Final Project topic

timer Asked: Sep 6th, 2018
account_balance_wallet $5

Question description


professor requires a topic for the individual project of 10-15 pages paper.

The paper can be based on any of the topics listed in any of the lectures below or relevant topics in management of information systems, information security, leadership, team communication.

Please take a glance of all the chapters in the book and figure out a topic for the paper! thank you

Management Information Systems Managing the Digital Firm FOURTEENTH Edition Kenneth C. Laudon New York University Jane P. Laudon Azimuth Information Systems Boston Columbus Indianapolis New York San Francisco Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor-in-Chief: Stephanie Wall Acquisitions Editor: Nicole Sam Program Manager Team Lead: Ashley Santora Program Manager: Denise Vaughn Editorial Assistant: Daniel Petrino Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Executive Product Marketing Manager: Anne Fahlgren Field Marketing Manager: Lenny Ann Raper Senior Strategic Marketing Manager: Erin Gardner Project Manager Team Lead: Judy Leale Project Manager: Karalyn Holland Operations Specialist: Diane Peirano Creative Director: Blair Brown Senior Art Director: Janet Slowik Cover Designer: Integra Software Services, Inc. Cover Image: Jumpeestudio/Fotolia Vice President, Director of Digital Strategy & Assessment: Paul Gentile Manager of Learning Applications: Paul Deluca Digital Editor: Brian Surette Digital Studio Manager: Diane Lombardo Digital Studio Project Manager: Robin Lazrus Digital Studio Project Manager: Alana Coles Digital Studio Project Manager: Monique Lawrence Digital Studio Project Manager: Regina DaSilva Full-Service Project Management and Composition: Azimuth Interactive, Inc. Printer/Binder: RR Donnelly/Roanoke Cover Printer: Phoenix Color/Hagerstown Text Font: 10.5/13 ITC Veljovic Std Book Microsoft and/or its respective suppliers make no representations about the suitability of the ­information contained in the ­documents and related graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. 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Partial screen shots may be viewed in full within the ­software version specified. Microsoft® Windows®, and Microsoft Office® are registered trademarks of Microsoft Corporation in the U.S.A. and other ­countries. This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation. Copyright © 2016, 2014, 2012 by Pearson Education, Inc., All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any ­prohibited reproduction, storage in a retrieval system, or ­transmission in any form or by any means, electronic, mechanical, photocopying, recording, or ­likewise. For information regarding permissions, request forms and the appropriate contacts within the Pearson Education Global Rights & Permissions Department, please visit Acknowledgments of third-party content appear on the appropriate page within the text, which ­constitutes an extension of this copyright page. Unless otherwise indicated herein, any third-party trademarks that may appear in this work are the property of their respective owners and any references to third-party trademarks, logos or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s ­products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc. or its affiliates, authors, licensees or distributors. Library of Congress Cataloging-in-Publication Information is available. 10 9 8 7 6 5 4 3 2 1 ISBN-13: 978-0-13-389816-3 ISBN-10: 0-13-389816-4 About the Authors Kenneth C. Laudon is a Professor of Information Systems at New York University’s Stern School of Business. He holds a B.A. in Economics from Stanford and a Ph.D. from Columbia University. He has authored twelve books dealing with electronic commerce, information systems, organizations, and society. Professor Laudon has also written over forty articles concerned with the social, organizational, and management impacts of information systems, privacy, ethics, and multimedia technology. Professor Laudon’s current research is on the planning and management of large-scale information systems and multimedia information technology. He has received grants from the National Science Foundation to study the evolution of national information s­ ystems at the Social Security Administration, the IRS, and the FBI. Ken’s research focuses on ­enterprise system implementation, computer-related organizational and occupational changes in large organizations, changes in management ideology, changes in public policy, and ­understanding productivity change in the knowledge sector. Ken Laudon has testified as an expert before the United States Congress. He has been a researcher and consultant to the Office of Technology Assessment (United States Congress), Department of Homeland Security, and to the Office of the President, several executive branch agencies, and Congressional Committees. Professor Laudon also acts as an in-house educator for several consulting firms and as a consultant on systems planning and strategy to several Fortune 500 firms. At NYU’s Stern School of Business, Ken Laudon teaches courses on Managing the Digital Firm, Information Technology and Corporate Strategy, Professional Responsibility (Ethics), and Electronic Commerce and Digital Markets. Ken Laudon’s hobby is sailing. Jane Price Laudon is a management consultant in the information systems area and the  author of seven books. Her special interests include systems analysis, data management, MIS auditing, software evaluation, and teaching business professionals how to design and use information systems. Jane received her Ph.D. from Columbia University, her M.A. from Harvard University, and her B.A. from Barnard College. She has taught at Columbia University and the New York University Graduate School of Business. She maintains a lifelong interest in Oriental languages and civilizations. The Laudons have two daughters, Erica and Elisabeth, to whom this book is dedicated. iii Brief Contents Part One Organizations, Management, and the Networked Enterprise  1 Chapter 1 Chapter 2 Chapter 3 Chapter 4 Information Systems in Global Business Today  2 Part Two Information Technology Infrastructure  165 Chapter 5 Chapter 6 IT Infrastructure and Emerging Technologies  166 Chapter 7 Chapter 8 Telecommunications, the Internet, and Wireless Technology  254 Part Three Key System Applications for the Digital Age  345 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications  346 Chapter 10 Chapter 11 Chapter 12 E-Commerce: Digital Markets, Digital Goods  380 Part Four Building and Managing Systems  499 Chapter 13 Chapter 14 Chapter 15 Building Information Systems  500 Glossary G 1 Indexes I 1 iv Global E-Business and Collaboration  40 Information Systems, Organizations, and Strategy  78 Ethical and Social Issues in Information Systems  122 Foundations of Business Intelligence: Databases and Information Management  214 Securing Information Systems  302 Managing Knowledge  426 Enhancing Decision Making  464 Managing Projects  540 Managing Global Systems  574 Complete Contents Part One Organizations, Management, and the Networked Enterprise  1 Chapter 1 Information Systems in Global Business Today  2  ◆Opening ◆ Case: T  he San Francisco Giants Win Big with Information Technology  3 1.1 How are information systems transforming business, and why are they so essential for running and managing a business today?  5 How Information Systems are Transforming Business  5 • What’s New In Management Information Systems?  7 • Globalization Challenges and Opportunities: A Flattened World  8 ◆Interactive ◆ Session: Management Meet the New Mobile Workers  9 The Emerging Digital Firm  12 • Strategic Business Objectives of Information Systems  12 1.2 What is an information system? How does it work? What are its management, organization, and technology components and why are complementary assets essential for ensuring that information systems provide genuine value for an organization?  16 What is an Information System?  16 • Dimensions of Information Systems  18 ◆Interactive ◆ Session: Technology UPS Competes Globally with Information Technology  23 It Isn’t Just Technology: A Business Perspective on Information Systems  25 • Complementary Assets: Organizational Capital and the Right Business Model  26 1.3 What academic disciplines are used to study information systems and how does each contribute to an understanding of information systems?  29 Technical Approach  29 • Behavioral Approach  30 • Approach of This Text: Sociotechnical Systems  30 Review Summary  32 • Key Terms  33 • Review Questions  33 • Discussion Questions  34 Hands-On MIS Projects  34 Management Decision Problems  34 • Improving Decision Making: Using Databases to Analyze Sales Trends  34 • Improving Decision Making: Using the Internet to Locate Jobs Requiring Information Systems Knowledge  35 Collaboration and Teamwork:  35 ◆Case ◆ Study: Home Depot Renovates Itself with New Systems and Ways of Working  35 ◆References: ◆ 39 v vi Contents Chapter 2 Global E-Business and Collaboration  40 ◆Opening ◆ Case: Social Networking takes off at Kluwer  41 2.1 What are business processes? How are they related to information systems?  43 Business Processes  43 • How Information Technology Enhances Business Processes  45 2.2 How do systems serve the different management groups in a business and how do systems that link the enterprise improve organizational performance?  45 Systems for Different Management Groups  46 ◆Interactive ◆ Session: Technology Vail Ski Resorts Goes High-Tech for High Touch  50 Systems for Linking the Enterprise  53 • E-business, E-commerce, and E-government  55 2.3 Why are systems for collaboration and social business so important and what technologies do they use?  56 What is Collaboration?  56 • What is Social Business?  57 • Business Benefits of Collaboration and Social Business  58 • Building a Collaborative Culture and Business Processes  59 • Tools and Technologies for Collaboration and Social Business  60 ◆Interactive ◆ Session: Management Is Social Business Working Out?  65 2.4 What is the role of the information systems function in a business?  67 The Information Systems Department  67 • Organizing the Information Systems Function  68 Review Summary  69 • Key Terms  70 • Review Questions  70 • Discussion Questions  71 Hands-On MIS Projects  71 Management Decision Problems  71 • Improving Decision Making: Using a Spreadsheet to Select Suppliers  72 • Achieving Operational Excellence: Using Internet Software to Plan Efficient Transportation Routes 72 Collaboration and Teamwork:  72 ◆Case ◆ Study: Should a Computer Grade Your Essays?  73 ◆References: ◆ 76 Chapter 3 Information Systems, Organizations, and Strategy  78 ◆Opening ◆ Case: Should T.J. Maxx Sell Online?  79 3.1 Which features of organizations do managers need to know about to build and use information systems successfully?  81 What is an Organization?  82 • Features of Organizations  84 3.2 What is the impact of information systems on organizations?  89 Economic Impacts  89 • Organizational and Behavioral Impacts  90 • The Internet and Organizations  92 • Implications for the Design and Understanding of Information Systems  93 3.3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?  94 Contentsvii Porter’s Competitive Forces Model  94 • Information System Strategies for Dealing with Competitive Forces  96 ◆Interactive ◆ Session: Technology Nike Becomes a Technology Company  98 The Internet’s Impact on Competitive Advantage  100 ◆Interactive ◆ Session: Organizations Identifying Market Niches in the Age of Big Data  101 The Business Value Chain Model  103 • Synergies, Core Competencies, and Network-Based Strategies  106 3.4 What are the challenges posed by strategic information systems and how should they be addressed?  110 Sustaining Competitive Advantage  110 • Aligning IT with Business Objectives  111 • Managing Strategic Transitions  112 Review Summary  112 • Key Terms  113 • Review Questions  113 • Discussion Questions  114 Hands-On MIS Projects  114 Management Decision Problems  114 • Improving Decision Making: Using a Database to Clarify Business Strategy  115 • Improving Decision Making: Using Web Tools to Configure and Price an Automobile 115 Collaboration and Teamwork:  115 ◆Case ◆ Study: Who’s The World’s Top Retailer? Walmart and Amazon Duke It Out  116 ◆References: ◆ 119 Chapter 4 Ethical and Social Issues in Information Systems  122 ◆Opening ◆ Case: Content Pirates Sail the Web  123 4.1 What ethical, social, and political issues are raised by information systems?  125 A Model for Thinking About Ethical, Social, and Political Issues  127 • Five Moral Dimensions of the Information Age  128 • Key Technology Trends That Raise Ethical Issues  128 4.2 What specific principles for conduct can be used to guide ethical decisions?  131 Basic Concepts: Responsibility, Accountability, and Liability  131 ◆Interactive ◆ Session: Management Edward Snowden: Traitor or Protector of Privacy?  132 Ethical Analysis  134 • Candidate Ethical Principles  134 • Professional Codes of Conduct  135 • Some Real-World Ethical Dilemmas  135 4.3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?  136 Information Rights: Privacy and Freedom in the Internet Age  136 • ◆Interactive ◆ Session: Technology Big Data Gets Personal: Behavioral Targeting  141 Property Rights: Intellectual Property  144 4.4 How have information systems affected laws for establishing accountability, liability, and the quality of everyday life?   148 viii Contents Computer-Related Liability Problems  148 • System Quality: Data Quality and System Errors  149 • Quality of Life: Equity, Access, and Boundaries  150 Review Summary  157 • Key Terms  157 • Review Questions  158 • Discussion Questions  158 Hands-On MIS Projects  159 Management Decision Problems  159 • Achieving Operational Excellence: Creating a Simple Blog  159 • Improving Decision Making: Analyzing Web Browser Privacy  159 Collaboration and Teamwork:  160 ◆Case ◆ Study: Facebook Privacy: There Is No Privacy  160 ◆◆References: 164 Part Two Information Technology Infrastructure  165 Chapter 5 IT Infrastructure and Emerging Technologies  166 ◆Opening ◆ Case: Portugal Telecom Offers IT Infrastructure for Sale  167 5.1 What is IT infrastructure and what are the stages and drivers of IT infrastructure evolution?  169 Defining IT Infrastructure  170 • Evolution of IT Infrastructure  171 • Technology Drivers of Infrastructure Evolution  175 5.2 What are the components of IT infrastructure?  180 Computer Hardware Platforms  180 • Operating System Platforms  182 • Enterprise Software Applications  183 • Data Management and Storage  183 • Networking/Telecommunications Platforms  184 • Internet Platforms  184 • Consulting and System Integration Services  184 5.3 What are the current trends in computer hardware platforms?  185 The Mobile Digital Platform  185 • Consumerization of IT and BYOD  185 • ◆Interactive ◆ Session: Technology Wearable Computers Go to Work  186 Quantum Computing  188 • Virtualization  188 • Cloud Computing  188 ◆Interactive ◆ Session: Organizations Is It Time for Cloud Computing?  191 Green Computing  193 • High-Performance and Power-Saving Processors  193 5.4 What are the current trends in computer software platforms?  194 Linux and Open Source Software  194 • Software for the Web: Java, HTML, and HTML5  194 • Web Services and Service-Oriented Architecture  195 • Software Outsourcing and Cloud Services  197 5.5 What are the challenges of managing IT infrastructure and management solutions?  200 Contentsix Dealing with Platform and Infrastructure Change  200 • Management and Governance  201 • Making Wise Infrastructure Investments  201 Review Summary  204 • Key Terms  205 • Review Questions  206 • Discussion Questions  206 Hands-On MIS Projects  207 Management Decision Problems  207 • Improving Decision Making: Using a Spreadsheet to Evaluate Hardware and Software Options  207 • Improving Decision Making: Using Web Research to Budget for a Sales Conference  207 Collaboration and Teamwork:  208 ◆Case ◆ Study: The Pleasures and Pitfalls of BYOD  209 ◆References: ◆ 212 Chapter 6 Foundations of Business Intelligence: Databases and Information Management  214 ◆Opening ◆ Case: Better Data Management Helps the Toronto Globe and Mail Reach Its Customers  215 6.1 What are the problems of managing data resources in a traditional file environment?  218 File Organization Concepts  218 • Problems with the Traditional File Environment  218 6.2 What are the major capabilities of database management systems (DBMS) and why is a relational DBMS so powerful?  221 Database Management Systems  221 • Capabilities of Database Management Systems  226 • Designing Databases  227 6.3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?  230 The Challenge of Big Data  230 • Business Intelligence Infrastructure  231 ◆Interactive ◆ Session: Technology Driving ARI Fleet Management with Real-Time Analytics  233 Analytical Tools: Relationships, Patterns, Trends  235 • Databases and the Web  238 6.4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?  240 Establishing an Information Policy  240 • Ensuring Data Quality  241 ◆Interactive ◆ Session: Management American Water Keeps Data Flowing  243 Review Summary  244 • Key Terms  245 • Review Questions  246 • Discussion Questions  247 Hands-On MIS Projects  247 Management Decision Problems  247 • Achieving Operational Excellence: Building a Relational Database for Inventory Management  247 • Improving Decision Making: Searching Online Databases for Overseas Business Resources  248 Collaboration and Teamwork:  248 ◆Case ◆ Study: Does Big Data Bring Big Rewards?  249 ◆References: ◆ 252 x Contents Chapter 7 Telecommunications, the Internet, and Wireless Technology  254 ◆Opening ◆ Case: Wireless Technology Makes Dundee Precious Metals Good as Gold  255 7.1 What are the principal components of telecommunications networks and key networking technologies?  257 Networking and Communication Trends  257 • What is a Computer Network?  258 • Key Digital Networking Technologies  260 7.2 What are the different types of networks?  