439 Kelly, Chris, 390 Kennedy, Ted, 241 Kilar, Jason, 118 King, Stephen, 411 L Lafley, A.G., 75 Leavitt, 93 Levy, Scott, 9 M McConnell, Mike, 330 McDonald, Robert, 75 McPherson, Barry, 305 Merzenich, Michael, 152 Mettler, Fred A., Jr., 159 Mintzberg, 88, 459 Monaghan, Tom, 52 Moore, Gordon, 170 Mullin, Mike, 321 Myrtle, Raymond, 470 N Neeleman, David, 556 Nordstrom, David, 429 O Obama, Barack, 469 Oliphant, Jack, 37 Ophir, Eyal, 152 Orwell, George, 144 Oxley, Michael, 306 P Page, Larry, 270 Peterson, Bud, 36–37 Peterson, Val, 36–37 Porter, Michael, 95, 115 R Reed, Alan, 178 Ricci, Ron, 3 Ryan, Claude, 22 S Sarbanes, Paul, 306 Schueller, Joe, 75 Shahzad, Faisal, 242 Skaare, Jerry, 358, 359 T Taleb, Nassim, 440 Tijerina, Louis, 147 Tubbs, Jerry, 548 V Vazquez, Raul, 411 W Weast, Jerry, 469 Woo, Edward, 119 Y Yang, Jerry, 270 Z Zimmerman, Richard, 345, 346 Zuckerberg, Mark, 390 Organizations Index A A&E, 118 ABC Inc., 118 Accenture, 62, 92, 181 Acxiom, 121 Adobe, 180, 404 Advanced Micro Design, 8 Aetna, 523 Agora Games, 321 AIC, 494 Air France, 65 Airborne Express, 22 Ajax Boiler, 266 Alcatel-Lucent, 180, 400, 401 Alcoa, 339–340 Allot Communications, 319 Alta Vista, 87 Amazon, 12, 45, 94, 98, 102, 103, 106, 111, 135, 170, 183, 184, 204, 262, 301, 321, 374, 383, 384, 386, 388, 389, 401, 404, 410, 411 AMD, 176 America Online (AOL), 118, 137, 382 America West, 113 American Airlines, 111 American Express, 13, 100 American Library Association, 262 American National Insurance Co. (ANCO), 494 AmerisourceBergen, 495 Android, Inc., 288 Ann Taylor, 109 Apple, 7, 9, 13, 14, 57, 79, 87, 94, 97, 103–104, 110, 111, 140, 168, 178, 185, 204, 287–289, 295, 388 Applebee's, 478 Armani Exchange, 401 Art Technology Group, 405 AstraTech, 181 AstraZeneca, 123 AT&T, 9, 79–80, 87, 110, 118, 180, 262, 276, 401 Attensity, 227 Author Solutions, 204 Avis Rent A Car, 401 B BAE Systems, 398 Ball State University, 319 Bank of America, 100, 107, 400 Banta, 207 Barnes & Noble, 223 Barrick Gold, 423 Bear Stearns, 123, 460 Bell Labs, 175 BestBuy, 45 BigFix, 186 BJ's Wholesale Club, 306 Black & Veatch, 471 BMW Oracle Racing, 41–42 The Body Shop International plc, 226 Boeing, 398 Border State Industries Inc. (BSE), 366–368 BP p.l.c, 256 British Airways, 557 Bryant & Stratton College, 359 C Cablevision, 247, 265 California Pizza Kitchen, 471 Canadian Pacific Railway, 478 Canadian Tire, 415, 416 Cannondale, 335–336 Capital One, 466 Catalina Marketing, 222–223 Caterpillar, 551 CBS, 118 Center Point Energy, 37 CenterPoint Properties, 267 Champion Technologies, 311 Check Point, 316 ChemConnect.com, 383 Chevron, 9 Choice Hotels, 227 Christian Coalition, 262 Chrysler Corp., 90, 99, 466, 567 CIMB Group, 487, 488, 490 Cisco Systems, 3, 12, 22, 62, 76, 90, 180, 289, 316 Citibank, 14, 111 Citicorp, 568 City University of New York, 186 Clarabridge, 227 Clear Channel Radio, 63 CNN, 118 Coca-Cola Company, 339, 527–528 Comcast Corp., 118, 247, 262 Comdisco Disaster Recovery Services, 311 Comedy Central, 118 Compiere, 357, 358, 359 CompuCredit, 101 Con-Way Transportation, 432, 434 Connectbeam, 76 Cornerstone Information Systems, 63 Countrywide Financial, 107 Cowen and Co., 321 Cross-Country Transport, 71 Crossbeam, 316 D Dartmouth College, 278 Dell Computer Corp., 12, 90, 99, 170, 176, 178, 180, 188, 357, 386 Deutsche Bank, 311 Diebold, Inc., 495, 496 Digital Equipment Corp. (DEC), 87, 168, 289 DirectTV, 256 Dish Network, 256 Disney.com, 383 Dollar Rent-A-Car, 190–191 Domino's, 52–53 Don's Lumber Company, 70 Doylestown Hospital, 9 DST Systems, 547–548 Duane Reade, 453, 454 Duke Energy, 37 Dundas Data Visualization, 50 DuPont, 430 D.W. Morgan, 9 E E*Trade, 12, 383, 388–389 Eastman Chemical Co., 90 eBay, 11, 12, 102, 108, 109, 111, 301, 374, 383, 384, 388, 404 Electronic Data Systems (EDS), 192 Eli Lilly, 123 Eloqua, 512 EMC (Documentum), 423 EMCorp., 179 Emerson Process Management, 234 Enterprise Rent-A-Car, 266 Envoy Media Group, 184 Equifax, 232 Esker, 367 estMed Medical Supplies Corp., 282 EuroChem, 65 Expedia, 383 Experian, 232 F Fairchild Semiconductor, 170 Famous Footwear, 221 FBI, 240 Federal Aviation Administration (FAA), 329 Federal Trade Commission (FTC), 132–133 FedEx, 6, 22, 44, 111, 277, 401, 466–467 First Citizens Bank, 467 Flextronics, 90 Flickr, 388 Florida Power and Light, 37 Flushing Financial Corp., 266 Ford Motor Co., 57, 89, 490, 568 Foremost Composite Materials Co., 199 Fortinent, 316 4Food, 371, 372 Fox Broadcasting, 118 Fox Sports, 401 Frito Lay, 564 Frontera, 575–576 FX, 118 G Galleon Group, 123 Games.com, 383 Gartner Group, 60, 231 Gaylord Hotels, 227 General Electric, 12, 61, 87, 441 General Motors, 11, 12, 89, 181, 394, 466, 567 Getty Images, 383 Global e-Sustainability Initiative and the Climate Group, 62 Global Hyatt Corp., 65 Google, 7, 11, 12, 37, 61, 80, 87, 94, 111, 121, 122, 127, 137, 170, 177, 186, 188, 193, 226, 262, 265, 287–289, 382, 387–388 Grace Construction Project, 586 Grace Davison, 586 Grokster, 141 GUESS Jeans, 109 H Hallmark Cards, 462 Hannaford Bros., 301 Harrah's Entertainment, 226 Haworth Inc., 344 Heinz, 61 Henry's Hardware, 70 Hewlett-Packard (HP), 62, 87, 140, 170, 175, 178, 180, 186, 188, 468, 561–562 Highmark, 187 Hilton Hotels, 98, 401 History Channel, 118 Hitachi, 441 Home Depot, 401 HP Enterprise Services, 181 Hyatt, 401 Hyundai Heavy Industries (HHI), 245–246 I i2, 345, 346, 441 i2Technologies, 344, 356 IBM, 7, 60, 87, 109, 170, 171, 175, 176, 179, 180, 183, 185, 188, 230, 267, 289, 421, 423, 463, 468, 493, 523 IBM Global Services, 181 IBM Software Group, 65 ICANN (Internet Corporation for Assigned Named and Numbers), 260 Indian Harvest Spealtifoods, 321 Infosys, 181 Insead, 60 Intel Corp., 8, 60, 87, 109, 176, 185, 188, 401, 567 Internal Revenue Service (IRS), 223 Intrawest, 49 Intuit, 386 iTunes.com, 383 iVillage, 108 J JCPenney, 14 JDA Software, 344 JetBlue, 227, 556, 557 Johnson and Johnson, 9 JPMorgan Chase, 107, 303, 400 Juniper Networks, 180, 316 K K2 Network, 323 Kazaa, 141 Kellwood Co., 347 Kennametal, 356 KFC, 568 KLM, 557 Kmart, 356 Kodak, 90 Koret of California, 347 Korn/Ferry International, 62 KT Corp., 245 L Layar, 429 Lehman Brothers, 123, 460 Leiner Health Products, 50 Levi Strauss, 109 Lexus, 429 LG, 110 I 2 Index Li & Fung, 109 LifeSize, 62 Lilly Pulitzer, 401 Little Ceasar, 52 Lockheed Martin, 9, 398 LoopFuse, 512 Louise's Trattoria, 222 Lufthansa, 494 M Macromedia, 180 Macy's, Inc., 113 Mandarin Oriental, 13–14 Manugistics, 344 MapInfo, 467 MasterCard, 311 Matsushita, 441 Maxtor, 179 McAfee, 185, 304–305, 316 McDonald's, 549–550, 568 McKinsey and Company, 56 Mercedes-Benz Canada, 361 Merrill Lynch, 431 Metcalfe, Robert, 173 MetLife, 62 Microsoft, 7, 9, 57, 64, 76, 87, 109, 121, 122, 140, 169, 170, 177, 178, 179, 180, 186, 188, 203, 213, 217, 218, 219, 284, 287–289, 303, 321, 322, 339, 389, 404, 463, 472 Microsoft Dynamics CRM, 351 Minerals Management Service, 123 Mitsubishi, 441 Mitsubishi Heavy Industries, 436 Montgomery County (MD) Public School System, 469–470 Moore Wallace, 207 Morpheus, 141 Motorola, 110, 178, 273, 550–551 MoveOn.org, 262 Mozilla, 188, 303 Mrs. Fields Cookies, 568 MSN, 118, 121 MSNBC, 401 MyPoints, 389 N Napster, 141 National Counterterrorism Center (NCTC), 240 NBC Universal, 118, 119 Nestle USA, 203 New York Yankees, 3–4, 5, 16, 25 NewsCorp., 118, 137 Nike, 98, 340–342 Nikko Securities, 441 Nikon, 358 Nissan, 401 Nokia, 295, 580 Nortel, 180 Novell Netware, 169 O O-So-Pure (OSP), 358 Office Depot, 361 O'Hare Airport, 178–179 1E NightWatchman, 186 1-800-Flowers, 401, 453 Onion News Network, 118 Open Text Corp., 423 Oracle Corp., 87, 170, 177, 179, 180, 188, 191, 203, 339, 351, 355, 356, 357, 359, 423, 463, 468, 493 Oracle PeopleSoft, 339 Oxygen, 118 P Pacific Gas & Electric, 37 Papa John's, 52, 53, 429 PayPal, 97, 98, 301 PBS, 118 Pearson Prentice Hall, 579 PeopleSoft, 177, 191, 351 Pepsico, 60, 61, 401 Pfizer, 123 PharMark, 471 Ping, 98 Pizza Hut, 52, 53 Polycom, 62 Potomac Hospital (Virginia), 266 The Presidents' Inn, 113 Priceline.com, 383, 384 Prime Service, 361 Procter & Gamble (P&G), 75, 108, 109, 342, 401, 441–442 Progressive Insurance, 473 Pulse Evolution, 52 Purisma, 207 Q Quantas Airways, 198 Quattro Wireless, 288 R Raytheon, 398 Real Media, 180 RedEnvelope.com, 383 Reebok, 109 RehabCare, 204 Research in Motion, 295 Ricoh, 441 RightNow, 203, 358 RIM, 110 Rip Curl, 62 Rolls-Royce plc, 398 Royal Dutch Shell PLC, 192 R.R. Donnelly, 207–208 S Salesboom.com, 203 Salesforce.com, 87, 170, 181, 183, 193, 203–205, 321, 351, 357, 512 San Francisco Public Utilities Commission (SFPUC), 445 Sanyo, 441 SAP AG, 60, 87, 170, 177, 191, 203, 339, 351, 355, 357, 359, 366, 366–368, 463 SAS Analytics, 462 SAS Inc., 453 SAS Institute, 463, 466 Schemmer Associates, 266 Schneider Logistics Services, 347 Schneider National, 490 ScrollMotion, Inc., 103 Seagate, 179 Sealand Transportation, 564 Sears, 12, 97 Sears Roebuck, 516 Servalite, 24 7–Eleven, 301 Siebel Systems, 351 Siemens, 123 Six Flags, 55 Skype Technologies, 62, 265 Snapple, 121 Snyders of Hanover, 31 Sony, 64, 568 Sophos, 145 Southwest Airlines, 345, 557 SpectorSoft Corp., 266 Speed, 118 Sprint Nextel, 110, 401, 443 Starbucks, 386, 453 SugarCRM, 358 Sun Microsystems, 175, 176, 180, 188, 468 Sundance, 118 SunGard Availability Services, 311 Sybase, 179 Sylvester's Bike Shop, 235 Symantec, 316 Synaptics, 178 T T-Mobile, 110, 276 T-Systems International GmbH, 192 Taco Bell, 471 Tacoda, 121 TAL Apparel Ltd., 14 Tasty Baking Company, 339 Taxware Systems, Inc., 366 TBS, 118 TCHO Chocolate, 9–10 TD Bank, 142 1020 Placecast, 400 Terremark Worldwide Inc., 31 Texas Instruments, 87 Thomas Register, 229 3M, 559–560 Tibco, 493 TicketDirect, 217 Time Warner, 118 Time Warner Cable, 265 TJX Cos., 301 TNT, 118, 119 TOPCALL International GmbH, 366 Toshiba, 65 Tower Records, 87 Toyota, 94 Transportation Security Administration (TSA), 241 TransUnion, 232 Trend Micro, 316 Troy Lee Designs, 427–428 TV.com, 118 U UBS Financial Services, 431 United Airlines, 494 United Parcel Service (UPS), 6, 14, 20, 21, 22–24, 44, 582 Universal Digital Entertainment, 118 University of Pittsburgh Medical Center (UPMC), 198 UPS Supply Chain Solutions, 347 US Airways, 113 U.S. Federal Highway Administration, 421 U.S. Pharma Corp., 443 USA Network, 118 USAData, 150 Utility Reform Network, 37 V Valero Energy, 361, 476 Varian Medical Systems, 157, 158 Verdiem, 186 Verizon Corp., 14, 79–80, 87, 110, 180, 256 Veterans Affairs (VA), 523 Viacom, 118, 119 Index I 3 Virgin Entertainment Group, 265 Virgin Mobile, 277 Vistex Inc., 367 VW Group Supply, 397 W Wachovia, 61 Waddell & Reed Financial, 439 Wal-Mart, 12, 13, 14, 94, 96–97, 100, 109, 280, 301, 348, 382, 410–411 Walgreens, 453 Wedbush Morgan Securities, 119 Wells Fargo, 273 Wendy's International, 227–228 Western Digital, 179 WestJet, 556–558 Whirlpool Corp., 344, 426 Wi-Fi Alliance, 316 Wipro Technologies, 181 World Bank, 421 WR Grace, 586–587 WSJ.com, 383 X Xcel Energy Inc., 36–37 Xerox, 168 Y Yahoo!, 111, 121, 122, 134, 137, 193, 270, 382, 387, 401 Yahoo Merchant Solutions, 404 Yankee Stadium, 3–4, 16 Z Zimbra, 512–513 Zip Realty, 429–430 Subject Index A A4 processor, 185 acceptable use policy (AUP), 310 acceptance testing, 499 access control, 310 Access (Microsoft), 213, 218, 219 accountability, 126, 129, 141–142 accounting, business processes, 43, 44 Acrobat (Adobe), 180 Acrobat Connect (Adobe), 62 active RFID tags, 280 Ad-Aware (software), 316 Adaptive Server Enterprise (Sybase), 179 adhocracy, 88 administrative controls, 308 administrative overhead, 396 Adobe Acrobat, 180 Adobe Acrobat Connect, 62 Adobe Dreamweaver, 404 Adobe InDesign, 404 advertising banner display ads, 122 mobile advertising, 400–401 online advertising, 122, 375 wireless advertising, 400–401 advertising exchanges, 395 advertising networks, 392–395, 395 advertising revenue model, 387–388 affiliate fee revenue model, 389, 393 agency theory, 90, 91 agent-based modeling, 441–442 aggregator software, 273 agile development, 514–515 AI. See artificial intelligence airline industry, terrorist watch-list database, 240–241 Ajax (software), 189 ALM. See application lifecycle management Altair computer, 168 Alto computer, 168 Amazon Relational Database, 217 Amazon Web Services, 217 Amazon.com, 44, 98, 102, 121, 193, 321, 374, 388, 389, 410, 411 ambient data, 307 America Online (AOL), 118, 137, 141–142 American Recovery and Reinvestment Act, 522 America's Cup, 41–42 analog signals, 252 analytical customer relationship management (CRM), 354–355, 364 Analyze for Voice of the Customer (VoC) (Attensity), 227 Ancestry.com, 388 Android, 80, 177, 193, 194, 294, 295 anti-virus software, problems with, 304–305 antispyware software, 316 antivirus software, 316, 326 Apache HTTP Server (software), 269 Apache HTTP Web server, 188 Apache Open for Business (OFBiz), 357 App Store, 103 AppExchange (software), 204 Apple I and II computers, 168 applets, 188 application controls, 308 Application Express (Oracle), 41 application generator, 509 application layer, 251 application lifecycle management (ALM), 547–548 application proxy filtering, 315 application server, 169 application server software, 169, 229 application software, 166 application software packages, 166, 509, 510–511, 519 apps, 193–194 aQuantive, 134 AR. See augmented reality ARM (processor), 185 artificial intelligence (AI), 431, 445 hybrid AI systems, 441 Ask.com, 382 associations (data