University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
The Business value of Information System
In the 21st century Information Systems has become an essential part of every business or, as Nicholas Carr wrote in his famous “IT doesn’t matter”, Information Technology has become a backbone of comerce1. We simply cannot imagine our everyday life without having an opportunity to check our mail, order something online, book tickets or read news from all over the world. In nowadays world the data has become the new currency in the digital economy. Vast quantity of data is captured with every message we send, every credit card we swipe, every order we make. But it is only useful if it is processed and used for innovation by increasing our collective knowledge. Leaders should take a holistic and integrated approach that mirrors how organizations think, how they operate and how they respond now and in the future. By combining and analyzing multiple data sources like social, text-based and point-of sale data companies in sectors such as retail, telecommunications and banking, can understand the needs of customers. Organizations can use high performance analytics to meet customers’ needs in real time yielding transformational and valuable insight in seconds instead of hours.
In a typical day a customer service might face 600 phone calls, 400 mails and 300 Internet comments. That is a subtle quantity of data within one day. Companies are missing a major opportunity if they can only understand a small part of this data. Regardless of the industry sector the integration of unstructured data opens a lot of possibilities for any organization. Everyone understands the importance of information systems. Companies are in the race of getting new technologies as soon as possible. Businesses worldwide spend trillions of dollars on IT development. In this paper we are going to distinguish a business value of Information systems and find out whether these investments are justified.
During the work on this paper I found several approaches to define Informational Systems. Some sources like, for example, Britannica, offer a definition based on IS functions. Information system – an integrated set of components for collecting, storing, and processing data and for delivering information, knowledge, and digital products. Business firms and other organizations rely on information systems to carry out and manage their operations, interact with their customers and suppliers, and compete in the marketplace.2 Other sources, like Farlex free dictionary, offer definitions that emphasize on Information System’s components. Information system – system consisting of the network of all communication channels used within an organization.3 The best definition, in my opinion, is given by Wiki Answers: Information System is a combination of people, hardware, software, communication devices, network- and data resources that processes (can be storing, retrieving, transforming information) data and information for a specific purpose.4 To sum it up we can say that Information System is a collection of people, processes, data, models, technology and partly formalized language, forming a cohesive structure, which serves the purpose of recording, storing, and disseminating linguistic expressions.as well as for the supporting of inference making5 The graph below illustrates the functions of Information Systems:
Graph 1.1.1. The functions of Information Systems
Source: Technical University of Iraq.
Information Systems consist of 5 components such as:
Resources of people (end users and IS specialists, system analyst, programmers, data administrators etc.) Hardware: (Physical computer equipments and associate device, machines and media) Software: (programs and procedures)
Data: (data and knowledge bases)
Networks: (communications media and network support)
The graph below illustrates the components on Information Systems:
Graph 1.1.2. Components of Information Systems.
Source: Technical University of Iraq
Now when we have define what are Information Systems and how do they work I would like to move further to the types of Information Systems. Main types of Information systems Information System can be divided into 5 major categories, which are: 1. Transaction Processing System (TPS) – A TPS collects and stores information about transactions, and controls some aspects of transactions. A transaction is an event of interest to the organization. 2. Management Information System (MIS) – converts TPS data into information for monitoring performance and managing an organization. Transactions recorded in a TPS are analyzed and reported by an MIS. 3. Decision Support System (DSS) – helps strategic management staff make decisions by providing information, models, or analysis tools. It is used for support of semi structured and unstructured decisions (structured decisions can be automated). Used for analytical work, rather than general office support. 4. Expert system (ES) – a computer system or program that uses artificial intelligence techniques to solve problems that ordinarily require a knowledgeable human. The method used to construct such systems, knowledge engineering, extracts a set of rules and data from an expert or experts through extensive questioning. This material is then organized in a format suitable for representation in a computer and a set of tools for inquiry, manipulation, and response is applied. While such systems do not often replace the human experts, they can serve as useful adjuncts or assistants. 5. Executive information System (EIS)- a type of management information system to facilitate and support the information and decision- making needs of senior executives by providing easy access to both internal and external information relevant to meeting the strategic goals of the organization. Commonly considered as a specialized form of a Decision Support System emphasizes on graphical displays and easy-to-use user interfaces, offers strong reporting and drill-down capabilities. The graph below illustrates the hierarchy of Information Systems types:
Graph 1.2.1. Types of Information Systems
Now I would like to move to the history of IS development.
