Chapter 2

THE STRATEGIC
ROLE OF
INFORMATION
SYSTEMS

2.1 © 2003 by Prentice Hall

 Chapter 2

OBJECTIVES

• Analyze the role played by the six major

types of information systems in
organizations.
• Describe the relationship between the
major types of information systems
• Distinguish a strategic information
system.
• Describe how information systems can
be used to support three levels of
strategy used in business.
2.2 © 2003 by Prentice Hall
 Chapter 2

MANAGEMENT CHALLENGES

• Integration: Different systems serve variety of

functions, and even to integrate them together as
using enterprise resource planning (ERP) is much
more easy but connecting organizational levels is
difficult, and costly

• Sustainability of competitive advantage:

A management team in a company need to be more
innovative to have new business strategies as
competitive advantage. Competitors can copy
strategic systems

2.3 © 2003 by Prentice Hall

 Different levels of management systems

 Operational-level systems
– support operational managers by keeping track of the
elementary activities & transactions of the org such as
sales, receipts, cash deposits
2. Knowledge-level systems
– support the organization’s knowledge and data worker.

- It help the company to discover, organize and integrate

new knowledge into business and to control the flow of
paperwork.

2.4 © 2003 by Prentice Hall

 Different kinds of systems

1. Management-Level system
- monitor, control, decision-making &
administrative activities of middle managers
- controlling whether everything in company is
working well, whether actual costs exceed
budgets
4. Strategic-Level Systems
- help senior management tackle and address
strategic issues and long-term trends, both in
the firm and the external environment

2.5 © 2003 by Prentice Hall

 Different kinds of system : Example

Systems Example (Sales system)

Strategic level To forecast sales trends, buying
habits trends for next 5 years
Management Tracks monthly sales figures, if
level sales exceed or fall below
expected figures
Knowledge To design promotional displays for
level firm’s products, i.e. to design an
attractive brochure
Operational To record daily sales figures, i.e.
level at the cashier machine
2.6 © 2003 by Prentice Hall
 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Types of Information Systems

Each types of systems

Serve Different levels

and Functions.

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 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

6 Major Types of Systems

• Executive Support Systems (ESS)

• Decision Support Systems (DSS)
• Management Information Systems (MIS)
• Knowledge Work Systems (KWS)
• Office Automation Systems (OAS)
• Transaction Processing Systems (TPS)

2.8 © 2003 by Prentice Hall

 Chapter 2

TYPES OF INFORMATION SYSTEMS

2.9 Figure 2-2 © 2003 by Prentice Hall

 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Transaction Processing Systems (TPS):

• Basic business systems that serve the
operational level
• A computerized system that performs and
records the daily routine transactions
necessary to the conduct of the business
• For example, sales order entry, hotel
reservation system, payroll, employee record
keeping and shipping

2.10 © 2003 by Prentice Hall

 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Payroll TPS

Figure 2-3
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 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Types of TPS Systems

Figure 2-4
2.12 © 2003 by Prentice Hall
 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Knowledge Work Systems (KWS):

 Aid knowledge workers in the creation and

integration of new knowledge in the org
 Eg: Scientific or engineering design
workstations to promote the creation of new
knowledge
 Office System-computer system, such as WP,
E-mail systems and scheduling systems to
increase the productivity of data workers by
supporting the coordinating and
communicating activities in an office
2.13 © 2003 by Prentice Hall
 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Management Information System (MIS):

 Is that serve the function of planning,

controlling and decision making by providing
routine summary and exception reports
 Eg: Sales Management , Inventory Control

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 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Management Information System (MIS)

Figure 2-5
2.15 © 2003 by Prentice Hall
 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Management Information System (MIS)

This is an annual

sales data produced

By the MIS

2.16 © 2003 by Prentice Hall

 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Decision Support System (DSS):

 DSS helps managers to make decisions that are

unique, rapidly changing and not easily specified
in advance
 DSS uses internal info (TPS & MIS) as well as
external sources such as current stock prices,
product prices of competitors
 DSS has more analytical power than other sys
 Eg: Production scheduling, Cost Analysis, Pricing
Analysis, Budgeting