analysis), 225 ATMs. See automatic teller machines attributes, 210 auditing, 312 augmented reality (AR), 428–430, 445 AUP. See acceptable use policy authentication, 252–253, 312–313, 326 authorization policies, 310 Authors.com, 204 automated high-speed decision making, 461 automatic teller machines (ATMs), 14–15, 111, 142, 178 automation, 489, 490, 519 autonomic computing, 185 avatars, 60 Average Data Efficiency, 186 Azure (Microsoft), 177, 217, 322 B B2B e-commerce. See business-to-business (B2B) e-commerce B2C e-commerce. See business-to-consumer (B2C) e-commerce backward chaining, 432 balanced scorecard method, 474 bandwidth, 257, 262 banking services, m-commerce, 400 banner ads, 122 Basecamp (software), 66 Bay Area Rapid Transit (BART), 163–164, 182 Beacon Program (Facebook), 390 behavioral models of management, 458 behavioral targeting, 121, 133, 136, 392–393 benchmarking, 105 best practices, 105 BI. See business intelligence Bing (Microsoft), 270, 271, 284, 289, 382, 383 biometric authentication, 313–314, 326 bit, 209 Black Swans (Taleb), 440 BlackBerry, 5, 6, 9, 181, 193, 288, 295, 374, 399, 400, 464 blade servers, 163, 176, 177, 186 Blinkx.com, 271 Blogger.com, 153, 273 blogging, 273 blogosphere, 273 blogroll, 272 blogs, 7, 272 affiliate marketing and, 389, 393 as collaborative tool, 75 malware and, 297 Bluefly, 405 BlueNile.com, 382 Bluetie (software), 66 Bluetooth, 276–277, 285, 295 book sales, 102 botnets, 299, 300 Boulder (Colorado), 36 BPM. See business process management bricks-and-clicks, 382 broadband connections, 247, 284, 374 Brown Bag Software vs. Symantec Corp., 140 browsers. See Web browsers bugs (in software), 135, 143, 303, 326 build-to-order, 347 build-to-stock, 347 bullwhip effect, 342–343 bureaucracies flattening of hierarchies, 91–92 organizational structure, 88 bus topology, 254, 255 business business functions, 18–19 business processes, 19, 43–45 collaboration and teamwork, 55–58, 72 competitive forces, 94–96, 102, 115 disruptive technologies, 103–104 information systems department, 68–69, 73 information value chain, 24–25 innovation, 57, 75, 76 internationalization, 564, 584 levels in a firm, 56 management hierarchy, 56 value chain, 102, 116 value web, 106, 107, 116 See also business analytics; business information systems; business I 4 Index intelligence; business models; business processes; e-commerce; global business business analytics, 453, 461 capabilities, 464–465 constituencies for, 465–466 defined, 462 delivery platform, 464 developments strategies, 468 toolset, 453, 463, 473 user interface, 464 business analytics software, 453, 463, 473 Business ByDesign (SAP), 357 business continuity planning, 311–312 business drivers, 562, 563 business ecosystem, 109–111 business firm, 84 business functions, 18–19 business information systems decision-support systems (DSS), 48–49, 475, 477, 479, 480 e-business, 55 e-commerce, 55 e-government, 55 enterprise applications, 51, 53–55 executive support systems (ESS), 50, 72, 473–475, 480 intranets and extranets, 54–55, 72 management information systems (MIS), 17–18, 47–48, 72, 480 transaction processing systems (TPS), 45–47 business intelligence (BI) about, 49–50 business analytics, 453, 461 business performance management, 475 capabilities, 464–465 constituencies for, 465–466, 471 data mining, 224–226, 237, 422, 431, 462 data visualization, 467 decision making and, 480 defined, 462 delivery platform, 464 developments strategies, 468 environment, 463–464 geographic information systems (GIS), 467–468, 482 infrastructure, 463 predictive analytics, 226, 466–467 in public sector, 468 vendors of, 463 Business Intelligence (Oracle), 359 business intelligence infrastructure, 463 business models about, 13 e-commerce, 375, 382–384, 407 information systems, 26 online entertainment, 375 Business Objects (SAP), 359 business performance, databases to improve, 221–222, 237 business performance management (BPM), 475 business plan, linking systems projects to, 532 business process management (BPM), 448, 491 business process redesign, 489, 490, 491–493, 519 case study, 495–496 tools for, 493–494 business process redesign, 489, 490, 491–493, 500, 519 change management, 540–542 cooptation, 574 critical success factors (CSFs), 532, 534 linking systems projects to business plan, 532 scoring models, 535–536 See also project management; systems development business processes, 11, 19, 43–45, 72 automation, 489, 519 core systems, 571, 572 defined, 84, 85 functional areas, 43–44 information technology to enhance, 44–45 Internet technology and, 94 paradigm shifts, 489, 490, 519 rationalization, 489, 490, 519 redesign, 489, 490, 491–493, 500, 519 routines and, 84, 85 See also business process management; business process redesign Business Suite (SAP), 357 business-to-business (B2B) e-commerce, 374, 381, 395–399, 407 business-to-consumer (B2C) e-commerce, 381 business value co-creation of, 7 of information systems projects, 536–539 business value chain model, 102, 104, 116 byte, 209–210 C C2C e-commerce. See consumer-to-consumer (C2C) e-commerce CA. See certificate authority Cabir (malware), 297 cable Internet connections, 258, 284 cable modems, 253 cable television, 118 CAD. See computer-aided design California, 37, 148 call option, 538 cameras, autofocus device, 436 campus-area networks. See CANs CANs (campus-area networks), 253 capacity planning, 194 capital budgeting, for systems development, 538 carbon footprint, 186 careers. See jobs carpal tunnel syndrome (CTS), 149 CASE. See computer-aided software engineering case-based reasoning (CBR), 434, 445 Categorical Imperative, 130 CBR. See case-based reasoning CDMA (Code Division Multiple Access), 276, 284 CDSS. See customer decision-support systems CDW. See Compliance Data Warehouse cell phones, 5, 181, 188, 257, 401 economic development and, 580–581 text messages, 60, 146, 147 usage statistics, 147 usage while driving, 147–148 See alsoalso smartphones cellular standards, 284 cellular systems, 257, 276, 284 centers of excellence, 574 centralized processing, 168 centralized systems, 568 certificate authority (CA), 318 CERTPOINT, 426 CGI script, 229 ChainLinq Mobile application, 9 change change management, 540–542 cooptation, 574 in global businesses, 574 organizational resistance to, 93, 115, 493 rapidity of, 144 social change, 144–145 technologically motivated, 144–145 See also organizational change change agent, 541 change management, 540–542 chat, 263–264 CheckFree.com, 98 chief information officer (CIO), 68 chief knowledge officer (CKO), 69 chief privacy officer (CPO), 69 chief security officer (CSO), 68 child domain, 258 Children's Online Privacy Protection Act (COPPA) of 1998!, 133 China, cyberwarfare by, 329, 330 choice, in decision making, 457, 458 ChoicePoint (software), 127–128 Christmas Day bomber, 242 Chrome operating system (Google), 136, 177, 188, 303 churn rate, 355 CIO. See chief information officer circuit-switched networks, 250 CIRRUS, 15 Cisco Telepresence, 62, 76 CKO. See chief knowledge officer class, 504, 505 classical model of management, 458 classification (data analysis), 225 classified ads, 393 click fraud, 302 client, 168 client operating system software, 177 client/server computing, 167, 168–169, 250, 254 cloud-based software, 183, 193, 203-205 cloud computing, 170, 200 case study, 203–205 co-location agreements and, 404 contractual arrangements, 194 data storage in, 184 databases, 215, 217 defined, 183 described, 6, 7, 167, 170, 375 drawbacks, 184 enterprise systems, 357, 358–359 growth of, 358 hardware, 183–184 infrastructure investment and, 195 for IT infrastructure, 183–184 private cloud, 183–184 Salesforce.com, 183, 203 security, 320, 321, 326 types of services, 183 cloud software as a service, 183 CLTV. See customer lifetime value clustering (data analysis), 225 co-location agreement, 404 coaxial cable, 255, 284 COBOL, 175 Code Division Multiple Access. See CDMA Index I 5 codes of conduct, 131 CollabNet (software), 547–548 collaboration, 55–58, 72-73 building a collaborative culture, 58–59 business benefits of, 58–59, 75 defined, 56-57 importance of, 55–57 self-managed teams, 92 tools for, 59–68, 417 collaboration tools described, 7, 8, 59–68, 75, 76, 445 evaluating and selecting, 67–68 Google Apps/Google sites, 61 Internet-based, 61–68 knowledge management systems (KMS), 424 Lotus Notes, 59, 61, 65, 417, 577 Microsoft SharePoint, 7, 61, 64, 76, 424, 463 telepresence technology, 61, 62 time/space collaboration tool matrix, 67 virtual meeting systems, 61-62 See also e-mail; instant messaging; social networking; virtual worlds; wikis collaborative culture, 58–59 Collaborative Planning, Forecasting, and Replenishment (CPFR), 344 command and control firms, 59 Common Gateway Interface (CGI), 229 Commonwarrior (malware), 297 communication, 11 declining costs of, 173–174, 200 text messaging, 60, 146, 147 trends in, 247 unified communications, 265, 267 See also e-mail communication satellites, 256, 284 communications networks, 252 signals, 252-253 See also networks and networking communities of practice (COPs), 421 community providers, 383, 384 competition, information systems and, 79–80, 94–101 competitive advantage as business objective, 14 Internet impact on, 101 competitive advantages strategic systems, 111 competitive forces, 94–96, 104, 116 business value chain model, 102, 104–105, 116 Porter's competitive forces model, 95–96, 102, 109, 115, 196–197 strategies for dealing with, 96–99 competitive forces model, 95–96, 102, 109, 115, 196–197 competitors, 95 Compiere Cloud Edition, 358 Compiere ERP Cloud Edition, 359 complementary assets, 26–28, 33 Compliance Data Warehouse (CDW), 223 component-based development, 515 CompStat, 482–483 computer abuse, 145–146 computer-aided design (CAD), 427, 428, 431, 445 computer-aided software engineering (CASE), 505–506 computer crime, 145, 300–301 See also cybercrime computer forensics, 307, 326 Computer Fraud and Abuse Act of 1986!, 301 computer hardware. See hardware computer literacy, 17 computer networks, 247–248 See also networks and networking computer operations controls, 308 computer software. See software Computer Software Copyright Act of 1980!, 140 computer vision syndrome (CVS), 149 computers about, 16 carpal tunnel syndrome (CTS), 149 computer vision syndrome (CVS), 149 computing power, 126 as disruptive technology, 87, 103 equity and access, 146, 148 ethical issues, 126, 155 for global business, 578 health risks of, 149–150 high-availability computing, 319 history of, 166–169 laptops, 276, 314 mainframes, 167, 168, 177 malware, 291–292, 296–297, 303, 320, 326 microprocessors, 87, 171, 185, 200 minicomputers, 167, 168 netbooks, 6, 7, 181, 185, 188, 277 power consumption, 185, 186 profiling by, 127 radiation from computer display screens, 150 repetitive stress injury (RSI), 149 subnotebooks, 7, 76, 181 supercomputers, 182 tablet computers, 103, 181 technostress, 149–150 touch interface, 177, 178 touchscreens, 177, 178 types, 166–168 viruses and worms, 296, 326 wireless Internet access, 277–279 See also computer crime; computer networks; hardware; mobile devices; networks and networking; platforms; software computing autonomic computing, 185 centralized computing, 168 client/server computing, 167, 168–169, 250, 254 decentralized computing, 144, 168 enterprise computing, 144, 168, 169–170 green computing (green IT), 184–185, 186–187, 200 grid computing, 163, 182, 200 high-availability computing, 319 on-demand computing, 184 recovery-oriented computing, 319 service-oriented computing, 515 See also cloud computing; computers; hardware; information systems; information technology; platforms; software Conficker (malware), 297 conflict, 20 connectivity, international information systems, 577–579 consolidated watch lists, 241 Consumer Reports, 388 consumer-to-consumer (C2C) e-commerce, 381 contact point, 349 content and media industries, 102 content management systems enterprise content management systems, 421–422, 422–424, 445 expertise location and management systems, 424 knowledge network systems, 424, 445 content mining, 228 content providers, 383–384 continuous replenishment system, 97 controls, 293 conversion, systems development, 500 cookies, 121, 134–135, 155 cooptation, 574 COPPA. See Children's Online Privacy Protection Act (COPPA) of 1998! COPs. See communities of practice copyright, 139–140 copyrighted material, piracy of, 262 core business processes, 11 core competencies, 107–108, 116 core systems, 571, 572 corporate databases, Web access to, 229, 237 corporate network infrastructure, 249 cost, project management, 530 cost transparency, 377 counterimplementation, 546 CPFR. See Collaborative Planning, Forecasting, and Replenishment CPO. See chief privacy officer cracker, 298 Creative Commons, 153 Creative Commons Search, 153–154 credit bureaus, errors in data, 232–233 credit card profiling, 100 credit card reform, 101 credit cards, data mining, 100 credit history, 232 critical success factors (CSFs), 532, 534 CRM on Demand (Oracle), 359 CRM systems. See customer relationship management (CRM) systems cross-functional business processes, 45 cross-selling, 352 crowdsourcing, 57, 371, 392 Crystal Reports (software), 219 CSFs. See critical success factors CSO. See chief security officer CTS. See carpal tunnel syndrome cultural particularism, 565 culture, 20 collaborative culture, 58–59 global culture, 563–564 organizational