263 Signals: Digital vs. Analog  263 • Types of Networks  264 • Transmission Media and Transmission Speed  265 7.3 How do the Internet and Internet technology work and how do they support communication and e-business?  266 What Is the Internet?  266 • Internet Addressing and Architecture  267 • ◆Interactive ◆ Session: Organizations The Battle Over Net Neutrality  270 Internet Services and Communication Tools  272 ◆Interactive ◆ Session: Management Monitoring Employees on Networks: Unethical or Good Business?  275 The Web  277 7.4 What are the principal technologies and standards for wireless networking, communication, and Internet access?  286 Cellular Systems  287 • Wireless Computer Networks and Internet Access  287 • RFID and Wireless Sensor Networks  290 Review Summary  293 • Key Terms  294 • Review Questions  294 • Discussion Questions  295 Hands-On MIS Projects  295 Management Decision Problems  295 • Improving Decision Making: Using Spreadsheet Software to Evaluate Wireless Services  295 • Achieving Operational Excellence: Using Web Search Engines for Business Research  296 Collaboration and Teamwork:  296 ◆Case ◆ Study: Google, Apple, and Facebook Struggle for Your Internet Experience  297 ◆References: ◆ 300 Chapter 8 Securing Information Systems  302 ◆Opening ◆ Case: The 21st Century Bank Heist  303 8.1 Why are information systems vulnerable to destruction, error, and abuse?  305 Why Systems Are Vulnerable  306 • Malicious Software: Viruses, Worms, Trojan Horses, and Spyware  308 • Hackers and Computer Crime  311 ◆Interactive ◆ Session: Management Target Becomes the Target for Massive Data Theft  315 Internal Threats: Employees  317 • Software Vulnerability  317 Contentsxi 8.2 What is the business value of security and control?  318 Legal and Regulatory Requirements for Electronic Records Management  319 • Electronic Evidence and Computer Forensics  320 8.3 What are the components of an organizational framework for security and control?  321 Information Systems Controls  321 • Risk Assessment  322 • Security Policy  323 • Disaster Recovery Planning and Business Continuity Planning  324 • The Role of Auditing  325 8.4 What are the most important tools and technologies for safeguarding information resources?  325 Identity Management and Authentication  325 • Firewalls, Intrusion Detection Systems, and Antivirus Software  327 • Securing Wireless Networks  330 • Encryption and Public Key Infrastructure  330 • Ensuring System Availability  332 • Security Issues for Cloud Computing and the Mobile Digital Platform  333 • Ensuring Software Quality  334 ◆Interactive ◆ Session: Technology BYOD: It’s Not So Safe  335 Review Summary  337 • Key Terms  337 • Review Questions  338 • Discussion Questions  339 Hands-On MIS Projects  339 Management Decision Problems  339 • Improving Decision Making: Using Spreadsheet Software to Perform a Security Risk Assessment  340 • Improving Decision Making: Evaluating Security Outsourcing Services  340 Collaboration and Teamwork:  340 ◆Case ◆ Study: The Looming Threat of Cyberwarfare  341 ◆References: ◆ 344 Part Three Key System Applications for the Digital Age  345 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 346 ◆Opening ◆ Case: ACH Food Companies Transforms Its Business with Enterprise Systems  347 9.1 How do enterprise systems help businesses achieve operational excellence?  349 What Are Enterprise Systems?  350 • Enterprise Software  351 • Business Value of Enterprise Systems  352 9.2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?  353 The Supply Chain  353 • Information and Supply Chain Management  354 • Supply Chain Management Software  355 ◆Interactive ◆ Session: Management Scotts Miracle-Gro Cultivates Supply Chain Proficiency  357 Global Supply Chains and the Internet  359 • Business Value of Supply Chain Management Systems  360 xii Contents 9.3 How do customer relationship management systems help firms achieve customer intimacy?  361 What is Customer Relationship Management?  362 • Customer Relationship Management Software  362 • Operational and Analytical CRM  366 • Business Value of Customer Relationship Management Systems  367 9.4 What are the challenges posed by enterprise applications and how are enterprise applications taking advantage of new technologies?  367 ◆Interactive ◆ Session: Organizations Graybar Goes for Customer Analytics  368 Enterprise Application Challenges  369 • Next Generation Enterprise Applications  371 Review Summary  372 • Key Terms  373 • Review Questions  373 • Discussion Questions  374 Hands-On MIS Projects  374 Management Decision Problems  374 • Improving Decision Making: Using Database Software to Manage Customer Service Requests  375 • Achieving Operational Excellence: Evaluating Supply Chain Management Services  375 Collaboration and Teamwork:  375 ◆Case ◆ Study: Vodafone: A Giant Global ERP Implementation  376 ◆References: ◆ 378 Chapter 10 E-Commerce: Digital Markets, Digital Goods  380 ◆Opening ◆ Case: Pinterest: How Much Is a Picture Worth? 381 10.1 What are the unique features of e-commerce, digital markets, and digital goods?  383 E-Commerce Today  384 • The New E-Commerce: Social, Mobile, Local  385 • Why E-Commerce Is Different  387 • Key Concepts in E-Commerce: Digital Markets and Digital Goods in a Global Marketplace  390 10.2 What are the principal e-commerce business and revenue models?  394 Types of E-commerce  394 • E-commerce Business Models  394 • E-Commerce Revenue Models  397 10.3 How has e-commerce transformed marketing?  399 ◆Interactive ◆ Session: Organizations Can Pandora Succeed with Freemium?  400 Behavioral Targeting  402 • Social E-commerce and Social Network Marketing  405 10.4 How has e-commerce affected business-to-business transactions?  408 Electronic Data Interchange (EDI)  409 • New Ways of B2B Buying and Selling  410 10.5 What is the role of m-commerce in business and what are the most important m-commerce applications?  412 Location-based Services and Applications  412 ◆Interactive ◆ Session: Technology Will Mobile Technology Put Orbitz in the Lead?  414 Other mobile commerce services  415 Contentsxiii 10.6 What issues must be addressed when building an e-commerce presence?  416 Develop an E-commerce Presence Map  416 • Develop a Timeline: Milestones  417 Review Summary  418 • Key Terms  419 • Review Questions  420 • Discussion Questions  420 Hands-On MIS Projects  420 Management Decision Problems  420 • Improving Decision Making: Using Spreadsheet Software to Analyze a Dot-Com Business  421 • Achieving Operational Excellence: Evaluating E-Commerce Hosting Services  421 Collaboration and Teamwork:  421 ◆Case ◆ Study: Cultivating Customers the Social Way  422 ◆References: ◆ 425 Chapter 11 Managing Knowledge  426 ◆Opening ◆ Case: Jaguar Land Rover Transforms with New Design and Manufacturing Technology  427 11.1 What is the role of knowledge management systems in business?  429 Important Dimensions of Knowledge  430 • The Knowledge Management Value Chain  431 • Types of Knowledge Management Systems  434 11.2 What types of systems are used for enterprise-wide knowledge management and how do they provide value for businesses?  435 Enterprise Content Management Systems  435 • Locating and Sharing Expertise  437 • Learning Management Systems  437 11.3 What are the major types of knowledge work systems and how do they provide value for firms?  438 Knowledge Workers and Knowledge Work  438 • Requirements of Knowledge Work Systems  438 • Examples of Knowledge Work Systems  439 ◆Interactive ◆ Session: Technology Is 3-D Printing a Game-Changer?  440 11.4 What are the business benefits of using intelligent techniques for knowledge management?  442 Capturing Knowledge: Expert Systems  443 • Organizational Intelligence: Case-Based Reasoning  446 • Fuzzy Logic Systems  446 • Machine Learning  448 ◆Interactive ◆ Session: Organizations Facial Recognition Systems: Another Threat to Privacy?  451 Intelligent Agents  453 • Hybrid AI Systems  455 Review Summary  455 • Key Terms  456 • Review Questions  456 • Discussion Questions  457 Hands-On MIS Projects  457 Management Decision Problems  457 • Improving Decision Making: Building a Simple Expert System for Retirement Planning  458 • Improving Decision Making: Using Intelligent Agents for Comparison Shopping  458 Collaboration and Teamwork:  458 ◆Case ◆ Study: What’s Up with IBM’s Watson?  459 ◆References: ◆ 462 xiv Contents Chapter 12 Enhancing Decision Making  464 ◆Opening ◆ Case: Germany Wins the World Cup with Big Data at its Side  465 12.1 What are the different types of decisions and how does the decision-making process work? How do information systems support the activities of managers and management decision making?  467 Business Value of Improved Decision Making  468 • Types of Decisions  468 • The Decision-Making Process  470 • Managers and Decision Making in the Real World  471 • High-Velocity Automated Decision Making  474 12.2 How do business intelligence and business analytics support decision making?  474 What is Business Intelligence?  475 • The Business Intelligence Environment  475 • Business Intelligence and Analytics Capabilities  477 • ◆Interactive ◆ Session: Technology Big Data Make Cities Smarter  480 ◆Interactive ◆ Session: Management America’s Cup: The Tension between Technology and Human Decision Makers  483 Management Strategies for Developing BI and BA Capabilities  485 12.3 How do different decision-making constituencies in an organization use business intelligence? What is the role of information systems in helping people working in a group make decisions more efficiently?  486 Decision Support for Operational and Middle Management  486 • Decision Support for Senior Management: Balanced Scorecard and Enterprise Performance Management Methods  488 • Group Decision-Support Systems (GDSS)  490 Review Summary  491 • Key Terms  492 • Review Questions  492 • Discussion Questions  493 Hands-On MIS Projects  493 Management Decision Problems  493 • Improving Decision Making: Using Pivot Tables to Analyze Sales Data  493 • Improving Decision Making: Using a Web-Based DSS for Retirement Planning  494 Collaboration and Teamwork:  494 ◆Case ◆ Study: How Much Does Data-Driven Planting Help Farmers?  495 ◆References: ◆ 498 Part Four Building and Managing Systems  499 Chapter 13 Building Information Systems  500 ◆Opening ◆ Case: New Systems Help Work Flow More Smoothly at Moen  501 13.1 How does building new systems produce organizational change?  503 Systems Development and Organizational Change 503 • Business Process Redesign  505 13.2 What are the core activities in the systems development process?  509 Systems Analysis  509 ◆Interactive ◆ Session: Organizations Datacard Group Redesigns the Way It Works  510 Systems Design  512 • Completing the Systems Development Process  513 Contentsxv 13.3 What are the principal methodologies for modeling and designing systems?  515 Structured Methodologies  515 • Object-Oriented Development  518 • Computer-Aided Software Engineering  519 13.4 What are alternative methods for building information systems?  520 Traditional Systems Life Cycle  520 • Prototyping  521 • End-User Development  523 • Application Software Packages and Outsourcing  524 13.5 What are new approaches for system building in the digital firm era?  526 Rapid Application Development (RAD)  527 • Component-Based Development and Web Services  527 • Mobile Application Development: Designing for a Multi-Screen World  528 ◆Interactive ◆ Session: Technology The Challenge of Mobile Application Development  530 Review Summary  532 • Key Terms  533 • Review Questions  533 • Discussion Questions  534 Hands-On MIS Projects  534 Management Decision Problems  534 • Improving Decision Making: Using Database Software to Design a Customer System for Auto Sales  535 • Achieving Operational Excellence: Analyzing Web Site Design and Information Requirements  536 Collaboration and Teamwork:  536 ◆Case ◆ Study: SourceGas Goes for Better Workforce Scheduling Systems  536 ◆References: ◆ 539 Chapter 14 Managing Projects  540 ◆Opening ◆ Case: Harrah’s Cherokee Casino Wins with Sound Project Management  541 14.1 What are the objectives of project management and why is it so essential in developing information systems?  543 Runaway Projects and System Failure  543 ◆Interactive ◆ Session: Management New York’s CityTime: An IS Project Goes Awry  545 Project Management Objectives  546 ◆Interactive ◆ Session: Organizations Britain’s National Health Service Jettisons Choose and Book System  547 14.2 What methods can be used for selecting and evaluating information systems projects and aligning them with the firm’s business goals?  549 Management Structure for Information Systems Projects  549 • Linking Systems Projects to the Business Plan  550 • Information Requirements and Key Performance Indicators  552 • Portfolio Analysis  552 • Scoring Models  552 14.3 How can firms assess the business value of information systems?  553 Information System Cost and Benefits  553 • Real Options Pricing Models  556 • Limitations of Financial Models  557 14.4 What are the principal risk factors in information systems projects, and how can they be managed?  557 xvi Contents Dimensions of Project Risk  557 • Change Management and the Concept of Implementation  558 • Controlling Risk Factors  560 • Designing for the Organization  563 • Project Management Software Tools  564 Review Summary  565 • Key Terms  566 • Review Questions  566 • Discussion Questions  567 Hands-On MIS Projects  567 Management Decision Problems  567 • Improving Decision Making: Using Spreadsheet Software for Capital Budgeting for a New CAD System  568 • Improving Decision Making: Using Web Tools for Buying and Financing a Home  568 Collaboration and Teamwork:  568 ◆Case ◆ Study: A Shaky Start for Healthcare.Gov  569 ◆References: ◆ 572 Chapter 15 Managing Global Systems  574 ◆Opening ◆ Case: New Systems Help Fiat Become a Global Powerhouse  575 15.1 What major factors are driving the internationalization of business?  577 Developing an International Information Systems Architecture  578 • The Global Environment: Business Drivers and Challenges  579 • State of the Art  582 15.2 What are the alternative strategies for developing global businesses?  583 Global Strategies and Business Organization  583 • Global Systems to Fit the Strategy  584 • Reorganizing the Business  585 15.3 What are the challenges posed by global information systems and management solutions for these challenges?  586 A Typical Scenario: Disorganization on a Global Scale  586 • Global Systems Strategy  587 • The Management Solution: Implementation  590 15.4 What are the issues and technical alternatives to be considered when developing international information systems?  591 Computing Platforms and Systems Integration  591 • Connectivity  592 • Software Localization  593 ◆Interactive ◆ Session: Organizations E-Commerce Russian-Style  594 ◆Interactive ◆ Session: Management South Korea’s Restricted Internet  596 Review Summary  597 • Key Terms  598 • Review Questions  598 • Discussion Questions  599 Hands-On MIS Projects  599 Management Decision Problems  599 • Achieving Operational Excellence: Building a Job Database and Web Page for an International Consulting Firm  600 • Improving Decision Making: Conducting International Marketing and Pricing Research  600 Collaboration and Teamwork:  600 ◆Case ◆ Study: Unilever’s Push Toward Unified Global Systems  601 ◆References: ◆ 604 Glossary G 1 Indexes I1 This page intentionally left blank Business Cases and interactive sessions Here are some of the business firms you will find described in the cases and Interactive Sessions of this book: Chapter 1: Information Systems in Global Business Today The San Francisco Giants Win Big with Information Technology Meet the New Mobile Workers UPS Competes Globally with Information Technology Home Depot Renovates Itself with New Systems and Ways of Working Chapter 2: Global E-Business and Collaboration Social Networking Takes Off at Kluwer Vail Ski Resorts Goes High-Tech for High Touch Is Social Business Working Out? Should a Computer Grade Your Essays? Chapter 3: Information Systems, Organizations, and Strategy Should T.J. Maxx Sell Online? Nike Becomes a Technology Company Identifying Market Niches in the Age of Big Data Who’s The World’s Top Retailer? Walmart and Amazon Duke It Out Chapter 4: Ethical and Social Issues in Information Systems Content Pirates Sail the Web Edward Snowden: Traitor or Protector of Privacy? Big Data Gets Personal: Behavioral Targeting Facebook Privacy: There Is No Privacy Chapter 5: IT Infrastructure and Emerging Technologies Portugal Telecom Offers IT Infrastructure for Sale Wearable Computers Go to Work Is It Time for Cloud Computing? The Pleasures and Pitfalls of BYOD Chapter 6: Foundations of Business Intelligence: Databases and Information Management Better Data Management Helps the Toronto Globe and Mail Reach Its Customers Driving ARI Fleet Management with Real-Time Analytics American Water Keeps Data Flowing Does Big Data Bring Big Rewards? Chapter 7: Telecommunications, the Internet and Wireless Technology Wireless Technology Makes Dundee Precious Metals Good as Gold The Battle Over Net Neutrality Monitoring Employees on Networks: Unethical or Good Business? Google, Apple, and Facebook Struggle for Your Internet Experience Chapter 8: Securing Information Systems The 21st Century Bank Heist Target Becomes the Target for Massive Data Theft BYOD: It’s Not So Safe The Looming Threat of Cyberwarfare Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications ACH Food Companies Transforms Its Business with Enterprise Systems Scotts Miracle-Gro Cultivates Supply Chain Proficiency Graybar Goes for Customer Analytics Vodafone: A Giant Global ERP Implementation Chapter 10: E-Commerce: Digital Markets, Digital Goods Pinterest: How Much Is a Picture Worth? Can Pandora Succeed with Freemium? Will Mobile Technology Put Orbitz in the Lead? Cultivating Customers the Social Way Chapter 11: Managing Knowledge Jaguar Land Rover Transforms with New Design and