WEEK FOUR: INFORMATION SYSTEMS IN THE ENTERPRISE

(Chapter 3/Session 2)

Lecture Four Types of Business Information Systems

By the end of this lesson, you should be able to:
i. Evaluate the role played by the major types of systems
in a business and their relationship to each other
ii. Explain how enterprise applications promote busi-
ness process integration and improve organizational per-
formance

iii. Evaluate the benefits and limitations of each type

of business information system

4.1 Types of Business Information Systems

A business or enterprise information system is a collection of hardware, software, data, people

and procedures that are designed to generate information that supports the day-to-day, short-
range, and long-range activities of users in an organization. Organizations and individuals use
different types of systems for different purposes. Components of information systems: people,
equipment, procedures, data. An information system (IS) is any combination of information
technology and people's activities using that technology to support operations, management,
and decision-making. The term is therefore broader than a computer system and is used to refer
not only to the ICT an organization uses, but also to the way in which people interact with this
technology in support of business processes.

As illustrated and described below, the four main types of IS are: TPS, MIS & DSS, and EIS.
Figure 3: A pyramid model of business types of information systems based on the differ-
ent levels in an organization

4.1.1 Transaction Processing Systems (TPS)

A TPS collects and stores information about transactions, and controls some aspects of transac-
tions. A transaction is an event of interest to the organization. E.g. a sale at a store. A transac-
tion processing system is a type of information system. TPSs collect, store, modify, and re-
trieve the transactions of an organization.

A transaction processing system (TPS) is an information system that captures and processes
data generated during an organization’s day-to-day transactions. A transaction is a business
activity such as a deposit, payment, order or reservation.

TPS characteristics:

 is often tied to other systems such as the inventory system which tracks stock sup-
plies and triggers reordering when stocks get low;
 serves the most elementary day-to-day activities of an organization;
 supports the operational level of the business;
 supplies data for higher-level management decisions (e.g. MIS, EIS);
 is often critical to survival of the organization;
 mostly for predefined, structured tasks;
 can have strategic consequences (egg airline reservation system);
 usually has high volumes of input and output;
 provides data which is summarized into information by systems used by higher lev-
els of management;
 Need to be fault-tolerant.

Clerical staff typically perform the activities associated with transaction processing, which
include the following:

1. Recording a business activity such as a student’s registration, a customer’s order, an em-

ployee’s timecard or a client’s payment.
2. Confirming an action or triggering a response, such as printing a student’s schedule, send-
ing a thank-you note to a customer, generating an employee’s paycheck or issuing a receipt to a
client.
3. Maintaining data, which involves adding new data, changing existing data, or removing un-
wanted data.

Transaction processing systems were among the first computerized systems developed to
process business data – a function originally called data processing. Usually, the TPS
computerized an existing manual system to allow for faster processing, reduced clerical costs
and improved customer service.

The first transaction processing systems usually used batch processing. With batch processing,
transaction data is collected over a period of time and all transactions are processed later, as a
group. As computers became more powerful, system developers built online transaction
processing systems. With online transaction processing (OLTP) the computer processes
transactions as they are entered. When you register for classes, your school probably uses
OLTP. On-line transaction processing is therefore a transaction processing mode in which
transactions entered on- line are immediately processed by the CPU.

The registration administrative assistant enters your desired schedule and the computer
immediately prints your statement of classes. The invoices, however, often are printed using
batch processing, meaning all student invoices are printed and mailed at a later date.

Batch processing is alternative approach to OLTP. Today, most transaction processing systems
use online transaction processing. Some routine processing tasks such as calculating paychecks
or printing invoices, however, are performed more effectively on a batch basis. For these
activities, many organizations still use batch processing techniques.
4.1.2 Management information system (MIS):

Condenses and converts TPS data into information for monitoring performance and managing
an organization.

Transactions recorded in a TPS are analyzed and reported by an MIS.

They have large quantities of input data and they produce summary reports as output. Used by
middle managers. An example is an annual budgeting system.

. A management information system, or MIS (pronounced em-eye-ess), is an information

system that generates accurate, timely and organized information so managers and other users
can make decisions, solve problems, supervise activities, and track progress. Because it
generates reports on a regular basis, a management information system sometimes is called a
management reporting system (MRS).