culture, 84–85 customer buying patterns, 98 customer decision-support systems (CDSS), 479 customer feedback, 6 customer intimacy, 13, 90 customer lifetime value (CLTV), 355 customer loyalty, 352 customer loyalty management process map, 351 customer preferences, 98 customer relationship management (CRM), 181, 203, 349–350 customer relationship management (CRM) systems, 51, 53–54, 72, 98, 181, 350, 363–364 business value of, 355 employee relationship management (ERM), 351 I 6 Index operational and analytical CRM, 354–355, 364 partner relationship management (PRM), 351 sales force automation (SFA), 288, 351 software for, 351–352, 512 customer service business benefits of collaboration, 58 CRM modules for, 351–352 customers, 96 customization of software package, 510 of Web pages, 376, 378 CVS. See computer vision syndrome Cybercom, 330 cybercrime, 145 data theft, 301 global threats, 302 hackers, 295, 296, 298, 329 identity theft, 301–302 malware, 291–292, 296, 296–297, 303, 320, 326 recent prosecutions, 301 See also computer crime cyberterrorism, 302 cybervandalism, 298 cyberwarfare, 302, 329–331 cycle time, 337 cycling, 335 D DARPA (U.S. Department of Defense Advanced Research Projects Agency), 251 dashboard. See digital dashboard data defined, 15, 217, 417 online analytical processing (OLAP), 224, 237 See also data resources; databases data administration, 230, 238 data analysis, ethical issues, 126–127, 127 Data Center Infrastructure Efficiency, 186 data cleansing, 231 data communication networks, 247 See also networks and networking data definition, 217 data dictionary, 217 data-driven DSS, 469 data flow diagram (DFD), 502–503 data governance, 230 Data Hub (Purisma), 207 data inconsistency, 211, 213, 237 data management and storage, 20, 166, 176, 179–180, 207–208 data manipulation language, 217, 237 data marts, 223 data mining, 224–226, 237, 422, 431, 462 data quality, 142, 143, 230–231, 238 data quality audit, 231 data redundancy, 211, 213, 237 data resources business intelligence (BI), 49, 224 data marts, 223 data quality, 230–231, 238 data warehouses, 222–223 information policy, 230, 238 managing, 230–231 online analytical processing (OLAP), 224, 237 predictive analysis, 226 See also database management systems (DBMS); databases data scrubbing, 231 data security encryption, 317–318, 326 public key encryption, 317–318 public key infrastructure, 326 data security controls, 308 data storage, 126, 179 in cloud computing, 184 data theft, 301 data visualization, 467 data warehouses, 222–223 data workers, 18 database administration, 230 Database Lite (Oracle), 213 database management systems (DBMS), 212–219, 229, 237 data manipulation language, 217 querying and reporting, 217–218 database server, 229 database servers, 254 database software, 179 databases, 209–212 accessing through the Web, 226, 228, 237 business uses of, 221–230 in cloud computing, 215, 217 data cleansing, 231 data quality, 230–231, 238 database management systems (DBMS), 212–219, 229, 237 for decision making, 221–222, 237 defined, 210, 212 designing, 219–221 entities and attributes, 210 entity-relationship diagrams, 220, 221, 237 to improve business performance, 222, 237 normalization, 220 object-oriented databases, 215 relational database, 213–215, 237 for sales trends, 31–32 the Web and, 226, 228–229 See also database management systems DB2 (IBM), 179, 213, 218 DBMS. See database management systems DDoS attacks. See distributed denial-of-service (DDoS) attacks Dealer Services (software), 466 debugging, 143, 323 decentralized computing, 144, 168 decentralized systems, 568, 584 decision making, 453–483, 479 as business objective, 14 business value of, 455, 479 databases for sales trends, 31 databases to improve, 221–222, 237 decentralization of, 2, 144 flattening of hierarchies, 91 fuzzy logic for, 436 high velocity automated decision making, 461 information quality and, 460 management filters, 460 managerial roles in, 458–459, 479 mobile digital platform and, 8 organizational inertia and politics, 460–461 process of, 457–458, 479 types of decisions, 455–457, 479 See also decision support; decisions decision support balanced scorecard method, 474 business analytics, 453, 461 customer decision-support systems (CDSS), 479 decision-support systems (DSS), 48–49, 72 executive support systems (ESS), 50, 72, 473–475, 480 group decision-support systems (GDSS), 475, 477 key performance indicators, 474 management information systems (MIS), 17–18, 47–48, 72, 480 for operational and middle management, 471–473 pivot tables, 472, 473 for senior management, 473–475, 477 sensitivity analysis, 472 Web-based customer decision-support systems (CDSS), 479 decision-support systems (DSS), 48–49, 72, 475, 477, 479, 480 decisions semistructured decisions, 456, 471–473, 479 structured decisions, 456, 479 types, 455–457, 479 unstructured decisions, 456, 479 See also decision support; decision-support systems deep packet inspection (DPI), 319 "deep Web," 269 Delicious (Web site), 425 Delivery Information Acquisition Device (DIAD), 24 Dell IdeaStorm (software), 357 demand-driven model, 347 demand-driven supply chains, 347–348 demand planning, 344 denial-of-service (DoS) attacks, 299 Descartes' rule of change, 130, 155 design business process redesign, 489, 490, 491–493, 500, 519 in decision making, 457, 458 systems design, 498–499 DFD. See data flow diagram DIAD. See Delivery Information Acquisition Device Digg (Web site), 425 digital asset management systems, 424 digital certificates, 318 digital dashboard, 14, 37, 50 digital databases, See also databases digital divide, 148 digital fingerprinting, 118 digital firm, 9 digital goods, 380, 381, 407 digital information, growth of, 6, 179–180 digital markets, 378, 379, 407 digital media effects on thinking and information retention, 151 intellectual property rights, 141, 155 digital media players, 185 Digital Millennium Copyright Act (DMCA) of 1998!, 141 digital networks, 247, 250 See also networks and networking digital records, retention of, 6, 15 digital signal, 252–253 Index I 7 digital subscriber line. See DSL direct cutover, business process redesign, 500 direct goods, 398 direct marketing, 352 Directive on Data Protection (European Commission), 134 disaster recovery planning, 310–312 disintermediation, 379, 380 display ads, 393 disruptive technologies, 87–88, 103–104 distributed decision making, 8 distributed denial-of-service (DDoS) attacks, 299, 329 divisionalized bureaucracy, 88 DMCA. See Digital Millennium Copyright Act (DMCA) of 1998! DNS (domain name system), 258–259, 284 Do Not Track list, 121, 133 Dollar General Corp., 31 domain extensions, 258 domain name system. See DNS domain network model, 254 domestic exporter strategy, 567, 584 Doostang, 384 DoS attacks. See denial-of-service (DoS) attacks "dot-com" bubble, 374 Doubleclick (software), 127, 134, 135, 136, 395 Downadup (malware), 297 downtime, 319 Downup (malware), 297 DPI. See deep packet inspection Dreamweaver (Adobe), 404 Droid, 178, 288, 374, 401 Drugstore.com, 382 DSL (digital subscriber line), 257, 258, 284, 294 DSL modems, 253 DSS. See decision-support systems due process, 129 duplicated systems, 568 dynamic pricing, 379 Dynamics suite (Microsoft), 357 E e-book readers, 103, 181, 375, 382, 411 e-books, 103, 399 e-business, 55 e-Business Suite (Oracle), 357 e-business suites, 356 e-commerce, 55, 373–412 building a Web site for, 401–405, 408 business models, 375, 382–384, 407 defined, 55 digital goods, 380, 381, 407 disintermediation, 379, 380 DoS attacks, 299 dynamic pricing, 379 electronic payments systems for, 393 features, 374–378 global reach, 376, 377 growth of, 6, 373, 375, 395 history, 373 information asymmetry reduction in, 378–379, 380 information richness, 376, 377 marketing, 390, 392–395, 407 privacy and, 136 revenue growth in, 373–374 revenue models, 387–389, 407 social networking and, 375, 376, 378, 379, 389 social technology, 376, 378 types, 381 unique nature of, 374–378, 407 universal standards, 376, 377, 378 See also business-to-business e-commerce; business-to-consumer e-commerce; consumer-to-consumer e-commerce; m- commerce e-commerce Web site budgeting for, 405 building, 401–405, 408 planning, 401–402 systems analysis for, 403 e-government, 55 e-mail about, 5, 261, 263 as collaboration tool, 60, 75 employer surveillance of, 134, 264, 266–267 marketing, 393 security threats to, 294 spam, 145–146 e-OSCAR, 233 e-readers See e-book readers e-SPS (software), 347 e-tailers, 382, 383 E-ZPass system, 280 EC2. See Elastic Compute Cloud economic development, cell phones and, 580–581 economics, 108 Metcalfe's law, 173, 200 network economics, 173 EDI. See electronic data interchange efficient customer response system, 97 eHarmony, 388 Elastic Compute Cloud (EC2) (Amazon), 183, 204, 358 electrical grid, cyberwarfare against, 329–330 electricity infrastructure, 36–38 electronic business. See e-business electronic commerce. See e-commerce electronic data interchange (EDI), 396, 582 electronic evidence, 307, 326 electronic government. See e-government electronic health records, 9 electronic payment system, 97, 393 electronic records management (EMR), 9, 306–307, 522–524 electronic surveillance of employee Internet activity, 134, 264, 266–267 See also privacy electronic trading systems, 439–440 Elemica, 398 employee relationship management (ERM), 351 employees electronic surveillance of employee Internet activity, 134, 264, 266–267 employee records, 15 employee relationship management (ERM), 351 internal cybercrime threats, 302–303 employers, electronic surveillance of employee Internet activity by, 134, 264, 266–267 employment. See jobs EMR. See electronic records management encryption, 317–318, 326 encryption key, 317 end-user development, 508–510, 519 end-user interface, 507, 530 end users, 69, 541 enterprise applications, 51, 53–55, 72, 355–356 enterprise computing, 144, 168, 169–170 enterprise content management systems, 421–422, 422–424, 445 Enterprise Linux (Oracle), 163 Enterprise Miner (SAS), 466 enterprise networking, 180 Enterprise Process Center (EPC), 448–449 enterprise project management system, 528 enterprise resource planning (ERP) systems, 51, 53, 337 enterprise software, 177, 191, 338–339 enterprise solutions, 356 enterprise suites, 356 enterprise systems, 191, 337–339, 364 about, 355 business value of, 339–340 case study, 366–368 challenges of, 355–356, 364 cloud-based versions, 357, 358–359 future trends, 356–357 service platforms and, 360–361, 364 enterprise-wide knowledge management systems, 421, 422, 445 entertainment, 401 new business models for, 375 entities, 210 entity-relationship diagrams, 220, 221, 237 entrepreneurial structure, 88 environmental scanning, 86 environments, of organizations, 86–88 EPC. See Enterprise Process Center Epinions, 389 EPM Solution (Microsoft Office EPM Solution), 527 Epocrates Essentials, 9 ergonomics, 546 ERM. See employee relationship management ERP Cloud Edition (Compiere), 359 ERP systems. See enterprise resource planning (ERP) systems ESS. See executive support systems Ethernet, 173, 174, 175, 254 ethical analysis, 129–130, 155 ethical and social issues, 121–159, 155 examples of failed ethical judgment by manager, 123 nonobvious relationship awareness (NORA), 128 privacy of personal information, 122 profiling, 100, 127 real-world dilemmas, 131 technology trends raising issues, 126–128 Web tracking, 127, 134, 137, 155, 390, 393 See also accountability; information rights; moral issues; property rights; quality of life ethical principles, 130, 155 ethics basic concepts, 129 defined, 124, 129 electronic surveillance of employee Internet activity, 134, 264, 266–267 ethical analysis, 129–130 ethical principles, 130, 408 professional codes of conduct, 131 See also ethical and social issues Europe, spamming in, 146 European Commission Directive on Data Protection, 134 I 8 Index European Union Data Protection Directive, 565 EveryBlock Chicago (Web site), 193 evil twins, 301 Excel PivotTable (Microsoft), 472 Exchange ActiveSync (Microsoft), 9 exchanges, 395, 397, 398–399 executive support systems (ESS), 50, 72, 473–475, 480 Exostar, 398 expert systems, 422, 432–434, 441, 445 expertise location and management systems, 424 explicit knowledge, 417 exports, globalization and, 8 Expression Web (Microsoft), 180 extended star networks, 254 extensible markup language. See XML external integration tools, 545 extranets, about, 21, 55, 72 F Facebook, 6, 7, 60, 102, 118, 136, 146, 179, 204, 262, 274, 291–292, 297, 371, 372, 373, 384, 389, 390–391, 400 facial recognition technology, 314 Fair Information Practices (FIP), 132 family, changed by technology, 144 Fancast.com, 118 Fast Ethernet, 254 fault-tolerant computer systems, 318 feasibility study, 497 Federal Information Security Management Act, 330 feedback, 17 fiber-optic cable, 255–256, 284 fields, 210 file processing traditional, 210–212, 237 See also databases file servers, 254 file sharing services, 141 File Transfer Protocol. See FTP finance and accounting, business processes, 43, 44 financial analysis, information systems projects, 538–539 financial models, limitations of, 539 financial performance, business benefits of collaboration, 58 financial services legislation regulating, 133 m-commerce, 400 Financial Services Modernization Act of 1999!. See Gramm-Leach-Bliley Act of 1999! financial systems, electronic trading systems, 