CHAPTER ONE

FUNDAMENTALS OF INFORMATION SYSTEM

Information systems are used in almost every imaginable profession. Entrepreneurs and small
business owners use information systems to reach customers around the world. Sales
representatives use information systems to advertise products, communicate with customers, and
analyze sales trends. Managers use them to make multimillion- dollar decisions, such as whether
to build a manufacturing plant or research a cancer drug. Financial advisors use information
systems to advise their clients to help them save for their children’s education and retirement.
From a small music store to huge multinational companies, businesses of all sizes could not
survive without information systems to perform accounting and finance operations. Regardless
of your college major or chosen career, information systems are indispensable tools to help you
achieve your career goals. Learning about information systems can help you land your first job,
earn promotions, and advance your career.
Why learn about information systems in organizations? What is in it for you? Learning about
information systems will help you achieve your goals. Let’s get started by exploring the basics of
information systems.
People and organizations use information every day. Many retail chains, for example, collect
data from their stores to help them stock what customers want and to reduce costs. The
components that are used are often called an information system. An information system (IS) is
a set of interrelated components that collect, manipulate, store, and disseminate data and
information and provide a feedback mechanism to meet an objective. It is the feedback
mechanism that helps organizations achieves their goals, such as increasing profits or improving
customer service. Businesses can use information systems to increase revenues and reduce costs.
This chapter emphasizes the benefits of an information system, including speed, accuracy,
increased revenues, and reduced costs.
Today we live in an information economy. Information itself has value, and commerce often
involves the exchange of information rather than tangible goods. Systems based on computers
are increasingly being used to create, store, and transfer information. Using information systems,
investors make multimillion-dollar decisions, financial institutions transfer billions of dollars
around the world electronically, and manufacturers order supplies and distribute goods faster

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than ever before. Computers and information systems will continue to change businesses and the
way we live. To prepare for these innovations, you need to be familiar with fundamental
information concepts.
Data, Information, and Knowledge
Data consists of raw facts, such as an employee number, total hours worked in a week, inventory
part numbers, or sales orders. As shown in Table 1.1, several types of data can represent these
facts. When facts are arranged in a meaningful manner, they become information.
Information is a collection of facts organized and processed so that they have additional value
beyond the value of the individual facts. For example, sales managers might find that knowing
the total monthly sales suits their purpose more (i.e., is more valuable) than knowing the number
of sales for each sales representative.

Table1.1 Types of data

Data represents real-world things. Hospitals and healthcare organizations, for example, maintain
patient medical data, which represents actual patients with specific health situations. In many
cases, hospitals and healthcare organizations are converting data to electronic form. Some have
developed electronic records management (ERM) systems to store, organize, and control
important data.
Turning data into information is a process, or a set of logically related tasks performed to
achieve a defined outcome. The process of defining relationships among data to create useful
information requires knowledge. Knowledge is the awareness and understanding of a set of
information and the ways that information can be made useful to support a specific task or reach
a decision. Having knowledge means understanding relationships in information.
In some cases, people organize or process data mentally or manually. In other cases, they use a
computer. Where the data comes from or how it is processed is less important than whether the

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data is transformed into results that are useful and valuable. This transformation process is
shown below.

The characteristics of valuable information

If an organization’s information is not accurate or complete, people can make poor decisions,
costing thousands, or even millions, of dollars. Furthermore, if information is not relevant, not
delivered to decision makers in a timely fashion, or too complex to understand, it can be of little
value to the organization.

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What is an information system?
As mentioned previously, an information system (IS) is a set of interrelated elements or
components that collect (input), manipulate (process), store, and disseminate (output) data and
information and provide a corrective reaction (feedback mechanism) to meet an objective (see
Figure below). The feedback mechanism is the component that helps organizations achieve their
goals, such as increasing profits or improving customer service.

Input, Processing, Output, Feedback

Input:
 Activity of gathering and capturing raw data
Processing:
 Converting data into useful outputs
Output:
 Production of useful information, usually in the form of documents and reports
Feedback:
 Information from the system that is used to make changes to input or processing
activities
Manual and computerized information system
An information system can be manual or computerized. For example, some investment analysts
manually draw charts and trend lines to assist them in making investment decisions. A
computer-based information system (CBIS) is a single set of hardware, software, databases,
telecommunications, people, and procedures that are configured to collect, manipulate, store, and
process data into information.
Information technology (IT) refers to hardware, software, databases, and telecommunications.
Telecommunications also includes networks and the Internet. A business’s technology

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infrastructure includes all the hardware, software, databases, telecommunications, people, and
procedures that are configured to collect, manipulate, store, and process data into information.
The technology infrastructure is a set of shared IS resources that form the foundation of each
computer-based information system.

