Topic 2: The Role of Management Information Systems in Decision Making

Management information systems combine hardware, software and network products in an

integrated solution that provides managers with data in a format suitable for analysis,
monitoring, decision-making and reporting. The system collects data, stores it in a database and
makes it available to users over a secure network.

1.Rapid access to information.

Managers need rapid access to information to make decisions about strategic, financial,
marketing and operational issues. Companies collect vast amounts of information including
customer records, sales data, market research, financial records, manufacturing and inventory
data and human resource records. However much of that information is held in separate
departmental databases, making it difficult for decision-makers to access data quickly.

A management information system simplifies and speeds up information retrieval by storing data
in a central location that is accessible via a network. The result is decisions that are quicker and
more accurate.

2. Decisions based on latest information.

Management information systems bring together data from inside and outside the organization.
By setting up a network that links a central database to retail outlets, distributors and members of
a supply chain, companies can collect sales and production data daily, or more frequently, and
make decisions based on the latest information.

3.Teams can collaborate.

In situations where decision-making involves groups, as well as individuals, management

information systems make it easy for teams to make collaborative decisions. In a project team,
management information systems enable all members to access the same essential data even if
they are working in different locations or departments.

4. Interpret results efficiently.

Management information systems help decision-makers understand the implications of their

decisions. The systems convert raw data into reports in a format that enables decision-makers to
quickly identify patterns and trends that would not have been obvious in the raw data.

Decision-makers can also use management information systems to understand the potential
effect of change. A sales manager can make predictions about the effect of a price change on
sales by running simulations within the system and asking a number of “what if the price was”
questions.
5. Ease of Presentation.

The reporting tools within management information systems enable decision-makers to tailor
reports to the information needs of other parties. If a decision requires approval by a senior
executive, the decision-maker can create a brief executive summary for review. If managers want
to share the detailed findings of a report with colleagues, they can create full reports and provide
different levels of supplementary data.

Types of Accounting Information

Accounting information is the base all important decisions which are taken by owners,
management, potential investors, creditors, lenders, employees, government , researchers and
public. They are the interested parties in accounting information. Different people need different
accounting information. So, it is necessary to classify the accounting information in different
types.

Following are the main types of accounting information which are generated from accounting
records for providing the benefits to interested parties.

1. Accounting Information of Financial Performance and Financial Position 

This is the main type and common accounting information. Every user need the information of
net profit or net loss of company. At the end of year, what is amount of net profit or net loss of
company. If net profit's value is very high, every user will take benefit from this data. Employees
can demand more salary. Shareholders may demand more dividend. Investors can invest their
money in the company because it is the good chance that they will receive more return on their
investment. For getting this information, it is necessary business has to make the profit and loss
account. This accounting information is also called the information of financial performance.
Next common information is financial position. We can find the financial position by seeing the
balance sheet. Balance sheet's understanding is helpful for telling whether financial position is
strong or weak. Financial Accounting provides such accounting information.

2. Accounting Information of Total Cost and Cost per unit. 

Second type of accounting information is of value of total cost and cost per unit. If you have to
sell your product in the market, you need to know what is your total cost and per unit cost. All
cost accounting records will be helpful for providing such accounting information. When
businessman gets this information, it will be very easy for him for fixing his estimated sale price
by adding profit margin in it. For example, My Cost of production per unit is sh  100 as per my
cost accounting records. Now, I want to get 50% profit on my sale. So, I use following simple
formula

Profit = Cost X Profit / ( 100 - Profit) = 100 X 50/ (100-50) =sh. 100
Sale Price = Cost + Profit = 100 +100 = sh. 200

3. Accounting Information for  Planning and Control of Business

There are lots of accounting information which are need for planning and control over the
business. Such information is added in the third type. For example, we are interested to paying
firstly to our creditor. For this planning, we have to check creditor turnover ratio and average
conversion period. Like this, there are lots of ratios which are helpful for different planning.
Through budget, we get different accounting information for controlling the business. Cash flow
statement is provide the information of source and application of cash. Such information is
helpful to control of cash which is used in operation activities, investing activities and financial
activities. All these accounting information, we can get from management accounting.