439–440 fingerprint databases, 240, 314 fingerprint recognition technology, 314 FiOS Internet service, 118, 256 FIP. See Fair Information Practices Firefox (Mozilla), 188, 303 firewalls, 185, 314–315, 326 Flash (Macromedia), 180 Flash cookies, 121 "flash crash," 439, 461 Flickr, 121, 153, 272, 388 folksonomies, 425 Force.com, 183, 204 foreign trade, globalization and, 8 formal control tools, 543 formal planning tools, 543 forward chaining, 432 4 G networks, 276, 284 Foursquare, 372, 400 fourth-generation languages, 508–510 franchising, 567–568, 584 free/fremium revenue model, 386, 388 Frontal A (malware), 297 FTP (File Transfer Protocol), 261 Fusion (Oracle), 357 fuzzy logic, 422, 434–436, 441, 445 G games, 401 Gantt chart, 543, 544 Gap.com, 388 GDDS. See decision support, group decision- support systems Genealogy.com, 388 general controls, 308 genetic algorithms, 422, 438, 440–441, 445 geo-tagging, 400 GeoCities, 121 geographic information systems (GIS), 467–468, 482 geosynchronous satellites, 256 Gigabit Ethernet, 254 GIS. See geographic information systems global business business challenges, 565–566, 584 business drivers, 562, 564 computing platforms, 577 connectivity, 577–579 domestic exporter, 567, 584 franchising, 567–568, 584 global supply chains, 346–347 global value chains, 576–577 implementation, 573–574, 576, 584 internationalization, 564, 584 managing, 570–576 multinational strategy, 567, 584 organizing, 567–570 particularism, 565 software localization, 579, 581–582 state of the art, 566 systems integration, 577 transborder data flow, 565 See also international information systems global business strategies, 567–568 global culture, 563–564 global markets, 564 global positioning systems. See GPS global reach, 376, 377 Global System for Mobile Communication (GSM), 276, 284 global systems, managing, 559–587 global value chain, 576–577 global village, 563 globalization, 8, 11, 144 Gmail, 61, 136, 184, 204 Golden Rule, 130 Google, 6, 7, 11, 37, 61, 76, 87, 102, 121, 135–136, 137, 151, 153, 184, 204, 269, 270, 271, 287–289, 374, 382, 383, 401, 461 Google Analytics, 136 Google Apps, 7, 61, 183, 184, 193, 204, 383 Google Buzz, 136 Google Calendar, 61, 184, 204 Google Checkout, 136 Google Chrome, 136, 177, 188, 303 Google Docs, 61, 184, 204 Google Gmail, 61, 184 Google Groups, 61 Google Insights, 226 Google Maps, 97, 189, 193 Google Product Search, 272 Google Search, 136 Google Sites, 7, 61, 417 Google Talk, 61, 184, 204, 264 Google Toolbar, 136 Google Trends, 226 Google Video, 61 Google Wave, 63 Gotopaper.com, 398 governance of data, 230 of information systems, 69, 194–195 of Internet, 260, 284 of transnational firms, 568 Government Multipurpose Smart Card (Malaysia), 487 Gowalla, 400 GPS (global positioning systems), 400 Gramm-Leach-Bliley Act of 1999!, 133, 306 graphics language, 509 green computing (green IT), 184–185, 186–187, 200 grid computing, 163, 182, 200 group decision-support systems (GDSS), 475, 477 groupware, 65 GSM. See Global System for Mobile Communication H hackers, 295, 296, 298, 330 handheld mobile devices. See mobile devices hard disks, 179 hardware, 20, 165, 181–187, 308 capacity planning, 193 cloud computing, 183–184 computer hardware platforms, 175–177, 181 green computing (green IT), 184–185, 186–187, 200 grid computing, 163, 182, 200 mobile digital platforms, 6, 7, 8, 10, 110, 170, 181, 279 for networking and telecommunications, 180 power-saving processors, 185, 200 scalability, 193 servers, 163, 168, 180 touchscreens, 177, 178 virtualization, 182, 184, 186, 200 See also computers HauteLook, 453 Health Insurance Portability and Accountability Act of 1996!. See HIPAA health records, HIPAA, 133, 306 hertz (unit), 257 HFTs. See high-frequency traders high-availability computing, 319 high-frequency traders (HFTs), 439 high velocity automated decision making, 461 HIPAA (Health Insurance Portability and Accountability Act of 1996), 133, 306 home delivery, 52 HomeScan application, 429–430 host country systems units, 569 host name, 258 hotjobs.com, 32 hotspots, 278 Index I 9 HP Project and Portfolio Management Center software (HP PPM), 550 HTC, 288 HTC Desire, 178 HTML (Hypertext Markup Language), 189, 268 HTTP (Hypertext Transfer Protocol), 251, 269 hubs, 248 Hulu.com, 118, 119, 388 HuluPlus, 119 human resources, business processes, 43 hybrid AI systems, 441 HyperPlant (software), 430 hypertext, 268–269 Hypertext Markup Language. See HTML Hypertext Transfer Protocol. See HTTP I i2 Demand Planner (software), 345 i2 Service Budget Optimizer (software), 345 i2 Service Parts Planner (software), 345 IAB (Internet Architecture Board), 259, 284 iAd (Quattro), 288 IBM 1401!, 168 IBM 7090!, 168 IBM Cloud, 183 IBM DB2, 179, 213, 218 IBM Lotus Connections, 7, 65 IBM Lotus Notes, 59, 61, 65, 417, 577 IBM Lotus Sametime, 65 IBM Smart Business Application Development & Test, 183 ICANN (Internet Corporation for Assigned Names and Numbers), 260 identity management systems, 310, 312–314 identity theft, 301–302 IEM. See Iowa Electronic Markets Ike4e.B (malware), 297 ILOVEYOU (malware), 297 IM. See instant messaging iMac, 287 implementation in decision making, 457, 458 in global business systems, 573–574, 576, 584 in project management, 540–541, 553 implementation controls, 308 imports, globalization and, 8 InDesign (Adobe), 404 indirect goods, 398 individual CSFs, 534 inference engine, 432, 433 Infor Global Solutions (Oracle), 339 information defined, 13, 16, 33, 417 quality dimensions of, 460 See also information systems; information technology information asymmetry, 378–379, 380 information density, 376, 377–378 information policy, 230, 238 information retention, trends in, 6–8, 15 information richness, 376, 377 information rights, 125 See also privacy; property rights information systems (IS) about, 5–6, 16, 33 behavioral approach, 28, 29 behavioral impact, 93 business models, 26 business objectives achieved through, 12–18, 111–112, 530–531, 553 business perspective, 24–26 business value of, 536–539 competition and, 79–80, 94–101 complementary assets, 26–28, 33 contemporary approaches to, 28–30 decision making, 453–483 defined, 15 economic impacts, 89–91 ethical and social issues, 121–159, 155 ethical dilemmas created by, 131 financial analysis, 538–539 functions of, 17 global strategy, 571–573 globalization and, 8, 11 IT governance, 69, 194–195 knowledge management, 69, 415–448, 416–418 linking systems projects to business plan, 532 literacy, 17 management structure for IS projects, 531–532, 553 managing global systems, 559–587 moral issues, 125–126, 131–150 offshoring, 8, 192, 511, 513, 514 organizational impact, 91–92 organizations and, 12, 18, 81–89, 115 organizing information systems department, 69 planning, 95 portfolio analysis, 534–535 professional codes of conduct, 131 project management, 527–556 real options pricing models (ROPMs), 538–539 security of, 68–69, 291–326 sociotechnical systems, 29–30, 33 supply chain management, 51, 53, 72, 340–344, 356, 363 systems analysis, 68, 496–499 systems design, 498–499 systems development, 494, 496–506, 519 technical approach, 28, 29 technology and, 20–21, 23–24 trends in, 6–8 See also ethical and social issues; information systems controls; information systems security; information technology (IT); information technology (IT) infrastructure; moral issues; systems design; systems development information systems controls, 308 See also information systems security information systems department, 68–69, 73, 488, 489–524 information systems literacy, 18 information systems managers, 68 information systems plan, 532, 533 information systems projects. See business process redesign; project management; systems design information systems security, 68–69, 291–326 access control, 310 antivirus and antispyware software, 316, 326 biometric authentication, 313–314, 326 business continuity planning, 311–312 business value of, 305–306, 326 cloud computing, 320, 321 computer forensics, 307 data security, 317–318, 326 denial-of-service (DoS) attacks, 299 disaster recovery planning, 310–312 distributed denial-of-service (DDoS) attacks, 299, 329 electronic evidence, 307 electronic records management, 9, 306–307, 522–524 encryption, 317–318, 326 firewalls, 185, 314–315, 326 global threats, 302 hackers, 295, 296, 298, 330 identity management and authentication, 312–314 identity theft, 301–302 information systems controls, 308 internal threats from employees, 302–303 intrusion detection systems, 316, 326 legislation, 301–302 MIS audit, 312, 326 outsourcing, 8, 11, 192, 201, 319 public key encryption, 317–318 public key infrastructure, 326 risk assessment, 309, 326, 539–540, 553 security policy, 310, 326 smart card, 313, 326 technologies and tools for protecting information resources, 312–320, 326 threats and vulnerability, 293–303, 323 tokens, 313, 326 unified threat management (UTM) systems, 316 for wireless networks, 295–296, 316–317 See also cybercrime; Internet security threats information technology (IT) aligning with business objectives, 111–112, 530–531, 553 autonomic computing, 185 behavioral impact, 93 capital investment, 5, 553 defined, 15, 20 economic impacts, 89–91 organizational change and, 489–490 organizational impact, 91–92 organizations and, 81 standards, 174–175 information technology (IT) infrastructure, 21, 22, 164, 165 capacity planning, 194 cloud computing, 6, 7, 167, 170 competitive forces model, 95–96, 102, 109, 115, 196–197 components, 165–167, 175–181, 200 computer hardware platforms, 175–177, 181 consulting and system integration services, 181 data management and storage, 20, 166, 176, 179–180 declining communication costs and, 173–174, 200 defining, 165–166 enterprise software applications, 176, 177, 338–339 evolution of, 166–170, 200 global systems, 556–587 hardware platforms, 181–187 Internet platforms, 176, 180 investment in, 5, 195–197, 201, 553 law of mass digital storage, 171–172, 200 legacy systems, 167, 181, 182, 191 I 10 Index management issues, 194–197 Metcalfe's law, 173, 200 mobile platforms, 6, 7, 9, 170 Moore's law, 170–171, 200 networking/telecommunications platforms, 176, 180 operating system platforms, 176, 177 rent vs. buy decision, 195 scalability, 194 "service platform" perspective, 166 total cost of ownership (TCO), 195–196, 201, 538 Web services, 189–190, 200–201 See also hardware; information technology; software information value chain, 24–25 informational role, of managers in decision making, 459, 479 informed consent, 134 infrastructure. See information technology (IT) infrastructure inheritance, 504, 505 innovation, 57, 75, 76 InnovationNet (software), 76 input, 16 input controls, 308 instant messaging, 264, 294 instant messaging (IM), as collaboration tool, 60 intangible benefits, 537 intellectual property, 138–139, 383 intellectual property rights, 138–141, 155 intelligence, in decision making, 457, 458 intelligent agent shopping bots, 271–272 intelligent agents, 422, 441–442, 445 intelligent techniques, 422, 431–442, 445 agent-based modeling, 441–442 artificial intelligence, 431, 441, 445 case-based reasoning, 434, 445 data mining, 224–226, 237, 422, 431 expert systems, 422, 432–434, 441, 445 fuzzy logic, 422, 434–436, 441, 445 genetic algorithms, 422, 438, 440–441, 445 hybrid AI systems, 441 intelligent agents, 422, 441–442, 445 knowledge discovery, 431 machine learning, 439, 440–441 neural networks, 422, 436–438, 441, 445 neurofuzzy system, 441 "interaction" jobs, 56 interactivity, 376, 377, 379 internal database, Web access to, 229, 237 internal integration tools, 543 internal supply chain, 341 international information systems, 556–587 business challenges, 565–566, 584 business drivers, 562, 563 case study, 559–560 computing platforms, 577 connectivity, 577–579 developing an international IS architecture, 562–563 domestic exporter strategy, 567, 584 franchising, 567–568, 584 global value chains, 576–577 globalization, 564 growth of, 561–562 implementation, 573–574, 576, 584 managing, 570–576 multinational strategy, 567, 584 organizing, 567–570 particularism, 565 software localization, 579, 581–582 state of the art, 566 systems integration, 577 transborder data flow, 565 international information systems architecture, 562 internationalization, 564, 584 See also global business; international information systems Internet, 21, 257–275, 284 about, 257, 260 challenges to privacy, 134–137, 155 cognitive effects of, 151 connection speed, 248 connectivity for global business, 577–579 customization, 376, 378 databases and, 226, 228 described, 21 domain name system (DNS), 258–259, 284 future of, 260–261 global reach, 376, 377 global supply chain and, 346–347 governance of, 260, 284 growth of, 260, 262 information density, 376, 377–378 information richness, 376, 377 intellectual property rights and, 140–141 interactivity, 376, 377 for marketing, 392–393 metered pricing of, 262 music industry and, 118 network neutrality, 262–263 organizations and, 93–94 personalization, 376, 378, 390, 392, 393, 394, 395 privacy and, 131–138 social change caused by Internet use, 144 social technology, 378 television and, 118–119 threats and vulnerabilities, 294–295, 323 ubiquity of, 374–376 unique nature of, 374–378, 407 universal standards, 376, 377, 378 usage, 5–6 VoIP, 264–265, 284, 294 VPNs, 267–268, 284, 316, 577 Web tracking, 127, 134, 137, 390, 392, 393, 394 wireless access, 277–279 See also Internet security