Management information systems often are integrated with transaction processing systems. To
process a sales order, for example, the transaction processing system records the sale, updates
the customer’s account balance, and makes a deduction from inventory. Using this information,
the related management information system can produce reports that recap daily sales activities;
list customers with past due account balances; graph slow or fast selling products; and highlight
inventory items that need reordering. A management information system focuses on generating
information that management and other users need to perform their jobs.

An MIS generates three basic types of information: detailed, summary and exception.
Detailed information typically confirms transaction processing activities. A Detailed Order
Report is an example of a detail report. Summary information consolidates data into a
format that an individual can review quickly and easily. To help synopsize information, a
summary report typically contains totals, tables, or graphs. An Inventory Summary Report is
an example of a summary report.

Exception information filters data to report information that is outside of a normal condition.
These conditions, called the exception criteria, define the range of what is considered normal
activity or status. An example of an exception report is an Inventory Exception Report is an
Inventory Exception Report that notifies the purchasing department of items it needs to reorder.
Exception reports help managers save time because they do not have to search through a
detailed report for exceptions. Instead, an exception report brings exceptions to the manager’s
attention in an easily identifiable form. Exception reports thus help them focus on situations
that require immediate decisions or actions.

Advantages of information management systems (1) The Company is able to highlight their
strength and weaknesses due to the presence of revenue reports, employee performance records
etc. The identification of these aspects can help the company to improve their business pro-
cesses and operations. (2) The availability of the customer data and feedback can help the com-
pany to align their business processes according to the needs of the customers. The effective
management of customer data can help the company to perform direct marketing and promo-
tion activities. (3) Information is considered to be an important asset for any company in the
modern competitive world. The consumer buying trends and behaviors can be predicted by the
analysis of sales and revenue reports from each operating region of the company.

An MIS provides the following advantages.

1. It Facilitates planning: MIS improves the quality of plants by providing relevant information
for sound decision – making. Due to increase in the size and complexity of organizations, man-
agers have lost personal contact with the scene of operations.

2. In Minimizes information overload: MIS change the larger amount of data in to summarized
form and there by avoids the confusion which may arise when managers are flooded with de-
tailed facts.

3. MIS Encourages Decentralization: Decentralization of authority is possibly when there is a

system for monitoring operations at lower levels. MIS is successfully used for measuring per-
formance and making necessary change in the organizational plans and procedures.

4. It brings Co-ordination: MIS facilities integration of specialized activities by keeping each

department aware of the problem and requirements of other departments. It connects all deci-
sion centers in the organization.

5. It makes control easier: MIS serves as a link between managerial planning and control. It im-
proves the ability of management to evaluate and improve performance. The used computers
has increased the data processing and storage capabilities and reduced the cost.

6. MIS assembles, process, stores, Retrieves, evaluates and disseminates the information.

4.1.3 Decision support system (DSS):

Helps strategic management staff (often senior managers) make decisions by providing
information, models, or analysis tools. For support of semi-structured and unstructured
decisions (structured decisions can be automated). Used for analytical work, rather than general
office support.

They are flexible, adaptable and quick. The user controls inputs and outputs. They support the
decision process and often are sophisticated modeling tools so managers can make simulations
and predictions.

Their inputs are aggregate data, and they produce projections. An example job for a DSS would
be a 5 year operating plan.

DSS therefore refers to decision-making activities that supports business or organizational

DSSs serve the management, operations, and planning levels of an organization and help to
make decisions, which may be rapidly changing and not easily specified in advance.

Typical information that a decision support application might gather and present are:

 inventories of information assets (including legacy and relational data sources,

cubes, data warehouses, and data marts),
 comparative sales figures between one period and the next,
 projected revenue figures based on product sales assumptions.
 One example may include a bank loan officer verifying the credit of a loan applicant or an engi-
neering firm that has bids on several projects and wants to know if they can be competitive with
their costs.

DSS is extensively used in business and management. Executive dashboard and other business
performance software allow faster decision making, identification of negative trends, and better
allocation of business resources.