Hardware:
 Consists of computer equipment used to perform input, processing, and output
activities
Software:
 Consists of the computer programs that govern the operation of the computer
Database:
 Organized collection of facts and information, typically consisting of two or more
related data files
Telecommunications, Networks and the Internet

Telecommunications is the electronic transmission of signals for communications, which

enables organizations to carry out their processes and tasks through effective computer networks.
Telecommunications can take place through wired, wireless, and satellite transmissions.
Networks connect computers and equipment in a building, around the country, or around the
world to enable electronic communication. Wireless transmission allows aircraft, such as
Boeing’s Scan Eagle, to fly using a remote control system to monitor commercial buildings or
enemy positions.

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The Internet is the world’s largest computer network, consisting of thousands of interconnected
networks, all freely exchanging information.
Intranet is an internal network based on Web technologies that allows people within an
organization to exchange information and work on projects.
An extranet is a network based on Web technologies that allows selected outsiders, such as
business partners and customers, to access authorized resources of a company’s intranet.
People are the most important element in most computer-based information systems. They make
the difference between success and failure for most organizations.
Procedures are the strategies, policies, methods, and rules for using the CBIS.

Business Information Systems

The most common types of information systems used in business organizations are those
designed for electronic and mobile commerce, transaction processing, management information,
and decision support. In addition, some organizations employ special-purpose systems, such as
virtual reality, that not every organization uses.
Electronic and Mobile Commerce
E-commerce involves any business transaction executed electronically between companies
(business-to-business, or B2B), companies and consumers (business-to-consumer, or B2C),
consumers and other consumers (consumer-to-consumer, or C2C), business and the public
sector, and consumers and the public sector.
Mobile commerce

(m-commerce) is the use of mobile, wireless devices to place orders and conduct business. M-
commerce relies on wireless communications that managers and corporations use to place orders
and conduct business with handheld computers, portable phones, laptop computers connected to
a network, and other mobile devices. Today, mobile commerce has exploded in popularity with
advances in smartphones, including Apple’s iPhone.
E-commerce can enhance a company’s stock prices and market value. Today, several e-
commerce firms have teamed up with more traditional brick-and-mortar businesses to draw from
each other’s strengths. For example, e-commerce customers can order products on a Web site
and pick them up at a nearby store.

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In addition to e-commerce, business information systems use telecommunications and the
Internet to perform many related tasks. Electronic procurement (e-procurement), for example,
involves using information systems and the Internet to acquire parts and supplies.
Electronic business (e-business) goes beyond e-commerce and e-procurement by using
information systems and the Internet to perform all business-related tasks and functions, such
as accounting, finance, marketing, manufacturing, and human resource activities. E-business also
includes working with customers, suppliers, strategic partners, and stakeholders. Compared to
traditional business strategy, e-business strategy is flexible and adaptable.

Enterprise Systems: Transaction Processing Systems and

Enterprise Resource Planning
Transaction Processing Systems
Since the 1950s, computers have been used to perform common business applications. Many of
these early systems were designed to reduce costs by automating routine, labor-intensive
business transactions. A transaction is any business-related exchange such as payments to
employees, sales to customers, or payments to suppliers. Processing business transactions was
the first computer application developed for most organizations. A transaction processing
system (TPS) is an organized collection of people, procedures, software, databases, and devices
used to perform and record business transactions. If you understand a transaction processing
system, you understand basic business operations and functions. One of the first business

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systems to be computerized was the payroll system (see Figure below). The primary inputs for a
payroll TPS are the number of employee hours worked during the week and the pay rate. The
primary output consists of paychecks. Early payroll systems produced employee paychecks and
related reports required by state and federal agencies, such as the Internal Revenue Service.
Other routine applications include sales ordering, customer billing and customer relationship
management, and inventory control.

Enterprise systems help organizations perform and integrate important tasks, such as paying
employees and suppliers, controlling inventory, sending invoices, and ordering supplies. In the
past, companies accomplished these tasks using traditional transaction processing systems.
Today, they are increasingly being performed by enterprise resource planning systems.
Enterprise Resource Planning
An enterprise resource planning (ERP) system is a set of integrated programs that manages
the vital business operations for an entire multisite, global organization. Pick n Pay, a South
African (SA) food retailer, used ERP to reduce costs and the prices paid by customers.
According to the chief executive officer, “We are happy to play our part in ensuring that SA’s
economy continues to perform well, particularly given the pressures being felt globally.”
Management Information Systems
A management information system (MIS) is an organized collection of people, procedures,
software, databases, and devices that provides routine information to managers and decision
makers. An MIS focuses on operational efficiency. Manufacturing, marketing, production,
finance, and other functional areas are supported by MISs and linked through a common
database.