threats Internet access equity and access, 146–148 for global business, 577–579 statistics, 174 wireless access, 277–279 Internet advertising, 6 Internet architecture, 259 Internet Architecture Board. See IAB Internet-based collaboration environments, 61–68 Internet Corporation for Assigned Names and Numbers. See ICANN Internet Explorer (Microsoft), 188, 303 Internet layer, 251 Internet music services, as disruptive technology, 87 Internet Protocol, 251 Internet protocol address. See IP address Internet Protocol version 6. See IPv6 Internet security threats, 134–137, 295–296 about, 323 botnets, 299, 300 bugs, 121, 135, 137, 303, 326 click fraud, 302 computer crime, 300–301 cookies, 134–135, 155 cyberterrorism and cyberwarfare, 302, 329–331 denial-of-service (DoS) attacks, 299 distributed denial-of-service (DDoS) attacks, 299, 329 evil twins, 301 global threats, 302 hackers, 295, 296, 298, 330 identity theft, 301–302 malware, 291–292, 296–297, 303, 320, 326 pharming, 301 phishing, 301 sniffing, 299, 313, 326 spoofing, 299 spyware, 135, 298 SQL injection attacks, 298, 301 Trojan horses, 291, 296, 298 viruses and worms, 296–297, 326 See also cybercrime; information systems controls; information systems security Internet service providers (ISPs), 110, 141, 206, 257 Internet services, 261, 263–264, 284 See also chat; e-mail; FTP; instant messaging; Internet; Internet access; Internet security threats; TelNet; unified communications; Web Internet2, 261 interorganizational information systems, 53 interpersonal roles, of managers in decision making, 459, 479 intranets about, 21, 54–55, 72 for knowledge management, 415, 416 intrusion detection systems, 316, 326 inventory management, 345 inventory optimization systems, 345 inventory replenishment system, 96–97 investment workstations, 431 Iowa Electronic Markets (IEM), 392 IP address (Internet protocol address), 258, 260, 294 IP datagrams, 251 IP phone systems, 265 iPad, 6, 7, 10, 98, 102, 103, 118, 177, 181, 185, 194, 277, 288, 371, 383 iPhone, 3, 5, 6, 7, 9, 10, 13, 79, 80, 98, 103, 110, 118, 177, 178, 181, 185, 193, 194, 262, 276, 277, 287, 288, 289, 297, 374, 383, 399, 400, 401, 464 iPod, 13, 94, 95, 97, 98, 287, 383 iPod Touch, 177, 288 IPv6 (Internet Protocol version 6), 261 IS. See information systems ISPs. See Internet service providers IT. See information technology iterative process, 507 iTunes, 7, 45, 87, 94, 98, 102, 103, 383, 388, 399 iVillage, 109, 383 J JAD. See joint application design Java (software), 180, 188–189, 200 Java Virtual Machine, 188 JIT strategy. See just-in-time strategy Index I 11 jobs offshoring, 8, 192, 511, 513, 514 outsourcing, 8, 11, 192, 201, 319 reengineering job loss, 146 join operation, 215, 216 join table, 216 joint application design (JAD), 514, 519 Joint Strike Fighter project, 329 JotSpot (software), 61 just-in-time (JIT) strategy, 9, 342 K Kaboodle, 389 key corporate assets, 11 key fields, 214 key performance indicators (KPIs), 474 keyloggers, 298 keystone firms, 109 keywords, 270 Kinaxis RapidResponse, 335, 336 Kindle (Amazon), 103, 181, 382, 411 KMS. See knowledge management systems knowledge, 417 acquisition, 420 application of, 420–421 dimensions of, 418 dissemination of, 420 global knowledge base, 564 storage of, 420 tacit knowledge, 417, 432 knowledge acquisition, 420 knowledge application, 420–421 knowledge base, 432, 564 knowledge-based organization, 88 knowledge discovery, 431 knowledge dissemination, 420 knowledge management, 445 about, 69, 416–418 case study, 415 communities of practice (COPs), 421 defined, 419 knowledge acquisition, 420 knowledge application, 420–421 knowledge dissemination, 420 knowledge storage, 420 knowledge management systems (KMS) about, 51, 54, 72, 421–422, 445 collaboration tools, 424 enterprise content management systems, 421–422, 422–425, 445 enterprise-wide knowledge management systems, 421, 422, 445 intelligent techniques, 422, 431–442, 445 knowledge network systems, 424, 445 knowledge work systems (KWS), 421, 427, 428, 445 learning management systems, 425–426 social bookmarking, 424–425, 445 knowledge management value chain, 419–421 knowledge network systems, 424, 445 knowledge storage, 420 knowledge work systems (KWS), 421, 427, 428, 445 augmented reality, 428–430, 445 investment workstations, 431 knowledge workstations, 427 virtual reality systems, 428, 429, 431, 445 knowledge workers, 18, 426 knowledge workstations, 427 Koobface (worm), 291 KPIs. See key performance indicators L LANs (local-area networks), 173, 174, 175, 180, 249, 253–254, 278, 285, 295 laptop computers Internet access, 276 security devices for, 314 Latitude XT tablet, 178 law of diminishing returns, 108 law of mass digital storage, 171–172, 200 Law of One Price, 581 leadership, low-cost leadership, 96–97, 99 learning management systems (LMS), 425–426 legacy systems, 167, 181, 182, 191 legal liability, inadequate security and control, 306–307 legislation anti-spam legislation, 145, 146 copyright of software, 139–140 cyberwarfare, 330 identity theft, 301–302 intellectual property rights, 141, 155 privacy laws, 122, 132–133 texting while driving, 147–148 legitimacy, 574 leisure, changed by technology, 144–145 liability, 129, 142–143, 157–159 Line-haul (software), 432 LinkedIn, 274, 384, 389 Linux (operating system), 176, 177, 180, 188, 200, 248, 323 literacy, 17 Live Communications Server (Microsoft), 76 Live Meeting (Microsoft), 76 LiveJournal.com, 273 LLBean.com, 388 LMS. See learning management systems local-area networks. See LANs location-based services, 400 logical view, 212 long tail marketing, 392 Long-Term Evolution. See LTE "look and feel" copyright infringement lawsuits, 140 Loopt, 400 Lotus Connections (IBM), 7, 65, 424 Lotus Notes (IBM), 59, 61, 65, 417 Lotus Notes Domino (IBM), 415, 416 Lotus Sametime (IBM), 65, 264 low-cost leadership, 96–97, 99 LTE (Long-Term Evolution), 276 M m-commerce (mobile e-commerce), 374, 375, 382, 399–401, 408 machine bureaucracy, 88 machine learning, 439, 440–441 Macromedia Flash, 180 magnetic ink character recognition. See MICR mail servers, 254 mainframes, 167, 168, 177 Malaysia, Government Multipurpose Smart Card, 482 malware about, 296–297, 303 blogs and, 297 on mobile devices, 296–297, 320 on social networking sites, 291–292, 297 Trojan horses, 291, 296, 298 worms, 296, 326 managed security service providers (MSSPs), 319–320 management of global systems, 570–576 knowledge management and, 42–421 legitimacy, 574 levels of, 56 platform and infrastructure, 194–196 management challenges, 562, 584 management costs, flattening of hierarchies, 91 management filters, 460 management hierarchy, 56, 91 management information systems (MIS), 47–48, 72 about, 29, 480 defined, 17–18 See also information systems management issues, information technology infrastructure, 194–197 management models, 458 managerial complementary assets, 27 managers business analytics, 463 decision making and, 458–459, 479 job of, 18–19 managing global systems, 559–587 projects. See project management MANs (metropolitan-area networks), 253, 254, 284 manufacturing and production, business processes, 43 MapInfo (software), 467 Mariposa botnet, 299 market creators, 383, 384 market entry costs, 377 market niche, 98–99 marketing affiliate and blog marketing, 393 behavioral targeting, 121, 132, 136, 392–393 business processes, 43 classified ads, 393 CRM systems, 352–353 display ads, 393 e-commerce, 390, 392–395, 407 e-mail, 393 long tail marketing, 392 micromarketing, 564 online viral marketing, 389–390 rich media, 393 search engine marketing, 122, 270, 393 social networking for, 371 sponsorships, 393 video, 393 marketspace, 375 mashups, 193, 201, 272 mass customization, 98 master data management (MDM), 207, 208 Match.com, 388 MDM. See master data management media new business models for, 375 transformation of industry, 102 medical records, HIPAA, 133, 306 MEDITECH electronic medical records system, 9 MeilleursAgents.com, 429 Melissa (malware), 297 membership functions, 435 menu costs, 379 Metastorm BPM software, 495 Metcalfe's law, 173, 200 I 12 Index metropolitan-area networks. See MANs micromarketing, 564 micropayment systems, 388 microprocessors, 87, 171, 185, 200 Microsoft Access, 213, 218, 219 Microsoft Azure, 177, 217, 322 Microsoft DOS, 175 Microsoft Dynamics suite, 357 Microsoft Excel PivotTable, 472 Microsoft Exchange ActiveSync, 9 Microsoft Expression Web, 180 Microsoft Expressions, 404 Microsoft Internet Explorer, 188, 303 Microsoft Live Communications Server, 76 Microsoft Live Meeting, 76 Microsoft .NET family, 180, 190 Microsoft Office, 76, 188, 441 Microsoft Office Enterprise Project Management (EPM) Solution, 527 Microsoft Office Live Meeting, 62 Microsoft Office Project 2010!, 549 Microsoft Office Project Portfolio Server 2007!, 527 Microsoft Office Project Professional 2007!, 527 Microsoft Office Project Professional 2010!, 549 Microsoft Office Project Server 2007!, 527 Microsoft Office Project Server 2010!, 549 Microsoft Office SharePoint Portal Server, 415 Microsoft Office SharePoint Server, 76, 415, 416 Microsoft Office Web Apps, 193–194 Microsoft Outlook, 76, 297 Microsoft Server, 527 Microsoft SharePoint, 7, 61, 64, 76, 424, 463 Microsoft SharePoint Designer, 180 Microsoft SQL Server, 179, 213, 218 Microsoft SQLAzure Database, 217 Microsoft Virtual Server, 182 Microsoft Windows OS, 168, 169, 174 Microsoft Windows Server, 177, 180, 182, 248, 254 Microsoft Windows Vista Service Pack 2!, 303 Microsoft Xboxlive.com, 388 microwave systems, 256, 284 middle management, 18 about, 59 business information systems for, 46–48, 72 decision support for, 471–473 MiFi (Virgin Mobile), 277 MIMO (multiple input multiple output), 279 minicomputers, 167, 168 Mint.com, 386 Mintzberg's role of classifications, 459 MIPS (millions of instructions per second), 171 Mirrorforce, 322 MIS. See management information systems MIS audit, 312, 326 mobile advertising, 400 mobile computing, 170 mobile devices about, 6, 375, 464 e-book readers, 103, 181, 375, 382, 411 economic development and, 580–581 malware for, 296–297, 320 netbooks, 6, 7, 181, 185, 188, 277 securing, 320 mobile digital platforms about, 6, 7, 110, 181, 279 apps, 429 case study, 10 decision making and, 8 described, 170 RFID, 279–281, 285 mobile e-commerce. See m-commerce Mobile Maps, 136 mobile WiMax, 276 MobiTV, 401 modeling, object-oriented modeling, 504 modems, 252–253 Monster.com, 32 Moore's law, 170–171, 200 moral issues, 125–126, 131–150 See also accountability; information rights; moral issues; property rights; quality of life Motorola Droid, 288 Movable Type (software), 273 movies scripts, indexing by search engines, 271 Mozilla Firefox, 188, 303 MP3 music files, intellectual property rights, 141 MP3.com, 87 MSN, 382 MSSPs. See managed security service providers multi-tiered client/server architecture, 169 multicore processor, 185, 200 multidimensional data analysis, 224, 225 multinational firms, 568 See also global business; international information systems multinational strategy, international information systems, 567, 584 multiple input multiple output. See MIMO multitouch interface. See touch interface music industry, 13, 118 My Location, 136 MyDoom (malware), 297, 300 MyKad, 482 MyPoints, 389 MySimon, 272 MySpace, 7, 60, 137, 146, 229–230, 274, 291, 297, 298–299, 383, 384, 389 MySQL (software), 213, 217 N N-tiered client/server architecture, 169 NAI. See Network Advertising Initiative nanotechnology, 171 nanotubes, 172 NAT. See Network Address Translation National Cyber Security Center (NCSC), 273 national Do Not Track list, 121, 133 National Information Infrastructure Protection Act of 1996!, 301–302 National Security Agency (NSA), 330 net marketplaces, 397, 398, 407 net neutrality, 262–263 Net Promoter (Satmetrix), 227 netbooks, 6, 7, 181, 185, 188, 277 Netflix, 392 Netscape.com, 373 NetSuite, 203, 321 NetWeaver Business Intelligence (SAP), 368 NetWeaver Master Data Management (SAP), 368 NetWeaver Portal (SAP), 361 Network Address Translation (NAT), 315 Network Advertising Initiative (NAI), 122, 133, 137 network-based strategies, 108–109, 116 network economics, 108, 173 network infrastructure, 249 network interface card (NIC), 248 network interface layer, 252 network neutrality, 262–263 network operating system (NOS), 248 network service providers, 259 network topologies, 254–255 networked systems, 568 networking services, 180 networking technology, 20, 250–252 networks and networking about, 284 advertising networks, 392–395, 395 CANs (campus-area networks), 253 controlling network traffic, 319 defined, 20–21, 248 extended star networks, 254 firewalls, 315–316, 326 global business, 577–579 hardware, 180 LANs (local-area networks), 173, 174, 180, 185, 249, 253–254, 278, 285, 295 in large companies, 249–250 MANs (metropolitan-area networks), 253, 254, 284 P2P networks, 254, 295 PANs (personal-area networks), 276, 285 physical transmission media, 255–257, 284 private industrial networks, 397, 407 topologies, 254–255 transmission, 256–257 transmission speed, 257 trends in, 247 VPNs (virtual private networks), 267–268, 284, 316, 577 WANs (wide-area networks), 180, 253, 254, 284 wireless networks, 276, 295, 316–317 WSNs (wireless sensor networks), 281, 285 See also information systems security; Internet security threats neural networks, 422, 436–438, 441, 445 neurofuzzy system, 441 New York Stock Exchange, 439, 461 news reader