Information Systems &

Their Business Value

 Technological & Financial Trends

• Moore’s Law
– Moore suggested in 1965 that the number of transistors,
and thus the power, of an integrated circuit (computer chip)
would double every year while the cost remained the same.
– He later revised this estimate to a slightly less rapid pace:
doubling every 18 months.
• Price-to-performance ratio
– Organizations will have the opportunity to buy, for the same
price, twice the processing power in 1½ years, four times
the power in 3 years, eight times the power in 4½ years,
etc.

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Moore’s Law

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 Technology & Organizations
• Impact of new technologies on organizations should be:
– First, most organizations will perform existing functions at
decreasing costs over time and thus become more efficient.
– Second, creative organizations will find new uses for
information technology—based on the improving price-to-
performance ratio—and thus become more effective.
– New and enhanced products and services will provide
competitive advantage to organizations that have the
creativity to exploit the increasing power of information
technology.

… but has it really happened?

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 The Productivity Paradox
• Over the last 50 years, organizations have invested
trillions of dollars in information technology.
– Total worldwide annual spending on IT in 2000 was two
trillion dollars, and is expected to be over three and a half
trillion dollars by 2017.
• Yet it is very hard to demonstrate that IT investments
really have increased outputs or profits.
• The discrepancy between investment in information
technology and output at the national level is described
as the Productivity Paradox.

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The Solow Productivity Paradox

You can see the computer age

everywhere except in the
productivity statistics

Robert Solow, 1987

Explaining the Productivity Paradox
Economists have developed a variety of explanations for the
productivity paradox. These can be grouped into the following
three categories;

 Data & analysis problems hide

productivity gains.
 Gains from IT are offset by losses in
other areas.
 Productivity gains are offset by IT costs
or losses.

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 The Counter Point of View: General Purpose
Technologies
• Over time are found to have many uses … are pervasive
• Initially have much scope for improvement
• Eventually come to be widely used and lead to (large)
rise in aggregate productivity growth

BUT
• Initially may have no positive impact on growth or even
imply a slowdown phase
• In the long run may not provide much competitive
advantage to individual firms
 Can Innovation Generate Supernormal Profits?

• Innovators capture about 2% of the total social gain

from technological progress
• Appropriability is low (7%) and depreciation is high
(20% per year)
• The US stock market valuation of ‘new economy’ firms
grew between 1995 and 2000 at a rate that implied
owners could capture 90% of the social gain
• Yet the appropriability of gains from ICT are unlikely to
match that of earlier technologies (like steam power,
electricity or railways)
The New Economy and Stock Prices
• It was a bubble but fundamentals (trend
growth) had improved once again
• Dot.coms experience would not have surprised
someone who lived through the 1840s
• Economic gains from ICT are not a mirage but
few of them will be reaped by investors
NASDAQ Composite Index
 Organizations & IT

• Does IT matter?
– IT Matters: IT has significant impact on
organizational performance
– IT Does not Matter: IT requires substantial
investment, but does not impact actual
performance as much as it is hyped to do

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Complements of General Purpose
Technologies

• Better skilled workers

• Higher levels of teamwork
• Redesigned processes
• New decision rights
 The Role of Managers

• Managers usually operate without a

comprehensive model of what IT does for
their organization, and what they must do to
ensure that IT initiatives succeed.
The CCR Model

• Capability
• Complementarity
• Responsibility
Complements of General Purpose
Technologies

• Better skilled workers

• Higher levels of teamwork
• Redesigned processes
• New decision rights
Across the three IT categories, Managers
have three tasks SAE

• IT Selection
• IT Adoption
• IT Exploitation
 IT selection
• The discussion centres on the importance of
clearly understanding the business
requirement first, then the technology
requirement will be clearer.
– Once the company’s business needs are clear, the
technologies it requires will come into focus
 Function IT

• Will any of the software in the market enable

our engineers, scientists, analysts and other
workers work more efficiently?
• Are our function technologies outdated? If so,
why? What has changed?
 Network IT

• How do people collaborate? Do we know what

technologies they are using?
• Do we have ways of exchanging qualitative
information within the company and with
suppliers and customers?
• How do we know what our people are
working on and what the hot topics are?
 Enterprise IT
• In what ways are our current processes not
supporting our business?
• Are there best practices that should be widely
deployed? How widely?
• Are there important business activities that
should be monitored?
• What is the most recent period we can easily
analyze? Is that sufficient for taking decisions?
 IT adoption
• The biggest mistake business leaders make is
to underestimate resistance when they
impose changes in the ways people work.
 Function IT