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Decision Support System

A decision support system (DSS) is an organized collection of people, procedures, software,

databases, and devices that support problem-specific decision making. The focus of a DSS is on
making effective decisions. Whereas an MIS helps an organization “do things right,” a DSS
helps a “do the right thing.

Specialized Business Information Systems: Knowledge Management, Artificial Intelligence,

Expert Systems, and Virtual Reality

In addition to TPSs, MISs, and DSSs, organizations often rely on specialized systems. Many use
knowledge management systems (KMSs), an organized collection of people, procedures,
software, databases, and devices, to create, store, share, and use the organization’s knowledge
and experience.
In addition to knowledge management, companies use other types of specialized systems.
Experimental systems in cars can help prevent accidents. These new systems allow cars to
communicate with each other using radio chips installed in their trunks. When two or more cars
move too close together, the specialized systems sound alarms and brake in some cases. Some
specialized systems are based on the notion of artificial intelligence (AI), in which the computer
system takes on the characteristics of human intelligence.

Expert Systems

Expert systems give the computer the ability to make suggestions and function like an expert in
a particular field, helping enhance the performance of the novice user. The unique value of
expert systems is that they allow organizations to capture and use the wisdom of experts and
specialists.64 Therefore, years of experience and specific skills are not completely lost when a
human expert dies, retires, or leaves for another job.
Virtual Reality and Multimedia
Virtual reality and multimedia are specialized systems that are valuable for many businesses and
nonprofit organizations. Many imitate or act like real environments.
Virtual reality is the simulation of a real or imagined environment that can be experienced
visually in three dimensions. One healthcare company, for example, is experimenting with a

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virtual reality game designed to help treat cancer in young adults and children. Multimedia is a
natural extension of virtual reality. It can include photos and images, the manipulation of sound,
and special 3D effects. Once used primarily in movies, 3D technology can be used by companies
to design products, such as motorcycles, jet engines, bridges, and more.
System Development

Systems development is the activity of creating or modifying information systems. Systems

development projects can range from small to very large and are conducted in fields as diverse as
stock analysis and video game development.
People inside a company can develop systems, or companies can use outsourcing, hiring an
outside company to perform some or all of a systems development project. Outsourcing allows a
company to focus on what it does best and delegate other functions to companies with expertise
in systems development. Figure below shows an overview of system development.

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Systems Investigation and Analysis

The first two steps of systems development are systems investigation and analysis. The goal of
the systems investigation is to gain a clear understanding of the problem to be solved or
opportunity to be addressed. After an organization understands the problem, the next question is,
“Is the problem worth solving?” Given that organizations have limited resources— people and
money—this question deserves careful consideration. If the decision is to continue with the
solution, the next step, systems analysis, defines the problems and opportunities of the existing
system. During systems investigation and analysis, as well as design maintenance and review,
discussed next, the project must have the complete support of top-level managers and focus on
developing systems that achieve business goals.
Systems Design, Implementation, and Maintenance and Review
Systems design determines how the new system should be developed to meet the business needs
defined during systems analysis. For some companies, this involves environmental design that
attempts to use systems development approaches that are kind to the environment and make a
profit. Gazelle, for example, used systems design to develop the software and systems needed to
recycle computer and electronic systems for a profit. According to the company founder, “What
we’re doing here is buying dollars for 80 cents.
Systems implementation involves creating or acquiring the various system components
(hardware, software, databases, etc.) defined in the design step, assembling them, and putting the
new system into operation. For many organizations, this includes purchasing software, hardware,
databases, and other IS components.
The purpose of systems maintenance and review is to check and modify the system so that it
continues to meet changing business needs. Increasingly, companies are hiring outside
companies to do their design, implementation, maintenance, and review functions.