Manufacturing Technology Is 3-D Printing a Game-Changer? Facial Recognition Systems: Another Threat to Privacy? What’s Up with IBM’s Watson? Chapter 12: Enhancing Decision Making Germany Wins the World Cup with Big Data at Its Side Big Data Make Cities Smarter America’s Cup: The Tension between Technology and Human Decision Makers How Much Does Data-Driven Planting Help Farmers? Chapter 13: Building Information Systems New Systems Help Work Flow More Smoothly at Moen Datacard Group Redesigns the Way It Works The Challenge of Mobile Application Development SourceGas Goes for Better Workforce Scheduling Systems Chapter 14: Managing Projects Harrah’s Cherokee Casino Wins with Sound Project Management New York’s CityTime: An IS Project Goes Awry Britain’s National Health Service Jettisons Choose and Book System A Shaky Start for Healthcare.Gov Chapter 15: Managing Global Systems New Systems Help Fiat Become a Global Powerhouse E-Commerce Russian-Style South Korea’s Restricted Internet Unilever’s Push Toward Unified Global Systems This page intentionally left blank Preface We wrote this book for business school students who wanted an in-depth look at how today's business firms use information technologies and systems to achieve corporate objectives. Information systems are one of the major tools available to business managers for achieving operational excellence, d ­ eveloping new products and services, improving decision making, and achieving c­ ompetitive advantage. Students will find here the most up-to-date and comprehensive overview of information systems used by business firms today. After ­reading this book, we expect students will be able to participate in, and even lead, ­management discussions of information systems for their firms. When interviewing potential employees, business firms often look for new hires who know how to use information systems and technologies for ­achieving bottom-line business results. Regardless of whether you are an accounting, finance, management, operations management, marketing, or information ­systems major, the knowledge and information you find in this book will be valuable throughout your business career. What’s New in This Editio Currency The 14th edition features all new opening, closing and Interactive Session cases. The text, figures, tables, and cases have been updated through October 2014 with the latest sources from industry and MIS research. New features • Assisted-graded Writing Questions at the end of each chapter with ­prebuilt grading rubrics and computerized essay scoring help instructors prepare, deliver, and grade writing assignments. • New Video Cases collection: 39 video cases (2 or more per chapter) and 18 additional instructional videos covering key concepts and ­experiences in the MIS world. • Learning Tracks: 47 Learning Tracks for additional coverage of ­selected topics. • Video Cases and Chapter Cases are listed at the beginning of each chapter. New topics • Social, Mobile, Local: New e-commerce content in Chapter 10 describing how social tools, mobile technology, and location-based services are ­transforming marketing and advertising.   xxi xxii Preface • Big Data: Chapter 6 on Databases and Information Management updated to provide in-depth coverage of Big Data and new data management ­technologies, including Hadoop, in-memory computing, non-relational databases, and analytic platforms. • Cloud Computing: Updated coverage of cloud computing in Chapter 5 (IT Infrastructure), with more detail on types of cloud services, private and public clouds, hybrid clouds, managing cloud services, and a new Interactive Session on using cloud services. Cloud computing also covered in Chapter 6 (databases in the cloud); Chapter 8 (cloud security); Chapter 9 (cloud-based CRM and ERP); Chapter 10 (e-commerce); and Chapter 13 (cloud-based ­systems development ). • Social Business: Extensive coverage of social business, introduced in Chapter 2 and discussed in throughout the text. Detailed discussions of enterprise (internal corporate) social networking as well as social networking in e-commerce. • • • • • • • • • • • • • • • • • Consumerization of IT and BYOD Internet of Things Visual Web Location analytics Location-based services (geosocial, geoadvertising, geoinformation services) Building an e-commerce presence Wearable computers Mobile application development, mobile and native apps Operational intelligence Expanded coverage of business analytics including big data analytics Software-defined networking 3-D printing Quantum computing Two-factor authentication Ransomware Chief data officer MOOCs What’s New in MIS? Plenty. In fact, there’s a whole new world of doing business using new ­technologies for managing and organizing. What makes the MIS field the most exciting area of study in schools of business is the continuous change in technology, management, and business processes. (Chapter 1 describes these changes in more detail.) IT Innovations. A continuing stream of information technology innovations is transforming the traditional business world. Examples include the emergence of cloud ­computing, the growth of a mobile digital business platform based on ­smartphones and tablet computers, and not least, the use of social networks by managers to achieve business objectives. Most of these changes have occurred in the last few years. These innovations enabling entrepreneurs and innovative Preface xxiii traditional firms to create new products and services, develop new business models, and transform the day-to-day conduct of business. In the process, some old businesses, even industries, are being destroyed while new businesses are springing up. New Business Models. For instance, the emergence of online video stores like Netflix for streaming, and Apple iTunes for downloading, has forever changed how premium video is distributed, and even created. Netflix in 2013 attracted 30 million subscribers to its DVD rental and streaming movie b ­ usiness. Netflix now accounts for 90 ­percent of streaming premium movies and TV shows, and consumes an estimated 33 percent of Internet bandwidth in the United States. Netflix has moved into premium TV show production with House of Cards, and Arrested Development, challenging cable networks like HBO, and potentially disrupting the cable channels dominance of TV show production. Apple’s iTunes now accounts for 67 percent of movie and TV show downloads and has struck deals with major Hollywood studios for recent movies and TV shows. A growing trickle of viewers are unplugging from cable and using only the Internet for entertainment. E-commerce Expanding. E-commerce will generate an estimated $470 ­billion in revenues in 2014, and is estimated to grow to nearly $700 billion in 2018. Amazon's revenues grew 21 percent to $74 billion in 2013, despite a slowly expanding economy growing at 2 percent annually, while offline retail grew by only 5 percent. E-commerce is changing how firms design, produce and deliver their products and services. E-commerce has reinvented itself again, disrupting the traditional marketing and advertising industry and putting major media and content firms in jeopardy. Facebook and other social networking sites such as YouTube, Twitter, and Tumblr, exemplify the new face of e-commerce in the 21st Century. They sell services. When we think of e-commerce we tend to think of a selling physical products. While this iconic vision of e-commerce is still very powerful and the fastest growing form of retail in the U.S., growing up alongside is a whole new value stream based on selling services, not goods. It’s a services model of e-commerce. Growth in social commerce is spurred by ­powerful growth of the mobile platform: 60 ­percent of Facebook’s users access the service from mobile phones and tablets. Information systems and technologies are the foundation of this new services-based e-commerce. Management Changes. Likewise, the management of business firms has changed: With new mobile smartphones, high-speed wireless Wi-Fi networks, and wireless laptop ­computers, remote salespeople on the road are only seconds away from their m ­ anagers’ questions and oversight. Managers on the move are in direct, continuous ­contact with their employees. The growth of enterprisewide information ­systems with extraordinarily rich data means that managers no longer operate in a fog of ­confusion, but instead have online, nearly instant, access to the really important information they need for accurate and timely decisions. In addition to their public uses on the Web, wikis and blogs are becoming important corporate tools for communication, collaboration, and information sharing. Changes in Firms and Organizations: Compared to industrial organizations of the previous century, new fast-growing 21st Century business firms put less emphasis on ­hierarchy and structure, and more emphasis on employees taking on multiple roles and tasks. They put greater emphasis on competency and skills rather than ­position in the hierarchy. They emphasize higher speed and more accurate decision making based on data and analysis. They are more aware of xxiv Preface changes in technology, consumer attitudes, and culture. They use social media to enter into conversations with consumers, and demonstrate a greater w ­ illingness to listen to consumers, in part because they have no choice. They show better understanding of the importance of i­nformation technology in c­ reating and ­managing business firms and other o ­ rganizations. To the extent organizations and business firms d ­ emonstrate these characteristics, they are 21st Century ­digital firms. The 14th Edition: The Comprehensive Solution for the MIS Curriculum Since its inception, this text has helped to define the MIS course around the globe. This edition continues to be authoritative, but is also more customizable, flexible, and geared to meeting the needs of different colleges, universities, and individual instructors. Many of its learning tools are now available in digital form. This book is now part of a complete learning package that includes the core text, Video Case Package, and Learning Tracks. The core text consists of 15 chapters with hands-on projects covering the most essential topics in MIS. An important part of the core text is the Video Case Study and Instructional Video Package: 39 video case studies (2-3 per chapter) plus 18 instructional videos that illustrate business uses of information systems, explain new technologies, and explore concepts. Videos are keyed to the topics of each chapter. In addition, for students and instructors who want to go deeper into selected topics, there are 47 online Learning Tracks that cover a variety of MIS topics in greater depth. The CORE Text The core text provides an overview of fundamental MIS concepts using an integrated framework for describing and analyzing information systems. This framework shows information systems composed of people, organization, and technology elements and is reinforced in student projects and case studies. Chapter Organization Each chapter contains the following elements: • A Chapter Outline based on Learning Objectives • Lists of all the Case Studies and Video Cases for each chapter • A chapter-opening case describing a real-world organization to establish the theme and importance of the chapter • A diagram analyzing the opening case in terms of the management, ­organization, and technology model used throughout the text • Two Interactive Sessions with Case Study Questions • A Review Summary keyed to the Student Learning Objectives • A list of Key Terms that students can use to review concepts • Review questions for students to test their comprehension of chapter material • Discussion questions raised by the broader themes of the chapter. Preface xxv A diagram accompanying each chapter-opening case graphically illustrates how management, organization, and technology elements work together to create an information system solution to the business challenges discussed in the case. • A series of Hands-on MIS Projects consisting of two Management Decision Problems, a hands-on application software project, and a project to develop Internet skills • A Collaboration and Teamwork Project to develop teamwork and ­presentation skills, with options for using open source collaboration tools • A chapter-ending case study for students to apply chapter concepts • Two assisted-graded writing questions with prebuilt grading rubrics • Chapter references Key features We have enhanced the text to make it more interactive, leading-edge, and appealing to both students and instructors. The features and learning tools are described in the following sections: B u s i n e s s - D r i v e n w i t h R e a l - Wo r l d B u s i n e s s C a s e s a n d Examples The text helps students see the direct connection between information s­ ystems and business performance. It describes the main business objectives ­driving the use of information systems and technologies in corporations all over the world: operational excellence; new products and services; customer and ­supplier ­intimacy; improved decision making; competitive advantage; and s­urvival. In-text examples and case studies show students how specific companies use information systems to achieve these objectives. We use only current (2014) examples from business and public organizations throughout the text to illustrate the important concepts in each chapter. All the case studies describe companies or organizations that are familiar to ­students, such as The San Francisco Giants, Facebook, Walmart, Google, Target, and Home Depot. xxvi Preface Interactivity There’s no better way to learn about MIS than by doing MIS! We provide ­different kinds of hands-on projects where students can work with real-world business scenarios and data, and learn firsthand what MIS is all about. These projects heighten student involvement in this exciting subject. • Online Video Case Package. Students can watch short videos online, either in-class or at home or work, and then apply the concepts of the book to the analysis of the video. Every chapter contains at least two business video cases that explain how business firms and managers are using information systems, describe new management practices, and explore concepts discussed in the chapter. Each video case consists of a video about a real-world company, a background text case, and case study questions. These video cases enhance students’ understanding of MIS topics and the relevance of MIS to the business world. In addition, there are 18 Instructional Videos that describe developments and concepts in MIS keyed to respective chapters. • Interactive Sessions. Two short cases in each chapter have been ­redesigned as Interactive Sessions to be used in the classroom (or on Internet discussion boards) to stimulate student interest and active ­learning. Each case concludes with case study questions. The case study questions provide topics for class discussion, Internet discussion, or ­written assignments. Each chapter contains two Interactive Sessions on Management, Organizations, or Technology using real-world companies to illustrate chapter concepts and issues. Case Study Questions encourage students to apply chapter concepts to real-world companies in class discussions, student presentations, or writing assignments. Preface xxvii • Hands-on MIS Projects. Every chapter concludes with a Hands-on MIS Projects section containing three types of projects: two Management Decision Problems, a hands-on application software ­exercise using Microsoft Excel, Access, or Web page and blog creation tools, and a ­project that develops Internet business skills. A Dirt Bikes USA running case provides additional hands-on projects for each chapter. • Collaboration and Teamwork Projects. Each chapter features a collaborative project that encourages students working in teams to use Google Drive, Google Docs, or other open-source collaboration tools. The first team project in Chapter 1 asks students to build a collaborative Google site. Two real-world business scenarios per chapter provide opportunities for students to apply chapter concepts and practice management decision making. Students practice using software in real-world settings for achieving operational excellence and enhancing decision making. Each chapter features a project to develop Internet skills for accessing information, conducting research, and performing online calculations and analysis. xxviii Preface A s s e s s m e n t a n d AA C S B A s s e s s m e n t G u i d e l i n e s The Association to Advance Collegiate Schools of Business (AACSB) is a not-forprofit corporation of educational institutions, corporations and other organizations that seeks to improve business education primarily by accrediting university business programs. As a part of its accreditation activities, the AACSB has developed an Assurance of Learning Program designed to ensure that schools do in fact teach students what they promise. Schools are required to state a clear mission, develop a coherent business program, identify student learning objectives, and then prove that students do in fact achieve the objectives. We have attempted in this book to support AACSB efforts to encourage assessment-based education. The back end papers of this edition identify student learning objectives and anticipated outcomes for our Hands-on MIS projects. The authors will provide custom advice on how to use this text in their c­ olleges with different missions and assessment needs. Please e-mail the authors or ­contact your local Pearson representative for contact information. For more information on the AACSB Assurance of Learning Program, and how this text supports assessment-based learning, please visit the Web site for this book. C u s t o m i z a t i o n a n d F l e x i b i l i t y : N e w L e a r n i n g Tr a c k Modules Our Learning Tracks feature gives instructors the flexibility to provide ­in-depth coverage of the topics they choose. There are 47 Learning Tracks available to instructors and students. This supplementary content takes ­students deeper into MIS topics, concepts and debates; reviews basic technology concepts in hardware, software, database design, telecommunications, and other areas; and provide additional hands-on software instruction. The 14th Edition includes new Learning Tracks on Building an E-Commerce Web Site, E-commerce Payment Systems including Bitcoin, Fourth Generation Languages, and Occupational and Career Outlook for Information Systems Majors 2012–2018. Author-certified test bank and supplements • Author-Certified Test Bank. The authors have worked closely with skilled test item writers to ensure that higher level cognitive skills are tested. Test bank multiple choice questions include questions on content, but also include many questions that require analysis, synthesis, and evaluation skills. • Annotated Slides. The authors have prepared a comprehensive ­collection of fifty PowerPoint slides to be used in your lectures. Many of these slides are the same as used by Ken Laudon in his MIS classes and executive education presentations. Each of the slides is annotated with teaching suggestions for asking students questions, developing ­in-class lists that illustrate key concepts, and recommending other firms as ­examples in addition to those provided in the text. The annotations are like an Instructor’s Manual built into the slides and make it easier to teach the course effectively. Student Learning-focused Student Learning Objectives are organized around a set of study questions to focus student attention. Each chapter concludes with a Review Summary and Review Questions organized around these study questions, and each major chapter section is based on a Learning Objective. Preface xxix Career Resources The Instructor Resources for this text include extensive Career Resources, including job-hunting guides and instructions on how to build a Digital Portfolio demonstrating the business knowledge, application software ­proficiency, and Internet skills acquired from using the text. The p ­ ortfolio can be included in a resume or job application or used as a learning a­ ssessment tool for instructors. Instructor Resources At the Instructor Resource Center,, instructors can easily register to gain access to a variety of instructor resources available with this text in downloadable format. If assistance is needed, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.