4. Accounting Information for Tax Management 

This is the important type of accounting information. In this type, we collected information
which are only need for tax management. For example, for calculating income tax on the profit,
we need profit before tax and dividend distribution. For VAT Input, we need information of
purchase of different products which are bought in day from one party. For VAT Output, we
need the information of sale of different product which are sold in a day to one party. For getting
this accounting information, it is very need to study tax accounting of business.

5. Accounting Information for Social Responsibility 

Through social accounting, we collect the accounting information for social responsibility. In big
corporate, a social account is made which provide the information of benefits to society and cost
of natural resources which are taken by corporate. Future benefits like product safety, financial
support to manpower, customer satisfaction and pollution control can be given on these
accounting information. 

Types of Information Systems in a Business Organization

In the digital era that dominates most modern industries, information systems play a vital role in
providing managers, supervisors, and rank-and-file employees with the tools they need to be
more efficient, more productive and more customer-focused.

1.Transaction Processing systems

Daily transactions give support to many small businesses, and a transaction processing system
allows companies to multiple ways to adjust, modify, store, collect, process and cancel
transactions. The most effective transaction-processing systems are stored on hard drives and on
cloud storage databases, to ensure that the information is never lost. Data processed through this
system include sales, inventory, manufacturing schedules and billing reports.
2.Management Information systems

To make the right business decisions, managers need the data collected by the transaction
processing system. Using this data, managers can create reports related to billing processes,
payroll, production schedules, and purchasing. This information is valuable because it can help
managers determine areas of waste in business operations, as well as areas that could be better
exploited. For example, if a sales report indicated sales growth during a specific season,
managers could increase marketing and production to take advantage of those specific months to
maximize revenue generated.

3.Customer Relationship Management systems

Customer relationship management systems help quantify and qualify the customer experience
as it relates to a business. CRM systems collect customer behavior such as buying trends, types
of customer inquiries, and customer subscription accounts. Each customer interaction with a
business can provide valuable information not just about existing customers but also about
prospects that call to inquire about a company’s products and services.

4. Knowledge Management systems.

Collecting, sharing and storing knowledge is essential for many companies, especially the ones
that are in a service industry. Knowledge management systems can help businesses that are
experts in a specific field, so these professions would need an efficient knowledge management
system that categorizes specific knowledge under specific topics and subjects, and makes them
available in easy-to-read spreadsheets, documents, presentations.

5. Executive Information systems

An executive information system helps leaders at the executive level analyze company-wide data
to make important decisions about the direction that a business is headed. Executive information
system offers very specific information such as graphs, reports, scheduling, cost accounting, and
predictive analysis so that executives can quickly make decisions without having to ask for more
complete data. For example, with an executive information system in place, the head of a
company could make a proactive decision to shift to pricing based models. That shift could be
triggered by analysis of customer behavior that indicates that sales are growing because
customers prefer the company’s lower prices compared to that of its competitors.

6. .Decision-Support Systems:

Decision-support systems (DSS) are used by management to make organizational decisions

versus the management decisions for which MIS is used. For instance, while MIS could be used
to make decisions about assisting a poorly performing employee, DSS could be used by
executives to create an overall shift in direction based on company and market trends.
7..Knowledge-Worker Systems: Knowledge-worker systems (KWS) are used by employees
who rely on knowledge for performing their basic job tasks, like company engineers, finance
experts and human resources personnel. KWS systems include things like computer-animated
drawing systems, human resources systems, financial workstations and virtual reality systems.

8. .Office-Automation Systems: Office-automation systems help facilitate the daily operations

of an office setting and include things like the voicemail system, word processing programs and
email. These are basic systems that are used by most employees at every level of an organization.

9. .Executive-Support Systems: Executive-support systems merge together MIS and DSS in

order to provide top executives with the data they need to make vital decisions about the
direction of the company as well as employee performance strategies.