software, 273 newsgroups, 154, 264 newspapers iPad and, 103 new business models for, 375 readership, 6 Next Generation Internet (NGI), 261 Nexus One, 178 NGI. See Next Generation Internet NIC. See network interface card niche firms, 109–110 No Child Left Behind Act, 470 "no-fly" list, 240 "no free lunch" rule, 130, 155 nonobvious relationship awareness (NORA), 128 nonprocedural languages, 508–509 normalization, 220 NOS. See network operating system Novell Open Enterprise Server, 248 NSA. See National Security Agency O object, 504 object-oriented database management systems (OODBMS), 215 object-oriented databases, 215 object-oriented development, 503–505 Index I 13 object-oriented modeling, 504 object-relational DBMS system, 215 Office Live Meeting (Microsoft), 62 Office (Microsoft), 76 Office SharePoint Server (Microsoft), 76, 415, 416 Office Web Apps (Microsoft), 193–194 offshore outsourcing, 8, 11, 192, 511, 513, 514 OLAP. See online analytical processing on-demand computing, 184 one-click shopping, 98 OneHub (software), 66 OneView (software), 512 online advertising, 122, 375 online analytical processing (OLAP), 224, 237, 354 online banner ads, 122 online bill payment, 98 online chat, 263–264 online collaboration tools, 61–68 online conferencing, 5, 7, 60 online entertainment, business models, 375 online ordering systems, 52 Online Privacy Alliance, 137 online transaction processing, 319 online video, 271 online viral marketing, 389–390 OnQ system, 98 OODBMS. See object-oriented database management systems ooVoo (software), 62 Open for Business (OFBiz) (Apache), 357 Open Office (Oracle), 188 Open Photo, 153 open source software, 187–188, 200, 357 Open Text LiveLink Enterprise Content Management, 423 Openbravo (software), 357 OpenOffice (Sun Microsystems), 188 Opera (browser), 303 operating systems, 176, 177 operational customer relationship management (CRM), 354, 364 operational excellence, as business objective, 12–13 operational management, 18, 46 opt-in policy, 137 opt-out policy, 136, 137 option, 538 Oracle Application Express, 41 Oracle Business Intelligence, 359 Oracle CRM on Demand, 359 Oracle Database, 41, 213 Oracle Database Lite, 213 Oracle e-Business Suite, 357 Oracle Enterprise Linux, 163 Oracle Enterprise Manager, 217 Oracle Fusion Middleware, 217, 357 Oracle Infor Global Solutions, 339 Oracle Open Office, 188 Oracle PeopleSoft Enterprise, 163 order fulfillment process, 44, 52 order-to-cash process, 360 organizational and management capital, 27, 419 organizational assets, 27 organizational change, IT-enabled, 489–490 automation, 489, 519 business process redesign, 489, 490, 491–493, 500, 519 paradigm shifts, 489, 490, 519 rationalization, 489, 490, 519 resistance to, 493 organizational CSFs, 534 organizational culture, 84–85 organizational environments, 86–88 organizational impact analysis, 546–547 organizational intelligence, case-based reasoning, 434, 445 organizational learning, 419 organizational politics, 84, 93 organizational structure, 88 organizations behavioral view of, 82–83 described, 28–83 disruptive technologies, 87–88 features of, 84–89 flattening, 91–92 information systems and, 12, 18, 81–89, 115 Internet and, 93–94 microeconomic definition of, 82 organizational culture, 84–85 organizational environments, 86–88 organizational politics, 84, 93 organizational structure, 88 postindustrial organizations, 92 resistance to change, 93, 115, 493 strategic transitions, 112 technical definition of, 83 technological change and, 83 technology and, 93 Outlook (Microsoft), 76, 297 output, 16 output controls, 308–309 outsourcing, 8, 11, 192, 201, 319, 511, 513, 519 Overstock.com, 356 P P2P networks. See peer-to-peer networks P3P (Platform for Privacy Preferences), 137–138, 139 packet filtering, 315 packet switching, 250 packets, 250, 258 PageRank algorithm, 87, 270 Pandora, 388 PANs (personal-area networks), 276, 285 paradigm shift, 489, 490, 519 parallel strategy, business process redesign, 500 particularism, 565 partner relationship management (PRM), 351 passive RFID tags, 280 passwords, 313 patch management, 303 patches (for software), 303, 304 patents, 140 payment systems electronic payments systems, 393 micropayment systems, 388 online bill payment, 98 PayPal, 97 payroll processing, transaction processing systems (TPS) for, 46 PDP-11, 168 peer-to-peer networks (P2P networks), 254, 295 Pegasystems BPM workflow software, 494 PeopleSoft Enterprise (Oracle), 163 personal-area networks. See PANs personal computers (PCs). See computers personal information, privacy of, 127, 155, 390 personalization, 376, 378, 392, 393, 394, 395 PERT charts, 543, 545 pharming, 301 phased approach, business process redesign, 500–501 phishing, 301 phones. See cell phones; iPhone; telephone networks; telephone systems PhotoBucket, 121, 383 physical view, 212 pilot study, business process redesign, 500 piracy, 262–263 pirated software, 141 pivot tables, 472, 473 pizza chains, 52 Pizza Tracker (software), 52 PKI. See public key infrastructure planning business continuity planning, 311–312 capacity planning, 194 demand planning, 344 disaster recovery planning, 310–312 e-commerce Web site, 401–402 EPR systems, 51, 53, 337 information systems, 95 supply chain planning systems, 342, 344 Platform for Privacy Preferences. See P3P platforms, 21, 166 computer hardware platforms, 175–177, 181 enterprise systems, 360–361, 364 international information systems, 577 management and, 194–196 P3P, 137–138, 139 service platforms, 360–361, 364 wireless platforms, 248 See also information technology (IT) infrastructure; mobile digital platforms podcasting, 383 Point-to-Point Tunneling Protocol. See PPTP policies and procedures, 194 portals, 50, 382, 445 Porter's competitive forces model, 95–96, 102, 109, 115, 196–197 portfolio analysis, information systems, 534–535 Post Sales Order Management System (OMS), 22 postimplementation audit, 501 postindustrial organizations, 92 power consumption, 185, 186 power grids, 36–38 power management software, 186 power-saving processors, 185, 200 Power Usage3 Effectiveness, 186 PowerMeter (Google), 37 PPTP (Point-to-Point Tunneling Protocol), 268 prediction markets, 392 predictive analytics, 226, 466–467 predictive modeling, 462 price discrimination, 377 price transparency, 377 pricing profile, 453 primary activities, business value chain model, 101 primary key, 214 privacy, 155 behavioral targeting, 121, 133, 136, 392–393 chief privacy officer (CPO), 69 defined, 131 I 14 Index electronic surveillance of employee Internet activity, 134, 264, 266–267 European legislation, 134 Facebook, 390–391 Internet and, 131–138 nonobvious relationship awareness (NORA), 128 of personal information, 127, 390 U.S. legislation, 122, 132–133 Web tracking, 127, 134, 137, 390, 393 Privacy Act of 1974!, 132 private cloud, 183–184 private exchange, 397 private industrial networks, 397, 407 PRM. See partner relationship management problem solving. See decision-making; decision support process specifications, 503 processing, 16 processing controls, 308 procurement, 396 product differentiation, 96, 97–98 production workers, 18 productivity, 58 professional bureaucracy, 88 professional codes of conduct, 131 profiling about, 100, 127 nonobvious relationship awareness (NORA), 128 program-data dependence, 211 programmers, 68 programming, systems development, 499 Progress Savvion BusinessManager PBM software, 496 Project Gate methodology, 528 project management, 527–556 change management, 540–542 critical success factors (CSFs), 532, 534 defined, 530 end users and, 541 Gantt charts, 543, 544 implementation, 540–541, 553 importance of, 529–531 increasing user involvement, 545 IS costs and benefits, 537–538 management structure for IS projects, 531–532, 553 managing risk, 539–549 objectives of, 111–112, 530–531, 553 overcoming user resistance, 545 PERT charts, 543, 545 portfolio analysis, 534–535 runaway projects, 529–530 scope of work, 530 software tools, 527–528, 548–549 system failure, 529–530 project management software, 527–528, 548–549 project operation, 215, 216 project risk controlling risk factors, 542–545 dimensions of, 539–540, 553 implementation and, 540–541, 553 project size, project risk and, 540, 553 project structure, project risk and, 540, 553 Promoted Trends, 386 property rights, 126, 138–141 protocol, 251 prototype, 506 prototyping, 507–508, 519 proxy servers, 315 public cloud, 183 Public Company Accounting Reform and Investor Protection Act of 2002!. See Sarbanes-Oxley Act of 2002! public key encryption, 317–318 public key infrastructure (PKI), 326 pull-based model, 347, 348 Pulse (Domino's), 52 Purisma Data Hub, 207 push-based model, 347, 348 Q quality business benefits of collaboration, 58 data quality, 230–231, 238 project management, 530 quality of life, 126, 144–145 query language, 509 QuickBooks, 386 R racial equity, computer usage and Internet access, 148 RAD. See rapid application development radiation, from computer display screens, 150 radiation therapy, liability and regulation, 157–159 radio frequency identification. See RFID rapid application development (RAD), 514–515, 519 RapidResponse (Kinaxis), 335, 336 rationalization of procedures, 489, 490, 519 reading e-book readers, 103, 181, 375, 382, 411 new business models for, 375 real options pricing models (ROPMs), 538–539 records, 210, 214 records management computer forensics, 307, 326 electronic, 306–307 electronic evidence, 307 electronic records management, 9, 306–307, 522–524 employee records, 326 health records and HIPAA, 133, 306 retention of digital records, 6, 15 security, 326 trends in, 6, 15 recovery-oriented computing, 319 reengineering job loss, 146 referential integrity, 220 "refreezing," 93 regional systems units, 569 regulation, radiation-related accidents, 157–159 relational database described, 213, 237 entity-relationship diagram, 237 normalization, 220 organizing data in, 214–215, 237 referential integrity, 220 tables, 214–215, 216, 237 remote work, 8 repetitive stress injury (RSI), 149 report generator, 509 Request for Proposal (RFP), 510 requirements analysis, 497–498, 499, 573–574 responsibility, 129 revenue models e-commerce, 387–389, 407 Facebook, 390 RFID (radio frequency identification), 279–281, 285 RFP. See Request for Proposal rich media, marketing, 393 Rigel (software), 366 ring topology, 254, 255 risk project management, 531, 539 See also project risk risk assessment, information systems security, 309, 326, 539–540, 553 Risk Aversion Principle, 130, 155 root domain, 258 ROPMs. See real options pricing models routers, 248 routines, 84, 85 RSI. See repetitive stress injury RSS, 273 Russia, cyberwarfare by, 330 S S-HTTP (Secure Hypertext Transfer Protocol), 317 S3. See Simple Storage Service SaaS. See software as a service SABRE reservation system, 111, 556 SabreSonic CSS, 556 Safari (browser), 303 safe harbor, 134 safety stock, 342 sailboats, 41–42, 43 Sajus BPM monitoring software, 494 sales and marketing, 43, 44 See also marketing sales force automation (SFA), 288, 351 sales revenue model, 388 Salesboom.com, 203 Salesforce.com, 87, 322, 357 SANs (storage area networks), 180 SAP Business ByDesign, 357 SAP Business Information Warehouse, 587 SAP Business Objects, 359 SAP Business Process Testing, 587 SAP Business Suite, 357 SAP Business Suite Applications, 559–560 SAP ERP Human Capital Management system, 467 SAP General Ledger, 586–587 SAP General Ledger Data Migration, 587 SAP Global Trade Services, 575 SAP NetWeaver Business Intelligence, 368 SAP NetWeaver Master Data Management, 368 SAP NetWeaver Portal, 361, 587 Sarbanes-Oxley Act of 2002!, 15, 306–307 SAS Enterprise Miner, 466 Sasser.ftp (malware), 297 Satmetrix Net Promoter, 227 scalability, 194 SCM systems. See supply chain management (SCM) systems scope of work, project management, 530 scoring models, business process redesign, 535–536 Scrum (software), 547 search engine marketing, 122, 270, 393 search engine optimization (SEO), 270 search engines, 269–271, 393 Second Life, 60 Secure Hypertext Transfer Protocol. See S- HTTP Secure Sockets Layer. See SSL Index I 15 Securities and Exchange Commission (SEC), 440 security cloud computing, 320, 321, 326 defined, 293 legal liability, 306–307 of telephone systems, 294 outsourcing, 319 security breaches, 203 security policy, 310, 326 Wi-Fi, 279, 323 of Wi-Fi networks, 295–296, 316–317, 326 of wireless networks, 295–296, 316–317 See also cybercrime; data security; information systems security; Internet security threats security breaches, 203 security policy, 310, 326 select operation, 215, 216 self-managed teams, 92 semantic Web, 274–275 semistructured decisions, 456, 471–473, 479 senior management, 18, 56, 59 decision support for, 473–475, 477 sensitivity analysis, 472 SEO. See Search engine optimization sequences (data analysis), 225 server computer, 248 server software, 248 servers, 163, 168, 180 blade servers, 163, 176, 177, 186 proxy servers, 315 service level agreement (SLA), 193, 320 service-oriented architecture (SOA), 190 service-oriented computing, 515 service platforms, 360–361, 364 service providers, 383, 384 service set identifiers. See SSIDs service workers, 18 SFA. See sales force automation SharePoint (Microsoft), 7, 61, 64, 76, 424, 463 SharePoint Designer (Microsoft), 180 SharePoint Enterprise Search, 415 ShopItToMe, 453 shopping bots, 271–272 signals, digital vs. analog, 252–253 