­ for answers to frequently asked questions and toll-free user support phone numbers. The following supplements are available with this text: • • • • • • Instructor’s Resource Manual Test Bank TestGen® Computerized Test Bank PowerPoint Presentation Image Library Lecture Notes Video Cases and Instructional Videos Instructors can download step-by-step instructions for accessing the video cases from the Instructor Resources Center. All Video Cases and Instructional Videos are listed at the beginning of each chapter as well as in the Preface. L e a r n i n g Tr a c k M o d u l e s At the Instructor Resource Center,, instructors can download 47 Learning Tracks providing additional coverage topics for ­students and instructors. See page xxx for a list of the Learning Tracks a­ vailable for this edition. Video Cases and Instructional Videos Chapter Video Chapter 1: Information Systems in Global Business Today Case 1: UPS Global Operations with the DIAD Case 2: Google Data Center Efficiency Best Practices Instructional Video 1: Green Energy Efficiency in a Data Center Using Tivoli Architecture (IBM) Instructional Video 2: Tour IBM’s Raleigh Data Center Chapter 2: Global E-business and Collaboration Case 1: Walmart’s Retail Link Supply Chain Case 2: The Emerging Social Enterprise Case 3: How FedEx Works: Inside the Memphis Hub Instructional Video 1: US Foodservice Grows Market with Oracle CRM on Demand Chapter 3: Information Systems, Organizations, and Strategy Case 1: National Basketball Association: Competing on Global Delivery With Akamai OS Streaming Case 2: IT and Geo-Mapping Help a Small Business Succeed Case 3: Materials Handling Equipment Corp: Enterprise Systems Drive Corporate Strategy for a Small Business Instructional Video 1: SAP BusinessOne ERP: From Orders to Final Delivery and Payment xxx Preface Video Cases and Instructional Videos (Continued) Chapter 4: Ethical and Social Issues in Information Systems Case 1: What Net Neutrality Means for You Case 2: Facebook Privacy: Social Network Data Mining Case 3: Data Mining for Terrorists and Innocents Instructional Video 1: Viktor Mayer Schönberger on The Right to Be Forgotten Chapter 5: IT Infrastructure and Emerging Technologies Case 1: Getting to eXtreme Scale On the Web Case 2: Managing by Smartphone Case 3: Case 3: Acxicom’s Strategic Advantage: IBM’s Virtual Blade Platform Instructional Video 1: Google and IBM Produce Cloud Computing Instructional Video 2: IBM Blue Cloud Is Ready-to-Use Computing Chapter 6: Foundations of Business Intelligence: Databases and Information Management Case 1: Dubuque Uses Cloud Computing and Sensors to Build a Smarter City Case 2 Data Warehousing at REI: Understanding the Customer. Case 3: Maruti Suzuki Business Intelligence and Enterprise Databases Chapter 7: Telecommunications, the Internet, and Wireless Technology Case 1: Telepresence Moves Out of the Boardroom and Into the Field Case 2: Virtual Collaboration With Lotus Sametime Chapter 8: Securing Information Systems Case 1: Stuxnet and Cyberwarfare Case 2: Cyberespionage: The Chinese Threat Case 3: IBM Zone Trusted Information Channel (ZTIC) Instructional Video 1: Sony PlayStation Hacked; Data Stolen from 77 Million Users Instructional Video 2: Zappos Working to Correct Online Security Breach Instructional Video 3: Meet the Hackers: Anonymous Statement on Hacking SONY Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications Case 1: Workday: Enterprise Cloud Software-as-a-Service (SaaS) Case 2: Evolution Homecare Manages Patients with Microsoft Dynamics CRM Instructional Video: GSMS Protects Products and Patients By Serializing Every Bottle of Drugs Chapter 10: E-commerce: Digital Markets, Digital Goods Case 1: Groupon: Deals Galore Case 2: Etsy: A Marketplace and Community Case 3: : Ford Manufacturing Supply Chain: B2B Marketplace Chapter 11: Managing Knowledge Case 1: How IBM’s Watson Became a Jeopardy Champion Case 2: Alfresco: Open Source Document Management and Collaboration Instructional Video 1: Analyzing Big Data: IBM’s Watson: After Jeopardy Instructional Video 2: Teamwork and Collaboration: John Chambers on Collaboration vs. Command and Control Chapter 12: Enhancing Decision Making Case 1: FreshDirect Uses Business Intelligence to Manage Its Online Grocery. Case 2: Business Intelligence Helps the Cincinnati Zoo Instructional Video 1: FreshDirect’s Secret Sauce: Customer Data From the Website Instructional Video 2: A Demonstration of Oracle’s Mobile Business Intelligence App Chapter 13: Building Information Systems Case 1: IBM: BPM in a SaaS Environment Case 2: IBM Helps the City of Madrid With Real-Time BPM Software Instructional Video 1: BPM: Business Process Management Customer Story Instructional Video 2: Workflow Management Visualized Chapter 14: Managing Projects Case 1: Blue Cross Blue Shield: Smarter Computing Project Case 2: NASA Project Management Challenges Instructional Video 1: Software Project Management in 15 Minutes, Part 1 Instructional Video 1: Software Project Management in 15 Minutes, Part 2 Chapter 15: Managing Global Systems Case 1: Daum Runs Oracle Apps on Linux Case 2: Lean Manufacturing and Global ERP: Humanetics and Global Shop Case 3: Monsanto Uses Cisco and Microsoft to Manage Globally L e a r n i n g Tr a c k M o d u l e s Chapter Learning Tracks Chapter 1: Information Systems in Global Business Today How Much Does IT Matter? Information Systems and Your Career The Mobile Digital Platform Chapter 2: Global E-business and Collaboration Systems From a Functional Perspective IT Enables Collaboration and Teamwork Challenges of Using Business Information Systems Organizing the Information Systems Function Occupational and Career Outlook for Information Systems Majors 2012–2018 Chapter 3: Information Systems, Organizations, and Strategy The Changing Business Environment for IT Preface xxxi L e a r n i n g Tr a c k M o d u l e s ( C o n t i n u e d ) Chapter 4: Ethical and Social Issues in Information Systems Developing a Corporate Code of Ethics for IT Chapter 5: IT Infrastructure and Emerging Technologies How Computer Hardware Works How Computer Software Works Service Level Agreements The Open Source Software Initiative Comparing Stages in IT Infrastructure Evolution Cloud Computing Chapter 6: Foundations of Business Intelligence: Databases and Information Management Database Design, Normalization, and Entity-Relationship Diagramming Introduction to SQL Hierarchical and Network Data Models Chapter 7: Telecommunications, the Internet, and Wireless Technology Broadband Network Services and Technologies Cellular System Generations Wireless Applications for Customer Relationship Management, Supply Chain Management, and Healthcare Introduction to Web 2.0 LAN Topologies Chapter 8: Securing Information Systems The Booming Job Market in IT Security The Sarbanes-Oxley Act Computer Forensics General and Application Controls for Information Systems Management Challenges of Security and Control Software Vulnerability and Reliability Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications SAP Business Process Map Business Processes in Supply Chain Management and Supply Chain Metrics Best-Practice Business Processes in CRM Software Chapter 10: E-commerce: Digital Markets, Digital Goods E-Commerce Challenges: The Story of Online Groceries Build an E-commerce Business Plan Hot New Careers in E-Commerce E-commerce Payment Systems Building an E-commerce Web Site Chapter 11: Managing Knowledge Challenges of Knowledge Management Systems Chapter 12: Enhancing Decision Making Building and Using Pivot Tables Chapter 13: Building Information Systems Unified Modeling Language Primer on Business Process Design and Documentation Primer on Business Process Management Fourth Generation Languages Chapter 14: Managing Projects Capital Budgeting Methods for Information Systems Investments Enterprise Analysis (Business Systems Planning) and Critical Success Factors Information Technology Investments and Productivity Acknowledgements The production of any book involves valued contributions from a number of persons. We would like to thank all of our editors for encouragement, insight, and strong support for many years. We thank our editor Nicole Sam, Program Manager Denise Vaughn, and Project Manager Karalyn Holland for their role in managing the project. We remain grateful to Bob Horan for all his years of editorial guidance. Our special thanks go to our supplement authors for their work, i­ncluding the following MyLab content contributors: John Hupp, Columbus State University; Robert J. Mills, Utah State University; John P. Russo, Wentworth Institute of Technology; and Michael L. Smith, SUNY Oswego. We are indebted to Robin Pickering for her assistance with writing and to William Anderson and xxxii Preface Megan Miller for their help during production. We thank Diana R. Craig for her ­assistance with database and software topics. Special thanks to colleagues at the Stern School of Business at New York University; to Professor Werner Schenk, Simon School of Business, University of Rochester; to Professor Mark Gillenson, Fogelman College of Business and Economics, University of Memphis; to Robert Kostrubanic, CIO and Director of Information Technology Services Indiana-Purdue University Fort Wayne; to Professor Lawrence Andrew of Western Illinois University; to Professor Detlef Schoder of the University of Cologne; to Professor Walter Brenner of the University of St. Gallen; to Professor Lutz Kolbe of the University of Gottingen; to Professor Donald Marchand of the International Institute for Management Development; and to Professor Daniel Botha of Stellenbosch University who provided additional suggestions for improvement. Thank you to Professor Ken Kraemer, University of California at Irvine, and Professor John King, University of Michigan, for more than a decade’s long discussion of information systems and organizations. And a special remembrance and dedication to Professor Rob Kling, University of Indiana, for being my friend and colleague over so many years. We also want to especially thank all our reviewers whose suggestions helped improve our texts. Reviewers for Managing the Digital Firm include the following: Brad Allen, Plymouth State University Dawit Demissie: University of Albany Anne Formalarie, Plymouth State University Bin Gu, University of Texas – Austin Essia Hamouda, University of California – Riverside Linda Lau: Longwood University Kimberly L. Merritt, Oklahoma Christian University James W. Miller, Dominican University Fiona Nah, University of Nebraska – Lincoln M.K. Raja: University of Texas Arlington Thomas Schambach, Illinois State University Shawn Weisfeld: Florida Institute of Technology K.C.L. J.P.L. P a r t O n e Organizations, Management, and the Networked Enterprise Chapter 1 Chapter 3 Information Systems in Global Business Today Information Systems, Organizations, and Strategy Chapter 2 Chapter 4 Global E-business and Collaboration Ethical and Social Issues in Information Systems Part One introduces the major themes of this book, raising a series of important ­questions: What is an information system and what are its management, organization, and technology dimensions? Why are information systems so essential in businesses today? Why are systems for collaboration and social business so important? How can information systems help businesses become more competitive? What broader ­ethical and social issues are raised by widespread use of information systems? Information Systems in Global Business Today 1 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. How are information systems transforming business, and why are they so essential for running and managing a business today? 2. What is an information system? How does it work? What are its management, organization, and technology components and why are complementary assets essential for ensuring that information systems provide genuine value for organizations? 3. What academic disciplines are used to study information systems and how does each contribute to an understanding of information systems? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 2 Chapter Cases Video Cases The San Francisco Giants Win Big with Information Technology Meet the New Mobile Workers UPS Competes Globally with Information Technology Home Depot Renovates Itself with New Systems and Ways of Working UPS Competes Globally with the DIAD Google Data Center Efficiency Best Practices Instructional Videos: Green Energy Efficiency in a Data Center Using Tivoli (IBM) Tour IBM’s Raleigh Data Center The San Francisco Giants Win Big with Information Technology T he San Francisco Giants are one of the oldest U.S. baseball teams, and one of the most successful as well. They have won the most games of any team in the history of American baseball and any North American professional sports team. The Giants have captured 23 National League pennants and appeared in 20 World Series competitions— both records in the National League. Their most recent triumph was winning the 2014 World Series. The Giants have ­outstanding players (with the most Hall of Fame players in all of professional baseball) and coaches, but some of their success, both as a team and as a b ­ usiness, can be attributed to their use of information technology. Baseball is very much a game of statistics, and all the major teams are ­constantly analyzing their data on player performance and optimal positioning on the field. But the Giants are doing more. They have started to use a video system from Sportsvision called FIELDf/x which digitally records the ­position of all players and hit balls in real time. The system generates ­defensive ­statistics such as the difficulty of a catch and the probability of a particular fielder making that catch. Information produced by the system on player speed and response time, such as how quickly an outfielder comes in for a ball or reacts to line drives, will enable the Giants to make player data analysis much more precise. In some cases, it will provide information that didn’t exist before on players’ defensive skills and other skills. FIELDf/x ­generates a million records per game. That amounts to 5 billion records in three years, the amount of time required to provide a high level of confidence in the data. In addition to player and team statistics, the Giants are starting to collect data about fans, including ticket purchases and social media activity. © Cynthia Lindow/Alamy. 