• Enhancing experimentation capacity

• Increasing precision
 Network IT

• Facilitating collaboration
• Allowing expressions of judgment
• Fostering emergence
 Enterprise IT

• Redesigning business processes

• Standardizing work flows
 IT exploitation

• A business leader’s third IT-related

responsibility is to extract the maximum
benefit from technologies once they are in
place
Exploitation of IT at Three Organization
Levels
Domain Operational Tactical Strategic
Efficiency •Reduce unit sales •Improve capacity Optimize distribution
cost as much as planning systems
possible •Improve scheduling
•Minimize •Improve inventory
turnaround times control and
manufacturing
resource planning
Effectiveness •Respond to all •Ensure that all tasks •Maximize coverage of
relevant inquiries conform to the best markets for sales and
practices service
Competitiveness •Scan the environment
outside firm
•Identify and track
threats and
opportunities for
different approaches
•Select different
activities and assess
impact for change
 How IT Has Changed Businesses
DRECCF

• Provides new ways to design organizations

• Creates new relationships between customers and
suppliers
• Enables efficiencies in production and service industries
• Changes the basis of competition and industry structure
• Provides mechanisms through groupware for coordinating
work and creating a knowledge base of organizational
intelligence
• Contributes to the flexibility and productivity of knowledge
workers
Processes Integration with Enterprise
Systems
 Business Process

A business process is a collection of tasks that

together create value for a customer.
Advantage of a business process

The inherent advantage of a business

process is that its performance can easily
be measured against the attainment of
the goal
 The New Product Development Process

Needs Market Component Product Product Process Equip- Prod-

Analysis Research Test Design Testing Design ment uction
Release
Design Start

Marketing R&D/Engineering Manufacturing

 The Order Fulfillment Process

Process Commit- Config- Credit Collec-

Proposal Delivery Billing
ment uration Checking tions

Functions Sales Manufacturing Finance Logistics

 Function Versus Process-based Organization

M M
E a E a
n M n n M n Order Fulfillment
g a u g a u
i r f i r f
n k a n k a
e e c e e c Customer Satisfaction
e ti t e ti t
r n u r n u
i g r i g r
n i n i Product Development
g n g n
g g
 Process Integration
Purchase
Requisition
MATERIAL
REQUIREMENT Purchase
PLANNING
Order
Run MRP

Goods
Sales Order Procurement
Check Receipt
Entry Process
Availability

Sales Order Invoice

Process Receipt
Pick
Receipt of Materials Payment
Payment to Vendor

Post Goods
Invoice Issue
Customer
 Process Integration Purchase
Order

Purchase
Requisition
Convert Production Goods
Proposal Receipt
Schedule Procurement
and Release Process
Run MPS
w/MRP Invoice
Goods Receipt
Production
Check Issue
Availability Process
Sales Order Payment
Completion
Entry to Vendor
Quality Confirmation
Sales Order Inspection Goods
Pick
Process Receipt
Materials
Order
Receipt of Settlement
Payment
Post Goods
Issue
Invoice
Customer
 ENTERPRISE SYSTEMS

• Enterprise Resource Planning (ERP) systems

• Interdependent software modules with a common

central database that support basic internal
business processes for finance and accounting,
human resources, manufacturing and production,
and sales and marketing

• Enables data to be used by multiple functions

and business processes for precise
organizational coordination and control
 3 Key ERP Concepts

1. Everyone works with real-time shared

data and applications
2. Technology becomes transparent for
users through open systems
architecture
3. A Process View of the organization is
required to make it a success
 Processes in Enterprise Systems
FINANCIAL SALES
LOGISTICS

 Financial processes
 Real-time cost and performance analysis
 Across projects and divisions
 Better financial planning
 Logistics processes
 Supports all phases of procurement process
 Integrates transportation management across the
supply chain
 Sales processes
 Complex pricing and profitability analysis
 Real-time inventory control
 Produce for Sales Order

Pre-Sales Sales Accounts

Delivery Billing
Activity Order Receivable

Availability Goods Issued

Check to Delivery

In Plant or Inventory General

Inventory Warehouse Postings Ledger
YES
Accounts
Issue Goods
NO to Production Goods from
Order Production Order

Planned Production Completion Confirmation Accounts

Order Order Payable
 Advantages of ERP Systems
• A more uniform organization

• More efficient operations and customer-driven

business processes

• Integrated information for realtime decision

making

• Collects data for Business Intelligence

• Enables integration with other platforms like E-

Commerce, Integrated Manufacturing systems