2.17 © 2003 by Prentice Hall

 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Decision Support System (DSS)

Figure 2-7
2.18 © 2003 by Prentice Hall
 Examples of Business Decision Support
software

• http://www.canadiancontent.net/tech/dow
• http://www.exefind.com/cash-flow-
planner-P4101.html

2.19 © 2003 by Prentice Hall

 Executive Support System

• Executive Support System (ESS) is a

reporting tool (software) that allows you
to turn your organization's data into
useful summarized reports.
• These reports are generally used by
executive level managers for quick
access to reports coming from all
company levels and departments such
as billing, cost accounting , staffing,
scheduling, and more.
2.20 © 2003 by Prentice Hall
 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Executive Support System (ESS):

 IS at the org strategic level designed to address

unstructured decision making through advanced
graphics and communication
 ESS address non-routine decisions requiring
judgment, evaluation since no agreed-on
procedure for arriving at a solution
 ESS provide a generalized computing and
communications capacity that can be applied to a
changing array of problems.
 ESS are not designed primarily to solve specific
problems
2.21 © 2003 by Prentice Hall
 Example of Executive information system

2.22 © 2003 by Prentice Hall

 Example EIS Epic

2.23 © 2003 by Prentice Hall

 Chapter 2

KEY SYSTEM APPLICATIONS IN THE ORGANIZATION

Executive Support System (ESS)

2.24
Figure 2-8
© 2003 by Prentice Hall
 Chapter 2

INTERRELATIONSHIPS AMONG SYSTEMS

2.25 Figure 2-9 © 2003 by Prentice Hall

 Systems From a Functional Perspective
Sales & Marketing Systems – system’s that help the firm
identify customers for the firm’s products or services,
develop products and services to meet their needs,
promote these products and services & provide ongoing
customer support
System Description Org Level
Order Enter, process & track Operational
Processing orders
Market Identify customers and Knowledge
Analysis markets using data on
demo
Pricing analysis Determine prices for pro Management
& services

Sales trend Prepare 5 year forecasts Strategic

forecasting
2.26 © 2003 by Prentice Hall
 Systems From a Functional Perspective
Manufacturing & Production System – systems that
deals with the planning, development and production of
products & services and with controlling the flow of
production
System Description Org Level
Machine Control Control the actions of Operational
machines & Equipment
CAD Design new products Knowledge
using the computer

Producing Decide when and how Management

planning many products should be
produced
Facilities Decide where to locate Strategic
location new production facilities

2.27 © 2003 by Prentice Hall

 Systems From a Functional Perspective

Finance and Accounting system – systems to keep

track of the firm’s financial assets and fund flows
such as cash, stocks, bonds and other investments

System Description Org Level

Accounts Track money owed the Operational
receivable firm
Portfolio Design the firm portfolio Knowledge
analysis of investment

Budgeting Prepare short-terms Management

budgets

Profit planning Plan long-term profits Strategic

2.28 © 2003 by Prentice Hall

 Systems From a Functional Perspective
Human Resources Systems – system’s that maintain
employee records, track employee skills, job
performance, and training and support planning for
employee compensation and career development
System Description Org Level
Training & Track employee training, Operational
Development skills, and performance
Career pathing Design career paths for Knowledge
employees

Compensation Monitor the range and Management

analysis distribution of employee
wages
Human resource Plan the long-term labor Strategic
planning force needs of the org
2.29 © 2003 by Prentice Hall
 What is Strategic Info System?

 Change the goals, operations, products,

services or environmental relationships of
org to help them gain an edge over
competitors
 Used at all organizational levels
 2 models of a firm and its environment have
been used to identify areas of business
where IS can provide advantage over
competitors
2.30 © 2003 by Prentice Hall
 Using Information System to achieve
Competitive Advantage
• A firm “do better” than others are said to have a
competitive advantage over others.
• For example, Apple’s iTunes is the leader with
more than 75% of the downloaded music
market.
• To understand competitive advantage, Michael
Porter’s competitive forces model can be used.