3 4 Part One Organizations, Management, and the Networked Enterprise Under the leadership of chief information officer (CIO) Bill Schlough, the San Francisco Giants have pioneered dynamic ticket pricing, based on ­software from Qcue, in which the price of a ticket fluctuates according to the level of demand for a particular ball game. It’s similar to the dynamic ticket pricing used in the airline industry. If a game is part of a crucial series, the Giants are playing an in-division rival, or the game appears to be selling out especially fast, ticket prices will rise. If the game isn’t a big draw, ticket prices fall. The Giants have sold out 100 percent of their home games since October 2010, and have increased season ticket sales from 21,000 in 2010 to 29,000 in 2012. Season ticket-holders don’t normally attend every game, and this can lose revenue for a team. Every time a fan with a season ticket decides to stay home from a game, the sports franchise loses an average of $20 in concession and merchandise sales. To make sure stadium seats are always filled, the Giants created a secondary online ticket market where season ticket holders can resell tickets they are not using over the Internet. The Giants’s information technology specialists found a way to activate and deactivate the bar codes on tickets so that they can be resold. The system is also a way for the Giants to provide additional service to customers. The Giants have also taken advantage of wireless technology to enhance their fans’ experience. A network extends from the seats to the concession stands to areas outside the stadium, and is one of the largest public wireless networks in the world. The stadium, AT&T Park, has a giant high-speed wireless network, which fans can use to check scores and video highlights, update their social networks, and do e-mail. Sources:, accessed January 16, 2014; http://, accessed February 12, 2014; Kenneth Corbin, “Federal CIOs Look to Speed Tech Development Cycle,” CIO, December 17, 2013; Peter High, “Interview with World Champion San Francisco Giants CIO and San Jose Giants Chairman, Bill Schlough,” Forbes, February 4, 2013; and Fritz Nelson, “Chief of the Year,” Information Week, December 17, 2012. T he challenges facing the San Francisco Giants and other baseball teams show why information systems are so essential today. Major league baseball is a ­business as well as a sport, and teams such as the Giants need to take in ­revenue from games in order to stay in business. Major league baseball is also a business where what matters above all is winning, and any way of using ­information to improve player performance is a competitive edge. The chapter-opening diagram calls attention to important points raised by this case and this chapter. To increase stadium revenue, the San Francisco Giants developed a dynamic ticket pricing system designed to adjust ticket prices to customer demand and to sell seats at the optimum price. The team developed another ticketing system that enables existing ticketholders to sell their tickets easily online to someone else. An additional way of cultivating ­customers is to deploy modern information technology at AT&T Park, i­ ncluding a massive Wi-Fi wireless network with interactive services. To improve player performance, the Giants implemented a system that captures video on players and then uses the data to analyze player defensive statistics, including speed and reaction times. Here are some questions to think about: What role does technology play in the San Francisco Giants’ success as a baseball team? Assess the contributions of the systems described in this case study. Chapter 1 Information Systems in Global Business Today 1.1 I How are information systems transforming business, and why are they so essential for running and managing a business today? t’s not business as usual in America anymore, or the rest of the global economy. In 2014, American businesses will spend an estimated $817 ­billion on information systems hardware, software, and telecommunications equipment. In addition, they will spend another $230 b ­ illion on ­business and management consulting and services—much of which involves redesigning firms’ business operations to take advantage of these new t­echnologies. Figure 1.1 shows that between 1999 and 2013, private ­business ­investment in ­information technology consisting of hardware, software, and communications ­equipment grew from 14 percent to 33 percent of all invested capital. As managers, most of you will work for firms that are intensively using information systems and making large investments in information technology. You will certainly want to know how to invest this money wisely. If you make wise choices, your firm can outperform competitors. If you make poor choices, you will be wasting valuable capital. This book is dedicated to ­helping you make wise decisions about information technology and information systems. How Information Systems are Transforming Business You can see the results of this massive spending around you every day by ­observing how people conduct business. Changes in technology, and new ­innovative business models, have transformed social life and business ­practices. Over 247 million Americans have mobile phones (67% of the p ­ opulation), and 167 million of these people access the Internet using ­smartphones and tablets. 46% of the entire population now use tablet computers whose sales have soared. 172 million Americans use online social networks, 150 million 5 6 Part One Organizations, Management, and the Networked Enterprise FIGURE 1.1 Information technology capital investment Information technology capital investment, defined as hardware, software, and communications ­equipment, grew from 14 percent to 33 percent of all invested capital between 1999 and 2013. Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, 2014. use Facebook, while 48 million use Twitter. Smartphones, social networking, texting, emailing, and Webinars have all become essential tools of business because that’s where your customers, suppliers, and colleagues can be found. (eMarketer, 2014). By June 2014, more than 114 million businesses worldwide had dot-com Internet sites registered (Domain Tools, 2014). Today, 196 million Americans shop online, and 163 million will purchase online. Every day about 90 million Americans go online to research a product or service. (eMarketer, 2014). In 2013, FedEx moved about 3.5 million packages daily to 220 countries and territories around the world, mostly overnight, and the United Parcel Service (UPS) moved over 16 million packages daily worldwide. Businesses are using information technology to sense and respond to rapidly changing customer demand, reduce inventories to the lowest possible levels, and achieve higher levels of operational efficiency. Supply chains have become more fast-paced, with companies of all sizes depending on just-in-time ­inventory to reduce their overhead costs and get to market faster. As newspaper print readership continues to decline, more than 168 ­million people read a newspaper online, and millions more read other news sites. About 83 million people watch a video online every day, 66 million read a blog, and 25 million post to blogs, creating an explosion of new writers and new forms of customer feedback that did not exist five years ago (eMarketer, 2014). Social networking site Facebook attracted 152 million monthly v ­ isitors in 2014 in the United States, and over 1 billion worldwide. Google+ has attracted over 130 ­million users in the United States. Businesses are starting to use social ­networking tools to connect their employees, customers, and managers worldwide. Many Fortune 500 companies now have Facebook pages, Twitter accounts, and Tumblr sites. E-commerce and Internet advertising continue to expand. Google’s online ad revenues surpassed $17 billion in 2013, and Internet advertising continues to Chapter 1 Information Systems in Global Business Today grow at more than 15 percent a year, reaching more than $43 billion in ­revenues in 2013 (eMarketer, 2014). New federal security and accounting laws, requiring many businesses to keep e-mail messages for five years, coupled with existing occupational and health laws requiring firms to store employee chemical exposure data for up to 60 years, are spurring the annual growth of digital information at the estimated rate of 5 exabytes annually, equivalent to 37,000 new Libraries of Congress. What’s New in Management Information Systems? Lots! What makes management information systems the most exciting topic in business is the continual change in technology, management use of the ­technology, business models and the impact on business success. New ­businesses and industries appear, old ones decline, and successful firms are those that learn how to use the new technologies. Table 1.1 summarizes the major new themes in business uses of information systems. These themes will appear throughout the book in all the chapters, so it might be a good idea to take some time now and discuss these with your professor and other students. There are three interrelated changes in the technology area: (1) the ­widespread adoption of the mobile computing ­platform, (2) the growing ­business use of “big data,” and (3) the growth in “cloud computing,” where more and more business ­software runs over the Internet. IPhones, iPads, Android tablets, and smartphones are not just gadgets or entertainment outlets. They represent new emerging computing platforms based on an array of new hardware and software technologies. More and more business computing is moving from PCs and desktop machines to these mobile devices. Managers are increasingly using these devices to coordinate work, communicate with employees, and provide information for decision making. We call these developments the “mobile digital platform.” Managers routinely use online collaboration and social technologies in order to make better, faster decisions. As management behavior changes, how work gets organized, coordinated, and measured also changes. By connecting employees working on teams and projects, the social network is where works gets done, where plans are executed, and where managers manage. Collaboration spaces are where employees meet one another—even when they are separated by continents and time zones. The strength of cloud computing and the growth of the mobile digital p ­ latform allow organizations to rely more on telework, remote work, and ­distributed decision making. This same platform means firms can outsource more work, and rely on markets (rather than employees) to build value. It also means that firms can collaborate with suppliers and customers to create new products, or make existing products more efficiently. You can see some of these trends at work in the Interactive Session on Management. Millions of managers rely heavily on the mobile digital ­platform to coordinate suppliers and shipments, satisfy customers, and manage their employees. A business day without these mobile devices or Internet access would be unthinkable. As you read this case, note how the mobile platform greatly enhances the accuracy, speed, and richness of decision ­making. 7 8 Part One Organizations, Management, and the Networked Enterprise TABLE 1.1 What’s New in MIS Change Business Impact Technology Cloud computing platform emerges as a major business area of innovation A flexible collection of computers on the Internet begins to perform tasks traditionally performed on corporate computers. Major business applications are delivered online as an Internet service (Software as a Service, or SaaS). Big data Businesses look for insights from huge volumes of data from Web traffic, e-mail messages, social media content, and machines (sensors) that require new data management tools to capture, store, and analyze. A mobile digital platform emerges to compete with the PC as a business system The Apple iPhone and tablet computers and Android mobile devices are able to download hundreds of thousands of applications to support collaboration, location-based services, and communication with colleagues. Small tablet computers, including the iPad and Kindle Fire, challenge conventional laptops as platforms for consumer and corporate computing. Management Managers adopt online collaboration and social networking software to improve coordination, collaboration, and knowledge sharing Google Apps, Google Sites, Microsoft Windows SharePoint Services, and IBM Lotus Connections are used by over 100 million business professionals worldwide to support blogs, project management, online meetings, personal profiles, social bookmarks, and online communities. Business intelligence applications accelerate More powerful data analytics and interactive dashboards provide ­­ real-time performance information to managers to enhance decision making. Virtual meetings proliferate Managers adopt telepresence videoconferencing and Web conferencing technologies to reduce travel time, and cost, while improving collaboration and decision making. Organizations Social business Businesses use social networking platforms, including Facebook, Twitter, and internal corporate social tools, to deepen interactions with employees, customers, and suppliers. Employees use blogs, wikis, e-mail texting, and SMS messaging to interact in online communities. Telework gains momentum in the workplace The Internet, wireless laptops, smartphones, and tablet computers make it possible for growing numbers of people to work away from the traditional office. Fifty-five percent of U.S. businesses have some form of remote work program. Co-creation of business value Sources of business value shift from products to solutions and experiences, and from internal sources to networks of suppliers and collaboration with customers. Supply chains and product development become more global and collaborative; customer interactions help firms define new products and services. Globalization Challenges and Opportunities: A Flattened World In 1492, Columbus reaffirmed what astronomers were long saying: the world was round and the seas could be safely sailed. As it turned out, the world was populated by peoples and languages living in isolation from one another, with Chapter 1 Information Systems in Global Business Today 9 I n t e r a c t i v e S e ss i o n : M a n a g e m e n t Meet the New Mobile Workers How much of your job can you do from the palm of your hand? Probably more than you think. Today there are many job functions for both rank-andfile employees and their managers that can be ­performed using mobile phones and tablets, including the iPad, iPhone, and Android mobile devices. Companies are enhancing their security systems so that mobile users can remotely access corporate ­systems with confidence. And they are developing more far-reaching applications to take advantage of the stunning mobile and graphic capabilities. Mobile technology is spreading to core work functions, such as marketing materials for pharmaceutical reps, ­customer account software for service technicians, and apps for farmers to test the quality of cow’s milk. McClendon’s Select, a Peoria-based organic familyrun farm, relies on iPad for each stage of its operation: planting fields, picking crops, filling orders, loading trucks, delivering to restaurants, and selling products at farmers’ markets. Co-owner Sean McClendon uses a wireless camera on his tractor to ensure crop rows are as straight as possible. The mydlinkLite app on his iPad lets him watch the footage as he plows. The farm’s planting manager no longer needs to leave the field to handle the careful record-keeping required to maintain an organic certification. Using her iPad connection to the 3G cellular network, she is able to access the Web-based COG Pro management system to update her records of seed types and where and when they’re planted. Before McClendon’s went digital, orders were handwritten on a white board, a process that was too time-consuming, error-prone, and costly. Now each employee grabs an iPad when arriving for work in the morning and uses a proprietary app called Picker Entry to generate a list of products to collect in the field based on online orders placed by restaurants and consumers. Using AirPrint technology in the iPad, employees then wirelessly print their orders and head out to the field to pick product. After the employees return from the field, they add inventory that they picked using an iPad. They are able to see all of the ­restaurants on the screen, tap the restaurant name, and fill the orders right from the iPad. When employees load those orders on trucks for deliveries, Picker Entry on the iPad replaces a manual process that used to take 30 to 45 minutes. A single tap to the iPad generates a report telling where each box goes on the truck for restaurant deliveries. One of the main reasons restaurants use McClendon’s is because of its order accuracy. Using handhelds to run the business is not limited to small companies. PepsiCo manufactures and sells brands including Pepsi, Gatorade, Mountain Dew, Tropicana, Quaker, and Frito-Lay worldwide and has nearly 280,000 employees. The company uses a complex web of interlocking distribution systems to move its products from its manufacturing and warehouse facilities onto trucks and then into stores in time to meet customer demand. PepsiCo runs about 17,000 distribution routes each day. The iPhone and iPad help employees of PepsiCo’s North America Beverages ­division ensure that the right products arrive in the right locations as quickly and efficiently as possible. In the past, PepsiCo drivers and merchandisers began each day by picking up printed schedules with order quantities and tasks to be performed at each outlet, from unloading cases of soda to setting up new product displays. It was difficult to accommodate ­last-minute changes in orders because communicating with the delivery drivers was difficult when they were on the road. PepsiCo North America Beverages created a ­custom in-house app for the iPhone called Power4Merch, which immediately notifies merchandisers when a driver has arrived at a store. The merchandiser’s iPhone has an electronic timecard, and he can see his schedule, the store details, the account profiles, and everything he needs to know to service the store. PepsiCo managers use iPads with custom ­applications to monitor their teams’ performance; pull up pricing, planograms and contracts; and help ­coordinate deliveries with merchandising. The Manager’s Briefcase app provides territory sales ­managers with electronic versions of all the ­paperwork and resources they need to manage their teams, ­including store audits, employee coaching forms, and automated notifications to merchandisers. A manager can make manpower assignments directly on the iPad. The iPad automatically sends a notification to the merchandiser’s iPhone informing him he has an additional stop to make, for example. In the past, managers had to spend much of their time on the phone, checking email in the office, and ­checking paperwork. With the iPad, the manager starts and ends his day with his team. 10 Part One Organizations, Management, and the Networked Enterprise The second iPad app, called SPOTLight, gives ­ anagers instant access to their Web-based SharePoint m content. They can pull out pricing, display planograms, customer development agreements, or new contracts. PepsiCo’s iPhone and iPad systems are integrated with its established corporate information systems. The company uses Mobile Device Management from AirWatch to securely deploy and manage its mobile applications and also takes advantage of the built-in security on iPhone and iPad to protect them from unauthorized access. PepsiCo’s main competitor, beverage-bottling ­company Coca-Cola Enterprises Inc. (CCE) is ­benefiting from mobile technology as well. CCE uses mobile field service software from ServiceMax Inc. to streamline the work activities of its technicians, who service restaurant soda fountains and fix ­vending machines.Previously, after a technician visited a c­ ustomer on site, he would go back to his car, transfer information from paper notes into a database on his laptop, and transmit it to Coca-Cola’s aging centralized software system. Many technicians spent an extra half hour at the end of each day polishing their paperwork. In 2012, about 100 CCE employees started using ServiceMax apps on iPhones to dispatch technicians to a day’s worth of service calls, provide detailed customer information, automatically update lists of service parts stored in their vans, and transfer ­information to the billing department. The new ­system cut administration time for service technicians by a third, and employees were freed up to service other ­companies’ equipment in addition to CCE’s own. ServiceMax charges about $1000 per person per year for a subscription. Sources: “Apple iPad in Business,, accessed January 29, 2014; Robert Bamforth, “Do You Need Tablets in Your Workplace?, January 27, 2014; and ShiraOvide, “Meet the New Mobile Workers,” The Wall Street Journal, March 11, 2013. c a s e st u dy q u e st i o n s 1. What kinds of applications are described here? What business functions do they support? How do they improve operational efficiency and decision making? 