10 .Transactions-Processing Systems: Transactional-processing systems (TPS) are used by

companies to fulfill purchases, place orders, bill clients, track received orders and more. When a
TPS works well, and people use it as intended, it provides accurate information on inventory,
sales rates, cost for materials, order fulfillment and many other details of daily operations. This
information is useful to everyone, from a sales employee to middle management and top
executives. .

Objectives of Management Information Systems

While the objective of a transactional-processing system is to provide accurate transaction data,

and the objective of office-automation systems is to increase office communication, management
information systems have specific objectives .

 Compare actual performance to expected performance of the entity.

 Facilitate efficient and timely managerial planning.
 Reduce costs by highlighting time wastage in the organization.
 Provide data about the performance of employees, management, products, services,
money, materials and equipment.
 Highlight organizational strengths and weaknesses in terms carried out.
 Identify product- or material-quality problems in order to reduce material wastage..

Application of MIS

 Increased Profits: MIS application can result in new product development, changed
marketing, changed packaging, improved customer service, a growing product line, better
communication with different levels of customers, competitive pricing and higher
customer retention rates.
 Increased Quality: MIS application contributes to increased quality through reducing
waste, helping in the selection of quality materials and implementing warranties
/guarantees that match material quality.
 Decreased Costs: MIS application helps management become more strategic about
material sourcing, staffing, scheduling, increasing efficiency, improving processes,
managing inventory appropriately and manufacturing goods at the right time. 
  Reduce wastage and increase profits. MIS reports can be used by individual managers
and groups of managers and can be shown to employees to highlight where they are
performing well and where they need to grow.

Decision-Making Processes by managers in organization

Many companies train their managers to make decisions using a structured decision-making
process. While these processes vary slightly from organization to organization, a basic seven-
step process is common:

1. Identifying the problem facing the enterprise.

The first step in the decision-making process is identifying the problem. Prior to identifying the
problem, it is essential to first recognize that a problem exists. Identification of the problem
involves three stages: scanning, categorization, and diagnosis. The scanning stage involves
monitoring the work environment for changes that may indicate the emergence of a problem.
The categorization stage attempts to understand this performance gap. At this point, the manager
attempts to categorize the situation as problematic or not. The diagnosis stage involves gathering
relevant facts and other additional information pertaining to the problem. It also specifies both
the nature and the causes of the problem

2. Gather data related to the resources and constraints to the problem.

Once the problem is identified and diagnosed, the manager should identify the resources and
constraints relevant to the problem. Anything that can be used to solve the problem is a resource.
These include people, money, materials, time, equipment, expertise, and information. On the
other hand, constraints are the factors that limit managers’ efforts to solve the problem like lack
of adequate resources, etc. Organizations generally face more than one problem at a time. These
problems compete for the manager’s attention and for the scarce resources of the organization.

3. Generating alternative solutions to the problem.

At this stage the managers are to generate feasible alternatives to the problem. Managers
should not take any major decision without exploring all the possible alternatives. Generating a
number of alternatives allows them to resist the temptation of finding a speedy solution to the
problem and increases the chances of reaching an effective decision. It is vital to consider
amount of time to be spent on generating alternatives and how accurately the manager is able to
differentiate between alternatives. This depends on the availability of data and the cost of
evaluating the data.
4. Evaluating the alternatives available to the problem. 

The generation of alternatives should be followed by a thorough analysis of the merits or

prospects and constraints of each alternative in order to see how effective each option would be.
Generally, there are five criteria on the basis of which alternatives are evaluated: feasibility,
quality, acceptability, cost, and ethics.

i)Feasibility refers to the degree to which an organization can accomplish a particular goal within
the related organizational constraints (such as time, budget, technology and policies).
Alternatives that do not seem feasible should not be considered any further.

ii) Quality refers to the extent to which an alternative finds an effective solution to the problem
under consideration.

iiI)Acceptability refers to the degree of support extended to the chosen alternative by the
decision-makers and those who would be affected by its implementation. This criterion is
considered to be very important in evaluating alternatives.

iii) The costs criterion refers to the resources required and also the degree to which the
alternative may produce undesirable side effects. Thus, the term ‘costs’ not only includes
monetary expenditures that the company incurs but also some intangible issues such as
retaliation from competitors.

iv) Ethics refers to the degree of compatibility of an alternative with the ethical standards and
social responsibilities of the organization.