SIIA. See Software and Information Industry Association Simon framework, 461 Simple Object Access Protocol. See SOAP Simple Storage Service (S3) (Amazon), 183, 204 SimpleDB (Amazon), 217 six sigma, 490, 519 Skype, 62, 245, 265 SLA. See service level agreement Slifter, 399 Smart Business Application Development & Test (IBM), 183 smart card, 313, 326 smart grid, 36–38 SmartGridCity Project (Boulder, CO), 36 smartphones, 9, 79, 111, 177, 178, 181, 185, 188, 194, 247, 275, 277, 294, 374, 382, 400, 401 See also Android; BlackBerry; Droid; iPhone sniffing, 299, 313, 326 SOA. See service-oriented architecture SOAP (Simple Object Access Protocol), 190 Sobig.F (malware), 297 social assets, 27, 28 social bookmarking, 424–425, 445 social change, technology and, 144–145 social class equity, computer usage and Internet access, 146, 148 social engineering, 302, 313 social networking about, 6, 7, 274, 371, 375 business models, 384 as collaboration tool, 60 community-building tools, 384 e-commerce and, 375, 376, 378, 379, 389 malware and, 291, 297 for marketing, 371 for mobile devices, 400–401 See also Facebook; LinkedIn; MySpace; Twitter social relationships, computer threats to, 144–145 social shopping, 389 Socialtext (software), 66 sociotechnical design, 548 sociotechnical systems, 29–30, 33 software, 16, 20, 165, 200 Ajax (software), 189 antivirus and antispyware software, 316, 326 application server software, 229 application software, 166 application software packages, 509, 510–511, 519 apps, 193–194 bugs, 135, 143, 303, 326 business analytics software, 453, 463, 473 for business process management, 493–494 capacity planning, 194 client operating system software, 177 cloud-based software, 183, 193, 203–205 cloud software as a service, 183 coordinating software releases, 574 copyright protection of, 139–140 for customer relationship management (CRM) systems, 351–352, 512 database software, 179 debugging, 143, 323 enterprise software, 177, 191, 338–339 external sources for, 191 financial investment in, 195 in global business, 574 liability and, 142, 143 localization, 579, 581–582 malware, 296 mashups, 193, 201, 272 metrics, 322, 326 for networking and telecommunications, 180 on-demand model, 203 open source software, 187–188, 200, 357 outsourcing, 192 patches, 303, 304 patent protection, 140 pirated, 141 power management software, 186 project management tools, 527–528, 548–549 quality of, 143, 320, 322–323 scalability, 194 securing quality, 320, 322–323 server software, 248 service level agreement (SLA), 320 site-building packages, 404 spam filtering software, 146 for supply chain management, 344 testing, 322 as trade secret, 139 virtualization software, 182, 184, 186, 200 virus and firewall software, 185 vulnerability to threats from, 303–304, 323 walkthrough, 322 Web services, 189–191, 200–201 Web software, 180 See also collaboration tools Software and Information Industry Association (SIIA), 141 software as a service (SaaS), 7, 87, 142, 193, 194, 195, 203, 205, 357 software controls, 308 software integration, 181 software localization, 579, 581–582 software metrics, 322, 326 software packages, 191 solar power, 36 space shifting, 12 spam, 145–146 spam filtering software, 146 sponsorships, marketing, 393 spoofing, 299 Sportsvite, 384 Spybot S&D (software), 316 spyware, 135, 298 Spyware Doctor (software), 316 SQL (software), 217–218 SQL injection attacks, 298, 301 SQL Server (Microsoft), 179, 213, 218 SQLAzure Database (Microsoft), 217 SSIDs (service set identifiers), 295–296, 316 SSL (Secure Sockets Layer), 317 standard operating procedures, 84 Staples.com, 382 Star Alliance, 494 star topology, 254, 255 stateful inspection, 315 "stickiness," 387 storage area networks. See SANs Storefinder (application), 400 Storm (malware), 297 strategic information systems, 116 strategic systems, 111, 115 strategic systems analysis, 112 strategic transitions, 112 streaming, 383–384 structure chart, 503, 504 structure mining, 228 structured decisions, 456, 479 structured knowledge, 422–423 structured methodologies, 502–503 Structured Query Language. See SQL "stub quotes," 439 Stylehive, 389 subnotebooks, 7, 181 subscription revenue model, 388 substitute products and services, 96, 101 Sun Java, 180 Sun Microsystems OpenOffice, 188 Sun Solaris, 323 supercomputers, 182 SuperDAT Remediation Tool (McAfee), 304 supplier intimacy, 14, 99 suppliers, 96 supply chain, 340 demand-driven supply chains, 347–348 execution systems, 344 global supply chains, 346–347 I 16 Index planning systems, 342, 344 supply chain execution systems, 344 supply chain management (SCM) systems, 51, 53, 72, 335–336, 340–344, 356, 363 bullwhip effect, 342–343 business value of, 348 demand planning, 344 just-in-time (JIT) strategy, 9, 342 software for, 344 supply chain planning systems, 342, 344 support activities, 104 surface Web, 269 surveillance. See privacy Surveyor (software) (Verdiem), 186 survival, as business objective, 14–15 switches, 248 switching costs, 99, 356 Sybase Adaptive Server Enterprise, 179 symmetric key encryption, 317 synergies, 107, 116 system errors, 142, 143 system quality, 126, 142, 143 system testing, 499 systems analysis, 68, 496–499, 501 feasibility study, 497 requirements analysis, 497, 499, 573–574 systems analysts, 68 systems design, 498–499, 501, 546, 548 cooptation, 574 structured methodologies, 502–503 systems development, 496–506, 519 about, 494, 496 agile development, 514–515 application software packages, 166, 509, 510–511, 519 capital budgeting for, 538 component-based development, 515 computer-aided software engineering (CASE), 505–506 conversion, 500, 501 core activities, 497–501 critical success factors (CSFs), 532, 534 defined, 494 documentation, 501 end-user development, 508–510, 519 feasibility study, 497 fourth-generation languages, 508–510 IS costs and benefits, 537–538 joint application design (JAD), 514, 519 linking systems projects to business plan, 532 maintenance, 501 object-oriented development, 503–505 outsourcing, 511, 513, 519 portfolio analysis, 534–535 production, 501 programming, 499, 501 prototyping, 507–508, 519 rapid application development (RAD), 514–515, 519 real options pricing models (ROPMs), 538–539 requirements analysis, 497–498, 499, 573–574 scoring models, 535–536 service-oriented computing, 515 structured methodologies, 502–503 systems analysis, 68, 496–499 systems design, 498–499 systems life cycle, 506–507, 519 testing, 499, 501 Web services, 189–191, 200–201, 515 See also business process redesign; project management systems life cycle, 506–507, 519 T T1 lines, 258 T3 lines, 258 tablet computers, 103, 181 tacit knowledge, 417, 432 tangible benefits, 537 task force-networked organizations, 92 task force organization, 88 taxonomy, 423 TCO. See total cost of ownership TCP (Transmission Control Protocol), 251, 258 TCP/IP (Transmission Control Protocol/Internet Protocol), 169–170, 174, 175, 180, 251, 258 teams, 56, 59 teamwork. See collaboration; collaboration tools technology ethical issues arising from, 122, 126–128, 155 information systems and, 20–21, 23–24 intellectual property rights, 141, 155 organization and, 93 quality of life issues and, 143–144 reengineering job loss from use of, 146 social change and, 144 See also information technology technology services, 166 technology standards, 174 technostress, 149–150 telecommunications industry, competition in, 79–80 telecommunications technology, 20, 166 telephone networks, 247 telephone systems, 252 IP phone systems, 265 liability and, 142 security, 294 telepresence, 61, 62, 76 television, cognitive effects of, 151 television industry, Internet and, 118–119 telework, 7, 8 TelNet, 261 terrorist watch-list database, 240–241 test plan, 500 testing of software, 322 systems development, 499 text messaging, 60, 146, 147 text mining, 226–228, 237 textbooks, 102, 103 "thick client" model, 52 Third World countries, 564 ThisNext, 389 ThomasNet.com, 229 3 G networks, 276, 284 tiered service, 262 time, project management, 530 time shifting, 11–12 time/space collaboration tool matrix, 67 Times Square bomber, 242 token, 326 Token Ring networking software, 254 tokens, 313 top-level domain, 258 topology, 254, 255 total cost of ownership (TCO), 195–196, 201, 538 total quality management (TQM), 490, 519 touch interface, 177 touch point, 350 touchpads, 178 TouchSmart computer (HP), 178 Toxic Substances Control Act of 1976!, 15 TPS. See transaction processing systems TQM. See total quality management trackbacks, 273 "tradable service" jobs, 8 trade secrets, 139 transaction brokers, 383, 384 transaction cost theory, 89–90 transaction costs, 376 transaction fee revenue model, 388–389 transaction processing systems (TPS), 45–47, 72, 471 transborder data flow, 565 transistors as disruptive technology, 87 nanotechnology, 171 Transmission Control Protocol. See TCP Transmission Control Protocol/Internet Protocol. See TCP/IP transmission speed, 257 transnational firms, 568, 584 See also global business; international information systems transnational systems units, 569 transport layer, 251 travel industry, terrorist watch-list database, 240–241 Traveler Redress Inquiry Program (TRIP), 241 Travelocity, 102 TRIP. See Traveler Redress Inquiry Program Trojan horses, 291, 296, 298 TRUSTe, 137 tuples, 214 TV.com, 118 "tweets," 385 twisted wire, 255, 284 Twitter, 204, 291, 297, 372, 383, 384, 385–386, 400 two-tiered client/server architecture, 169 Typepad.com, 216 U U-verse (AT&T), 118 ubiquity, of e-commerce, 374–376 UDDI (Universal Description, Discovery, and Integration), 190 Ultra Mobile Broadband (UMB), 276 "unfreezing," 93 unified communications, 265, 267 unified threat management (UTM) systems, 316 uniform resource locator. See URL unit testing, 499, 587 United States cyberwarfare against, 329–331 globalization and employment, 8, 11 Universal Description, Discovery, and Integration. See UDDI Unix (operating system), 174, 175, 176, 177, 180, 188, 323 unstructured decisions, 456, 479 URL (uniform resource locator), 269 U.S. CAN-SPAM Act of 2003, 146 Index I 17 U.S. Department of Defense Advanced Research Projects Agency. See DARPA U.S. stock market, 439, 461 usage mining, 228 user-designer communications gap, 541–542 user interface, 507, 530 user requirements, 573 Utah, texting while driving legislation, 147, 148 Utilitarian Principle, 130, 155 UTM systems. See unified threat management (UTM) systems V value chain, 102, 116 global value chain, 576–577 value chain model, 102, 104–105, 116 value web, 106, 107, 116 VAX computers, 168 VDTs. See video display terminals Venuing (app), 3 Verdiem Surveyor (software), 186 video, marketing, 393 video display terminals (VDTs), 150 video games, cognitive effects of, 151 video ID filtering, 118 videoconferencing, 7, 12, 61, 62, 62–63 viral marketing, 389–390 virtual company (virtual organization), 109 virtual meeting systems, 7, 12, 61–62 virtual private networks. See VPNs Virtual Reality Modeling Language. See VRML virtual reality systems, 428, 429, 431, 445 Virtual Server (Microsoft), 182 virtual worlds, as collaboration tool, 61 virtualization, 182, 184, 186, 200 virus protection, 185 Virus Scan (software), 304 viruses (malware), 296, 326 visitor tracking (of Web sites), 127, 134, 137, 390, 392, 393, 394 VistA (software), 523 VMware (software), 182, 186 voice networks, 247 VoIP (Voice over IP), 264–265, 284, 294, 295 VPNs (virtual private networks), 267–268, 284, 316, 577 VRML (Virtual Reality Modeling Language), 430 W W3C. See World Wide Web Consortium walkthrough, 322 Wall Street Journal, 388 WANs (wide-area networks), 180, 253, 254, 284 war driving, 295–296 Warehouse Management System (WMS), 344 Web, 268–275 about, 268 customization, 376, 378 "deep Web," 269 employer surveillance of, 134, 264, 266–267 global reach, 376, 377 information density, 376, 377–378 information richness, 376, 377 interactivity, 376, 377 personalization, 376, 378, 390, 392, 393, 394, 395 search engines, 269–271 semantic Web, 274–275 social technology, 376, 378 surface Web, 269 trends in, 274–275 ubiquity of, 374–376 unique nature of, 374–378, 407 universal standards, 376, 377 Web 2.0!, 7, 272–273, 297, 357 Web 3.0!, 274, 275 See also Internet Web 2.0!, 7, 272–273, 297, 357 Web 3.0!, 274, 275 Web-based collaboration environments, 61–68 Web beacons, 121, 135, 137 Web browsers, 188 Web bugs, 121, 135, 137, 303, 326 Web conferencing, 7, 12, 61 Web mashups, 193, 272, 291 Web mining, 226, 228, 237 Web servers, 169, 254, 269 Web services, 189–191, 200–201, 515 Web services description language. See WSDL Web sites budgeting for, 405 building an e-commerce site, 401–405, 408 building in-house vs. outsourcing, 403–405 defined, 268 hosting, 404–405 personalization, 376, 378, 390, 392, 393, 394, 395 visitor tracking, 127, 134, 137, 390, 392, 393, 394 Web structure mining, 228 Web tracking, 121, 127, 134, 137, 390, 393 WebEx (software), 62 WebFocus (software), 466 WEP (wired equivalent privacy), 296, 316 Wi-Fi networks, 249, 253, 277 case study, 245 hotspots, 278 security challenges to, 295–296, 326 security measures for, 316–317 standards, 277, 285, 316 Wi-Fi Protected Access 2!. See WPA2 Wi-Fi standards, 277, 285 802.11b standard, 277 802.11g standard, 277 802.11i specification, 316 802.11n standard, 277, 279 wide-area networks. See WANs wiki software, 273 Wikipedia, 60, 151 wikis about, 7, 273 as collaboration tool, 60, 445 malware and, 297 Wikitude, 400 WiMax, 279, 285 Windows Live Messenger, 264 Windows Server (Microsoft), 177, 180, 182, 248, 254, 323 Windows Vista (Microsoft), 323 Windows Vista Service Pack 2 (Microsoft), 303 Windows Vista Ultimate (Microsoft), 323 Wintel standard, 168, 174, 175 wired equivalent privacy. See WEP wireless advertising, 400–401 wireless handheld devices, 245 wireless Internet access, 277–279, 284 wireless modems, 253 wireless networks about, 276 security challenges to, 295–296, 316–317 security measures for, 316–317 wireless platforms, 248 wireless sensor networks. See WSNs wireless technology, 9, 37, 245, 275–281 wireless transmission media, 256–257, 284 wisdom, 417 "wisdom of crowds," 57, 391–392 WMS. See Warehouse Management System word processing software, as disruptive technology, 87 work changed by technology, 144 changing nature of, 56 See also jobs work crossovers, 448 workgroup collaboration, 61 workgroup network model, 254 WorkZone (software), 66 World Intellectual Property Organization Treaty, 141 World Wide Web, 21, 87, 175, 261 See also Web World Wide Web Consortium (W3C), 189, 260, 284 Worldwide Interoperability for Microwave Access. See WiMax worms (malware), 296, 326 WPA2 (Wi-Fi Protected Access 2), 316 WSDL (Web services description language), 190 WSNs (wireless sensor networks), 281, 285 X Xanga.com, 273 Xbox 360!, 411 Xboxlive.com, 388 Xdrive.com, 383 XML (extensible markup language), 189–190 Y Yahoo!, 118, 121, 134, 137, 270, 278, 287–289, 382, 383, 401 Yahoo! Messenger, 264 YouTube, 102, 118, 119, 136, 262, 271, 272, 389 Z ZCS. 