2. Identify the problems that businesses in this case study solved by using mobile digital devices. 3. What kinds of businesses are most likely to benefit from equipping their employees with mobile digital devices such as iPhones and iPads? iPhone and iPad Applications for Business 1. 2. 3. 4. 5. 6. 7. 8. Salesforce1 Cisco WebEx SAP Business ByDesign iWork Evernote Adobe Reader Oracle Business Intelligence Dropbox © STANCA SANDA/Alamy. 4. One company deploying iPhones has said, “The iPhone is not a game changer, it’s an i­ndustry changer. It changes the way that you can interact with your customers” and “with your suppliers.” Discuss the implications of this statement. Whether it’s attending an online meeting, checking orders, working with files and documents, or obtaining business intelligence, Apple’s iPhone and iPad offer unlimited possibilities for business users. A stunning multitouch ­display, full Internet browsing, and capabilities for messaging, video and audio transmission, and document management, make each an all-purpose platform for mobile ­computing. Chapter 1 Information Systems in Global Business Today great disparities in economic and scientific development. The world trade that ensued after Columbus’s voyages has brought these peoples and cultures closer. The “industrial revolution” was really a world-wide phenomenon energized by expansion of trade among nations and the emergence of the first global economy. In 2005, journalist Thomas Friedman wrote an influential book declaring the world was now “flat,” by which he meant that the Internet and global ­communications had greatly reduced the economic and cultural advantages of ­developed countries. Friedman argued that the U.S. and European countries were in a fight for their economic lives, competing for jobs, markets, resources, and even ideas with highly educated, motivated populations in low-wage areas in the less developed world (Friedman, 2007). This “globalization” presents both ­challenges and opportunities for business firms A growing percentage of the economy of the United States and other advanced industrial countries in Europe and Asia depends on imports and exports. In 2013, more than 33 percent of the U.S. economy resulted from ­foreign trade, both imports and exports. In Europe and Asia, the number exceeded 50 ­percent. Many Fortune 500 U.S. firms derive half their revenues from foreign operations. For instance, 85 percent of Intel’s revenues in 2013 came from overseas sales of its microprocessors. Eighty percent of the toys sold in the United States are manufactured in China, while about 90 percent of the PCs ­manufactured in China use American-made Intel or Advanced Micro Design (AMD) chips. The microprocessor chips are shipped from the United States to China for assembly into devices. In the severe recession of 2008-2011, all the world’s economies were negatively impacted. It’s not just goods that move across borders. So too do jobs, some of them high-level jobs that pay well and require a college degree. In the past decade, the United States lost several million manufacturing jobs to offshore, low-wage producers. But manufacturing is now a very small part of U.S. employment (less than 12 ­percent and declining). In a normal year, about 300,000 service jobs move ­offshore to lower wage countries. Many of the jobs are in ­less-skilled information system occupations, but some are “tradable service” jobs in ­architecture, financial services, customer call centers, consulting, e ­ ngineering, and even radiology. On the plus side, the U.S. economy ­creates over 3.5 million new jobs in a normal, non-recessionary year. However, only 1.1 million private sector jobs were created due to slow recovery in 2011, but by 2014 2.5 million jobs were added. Employment in information s­ ystems and the other service occupations is expanding, and wages are stable. Outsourcing has actually accelerated the development of new systems in the United States and worldwide. The challenge for you as a business student is to develop high-level skills through education and on-the-job experience that cannot be outsourced. The challenge for your business is to avoid markets for goods and services that can be produced offshore much less expensively. The opportunities are equally immense. Throughout this book, you will find examples of companies and ­individuals who either failed or succeeded in using information systems to adapt to this new global environment. What does globalization have to do with management information s­ ystems? That’s simple: everything. The emergence of the Internet into a full-blown ­international communications system has drastically reduced the costs of ­operating and transacting on a global scale. Communication between a ­factory floor in Shanghai and a distribution center in Rapid City, South Dakota, is now instant and virtually free. Customers can now shop in a worldwide ­marketplace, obtaining price and quality information reliably 24 hours a day. 11 12 Part One Organizations, Management, and the Networked Enterprise Firms producing goods and services on a global scale achieve extraordinary cost reductions by finding low-cost suppliers and managing production facilities in other ­countries. Internet service firms, such as Google and eBay, are able to replicate their ­business models and services in multiple countries without having to redesign their expensive fixed-cost information systems infrastructure. Half of the revenue of eBay (as well as General Motors) originates outside the United States. Briefly, information systems enable globalization. The Emerging Digital Firm All of the changes we have just described, coupled with equally significant ­organizational redesign, have created the conditions for a fully digital firm. A digital firm can be defined along several dimensions. A digital firm is one in which nearly all of the organization’s significant business relationships with ­customers, suppliers, and employees are digitally enabled and mediated. Core business ­processes are accomplished through digital networks spanning the entire organization or linking multiple organizations. Business processes refer to the set of logically related tasks and b ­ ehaviors that organizations develop over time to produce specific business results and the unique manner in which these activities are organized and coordinated. Developing a new product, generating and fulfilling an order, creating a ­marketing plan, and hiring an employee are examples of business processes, and the ways organizations accomplish their business processes can be a source of competitive strength. (A detailed discussion of business processes can be found in Chapter 2.) Key corporate assets—intellectual property, core competencies, and financial and human assets—are managed through digital means. In a digital firm, any piece of information required to support key business decisions is available at any time and anywhere in the firm. Digital firms sense and respond to their environments far more rapidly than traditional firms, giving them more flexibility to survive in turbulent times. Digital firms offer extraordinary opportunities for more flexible global organization and management. In digital firms, both time shifting and space shifting are the norm. Time shifting refers to business being conducted continuously, 24/7, rather than in narrow “work day” time bands of 9 a.m. to 5 p.m. Space shifting means that work takes place in a global workshop, as well as within national boundaries. Work is accomplished physically wherever in the world it is best accomplished. Many firms, such as Cisco Systems, 3M, and IBM, are close to becoming ­digital firms, using the Internet to drive every aspect of their business. Most other companies are not fully digital, but they are moving toward close digital integration with suppliers, customers, and employees. Strategic Business Objectives of Information Systems What makes information systems so essential today? Why are businesses ­investing so much in information systems and technologies? In the United States, more than 21 million managers and 154 million workers in the information and knowledge sectors in the labor force rely on information systems to conduct business. Information systems are essential for conducting day-to-day business in the United States and most other advanced countries, as well as achieving strategic business objectives. Chapter 1 Information Systems in Global Business Today Entire sectors of the economy are nearly inconceivable without substantial investments in information systems. E-commerce firms such as Amazon, eBay, Google, and E*Trade simply would not exist. Today’s service industries—finance, insurance, and real estate, as well as personal services such as travel, medicine, and education—could not operate without information systems. Similarly, retail firms such as Walmart and Sears and manufacturing firms such as General Motors and General Electric require information systems to survive and prosper. Just as offices, telephones, filing cabinets, and efficient tall buildings with elevators were once the foundations of business in the twentieth ­century, information technology is a foundation for business in the twenty-first century. There is a growing interdependence between a firm’s ability to use information technology and its ability to implement corporate strategies and achieve ­corporate goals (see Figure 1.2). What a business would like to do in five years often depends on what its systems will be able to do. Increasing market share, becoming the high-quality or low-cost producer, developing new products, and increasing employee productivity depend more and more on the kinds and ­quality of information systems in the organization. The more you understand about this relationship, the more valuable you will be as a manager. Specifically, business firms invest heavily in information systems to achieve six strategic business objectives: operational excellence; new products, services, and business models; customer and supplier intimacy; improved decision ­making; competitive advantage; and survival. Operational Excellence Businesses continuously seek to improve the efficiency of their operations in order to achieve higher profitability. Information systems and technologies are some of the most important tools available to managers for achieving higher FIGURE 1.2 The interdependence between organizations and information systems In contemporary systems, there is a growing interdependence between a firm’s information systems and its business capabilities. Changes in strategy, rules, and business processes increasingly require changes in hardware, software, databases, and telecommunications. Often, what the organization would like to do depends on what its systems will permit it to do. 13 14 Part One Organizations, Management, and the Networked Enterprise levels of efficiency and productivity in business operations, especially when coupled with changes in business practices and management behavior. Walmart, the largest retailer on earth, exemplifies the power of information systems coupled with brilliant business practices and supportive ­management to achieve world-class operational efficiency. In fiscal year 2014, Walmart achieved $473 billion in sales—nearly one-tenth of retail sales in the United States—in large part because of its Retail Link system, which digitally links its suppliers to every one of Walmart’s stores. As soon as a customer purchases an item, the supplier monitoring the item knows to ship a replacement to the shelf. Walmart is the most efficient retail store in the industry, achieving sales of more than $428 per square foot, compared to its closest competitor, Target, at $295 a square foot. Other less efficient general merchandise stores generate from $150 to $200 a square foot. N ew P r o d u c t s , S e r v i c e s , a n d B u s i n e s s M o d e l s Information systems and technologies are a major enabling tool for firms to create new products and services, as well as entirely new business models. A business model describes how a company produces, delivers, and sells a ­product or service to create wealth. Today’s music industry is vastly different from the industry a decade ago. Apple Inc. transformed an old business model of music distribution based on vinyl records, tapes, and CDs into an online, legal distribution model based on its own iPod technology platform. Apple has prospered from a continuing stream of iPod innovations, including the iTunes music service, the iPad, and the iPhone. Customer and Supplier Intimacy When a business really knows its customers, and serves them well, the customers generally respond by returning and purchasing more. This raises revenues and profits. Likewise with suppliers: the more a business engages its s­ uppliers, the better the suppliers can provide vital inputs. This lowers costs. How to really know your customers, or suppliers, is a central problem for businesses with millions of offline and online customers. The Mandarin Oriental in Manhattan and other high-end hotels exemplify the use of information systems and technologies to achieve customer i­ ntimacy. These hotels use computers to keep track of guests’ preferences, such as their preferred room temperature, check-in time, frequently dialed ­telephone ­numbers, and television programs, and store these data in a large data ­repository. Individual rooms in the hotels are networked to a central network server computer so that they can be remotely monitored or controlled. When a customer arrives at one of these hotels, the system automatically changes the room conditions, such as dimming the lights, setting the room temperature, or selecting appropriate music, based on the customer’s digital profile. The hotels also analyze their customer data to identify their best customers and to develop individualized marketing campaigns based on customers’ preferences. JCPenney exemplifies the benefits of information systems-enabled supplier intimacy. Every time a dress shirt is bought at a JCPenney store in the United States, the record of the sale appears immediately on computers in Hong Kong at the TAL Apparel Ltd. supplier, a contract manufacturer that produces one in eight dress shirts sold in the United States. TAL runs the numbers through a computer model it developed and then decides how many replacement shirts to make, and in what styles, colors, and sizes. TAL then sends the shirts to Chapter 1 Information Systems in Global Business Today each JCPenney store, bypassing completely the retailer’s warehouses. In other words, JCPenney’s shirt inventory is near zero, as is the cost of storing it. I m p r ov e d D e c i s i o n M a k i n g Many business managers operate in an information fog bank, never really having the right information at the right time to make an informed decision. Instead, managers rely on forecasts, best guesses, and luck. The result is overor underproduction of goods and services, misallocation of resources, and poor response times. These poor outcomes raise costs and lose customers. In the past decade, information systems and technologies have made it possible for managers to use real-time data from the marketplace when making decisions. For instance, Verizon Corporation, one of the largest telecommunication companies in the United States, uses a Web-based digital dashboard to provide managers with precise real-time information on customer complaints, network performance for each locality served, and line outages or storm-damaged lines. Using this information, managers can immediately allocate repair resources to affected areas, inform consumers of repair efforts, and restore service fast. C o m p e t i t i v e A dv a n t a g e When firms achieve one or more of these business objectives—operational excellence; new products, services, and business models; customer/supplier intimacy; and improved decision making—chances are they have already achieved a competitive advantage. Doing things better than your competitors, charging less for superior products, and responding to customers and suppliers in real time all add up to higher sales and higher profits that your competitors cannot match. Apple Inc., Walmart, and UPS, described later in this chapter, are industry leaders because they know how to use information systems for this purpose. Survival Business firms also invest in information systems and technologies because they are necessities of doing business. Sometimes these “necessities” are driven by industry-level changes. For instance, after Citibank introduced the first ­automated teller machines (ATMs) in the New York region in 1977 to attract customers through higher service levels, its competitors rushed to provide ATMs to their customers to keep up with Citibank. Today, virtually all banks in the United States have regional ATMs and link to national and international ATM networks, such as CIRRUS. Providing ATM services to retail banking customers is simply a requirement of being in and surviving in the retail banking business. There are many federal and state statutes and regulations that create a legal duty for companies and their employees to retain records, including digital records. For instance, the Toxic Substances Control Act (1976), which regulates the exposure of U.S. workers to more than 75,000 toxic chemicals, requires firms to retain records on employee exposure for 30 years. The Sarbanes-Oxley Act (2002), which was intended to improve the accountability of public firms and their auditors, requires certified public accounting firms that audit public ­companies to retain audit working papers and records, including all e-mails, for five years. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) which was intended to strengthen regulation of the banking industry requires firms to retain all records for ten years. Many other pieces of federal 15 16 Part One Organizations, Management, and the Networked Enterprise and state legislation in health care, financial services, education, and privacy protection impose significant ­information retention and reporting requirements on U.S. businesses. Firms turn to information systems and technologies to provide the capability to respond to these challenges. 1.2 What is an information system? How does it work? What are its management, organization, and technology components and why are complementary assets essential for ensuring that information systems provide genuine value for an organization? So far we’ve used information systems and technologies informally without d ­ efining the terms. Information technology (IT) consists of all the ­hardware and ­software that a firm needs to use in order to achieve its business ­objectives. This includes not only computer machines, storage devices, and handheld mobile devices, but also software, such as the Windows or Linux ­operating s­ ystems, the Microsoft Office desktop productivity suite, and the many thousands of computer programs that can be found in a typical large firm. “Information systems” are more complex and can be best understood by looking at them from both a technology and a business perspective. What Is an Information System? An information system can be defined technically as a set of interrelated components that collect (or retrieve), process, store, and distribute information to support decision making and control in an organization. In addition to supporting decision making, coordination, and control, information systems may also help managers and workers analyze problems, visualize complex subjects, and create new products. Information systems contain information about significant people, places, and things within the organization or in the environment surrounding it. By information we mean data that have been shaped into a form that is ­meaningful and useful to human beings. Data, in contrast, are streams of raw facts representing events occurring in organizations or the physical environment before they have been organized and arranged into a form that people can understand and use. A brief example contrasting information and data may prove useful. Supermarket checkout counters scan millions of pieces of data from bar codes, which describe each product. Such pieces of data can be totaled and analyzed to provide meaningful information, such as the total number of bottles of dish detergent sold at a particular store, which brands of dish detergent were selling the most rapidly at that store or sales territory, or the total amount spent on that brand of dish detergent at that store or sales region (see Figure 1.3). Three activities in an information system produce the information that organizations need to make decisions, control operations, analyze problems, and create new products or services. These activities are input, processing, and output (see Figure 1.4). Input captures or collects raw data from within Chapter 1 Information Systems in Global Business Today FIGURE 1.3 Data and Information Raw data from a supermarket checkout counter can be processed and organized to produce meaningful information, such as the total unit sales of dish detergent or the total sales revenue from dish detergent for a specific store or sales territory. the organization or from its external environment. Processing converts this raw input into a meaningful form. Output transfers the processed information to the people who will use it or to the activities for which it will be used. FIGURE 1.4 Functions of an Information System An information system contains information about an organization and its surrounding environment. Three basic activities—input, processing, and output—produce the information organizations need. Feedback is output returned to appropriate people or activities in the organization to evaluate and refine the input. Environmental actors, such as customers, suppliers, competitors, stockholders, and regulatory agencies, interact with the organization and its information systems. 17 18 Part One Organizations, Management, and the Networked Enterprise Information systems also require feedback, which is output that is returned to appropriate members of the organization to help them evaluate or correct the input stage. In the San Francisco Giants system for selling tickets, the raw input consists of order data for tickets, such as the purchaser’s name, address, credit card number, number of tickets ordered, and the date of the game for which the ticket is being purchased. Another input would be the ticket price, which would fluctuate based on computer analysis of how much could optimally be charged for a ticket for a particular game. Computers store these data and process them to calculate order totals, to track ticket purchases, and to send requests for payment to credit card companies. The output consists of tickets to print out, receipts for orders, and reports on online ticket orders. The system provides meaningful information, such as the number of tickets sold for a particular game or at a particular price, the total number of tickets sold each year, and frequent customers. Although computer-based information systems use computer technology to process raw data into meaningful information, there is a sharp distinction between a computer and a computer program on the one hand, and an information system on the other. Electronic computers and related software programs are the technical foundation, the tools and materials, of modern information systems. Computers provide the equipment for storing and p ­ rocessing information. Computer programs, or software, are sets of operating instructions that direct and control computer processing. Knowing how computers and computer programs work is important in designing solutions to organizational problems, but computers are only part of an information system. A house is an appropriate analogy. Houses are built with hammers, nails, and wood, but these do not make a house. The architecture, design, setting, ­landscaping, and all of the decisions that lead to the creation of these ­features are part of the house and are crucial for solving the problem of putting a roof over one’s head. Computers and programs are the hammers, nails, and lumber of computer-based information systems, but alone they cannot produce the information a particular organization needs. To understand information ­systems, you must understand the problems they are designed to solve, their architectural and design elements, and the organizational processes that lead to these solutions. Dimensions of Information Systems To fully understand information systems, you must understand the broader organization, management, and information technology dimensions of ­systems (see Figure 1.5) and their power to provide solutions to ­challenges and problems in the business environment. We refer to this broader understanding of information systems, which encompasses an understanding of the management and organizational dimensions of systems as well as the technical dimensions of systems, as information systems ­ literacy. Computer literacy, in contrast, focuses primarily on knowledge of ­information technology. The field of management information systems (MIS) tries to achieve this broader information systems literacy. MIS deals with behavioral issues as well as technical issues surrounding the development, use, and impact of information systems used by managers and employees in the firm. Let’s examine each of the dimensions of information systems—organizations, management, and information technology. Chapter 1 Information Systems in Global Business Today FIGURE 1.5 Information systems are more than computers Using information systems effectively requires an understanding of the organization, management, and information technology shaping the systems. An information system creates value for the firm as an organizational and management solution to challenges posed by the environment. Organizations Information systems are an integral part of organizations. Indeed, for some ­companies, such as credit reporting firms, there would be no business without an information system. The key elements of an organization are its people, ­structure, business processes, politics, and culture. We introduce these components of organizations here and describe them in greater detail in Chapters 2 and 3. Organizations have a structure that is composed of different levels and ­specialties. Their structures reveal a clear-cut division of labor. Authority and responsibility in a business firm are organized as a hierarchy, or a pyramid structure. The upper levels of the hierarchy consist of managerial, professional, and technical employees, whereas the lower levels consist of operational personnel. Senior management makes long-range strategic decisions about products and services as well as ensures financial performance of the firm. Middle management carries out the programs and plans of senior management, and operational management is responsible for monitoring the daily activities of the business. Knowledge workers, such as engineers, scientists, or ­architects, design products or services and create new knowledge for the firm, whereas data workers, such as secretaries or clerks, assist with scheduling and ­communications at all levels of the firm. Production or service workers ­actually produce the product and deliver the service (see Figure 1.6). Experts are employed and trained for different business functions. The major business functions, or specialized tasks performed by business organizations, consist of sales and marketing, manufacturing and production, finance and accounting, and human resources (see Table 1.2). Chapter 2 provides more detail on these business functions and the ways in which they are supported by information systems. An organization coordinates work through its hierarchy and through its ­business processes, which are logically related tasks and behaviors for ­accomplishing work. Developing a new product, fulfilling an order, and hiring a new employee are examples of business processes. 19 20 Part One Organizations, Management, and the Networked Enterprise FIGURE 1.6 Levels in a Firm Business organizations are hierarchies consisting of three principal levels: senior management, middle management, and operational management. Information systems serve each of these levels. Scientists and knowledge workers often work with middle management. Most organizations’ business processes include formal rules that have been developed over a long time for accomplishing tasks. These rules guide employees in a variety of procedures, from writing an invoice to responding to customer complaints. Some of these business processes have been written down, but others are informal work practices, such as a requirement to return telephone calls from coworkers or customers, that are not formally documented. Information systems automate many business processes. For instance, how a customer receives credit or how a customer is billed is often determined by an information system that incorporates a set of formal business processes. Each organization has a unique culture, or fundamental set of assumptions, values, and ways of doing things, that has been accepted by most of its ­members. You can see organizational culture at work by looking around your university or college. Some bedrock assumptions of university life are that professors know more than students, the reasons students attend college is to learn, and that classes follow a regular schedule. TABLE 1.2 Major Business Functions Function Purpose Sales and marketing Selling the organization’s products and services Manufacturing and production Producing and delivering products and services Finance and accounting Managing the organization’s financial assets and maintaining the organization’s financial records Human resources Attracting, developing, and maintaining the organization’s labor force; maintaining employee records Chapter 1 Information Systems in Global Business Today Parts of an organization’s culture can always be found embedded in its i­ nformation systems. For instance, UPS’s first priority is customer service, which is an aspect of its organizational culture that can be found in the c­ ompany’s package tracking systems, which we describe later in this section. Different levels and specialties in an organization create different interests and points of view. These views often conflict over how the company should be run and how resources and rewards should be distributed. Conflict is the basis for organizational politics. Information systems come out of this ­cauldron of differing perspectives, conflicts, compromises, and agreements that are a n ­ atural part of all organizations. In Chapter 3, we examine these features of organizations and their role in the development of information systems in greater detail. Management Management’s job is to make sense out of the many situations faced by ­organizations, make decisions, and formulate action plans to solve organizational problems. Managers perceive business challenges in the environment; they set the organizational strategy for responding to those challenges; and they allocate the human and financial resources to coordinate the work and achieve success. Throughout, they must exercise responsible leadership. The business information systems described in this book reflect the hopes, dreams, and ­realities of real-world managers. But managers must do more than manage what already exists. They must also create new products and services and even re-create the organization from time to time. A substantial part of management responsibility is creative work driven by new knowledge and information. Information technology can play a powerful role in helping managers design and deliver new products and ­services and redirecting and redesigning their organizations. Chapter 12 treats management decision making in detail. I n fo r m a t i o n Te c h n o l o g y Information technology is one of many tools managers use to cope with change. Computer hardware is the physical equipment used for input, processing, and output activities in an information system. It consists of the following: computers of various sizes and shapes (including mobile handheld devices); various input, output, and storage devices; and telecommunications devices that link computers together. Computer software consists of the detailed, preprogrammed instructions that control and coordinate the computer hardware components in an information system. Chapter 5 describes the contemporary software and hardware ­platforms used by firms today in greater detail. Data management technology consists of the software governing the ­organization of data on physical storage media. More detail on data organization and access methods can be found in Chapter 6. Networking and telecommunications technology, consisting of both physical devices and software, links the various pieces of hardware and transfers data from one physical location to another. Computers and communications equipment can be connected in networks for sharing voice, data, images, sound, and video. A network links two or more computers to share data or resources, such as a printer. The world’s largest and most widely used network is the Internet. The Internet is a global “network of networks” that uses universal standards (described in Chapter 7) to connect millions of different networks with nearly 3 billion users in over 230 countries around the world. 