5. Select the solution or alternative that minimizes risks while increasing benefits.

- Managers can make use of three basic approaches for selecting amongst the alternatives i.e
experience, experimentation and research analysis When taking decisions, managers tend to
rely on past experience to a great extent. Many managers believe that their previous
accomplishments and mistakes give guides to the future. Though experience is the best teacher,
excessive reliance on it can be dangerous, especially since many managers fail to recognize the
underlying reasons for their mistakes or failure.

-Experimentation is often used in scientific inquiry. Most people recommend that it should be
employed more often in managing and that it should be the only way by which a manager can
make sure that the plans are right. The experimentation approach can be quite expensive,
especially if a program requires heavy capital expenditure, and if several alternatives have to be
tried out.

-When important decisions are involved, one of the most effective techniques to select an
alternative is through research and analysis. This approach attempts to solve a problem by first
understanding it. It tries to find relationships among the critical variables, constraints, and
premises which have a direct effect on the goal to be accomplished. In this approach, the
decision-maker develops a model simulating the problem. He may also represent the variables in
a problem situation through mathematical terms and relationships.

-Whatever approach the decision-maker may adopt in selecting an alternative, he must bear in
mind that the selected alternative should be acceptable to those who must implement it and those
who will be affected by the decision. Failure to meet this condition is one of the most likely
reasons for failure of the decision-making process.

6. Implementation of the choice of decision made/ alternative chosen 

- Once the best among the available alternatives has been selected, it must be implemented
properly to achieve the objective for which it was selected. It is possible for a good decision to
become ineffective due to poor implementation. Successful implementation of a decision usually
depends on two factors – careful planning, and sensitivity to those who will implement the
decision and/or those who will be affected by it.

Major changes require extensive planning efforts, such as written plans, special funding
arrangements, and careful coordination with units inside and outside the organization. Decisions
can be implemented smoothly by being sensitive to the reactions of those whom the decision will
affect. The decision-makers should anticipate potential resistance at various stages of the
implementation process. They should also realize that unanticipated consequences may arise
despite the fact that precise evaluation of all alternatives and carefully consideration of the
consequences of each alternative have been undertaken.

Contingency plans are needed to deal with situations such as unexpected effects on cash flow or
operating expenses that may arise. Managers must, therefore, have contingency plans ready to
deal with such situations. In order to overcome resistance to change, the people who will be
implementing the decision should be given careful orientation and training.

A participative approach may be an effective way for the successful implementation of certain
decisions. Most managerial problems require the combined efforts of many members of the
organization; each should understand what role he or she is to play during each phase of the
implementation process.

7. Monitoring and review the effectiveness of decision to help inform future actions.

Managers are required to monitor the process of implementation of the decision so as to make
sure that everything is progressing according to plan. It should also be ensured that the problem
that initiated the decision-making process has been resolved. Monitoring decisions involves
gathering information to evaluate how the decision is working. Thus, feedback is an essential
component of the decision process. It allows the decision-maker to determine the effectiveness of
the chosen alternative in solving the problem or in moving the organization closer to the
attainment of its goals.

In order to evaluate the effectiveness of a decision, there should be a set of standards against
which actual performance can be compared. There should be availability of performance data for
comparison with the set standards. Finally the data analysis strategy, which includes a formal
plan outlining how the data will be used should be developed. By reviewing the decisions, the
decision-maker will recognize the mistakes he has made and learn where and how to avoid them
in the future. This will also help him improve his decision-making skills.

Characteristics of a Good Management Information System.

The purpose of a management information system, often referred to simply as MIS, is to help
executives of an organization make decisions that advance the organization's goals. An effective
MIS assembles data available from company operations, external inputs and past activities into
information that shows what the company has achieved in key areas of interest, and what is
required for further progress. The most important characteristics of an MIS are those that give
decision-makers confidence that their actions will have the desired consequences.