Benefits of DSS

Improves personal efficiency

Speed up the process of decision making
Increases organizational control
Encourages exploration and discovery on the part of the decision maker
Speeds up problem solving in an organization
Facilitates interpersonal communication
Promotes learning or training
Generates new evidence in support of a decision
Creates a competitive advantage over competition
Reveals new approaches to thinking about the problem space
Helps automate managerial processes

4.1.4 Executive information system (EIS):

Also known as an Executive Support System (ESS), it provides executives information in a readily
accessible, interactive format. They are a form of MIS intended for top-level executive use. An
EIS/ESS usually allows summary over the entire organization and also allows drilling down to
specific levels of detail. They also use data produced by the ground-level TPS so the executives can
gain an overview of the entire organization.

Used by top level (strategic) management. They are designed to the individual. They let the CEO of
an organization tie in to all levels of the organization. They are very expensive to run and require
extensive staff support to operate.

An Executive Information System (EIS) is a type of business information system intended to facili-
tate 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 organi-
zation. It is commonly considered as a specialized form of a Decision Support System (DSS)

The emphasis of EIS is on graphical displays and easy-to-use user interfaces. They offer strong re-
porting and drill-down capabilities. In general, EIS are enterprise-wide DSS that help top-level exec-
utives analyze, compare, and highlight trends in important variables so that they can monitor perfor-
mance and identify opportunities and problems. EIS and data warehousing technologies are converg-
ing in the marketplace.

Applications of ESS

EIS enables executives to find those data according to user-defined criteria and promote infor-
mation-based insight and understanding. Unlike a traditional management information system
presentation, EIS can distinguish between vital and seldom-used data, and track different key
critical activities for executives, both which are helpful in evaluating if the company is meeting
its corporate objectives. After realizing its advantages, people have applied EIS in many areas,
especially, in manufacturing, marketing, and finance areas. For instance,

In Marketing -In an organization, marketing executives’ role is to create the future decisions.

Advantages and disadvantages

Advantages of EIS

 Easy for upper-level executives to use, extensive computer experience is not required in
operations
 Provides timely delivery of company summary information
 Information that is provided is better understood
 Filters data for management
 Improves to tracking information
 Offers efficiency to decision makers

Disadvantages of EIS

 System dependent
 Limited functionality, by design
 Information overload for some managers
 Benefits hard to quantify
 High implementation costs
 System may become slow, large, and hard to manage
 Need good internal processes for data management
 May lead to less reliable and less secure data
4.1.5 Others

a) Office automation system (OAS) :

OAS provide individuals with effective ways to process personal and organizational data,
perform calculations, and create documents. E.g. word processing, spreadsheets, file managers,
personal calendars, presentation packages

They are used for increasing personal productivity and reducing "paper warfare". OAS software
tools are often integrated (e.g. Word processor can import a graph from a spreadsheet) and
designed for easy operation.

OAS Sub-systems:

Communication systems: helps people work together by sharing information in many

different forms

Teleconferencing (including audio conferencing, computer conferencing,

videoconferencing), electronic mail, voice mail, fax

Groupware system: helps teams work together by providing access to team data,
structuring communication, and making it easier to schedule meetings. For sharing
information, controlling work flows, communication/integration of work

Table 1: Characteristics of information processing system

b) Expert Systems

An expert system is an information system that captures and stores the knowledge of
human experts and then imitates human reasoning and decision-making processes for
those who have less expertise. Expert systems are composed of two main components: a
knowledge base and inference rules. A knowledge base is the combined subject
knowledge and experiences of the human experts. The inference rules are a set of logical
judgments applied to the knowledge base each time a user describes a situation to the
expert system.

Although expert systems can help decision-making at any level in an organization, non-
management employees are the primary users who utilize them to help with job-related
decisions. Expert systems also successfully have resolved such diverse problems as
diagnosing illnesses, searching for oil and making soup.

Expert systems are one part of an exciting branch of computer science called artificial
intelligence. Artificial intelligence (AI) is the application of human intelligence to
computers. AI technology can sense your actions and, based on logical assumptions and
prior experience, will take the appropriate action to complete the task. AI has a variety of
capabilities, including speech recognition, logical reasoning, and creative responses.