Organizations and information systems

An organization is a formal collection of people and other resources established to accomplish a
set of goals. The primary goal of a for-profit organization is to maximize shareholder value,
often measured by the price of the company stock. Nonprofit organizations include social

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groups, religious groups, universities, and other organizations that do not have profit as their
goal. As discussed in this chapter, the ability of an organization to achieve its goals is often a
function of the organization’s overall structure, culture, and ability to change.
The value chain is a series (chain) of activities that includes inbound logistics, warehouse and
storage, production and manufacturing, finished product storage, outbound logistics, marketing
and sales, and customer service.
Supply chain management (SCM) helps determine what supplies are required for the value
chain, what quantities are needed to meet customer demand, how the supplies should be
processed (manufactured) into finished goods and services, and how the shipment of supplies
and products to customers should be scheduled, monitored, and controlled.
Customer relationship management (CRM) programs:
 Help companies manage all aspects of customer encounters

 Can get customer feedback to help design new products and services

Organizational Culture and Change

Culture is a set of major understandings and assumptions shared by a group, such as within an
ethnic group or a country.
Organizational culture consists of the major understandings and assumptions for a business,
corporation, or other organization. The understandings, which can include common beliefs,
values, and approaches to decision making, are often not stated or documented as goals or formal
policies.
Organizational change deals with how for-profit and nonprofit organizations plan for,
implement, and handle change. Change can be caused by internal factors, such as those initiated
by employees at all levels, or by external factors, such as activities wrought by competitors,
stockholders, federal and state laws, community regulations, natural occurrences (such as
hurricanes), and general economic conditions.
User Satisfaction and Technology Acceptance
User satisfaction with a computer system and the information it generates often depend on the
quality of the system and the value of the information it delivers to users. A quality information

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system is usually flexible, efficient, accessible, and timely. Recall that quality information is
accurate, reliable, current, complete, and delivered in the proper format.

The technology acceptance model (TAM) specifies the factors that can lead to better attitudes
about the information system, along with higher acceptance and usage of the system in an
organization.
Technology diffusion is a measure of how widely technology is spread throughout an
organization. An organization in which computers and information systems are located in most
departments and areas has a high level of technology diffusion.
Technology infusion, on the other hand, is the extent to which technology permeates an area or
department. In other words, it is a measure of how deeply embedded technology is in an area of
the organization.
COMPETITIVE ADVANTAGE
A competitive advantage is a significant and (ideally) long-term benefit to a company over its
competition, and can result in higher-quality products, better customer service, and lower costs.
Factors That Lead Firms to Seek Competitive Advantage
Five-forces model A widely accepted model that identifies five key factors that can lead to
attainment of competitive advantage, including “-
(1) The rivalry among existing competitors,
(2) The threat of new entrants,
(3) The threat of substitute products and services,
(4) The bargaining power of buyers, and
(5) The bargaining power of suppliers.
Rivalry among Existing Competitors
Typically, highly competitive industries are characterized by high fixed costs of entering or
leaving the industry, low degrees of product differentiation, and many competitors.
Threat of New Entrants
A threat appears when entry and exit costs to an industry are low and the technology needed to
start and maintain a business is commonly available. For example, a small restaurant is
threatened by new competitors.
Threat of Substitute Products and Services

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Companies that offer one type of goods or services are threatened by other companies that offer
similar goods or services.
Bargaining Power of Customers and Suppliers
Large customers tend to influence a firm, and this influence can increase significantly if the
customers can threaten to switch to rival companies.
Strategic Planning for Competitive Advantage
To be competitive, a company must be fast, nimble, flexible, innovative, productive, economical,
and customer oriented. It must also align its IS strategy with general business strategies and
objectives.
Strategies:-
Cost leadership- Deliver the lowest possible cost for products and services.
Differentiation- Deliver different products and services.
Niche strategy- Deliver to only a small, niche market. Porsche, for example, doesn’t produce
inexpensive economy cars.
Altering the industry structure- Change the industry to become more favorable to the company
or organization.
Creating new products and services-Introduce new products and services periodically or
frequently.
Improving existing product lines and services- Make real or perceived improvements to
existing product lines and services.

PERFORMANCE-BASED INFORMATION SYSTEMS

Three stages in business use of information systems are:-
a) Cost reduction and productivity
b) Competitive advantage
c) Performance based management

Productivity- it is a measure of the output achieved divided by the input required. A higher level
of output for a given level of input means greater productivity; a lower level of output for a given
level of input means lower productivity.
Productivity = (Output / Input) × 100%