Relevance of Information

The information a manager receives from an MIS has to relate to the decisions the manager has
to make. An effective MIS takes data that originates in the areas of activity that concern the
manager at any given time, and organizes it into forms that are meaningful for making decisions.
If a manager has to make pricing decisions, for example, an MIS may take sales data from the
past five years, and display sales volume and profit projections for various pricing scenarios.

Accuracy and Reliability of Information

A key measure of the effectiveness of an MIS is the accuracy and reliability of its information.
The accuracy of the data it uses and the calculations it applies generally determine the
effectiveness of the resulting information. However, not all data needs to be equally accurate.

For example, payroll information needs to be precise, but employee hours spent on a given task
can be based on reasonable estimates. The sources of the data determine whether the information
is reliable. Historical performance is often part of the input for an MIS, and also serves as a good
measure of the accuracy and reliability of its output.

Usefulness of Information

The information a manager receives from an MIS may be relevant and accurate, but it is only
useful if it helps him with the particular decisions he has to make. For example, if a manager has
to make decisions on which employees to cut due to staff reductions, information on resulting
cost savings is relevant, but information on the performance of the employees in question is more
useful. The MIS has to make useful information easily accessible.
Timeliness of Information

MIS output must be current. Management has to make decisions about the future of the
organization based on data from the present, even when evaluating trends. The more recent the
data, the more these decisions will reflect present reality and correctly anticipate their effects on
the company. When the collection and processing of data delays its availability, the MIS must
take into consideration its potential inaccuracies due to age and present the resulting information
accordingly, with possible ranges of error.

Data that is evaluated in a very short time frame can be considered real-time information. For
example, information on an increase in product defects may be flagged for instant management
attention.

Completeness of Information

An effective MIS presents all the most relevant and useful information for a particular decision.
If some information is not available due to missing data, it highlights the gaps and either displays
possible scenarios or presents possible consequences resulting from the missing data.
Management can either add the missing data or make the appropriate decisions aware of the
missing information An incomplete or partial presentation of information can lead to decisions
that don't have the anticipated effects

Pyramid Diagram of Organizational levels and information requirements

Understanding the various levels of an organization is essential to understand the information

required by the users who operate at their respective levels.

The following diagram illustrates the various levels of a typical organization.

 1. Operational management level /Lower level management

Operational management monitors the performance of each subunit of the firm and manages
individual employees. Operational managers are in charge of specific projects and allocate
resources within the project budget, establish schedules, and make personnel decisions.
Operational work may also be accomplished through teams.

The operational level is concerned with performing day to day business transactions of the
organization. Examples of users at this level of management include cashiers at a point of sale,
bank tellers, nurses in a hospital, customer care staff, etc.

Users at this level use make structured decisions. This means that they have defined rules that
guides them while making decisions. For example, if a store sells items on credit and they have a
credit policy that has some set limit on the borrowing. All the sales person needs to decide
whether to give credit to a customer or not is based on the current credit information from the
system.

2. Tactical Management Level / Middle management

This organization level is dominated by middle-level managers, heads of departments,

supervisors, etc. The users at this level usually oversee the activities of the users at the
operational management level.
 Middle management is concerned with specific, timely information about firm performance,
including revenue and cost reduction targets and with developing plans and budgets to meet
strategic goals established by senior management. This group needs to make important decisions
about allocating resources, developing short-range plans, and monitoring the performance of
departments, task forces, teams, and special project groups. Often the work of middle managers
is accomplished in teams or small groups of managers working on a task.

Tactical users make semi-structured decisions. The decisions are partly based on set guidelines
and judgmental calls e.g a tactical manager can check the credit limit and payments history of a
customer and decide to make an exception to raise the credit limit for a particular customer. The
decision is partly structured in the sense that the tactical manager has to use existing information
to identify a payments history that benefits the organization and an allowed increase percentage.

3. Strategic Management Level /Senior management/Top level mgt

This is the most senior level in an organization. The users at this level make unstructured
decisions. Senior level managers are concerned with the long-term planning of the organization.
They use information from tactical managers and external data to guide them when making
unstructured decisions.