History of information systems development in business “The history of information systems in business has been a history of increased interconnectivity and interoperability.”6 The history of information systems business usage starts in 1970s when first mainframe computers were used. Computers and data were centralized and systems were tied to a few business functions: payroll, inventory, and billing. Main focus was set to automate existing processes. In 1980s there were installed personal computers and LANs. Departments set up their own computer systems. End-user computing with Word Processors and Spreadsheets made departments less dependent on the IT department. The main focus was set on automating existing processes. In 1990s Wide Area Networks (WANs) became corporate standards. Senior management started to look for system integration and data integration getting rid of stand-alone systems. Main focus was central control and corporate learning. In 2000s Wide Area Networks expanded via the Internet. Supply chain and distribution were used to include global enterprises and business partners. Senior management looked for data sharing across systems. Main focus was on efficiencies and speed in inventory, manufacturing, and distribution. Twenty years ago most executives looked down on computers as proletarian tools – glorified typewriters and calculators – best regarded to low-level employees like secretaries, analysts, and technicians. Today that has changed completely. Chief executives now routinely talk about the strategic value of information technology, about how they can use IT to gain a competitive edge about the digitization of their business models.
IT buildout is much closer to its end than its beginning for the following reasons, according to N.Carr: 1. IT’s power is outstripping most of the business needs it fulfills 2. The price of essential IT functionality has dropped to the point when it is more or less affordable for all 3. The capacity of the universal distribution networks has caught up with demand 4. IT vendors are rushing to position themselves as commodity suppliers or even as utilities 5. The investment bubble has burst, which historically has been a clear indication that an infrastructural technology is reaching the end of it buildout. And now I would like to come to the topic of perceived and real value of Information Systems for the businesses. Business value of information systems
Responsiveness and flexibility rule nowadays. Successful companies now follow the strategy of sensing and responding to frequently changing customer needs rather than just producing and selling their products. Many large companies have drastically downsized, divested, and out-sourced to reduce the costs and complexity of their operations. These companies wish to have a small company spirit in order to stay flexible. S. Haeckel argues that downsizing is not necessary to become fast responsive to market fluctuations. The trick is to stay a large company and use “management by wire” meaning the usage on Information Systems for improving the processes within the company.
It is getting harder and harder to outpace the competitors nowadays. “Our recent research finds that since the middle of the 1990s, which marked the mainstream adoption of the internet and commercial enterprise software, competition within the U.S. economy has accelerated to unprecedented levels. There are a number of possible reasons for this quickening, including M&A activity, the opening up of global markets, and companies’ continuing R&D efforts. However, we found that a central catalyst in this shift is the massive increase in the power of IT investments.”8 – Wrote Andrew McAfee and Erik Brynjolfsson in their article “Investing in the IT That Makes a Competitive Difference”. “To better understand when and where IT confers competitive advantage in today’s economy, we studied all publicly traded U.S. companies in all industries from the 1960s through 2005, looking at relevant performance indicators from each (including sales, earnings, profitability, and market capitalization) and found some striking patterns: Since the mid-1990s, a new competitive dynamic has emerged—greater gaps between the leaders and laggards in an industry, more concentrated and winner-take-all markets, and more churn among rivals in a sector. Strikingly, this pattern closely matches the turbulent “creative destruction” mode of capitalism that was first predicted over 60 years ago by economist Joseph Schumpeter.