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M”)*%B-12″.,%5″$*<%&)*"'AB.8,&")'()*+,&-*.# K#2"%B33@,%()*+,&-*.#'%<'1&C")-"-='A*..$,'H%2C G"10-+%B#-E01,%FB&0B,'()*+,&-*.# Cover Title Page Copyright Page Contents Preface ACKNOWLEDGEMENTS Part One: Organizations, Management, and the Networked Enterprise Chapter 1 Information Systems in Global Business Today Opening Case: The New Yankee Stadium Looks to the Future 1.1 The Role of Information Systems in Business Today Interactive Session: Management: MIS in Your Pocket 1.2 Perspectives on Information Systems Interactive Session: Technology: UPS Competes Globally with Information Technology 1.3 Contemporary Approaches to Information Systems 1.4 Hands-on MIS Projects Learning Track Modules: How Much Does IT Matter?; Information Systems and Your Career, The Emerging Mobile Digital Platform Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Creating a Web Site for Team Collaboration Case Study: What’s the Buzz on Smart Grids? Chapter 2 Global E-Business and Collaboration Opening Case: America’s Cup 2010: USA Wins with Information Technology 2.1 Business Processes and Information Systems 2.2 Types of Business Information Systems Interactive Session: Organizations: Domino’s Sizzles with Pizza Tracker 2.3 Systems for Collaboration and Teamwork Interactive Session: Management: Virtual Meetings: Smart Management 2.4 The Information Systems Function in Business 2.5 Hands-on MIS Projects Learning Track Modules: Systems from a Functional Perspective; IT Enables Collaboration and Teamwork; Challenges of Using Business Information Systems; Organizing the Information Systems Function Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Describing Management Decisions and Systems Case Study: Collaboration and Innovation at Procter & Gamble Chapter 3 Information Systems, Organizations, and Strategy Opening Case: Verizon or AT&T—Which Company Has the Best Digital Strategy? 3.1 Organizations and Information Systems 3.2 How Information Systems Impact Organizations and Business Firms 3.3 Using Information Systems to Achieve Competitive Advantage Interactive Session: Organizations: How Much Do Credit Card Companies Know About You? Interactive Session: Management: Is the iPad a Disruptive Technology? 3.4 Using Systems for Competitive Advantage: Management Issues 3.5 Hands-on MIS Projects Learning Track Module: The Changing Business Environment for Information Technology Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Identifying Opportunities for Strategic Information Systems Case Study: Will TV Succumb to the Internet? Chapter 4 Ethical and Social Issues in Information Systems Opening Case: Behavioral Targeting And Your Privacy: You’re the Target 4.1 Understanding Ethical and Social Issues Related to Systems 4.2 Ethics in an Information Society 4.3 The Moral Dimensions of Information Systems Interactive Session: Organizations: The Perils of Texting Interactive Session: Technology: Too Much Technology 4.4 Hands-on MIS Projects Learning Track Modules: Developing a Corporate Code of Ethics for Information Systems Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Developing a Corporate Ethics Code Case Study: When Radiation Therapy Kills Part Two: Information Technology Infrastructure Chapter 5 IT Infrastructure and Emerging Technologies Opening Case: BART Speeds Up with a New IT Infrastructure 5.1 IT Infrastructure 5.2 Infrastructure Components Interactive Session: Technology: New to the Touch 5.3 Contemporary Hardware Platform Trends Interactive Session: Organizations: Is Green Computing Good for Business? 5.4 Contemporary Software Platform Trends 5.5 Management Issues 5.6 Hands-on MIS Projects Learning Track Modules: How Computer Hardware and Software Work; Service Level Agreements; The Open Source Software Initiative; Comparing Stages in IT Infrastructure Evolution Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Evaluating Server Operating Systems Case Study: Salesforce.com: Cloud Services Go Mainstream Chapter 6 Foundations of Business Intelligence: Databases and Information Management Opening Case: RR Donnelley Tries to Master Its Data 6.1 Organizing Data in a Traditional File Environment 6.2 The Database Approach to Data Management 6.3 Using Databases to Improve Business Performance and Decision Making Interactive Session: Technology: What Can Businesses Learn from Text Mining? 6.4 Managing Data Resources Interactive Session: Organizations: Credit Bureau Errors—Big People Problems 6.5 Hands-on MIS Projects Learning Track Modules: Database Design, Normalization, and Entity-Relationship Diagramming; Introduction to SQL; Hierarchical and Network Data Models Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Identifying Entities and Attributes in an Online Database Case Study: The Terror Watch List Database’s Troubles Continue Chapter 7 Telecommunications, the Internet, and Wireless Technology Opening Case: Hyundai Heavy Industries Creates a Wireless Shipyard 7.1 Telecommunications and Networking in Today’s Business World 7.2 Communications Networks 7.3 The Global Internet Interactive Session: Organizations: The Battle Over Net Neutrality Interactive Session: Management: Monitoring Employees on Networks: Unethical or Good Business? 7.4 The Wireless Revolution 7.5 Hands-on MIS Projects Learning Track Modules: Computing and Communications Services Provided by Commercial Communications Vendors; Broadband Network Services and Technologies; Cellular System Generations; Wireless Applications for CRM, SCM, and Healthcare; Web 2.0 Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Evaluating Smartphones Case Study: Google, Apple, and Microsoft Struggle for Your Internet Experience Chapter 8 Securing Information Systems Opening Case: You’re On Facebook? Watch Out! 8.1 System Vulnerability and Abuse Interactive Session: Management: When Antivirus Software Cripples Your Computers 8.2 Business Value of Security and Control 8.3 Establishing a Framework for Security and Control 8.4 Technologies and Tools for Protecting Information Resources Interactive Session: Technology: How Secure Is the Cloud? 8.5 Hands-on MIS Projects Learning Track Modules: 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 Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Evaluating Security Software Tools Case Study: Are We Ready for Cyberwarfare? Part Three: Key System Applications for the Digital Age Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications Opening Case: Cannondale Learns to Manage a Global Supply Chain 9.1 Enterprise Systems 9.2 Supply Chain Management Systems Interactive Session: Organizations: Southwest Airlines Takes Off with Better Supply Chain Management 9.3 Customer Relationship Management Systems 9.4 Enterprise Applications: New Opportunities and Challenges Interactive Session: Technology: Enterprise Applications Move to the Cloud 9.5 Hands-on MIS Projects Learning Track Modules: SAP Business Process Map; Business Processes in Supply Chain Management and Supply Chain Metrics; Best Practice Business Processes in CRM Software Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Analyzing Enterprise Application Vendors Case Study: Border States Industries Fuels Rapid Growth with ERP Chapter 10 E-Commerce: Digital Markets, Digital Goods Opening Case: 4Food: Burgers Go Social 10.1 E-commerce and the Internet 10.2 E-commerce: Business and Technology Interactive Session: Organizations: Twitter Searches for a Business Model Interactive Session: Management: Facebook: Managing Your Privacy for Their Profit 10.3 The Mobile Digital Platform and Mobile E-commerce 10.4 Building an E-commerce Web Site 10.5 Hands-on MIS Learning Track Modules: Building a Web Page; E-Commerce Challenges: The Story of Online Groceries; Build an E-commerce Business Plan; Hot New Careers in E-commerce Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Performing a Competitive Analysis of E-Commerce Sites Case Study: Amazon vs. Walmart: Which Giant Will Dominate E-commerce? Chapter 11 Managing Knowledge Opening Case: Canadian Tire Keeps the Wheels Rolling With Knowledge Management Systems 11.1 The Knowledge Management Landscape 11.2 Enterprise-Wide Knowledge Management Systems 11.3 Knowledge Work Systems Interactive Session: Technology: Augmented Reality: Reality Gets Better 11.4 Intelligent Techniques Interactive Session: Organizations: The Flash Crash: Machines Gone Wild? 11.5 Hands-on MIS Projects Learning Track Module: Challenges of Knowledge Management Systems Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Rating Enterprise Content Management Systems Case Study: San Francisco Public Utilities Commission Preserves Expertise with Better Knowledge Management Chapter 12 Enhancing Decision Making Opening Case: What to Sell? What Price to Charge? Ask the Data 12.1 Decision Making and Information Systems 12.2 Business Intelligence in the Enterprise Interactive Session: Organizations: Data-Driven Schools 12.3 Business Intelligence Constituencies Interactive Session: Management: Piloting Valero with Real-time Management 12.4 Hands-on MIS Projects Learning Track Module: Building and Using Pivot Tables Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Designing a University GDSS Case Study: Does CompStat Reduce Crime? Part Four: Building and Managing Systems Chapter 13 Building Information Systems Opening Case: CIMB Group Redesigns Its Account Opening Process 13.1 Systems as Planned Organizational Change 13.2 Overview of Systems Development Interactive Session: Organizations: Can Business Process Management Make a Difference? 13.3 Alternative Systems-Building Approaches Interactive Session: Technology: Zimbra Zooms Ahead with OneView 13.4 Application Development for the Digital Firm 13.5 Hands-on MIS Projects Learning Track Modules: Unified Modeling Language (UML); A Primer on Business Process Design and Documentation Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Preparing Web Site Design Specifications Case Study: Are Electronic Medical Records a Cure for Health Care? Chapter 14 Managing Projects Opening Case: Coca-Cola: “Opening Happiness” with a New Project Management System 14.1 The Importance of Project Management 14.2 Selecting Projects 14.3 Establishing the Business Value of Information Systems 14.4 Managing Project Risk Interactive Session: Organizations: DTS Systems Scores with Scrum and Application Lifecycle Management Interactive Session: Management: Motorola Turns to Project Portfolio Management 14.5 Hands-on MIS Projects Learning Track Modules: Capital Budgeting Methods for Information System Investments; Information Technology Investments and Productivity; Enterprise Analysis (Business Systems Planning) Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Identifying Implementation Problems Case Study: JetBlue and WestJet: A Tale of Two IS Projects Chapter 15 Managing Global Systems Opening Case: 3M: Sticky Film and Scratchy Things That Sell Around the World 15.1 The Growth of International Information Systems 15.2 Organizing International Information Systems 15.3 Managing Global Systems Interactive Session: Management: Fonterra: Managing the World’s Milk Trade 15.4 Technology Issues and Opportunities for Global Value Chains Interactive Session: Organizations: How Cell Phones Support Economic Development 15.5 Hands-on MIS Review Summary Key Terms Review Questions Discussion Questions Video Cases Collaboration and Teamwork: Identifying Technologies for Global Business Strategies Case Study: WR Grace Consolidates Its General Ledger System References Glossary A B C D E F G H I J K L M N O P Q R S T U V W X Photo and Screen Shot Credits Indexes Name Index A B C D E F G H I J K L M N O P R S T V W Y Z Organizations Index A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Subject Index A B C D E F G H I J K L M N O P Q R S T U V W X Y Z