Senior management is concerned with general yet timely information on changes in the industry
and society at large that may affect both the long-term and near-term future of the firm, the
firm’s strategic goals, short-term and future performance, specific bottlenecks and trouble
affecting operational capabilities, and the overall ability of the firm to achieve its objectives.

TYPES OF DECISIONS MADE BY MANAGERS

The characteristics of decisions faced by managers at various levels in the organizations are quite
different. These decisions made by the managers can be classified as structured, semi structured,
and unstructured

1.Unstructured decisions are those decisions in which the decision maker must provide
judgment, evaluation, and insights into the problem definition. Each of these decisions is unique
and non routine, and there is no well-understood or agreed-on procedure for making them.
unstructured decision making is more common at higher levels of the firm. .Senior executives
tend to be exposed to many unstructured decision situations that are open ended, evaluative and
that require insight based on many sources of information and personal experience. An example
of an unstructured decision that management may face could be deciding if the company should
enter into a new market or would it be more beneficial for them to stay in just their current
market. Information systems help to make such decisions that 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 for their
opinions.
2. Structured decisions-These decisions are repetitive and routine in nature and decision makers
can follow a definite procedure for handling them to be efficient.. They involve definite
procedures for getting solution. Therefore they don’t need to be treated as new each time the
decision has to be made. A good example of a structured decision would be the hiring process in
a company. It is important to create structure around repetitive situations so that a lot of time is
not spent on very minor decisions In general, structured decisions are made more prevalently at
lower organizational levels. Middle management and operational management tend to face more
structured decision scenarios, but their decisions may include unstructured components.

3.Semi structured decisions-They have elements of both structured and unstructured decisions
in which only a part of the problem has a clear-cut answer provided by an accepted procedure. .
A semi structured decision is one which is partially programmable but still requires human
judgement. There are three dimensions to a semi structured decision to be considered i.e degree
of decision-making skill required, degree of problem complexity and the number of criteria
under evaluation.

Competitive advantage of information and MIS

Competitive advantage is a position that makes a business more profitable than its competitors.
For example, producing products at a lower cost than your competitors makes you more
profitable.

Information systems have the capacity to help an organization into such a position. They do so in
the following ways

1. Operational excellence – operational excellence seeks to improve the operations of the

business. A retail store can use information systems to automatically place an order with
a supplier once the inventory level reaches the re-order limit. This ensures that the retail
store never runs out of inventory and customers can always count on it to find what they
need.
2. New business models, products, and services –The retail store can develop a web based
order system or smartphone application that clients can use to buy items from the comfort
of their homes or wherever they are. The order system can be linked to a delivery
business and have support for online payments. This is a new business model compared
to customers walking in to make purchases vs doing it from web based or smartphone
applications.
3. Improved supplier and customer relations – historical data is used to understand the
needs of the customers and suppliers. This data is then used to create services and
products that address the needs. This leads to long-term relationships with customers and
business which puts an organization in a more profitable position.
4. Improved decision making – information is critical when making decisions. Information
systems if designed and operated efficiently, output information that has all the
characteristic of good information described in the above section. This enables an
organization to make decisions that will profit the organizations.
Porter’s Five Forces of Competitive Position
Analysis
Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organization.

This theory is based on the concept that there are five forces that determine the competitive
intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a
business situation. This is useful both in understanding the strength of an organization’s current
competitive position, and the strength of a position that an organization may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services
are potentially profitable. By understanding where power lies, the theory can also be used to
identify areas of strength, to improve weaknesses and to avoid mistakes.

Porter’s five forces of competitive position analysis:

The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is
driven by the: number of suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost of switching from one supplier to another.

2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven
by the: number of buyers in the market; importance of each individual buyer to the organization;
and cost to the buyer of switching from one supplier to another. If a business has just a few
powerful buyers, they are often able to dictate terms.

3. Competitive rivalry. The main driver is the number and capability of competitors in the
market. Many competitors, offering undifferentiated products and services, will reduce market
attractiveness.

4. Threat of substitute products. Where close substitute products exist in a market, it increases
the likelihood of customers switching to alternatives in response to price increases. This reduces
both the power of suppliers and the attractiveness of the market.