2.31 © 2003 by Prentice Hall

 Using Information System to achieve Competitive
Advantage

 Competitive Forces – used to describe the

interaction of external influences, specifically
threats and opportunities, that affect an org’s
strategy and ability to compete
 Eg: Threats & Opportunities – new entrants into
market, pressure from substitute products or
services, customers & Suppliers bargaining power

2.32 © 2003 by Prentice Hall

 Michael 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 forces in the industry’s
environment: new market entrants, substitute products, bargaining
power of customers, and bargaining power of suppliers.
2.33 © 2003 by Prentice Hall
 Michael Porter’s competitive forces
model
• Entry of competitors
– How easy/difficult is it for new entrants to
start competing which barriers do exist.
• Threat of substitutes
– Substitutes goods or services from outside
an industry that perform the same functions
as a product that the industry produces.
– For example, substitutes good for Milo might
be coffee
– How easy/difficult a product or service can
be substitute, especially made cheaper.

2.34 © 2003 by Prentice Hall

 Michael Porter’s competitive forces
model
• Bargaining power of buyers
– Customers will bargain for higher quality, greater levels
of services and lower prices.
– Bargaining power of buyers seems to be increased with
the used of Internet where they have more choices to
compare for price from different manufacturers.
– Customers are powerful when:
• They purchase a large portion of an industry’s total
output
• The sales of the product being purchased account for a
significant portion of the seller’s annual revenues.
• They could switch to another product at little if any cost
• The industry’s products are undifferentiated or
standardized and the buyers pose a credible threat if
they were to integrate backward into the seller’s
industry.
2.35 © 2003 by Prentice Hall
 Michael Porter’s competitive forces
model
• Bargaining power of suppliers
– Increasing prices and reducing the quality of its
products are potential means used by suppliers to
exert power over firms competing within an industry.
– If a firm is unable to recover cost increase by its
suppliers, then their profitability level is decrease
because of the suppliers’ action.
– A supplier group is powerful when;
• It is dominated by a few large companies and is
more concentrated than the industry to which it
sells.
• Satisfactory substitute products are not available
to industry firms.
• Industry firms are not a significant customer for the
supplier group
– Suppliers’ goods are critical to buyers’ marketplace
2.36 success © 2003 by Prentice Hall
 Michael Porter’s competitive forces
model
• Intensity of rivalry among competitors
– Does a strong competition exist among the
existing competitors in the market.
– Competitive rivalry intensifies when a firm is
challenged by a competitor’s actions or when
an opportunity to improve its market position
is recognized.
– Visible dimensions on which rivalry is based
include price, quality and innovation.

2.37 © 2003 by Prentice Hall

 Achieving a Competitive Advantage

• Competitive advantage is achieved

when a for-profit company increases
its profits significantly, usually through
increased market share
• Many initiatives can be used to gain
competitive advantage
• Strategic moves often combine two or
more initiatives
• The essence of strategy is innovation
2.38 © 2003 by Prentice Hall
 Four basic competitive strategies

2.39 © 2003 by Prentice Hall

 Competitive Strategies

4 basic competitive strategies to deal with competitive

forces :-
2. Product Differentiation
 Creating unique new products & services from
those competitors, or potential competitors can’t
duplicate
 Using IS to custom-tailored to fit individual
customers precise specifications.
 Eg: Dell Computer corporation – sells build-to-order
manufacturing

2.40 © 2003 by Prentice Hall

 Competitive Strategies

2. Developing Tight Linkages to Customers &

Suppliers
 Firms can create ties to customers and suppliers
that “lock” customers into the firm’s products
 This raises switching costs – cost for customer to
switch to competitors products/ services and reduce
customers & suppliers bargaining power
 For example, Amazon.com keep track of user
preferences for book and CD purchases and
recommend titles purchased by other customers