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Return on Investment and the Value of Information Systems
Return on investment (ROI):
 One measure of IS value
 Investigates the additional profits or benefits that are generated as a percentage of
the investment in IS technology
Earnings Growth
Another measure of IS value is the increase in profit, or earnings growth, the system brings. For
instance, a mail-order company might install an order-processing system that generates a seven
percent earnings growth compared with the previous year.
Market Share and Speed to Market
Market share is the percentage of sales that a product or service has in relation to the total
market.
Customer Awareness and Satisfaction
Although customer satisfaction can be difficult to quantify, about half of today’s best global
companies measure the performance of their information systems based on feedback from
internal and external users.
Total Cost of Ownership (TCO)
TCO is the sum of all costs over the life of the information system, including the costs to acquire
components such as the technology, technical support, administrative costs, and end-user
operations.
Risk
In addition to the return-on-investment measures of a new or modified system discussed earlier,
managers must also consider the risks of designing, developing, and implementing these
systems. Information systems can sometimes be costly failures.
CAREERS IN INFORMATION SYSTEMS
Realizing the benefits of any information system requires competent and motivated IS personnel,
and many companies offer excellent job opportunities. As mentioned earlier, knowledge workers
(KWs) are people who create, use, and disseminate knowledge. They are usually professionals in
science, engineering, business, and other areas that specialize in information systems. Numerous

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schools have degree programs with such titles as information systems, computer information
systems, and management information systems.
Roles, Functions, and Careers in IS
Primary responsibilities in information systems:
 Operations:
System operators primarily run and maintain IS equipment
 Systems development:
Focuses on specific development projects and ongoing maintenance and
review
 Support:
 Provides user assistance in hardware and software acquisition and use,
data administration, user training and assistance, and Web administration
 Information service units:
 A miniature IS department attached and directly reporting to a functional
area in a large organization
Typical IS Titles and Functions
Chief information officer (CIO):
 Employs the IS department’s equipment and personnel to help the organization
attain its goals
LAN administrators:
 Set up and manage the network hardware, software, and security processes
Internet careers:
 Internet strategists and administrators
 Internet systems developers
 Internet programmers
 Internet or Web site operators
Certification:
 Process for testing skills and knowledge resulting in an endorsement by the
certifying authority
Other IS Careers
New and exciting careers have developed in security and fraud detection and prevention

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Other IS career opportunities include being employed by technology companies, such as:
 Microsoft (www.microsoft.com), Google (www.google.com), Dell
(www.dell.com), and many others
Working in Teams
It is always good for IS professionals to:
 Have good communications skills and the ability to work with other people
Getting the best team of IS personnel to work on important projects is:
 Critical in successfully developing new information systems or modifying
existing ones
Finding a Job in IS
Developing an online résumé can be critical to finding a good job
Job search approaches:
 On campus visits
 Referrals from professors, friends, and family members
 The Internet:
 Online job sites
 Company Web sites
 Social networking sites
 Blogs
Global Challenges in Information Systems
Cultural challenges. Countries and regional areas have their own cultures and customs that can
significantly affect individuals and organizations involved in global trade.
Language challenges. Language differences can make it difficult to translate exact meanings
from one language to another.
Time and distance challenges. Time and distance issues can be difficult to overcome for
individuals and organizations involved with global trade in remote locations. Large time
differences make it difficult to talk to people on the other side of the world. With long distance, it
can take days to get a product, a critical part, or a piece of equipment from one location to
another location.

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Infrastructure challenges. High-quality electricity and water might not be available in certain
parts of the world. Telephone services, Internet connections, and skilled employees might be
expensive or not readily available.
Currency challenges. The value of different currencies can vary significantly over time, making
international trade more difficult and complex.
Product and service challenges. Traditional products that are physical or tangible, such as an
automobile or bicycle, can be difficult to deliver to the global market. However, electronic
products (e-products) and electronic services (e-services) can be delivered to customers
electronically, over the phone, networks, through the Internet, or other electronic means.
Software, music, books, manuals, and advice can all be delivered globally and over the Internet.
Technology transfer issues. Most governments don’t allow certain military-related equipment
and systems to be sold to some countries. Even so, some believe that foreign companies are
stealing intellectual property, trade secrets, and copyrighted materials, and counterfeiting
products and services.
State, regional, and national laws. Each state, region, and country has a set of laws that must be
obeyed by citizens and organizations operating in the country. These laws can deal with a variety
of issues, including trade secrets, patents, copyrights, protection of personal or financial data,
privacy, and much more. Laws restricting how data enters or exits a country are often called
transborder data-flow laws. Keeping track of these laws and incorporating them into the
procedures and computer systems of multinational and transnational organizations can be very
difficult and time consuming, requiring expert legal advice.
Trade agreements. Countries often enter into trade agreements with each other. The North
American Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement
(CAFTA) are examples.

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