Experts predict that AI eventually will be incorporated into most computer systems and
many individual software applications. Many word processing programs already include
speech recognition.

c) ENTERPRISE RESOURCE PLANNING

Enterprise resource planning (ERP) integrates internal and external management infor-
mation across an entire organization, embracing finance/accounting, manufacturing, sales
and service, human resources, etc. ERP systems automate this activity with an inte-
grated software application. Its purpose is to facilitate the flow of information between
all business functions inside the boundaries of the organization and manage the con-
nections to outside stakeholders.

ERP systems can run on a variety of hardware and network configurations, typically em-
ploying a database to store data.

ERP systems typically include the following characteristics:

 An integrated system that operates in real time (or next to real time), without relying on
periodic updates.
 A common database, which supports all applications.

 A consistent look and feel throughout each module.

 Installation of the system without elaborate application/data integration by the Informa-
tion Technology (IT) department
Advantages

The fundamental advantage of ERP is that integrating the myriad processes by which
businesses operate saves time and expense. Decisions can be made more quickly and with
fewer errors. Data becomes visible across the organization. Tasks that benefit from this in-
tegration include:

 Sales forecasting, which allows inventory optimization

 Order tracking, from acceptance through fulfillment
 Revenue tracking, from invoice through cash receipt
 Matching purchase orders (what was ordered), inventory receipts (what arrived),
and costing (what the vendor invoiced)

ERP systems centralize business data, bringing the following benefits:

 They eliminate the need to synchronize changes between multiple systems—consolida-

tion of finance, marketing and sales, human resource, and manufacturing applications
 They enable standard product naming/coding.

 They provide a comprehensive enterprise view (no "islands of information"). They

make real–time information available to management anywhere, anytime to make proper
decisions.
 They protect sensitive data by consolidating multiple security systems into a single
structure.

Disadvantages

 Customization is problematic.
 Re–engineering business processes to fit the ERP system may damage competitiveness
and/or divert focus from other critical activities
 ERP can cost more than less integrated and/or less comprehensive solutions.
 High switching costs increase vendor negotiating power Vis a Vis support, maintenance
and upgrade expenses.
Overcoming resistance to sharing sensitive information between departments can divert
management attention.
 Integration of truly independent businesses can create unnecessary dependencies.

Extensive training requirements consumes resources

4.2 Relationship between the major types of Business information systems

TPS are typically a major source of data for other systems, whereas ESS are primarily a
recipient of data from lower—level systems. The other types of systems may exchange
data with each other as well. Data may also be exchanged among systems serving
different functional areas. For example, an order captured by a sales system may be
transmitted to a manufacturing system as a transaction for producing or delivering the
product specified in the order or to a MIS for financial reporting. It is definitely
advantageous to integrate these systems so that information can flow easily between
different parts of the organization and provide management with an enterprise- wide view
of how the organization is performing as a whole. But integration costs money, and
integrating many different systems is extremely time consuming and complex. This is a
major challenge for large organizations, which are typically saddled with hundreds, even
thousands of different applications serving different levels and business functions. Each
organization must weigh its needs for integrating systems against the difficulties of
mounting a large-scale systems integration effort.
Figure 4: Interrelationships among systems

4.3 Management Opportunities, Challenges, and Solutions

None of these enterprise systems are without their opportunities and challenges.
Briefly, the opportunities are:

 Higher levels of productivity, earnings, and share prices

 Enhanced decision-making at all levels of the organization
 Information when and where necessary

The challenges are:

 Integrating the system throughout the organization and yet serving specific
needs
 Training managers and employees
 Managing the costs of information
 Managing user demands on the system

The solutions are:

 Determine specific information requirements and which of the requirements

are being met by current systems
 Pay attention to the training needs of managers and employees — allocate the
necessary funds to ensure training needs are adequately met
 Ensure each division is charged for all the information services they use and
make the division managers responsible for managing the resource the same as they
must manage all their other resources
Further Reading:
Laudon K, Laudon J, Management Information Systems,
Managing the digital firm (Ninth Edition) page 40-65

Self-Assessment Questions (These questions are meant

to aid the learner in revision of the session lesson):
1. Which of the four major types of information sys-
tems do you think is the most fundamental
2. Explain the relationship between MIS and TPS
3. Examine the benefits of DSS in the context large
enterprises
4. Evaluate the value and limitations of MIS in fa-
cilitating achievement of business strategic objectives
5. Discuss other types of systems that can support
organizations to benefit from the main enterprise systems