This accelerated competition has coincided with a sharp increase in the quantity and quality of IT investments, as more organizations have moved to bolster (or altogether replace) their existing operating models using the internet and enterprise software. Tellingly, the changes in competitive dynamics are most apparent in precisely those sectors that have spent the most on information technology, even when we controlled for other factors.”9 Not only products have become digital, but also more and more processes. An innovator with a better way of doing things can settle up an amazing speed to dominate an industry. In response, a competitor can make further process innovations to regain the market share. Competing at such high speed is not easy, so a company should always keep a finger on the pulse. Impact on industries
A. McAfee and E. Brynjolfssonwith the help of M. Sorell and F. Zhu conducted a research in order to find out what impact does the development of IT make on the industries. They took into consideration 3 dimensions of competitive dynamics. Industry Concentration: After decades of decline in all industries, industry concentration began to rise in the mid-1990s. Though the absolute level is lower, the rate of rise is faster in high-IT industries than it is for low-IT industries. Graph 2.2.1 Industry Concentration
Turbulence: In turbulent markets, the top-selling company one year may not dominate the next. Today’s 10th place company, for instance, might catapult to number one the following year. In less turbulent markets the same companies dominate year after year and there’s very little movement up and down in rank order. By this measure, we found consistently more sales turbulence in high-IT industries—and a marked increase in the mid-1990s. Graph 2.2.2. Turbulence
Performance Spread: The spread in gross profit margin between the company performing at the 25th percentile in its industry and the company performing at the 75th percentile—an indication of the spread between winners and losers—has grown dramatically in high-IT industries since the mid-1990s. Graph 2.2.3
“While it’s true that the tool kit of corporate IT has expanded a great deal
in recent years, we believe that an overabundance of new technologies is not the fundamental driver of the change in dynamics we’ve documented. Instead, our field research suggests that businesses entered a new era of increased competitiveness in the mid-1990s not because they had so many IT innovations to choose from but because some of these new technologies enabled improvements to companies’ operating models and then made it possible to replicate those improvements much more widely.”10 Worldwide investments in Information Systems
In 1965, according to a study by US Department of Commerce’s Bureau of economic analysis, less than 5% of the capital expenditures of American companies went to IT. After the introduction of the personal computer in the early 1980s, that percentage rose to 15%. By the early 1990s it had reached more than 30% and by the end of decade it had hit nearly 50%.11 According the U.S. Bureau of Economic Analysis (BEA), corporate investments in IT surged from about $3,500 spent per worker in 1994 to about $8,000 in 2005. The graph below illustrates the dollar value of total USA corporate IT stock. Graph 2.3.1.
At the same time, annual productivity growth in U.S. companies roughly doubled, after plodding along at about 1.4% for nearly 20 years. Much attention has been paid to the connection between productivity growth and the increase in IT investment. But hardly any has been directed to the nature of the link between IT and competitiveness. According to Gartner, Worldwide IT Spending Forecast, in 2016 IT spending will grow to 4,3 trillions dollars (comparing to 3.5 in 2012). See the graph below.
All this information above shows us how drastically the IT investmenthas risen. Leaders all over the world realize that IT development must be paid for in order to keep or improve their positions. But are all this huge amounts of money justified? Some critics say no. Let us look closer on their arguments Criticism
So companies spend incredible amounts of money on IT as they see it as a strategic tool. In his famous “IT doesn’t matter” N. Carr strongly recommends changing these views: “Behind the change in thinking lies a simple assumption: that as IT’s potency and ubiquity have increased, so too has its strategic value. It’s a reasonable assumption, even an intuitive one. But it’s mistaken. What makes a resource truly strategic – what gives it the capacity to be the basis for a sustained competitive advantage – is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can’t have or do. By now, the core functions of IT – data storage, data processing, and data transport – have become available and affordable to all. Their very power and presence have begun to transform them from potentially strategic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none.”12 Also he argues that those companies, who do not take part in the race of ammunition, but waiting for new technologies to become affordable, are more stable and successful in real business.
In this paper we defined the concept of Information System and found its components and main types. We saw the data showing the importance of IS development within a company and opinions of different businesses analytics on why and how one should constantly invest in IT. So, to conclude I would like to say that without any doubts, IS is the key to success in current business environment. It provides businesses with flexibility, better built processes, saves time and reduces costs on labor force. And this is a sort of obvious judgment, so every reasonable leader realizes the potential of IS. But because of this common belief, businesses blindly invest in new technologies hoping that it might provide them with a great competitive advantage. Unfortunately. these companies fail, as a rule, giving the place to those who patiently wait for new technologies to become affordable and improved. References
1. http://www.britannica.com/ – Britannica. Online encyclopedia. 2. http://www.thefreedictionary.com/ – The Free Dictionary by Farlex 3. http://wiki.answers.com/ – Wiki Answers
4. http://weforum.org/ – World Economic Forum
5. http://www.uotechnology.edu.iq/ – Technical University of Iraq 6. http://www.gartner.com/ – Gartner Analytics
7. N. Carr- “IT doesn’t matter”, January 2007
8. http://www.uwosh.edu/ – University of Wisconsin, Oshkosh. 9. S. H. Haeckel – Managing by Wire, September 1993
10. A. McAfee and E. Brynjolfsson – Investing in the IT That Makes a Competitive Difference, July 2008