2.41 © 2003 by Prentice Hall

 Competitive Strategies

3. Becoming Low-Cost Producer

 To prevent new competitors from entering their
markets, businesses can produce goods and
services at a lower price than competitors.
 Eg: Supply Chain Management System – integrates
supplier, distributor and customer logistics
requirements into one cohesive process
 SCM lower down inventory cost and create efficient
customer response systems that deliver the product
or services more rapidly to customers

2.42 © 2003 by Prentice Hall

 Competitive Strategies

• 4. Focus on Market Niche

– Using Information Systems to enable a specific market
focus and serve narrow target market better than
competitors.
– IS enable companies to analyze customer preferences
and taste, and then categorize them in group so that a
certain advertising will only send to the relevant
interests group.
– For example, Customer relationship management can
be used by a hotel to find the preferences of active
guest so that the staff can give what they want
through past staying records.

2.43 © 2003 by Prentice Hall

 The Internet’s Impact on competitive
Advantage
 Adopting IS requires changes in business
goals, relationship with customers and
suppliers, internal operations and information
architecture
 Socio-technical changes - both social and
technical elements of the org
 Internet technology challenges many
traditional business models - it provides
customers, suppliers and other with rich new
sources of information.

2.44 © 2003 by Prentice Hall

 The Internet’s Impact on competitive
Advantage

2.45 © 2003 by Prentice Hall

 Value Chain Concepts

• It show how various types of information

technologies might be applied to specific
business processes to help a firm gain
competitive advantages in the marketplace.
• A value chain is a chain of activities. Products
pass all activities of the chain in order and at
each activity the product gains some value.
• The value chain categorizes the generic
value-
value adding activities of an organization.

2.46 © 2003 by Prentice Hall

 The value chain of a firm. This diagram provide examples how and where
information technologies can be applied to basic business processes using
the value chain framework.

2.47 © 2003 by Prentice Hall

 Value Chain Concepts

• The "primary activities" include:

inbound logistics, operations (production),
outbound logistics, marketing and sales,
and services (maintenance).
• The "support activities" include:
administrative infrastructure management,
human resource management, R&D, and
procurement
• Its ultimate goal is to maximize value
creation while minimizing costs.

2.48 © 2003 by Prentice Hall

 AirAsia: A Success Story

• AirAsia: airline company that entered a

formerly hurting market with great success
– Ticketless travel
– Automation with IT
– Reduced costs
– Improved service

2.49 © 2003 by Prentice Hall

 AirAsia: A Success Story

2.50 © 2003 by Prentice Hall

 Massive Automation

• AirAsia developed Open Skies software to

automate ticket handling
– Avoids travel agents and their fees
– Uses reservation agents who work from home
using VoIP
– Encourages Internet flight booking by
customers
• Maintenance information system used to
log airplane parts and time cycles for
replacement
2.51 © 2003 by Prentice Hall
 Away from Tradition
• AirAsia used innovative technique for routing airplanes
– Does not use hub-and-spokes method, only point to
point
– Take most profitable route between cities
• Keeping flight manuals on laptop computers allows for
paperless cockpits
– Saves preflight time associated with calculating
weight of plane (annual savings of ~4800 hours)

2.52 © 2003 by Prentice Hall

 Competitive advantages
• Technology helps AirAsia offer better
service
– Safety First:
Partnering with the world’s most renowned
maintenance providers and complying with the with
world airline operations.

– High Aircraft Utilization:

Implementing the regions fastest turnaround time at
only 25 minutes, assuring lower costs and higher
productivity.

2.53 © 2003 by Prentice Hall

 Competitive advantages
• Technology helps AirAsia offer better service
– Low Fare, No Frills:
Providing guests with the choice of customizing
services without compromising on quality and services.
– Streamline Operations:
Making sure that processes are as simple as possible.
– Lean Distribution System:
Offering a wide and innovative range of distribution
channels to make booking and travelling easier.
– Point to Point Network:
Applying the point-to-point network keeps operations
simple and costs, low.

2.54 © 2003 by Prentice Hall

 THE END.

Any questions??????

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