5. Threat of new entry. Profitable markets attract new entrants, which erodes profitability.
Unless incumbents have strong and durable barriers to entry, for example, patents, economies of
scale, capital requirements or government policies, then profitability will decline to a competitive
rate. Arguably regulation, taxation and trade policies make government a sixth force for many
industries.

What benefits does Porter’s Five Forces analysis provide?

Five forces analysis helps organizations to understand the factors affecting profitability in a
specific industry, and can help to inform decisions relating to: whether to enter a specific
industry; whether to increase capacity in a specific industry; and developing competitive
strategies.

Actions to take / Dos Actions to Avoid / Don'ts

 Use this model where there are  Avoid using the model for
at least three competitors in the an individual firm; it is
market designed for use on an
 Consider the impact that industry basis
government has or may have on
the industry
 Consider the industry lifecycle
stage – earlier stages will be
more turbulent
 Consider the dynamic/changing
characteristics of the industry
 Michael Porter's Value Chain diagram

The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organization as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve the
acquisition and consumption of resources - money, labour, materials, equipment, buildings, land,
administration and management. How value chain activities are carried out determines costs and
affects profits

Most organizations engage in hundreds, even thousands, of activities in the process of converting
inputs to outputs. These activities can be classified generally as either primary or support
(secondary) activities that all businesses must undertake in some form.
Value chain refers to activities that a company performs to create value for its customers. The
concept of a value chain was developed by Michael Porter. Porter's value chain has two activities
namely; primary and support( secondary) activities.

A) Primary activities – These are activities that are related to the creating
products/services, marketing and sales, and support. Primary activities consist of
inbound logistics, operations, outbound logistics, marketing and sales, and
service. According to Porter (1985), the primary activities are:

1. Inbound Logistics - involve relationships with suppliers and include all the activities
required to receive, store, and disseminate inputs.
2. Operations - are all the activities required to transform inputs into outputs (products and
services).
3. Outbound Logistics - include all the activities required to collect, store, and distribute
the output.
4. Marketing and Sales – Activities to inform buyers about products and services, induce
buyers to purchase them, and facilitate their purchase.
5. Service - includes all the activities required to keep the product or service working
effectively for the buyer after it is sold and delivered.

B) Support activities – These are activities that support the primary activities.
Support activities consist of procurement (purchasing), human resource
management, technological development and infrastructure. The secondary
activities are:

1. Procurement - is the acquisition of inputs, or resources for the firm.

2. Human Resource management - consists of all activities involved in recruiting, hiring,
training, developing, compensating and (if necessary) dismissing or laying off personnel.
3. Technological Development - pertains to the equipment, hardware, software, procedures
and technical knowledge brought to bear in the firm's transformation of inputs into
outputs.
4. Infrastructure - serves the company's needs and ties its various parts together, it consists
of functions or departments such as accounting, legal, finance, planning, public affairs,
government relations, quality assurance and general management.

The overall goal of the value chain is to help a business gain competitive advantage. Competitive
advantage is a business's position in a market that makes it to be more profitable than its direct
competitors.

Influence of IT on organizational goals

Organizational goals refer to objectives and the mission of the organization, especially in the
long term. Regardless of the type of business that an organization engages in, the overall goal is
to create value for the customers or clients..

Business Information Technology alignment is concerned with using information technology to

effectively achieve business goals.

Two of the most common ways that an organization can provide value is by offering a quality
product at a lower price than the competitor or at a high price but with more features that add
value to the customers.

Information technology enables businesses to process and analyze large amounts of data at a
cheaper cost and within the shortest possible time. This enables organizations to provide quality
products at a cheaper price.

Example

A bank can use ATM to allow the clients to withdraw money and other automated means to
deposit money. Customers with queries can be directed to a website that has frequently asked
questions. Both individuals and businesses can view the statements online if they subscribe to
internet banking.

The above IT business practices lead to reduced costs of doing business and creating new
products and services. Reduced cost of doing business enables a bank to reduce the bank
charges, therefore, offering a quality product or service at a cheaper rates.