21 22 Part One Organizations, Management, and the Networked Enterprise The Internet has created a new “universal” technology platform on which to build new products, services, strategies, and business models. This same ­technology platform has internal uses, providing the connectivity to link different systems and networks within the firm. Internal corporate networks based on Internet technology are called intranets. Private intranets extended to authorized users outside the organization are called extranets, and firms use such networks to coordinate their activities with other firms for making ­purchases, collaborating on design, and other interorganizational work. For most business firms today, using Internet technology is both a business ­necessity and a competitive advantage. The World Wide Web is a service provided by the Internet that uses universally accepted standards for storing, retrieving, formatting, and displaying information in a page format on the Internet. Web pages contain text, graphics, animations, sound, and video and are linked to other Web pages. By clicking on highlighted words or buttons on a Web page, you can link to related pages to find additional information and links to other locations on the Web. The Web can serve as the foundation for new kinds of information systems such as UPS’s Webbased package tracking system described in the following Interactive Session. All of these technologies, along with the people required to run and m ­ anage them, represent resources that can be shared throughout the organization and constitute the firm’s information technology (IT) infrastructure. The IT infrastructure provides the foundation, or platform, on which the firm can build its specific information systems. Each organization must carefully design and manage its IT infrastructure so that it has the set of technology services it needs for the work it wants to accomplish with information systems. Chapters 5 through 8 of this book examine each major technology component of information technology infrastructure and show how they all work together to create the technology platform for the organization. The Interactive Session on Technology describes some of the typical ­technologies used in computer-based information systems today. UPS invests heavily in information systems technology to make its business more efficient and customer oriented. It uses an array of information technologies, including bar code scanning systems, wireless networks, large mainframe computers, handheld computers, the Internet, and many different pieces of software for tracking packages, calculating fees, maintaining customer accounts, and ­managing logistics. Let’s identify the organization, management, and technology elements in the UPS package tracking system we have just described. The organization e ­ lement anchors the package tracking system in UPS’s sales and production functions (the main product of UPS is a service—package delivery). It specifies the required procedures for identifying packages with both sender and recipient information, taking inventory, tracking the packages en route, and providing package status reports for UPS customers and customer service representatives. The system must also provide information to satisfy the needs of managers and workers. UPS drivers need to be trained in both package pickup and ­delivery procedures and in how to use the package tracking system so that they can work efficiently and effectively. UPS customers may need some training to use UPS in-house package tracking software or the UPS Web site. UPS’s management is responsible for monitoring service levels and costs and for promoting the company’s strategy of combining low cost and superior ­service. Management decided to use computer systems to increase the ease of sending a package using UPS and of checking its delivery status, thereby ­reducing delivery costs and increasing sales revenues. Chapter 1 Information Systems in Global Business Today 23 I n t e r a c t i v e S e ss i o n : T e c h n o l o g y UPS Competes Globally with Information Technology United Parcel Service (UPS) started out in 1907 in a closet-sized basement office. Jim Casey and Claude Ryan—two teenagers from Seattle with two bicycles and one phone—promised the “best service and ­lowest rates.” UPS has used this formula successfully for more than a century to become the world’s largest ground and air package-delivery company. It’s a global enterprise with nearly 400,000 employees, 96,000 vehicles, and the world’s ninth largest airline. Today UPS delivers 16.3 million packages and documents each day in the United States and more than 220 other countries and territories. The firm has been able to maintain leadership in small-package delivery services despite stiff competition from FedEx and Airborne Express by investing heavily in advanced information technology. UPS spends more than $1 billion each year to maintain a high level of customer service while keeping costs low and streamlining its overall operations. It all starts with the scannable bar-coded label attached to a package, which contains detailed ­information about the sender, the destination, and when the package should arrive. Customers can download and print their own labels using special software provided by UPS or by accessing the UPS Web site. Before the package is even picked up, ­information from the “smart” label is transmitted to one of UPS’s computer centers in Mahwah, New Jersey, or Alpharetta, Georgia and sent to the ­distribution center nearest its final destination. Dispatchers at this center download the label data and use special software to create the most efficient delivery route for each driver that considers traffic, weather conditions, and the location of each stop. In 2009, UPS began installing sensors in its delivery vehicles that can capture the truck’s speed and location, the number of times it’s placed in reverse and whether the driver’s seat belt is buckled. At the end of each day, these data are uploaded to a UPS central computer and analyzed. By combining GPS information and data from fuel-efficiency sensors installed on more than 46,000 vehicles in 2011, UPS reduced fuel consumption by 8.4 million gallons and cut 85 million miles off its routes. UPS estimates that ­saving only one daily mile driven per driver saves the ­company $30 million. The first thing a UPS driver picks up each day is a handheld computer called a Delivery Information Acquisition Device (DIAD), which can access a ­wireless cell phone network. As soon as the driver logs on, his or her day’s route is downloaded onto the handheld. The DIAD also automatically captures customers’ signatures along with pickup and delivery information. Package tracking information is then transmitted to UPS’s computer network for storage and processing. From there, the information can be accessed worldwide to provide proof of delivery to customers or to respond to customer queries. It ­usually takes less than 60 seconds from the time a driver presses “complete” on a the DIAD for the new information to be available on the Web. Through its automated package tracking ­system, UPS can monitor and even re-route packages throughout the delivery process. At various points along the route from sender to receiver, bar code devices scan shipping information on the package label and feed data about the progress of the package into the central computer. Customer service ­representatives are able to check the status of any package from desktop computers linked to the ­central computers and respond immediately to ­inquiries from customers. UPS customers can also access this information from the company’s Web site using their own computers or mobile phones. UPS now has mobile apps and a mobile Web site for iPhone, BlackBerry, and Android smartphone users. Anyone with a package to ship can access the UPS Web site to track packages, check delivery routes, ­calculate shipping rates, determine time in transit, print labels, and schedule a pickup. The data ­collected at the UPS Web site are transmitted to the UPS central computer and then back to the customer after processing. UPS also provides tools that enable customers, such Cisco Systems, to embed UPS functions, such as tracking and cost calculations, into their own Web sites so that they can track shipments without visiting the UPS site. A Web-based Post Sales Order Management System (OMS) manages global service orders and inventory for critical parts fulfillment. The system enables ­high-tech electronics, aerospace, medical equipment, and other companies anywhere in the world that ship critical parts to quickly assess their critical parts inventory, determine the most optimal routing strategy to meet customer needs, place orders online, and track parts from the warehouse to the end user. 24 Part One Organizations, Management, and the Networked Enterprise An automated e-mail or fax feature keeps customers informed of each shipping milestone and can provide notification of any changes to flight schedules for commercial airlines carrying their parts. UPS is now leveraging its decades of expertise managing its own global delivery network to manage logistics and supply chain activities for other companies. It created a UPS Supply Chain Solutions division that provides a complete bundle of standardized services to subscribing companies at a fraction of what it would cost to build their own systems and infrastructure. These services include supply-chain design and management, freight forwarding, customs brokerage, mail services, multimodal transportation, and financial services, in addition to logistics services. For example, UPS handles logistics for Lighting Science Group, the world’s leading maker of advanced light products such as energy-efficient light-emitting diode (LED) lamps and custom design lighting ­systems. The company has manufacturing operations in Satellite Beach, Florida and China. UPS conducted a warehouse/distribution analysis to shape the ­manufacturer’s distribution strategy, in which finished goods from China are brought to a UPS warehouse in Fort Worth, Texas, for distribution. The UPS ­warehouse repackages finished goods, handles returns and conducts daily cycle counts as well as annual inventory. Lighting Science uses UPS Trade Management Services and UPS Customs Brokerage to help manage import and export compliance to ensure timely, reliable delivery and reduce customs delays. UPS also helps Lighting Science reduce customer inventory and improve order fulfillment. UPS manages logistics and international shipping for Celaris, the world’s largest wireless accessory vendor, selling mobile phone cases, headphones, screen protectors, and chargers. Cellaris has nearly 1,000 franchises in the United States, Canada and the United Kingdom. The company’s supply chain is complex, with products developed in Georgia, manufactured at more than 25 locations in Asia and 10 locations in the U.S., warehoused in a Georgia distribution center, and shipped to franchisees and customers worldwide. UPS redesigned Celaris’s inbound/outbound supply chain and introduced new services to create a more efficient shipping model. UPS Buyer Consolidation for International Air Freight reduces complexity in dealing with multiple international manufacturing sources. UPS Worldwide Express Freight guarantees ­on-time ­service for critical freight pallet shipments and UPS Customs Brokerage enables single-source ­clearance for multiple transportation modes. These changes have saved Celaris more than 5,000 hours and $500,000 annually, and the supply chain ­redesign alone has saved more than 15 percent on ­shipments. Sources: “A Good Call Becomes a Thriving Business,” UPS Compass, February 2014;”High-Tech Manufacturer Masters Logistics, UPS Compass, January 2014;, accessed April 17, 2014; Steve Rosenbush and Michael Totty, “How Big Data Is Transforming Business,” The Wall Street Journal, March 10, 2013; Thomas H. Davenport, “Analytics That Tell You What to Do,” The Wall Street Journal, April 3, 2013; Elana Varon, “How UPS Trains Front-Line Workers to Use Predictive Analytics,” DataInformed, January 31, 2013; and Jennifer Levitz and Timothy W. Martin, “UPS, Other Big Shippers, Carve Health Care Niches,” The Wall Street Journal, June 27, 2012. c a s e st u dy q u e st i o n s 1. What are the inputs, processing, and outputs of UPS’s package tracking system? 2. What technologies are used by UPS? How are these technologies related to UPS’s business strategy? 3. What strategic business objectives do UPS’s ­information systems address? 4. What would happen if UPS’s information systems were not available? The technology supporting this system consists of handheld computers, bar code scanners, desktop computers, wired and wireless communications ­networks, UPS’s data center, storage technology for the package delivery data, UPS in-house package tracking software, and software to access the World Wide Web. The result is an information system solution to the business challenge of providing a high level of service with low prices in the face of mounting competition. Chapter 1 Information Systems in Global Business Today 25 Using a handheld computer called a Delivery Information Acquisition Device (DIAD), UPS drivers automatically capture customers’ signatures along with pickup, delivery, and time card information. UPS information systems use these data to track packages while they are being transported. © Bill Aron/PhotoEdit It Isn’t Just Technology: A Business Perspective on Information Systems Managers and business firms invest in information technology and systems because they provide real economic value to the business. The decision to build or maintain an information system assumes that the returns on this investment will be superior to other investments in buildings, machines, or other assets. These superior returns will be expressed as increases in productivity, as increases in revenues (which will increase the firm’s stock market value), or perhaps as superior long-term strategic positioning of the firm in certain ­markets (which produce superior revenues in the future). We can see that from a business perspective, an information system is an important instrument for creating value for the firm. Information ­systems enable the firm to increase its revenue or decrease its costs by providing ­information that helps managers make better decisions or that improves the execution of business processes. For example, the information system for ­analyzing supermarket checkout data illustrated in Figure 1.3 can increase firm profitability by helping managers make better decisions as to which products to stock and promote in retail supermarkets. Every business has an information value chain, illustrated in Figure 1.7, in which raw information is systematically acquired and then transformed through various stages that add value to that information. The value of an information system to a business, as well as the decision to invest in any new information system, is, in large part, determined by the extent to which the system will lead to better management decisions, more efficient business processes, and higher firm profitability. Although there are other reasons why systems are built, their primary purpose is to contribute to corporate value. From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability. The business perspective calls attention to the organizational and ­managerial nature of information systems. An information system represents 26 Part One Organizations, Management, and the Networked Enterprise FIGURE 1.7 The business information value chain From a business perspective, information systems are part of a series of value-adding activities for acquiring, ­transforming, and distributing information that managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability. an organizational and management solution, based on information technology, to a challenge or problem posed by the environment. Every chapter in this book begins with a short case study that illustrates this concept. A diagram at the beginning of each chapter illustrates the relationship between a business challenge and resulting management and organizational decisions to use IT as a solution to challenges generated by the business environment. You can use this diagram as a starting point for analyzing any information system or information system problem you encounter. Review the diagram at the beginning of this chapter. The diagram shows how the San Francisco Giants’ systems solved the business problem presented by the need to generate revenue in a highly competitive industry. These systems provide a solution that takes advantage of opportunities provided by new digital technology and the Internet. They opened up new channels for selling tickets and interacting with customers, optimized ticket pricing, and used new tools to analyze player performance. These systems were essential in improving the Giants’s overall business performance. The diagram also illustrates how management, technology, and organizational elements work together to create the systems. Complementary Assets: Organizational Capital and the Right Business Model Awareness of the organizational and managerial dimensions of information systems can help us understand why some firms achieve better results from Chapter 1 Information Systems in Global Business Today their information systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive (see Figure 1.8). Some firms invest a great deal and receive a great deal (quadrant 2); others invest an equal amount and receive few returns (­quadrant 4). Still other firms invest little and receive much (quadrant 1), whereas others invest little and receive little (quadrant 3). This suggests that investing in information technology does not by itself guarantee good returns. What accounts for this variation among firms? The answer lies in the concept of complementary assets. Information ­technology investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Business firms need to change how they do business before they can really reap the advantages of new information technologies. Some firms fail to adopt the right business model that suits the new ­technology, or seek to preserve an old business model that is doomed by new technology. For instance, recording label companies refused to change their old business model, which was based on physical music stores for distribution rather than adopt a new online distribution model. As a result, online legal music sales are dominated not by record companies but by a technology ­company called Apple Computer. Complementary assets are those assets required to derive value from a ­primary investment (Teece, 1988). For instance, to realize value from ­automobiles requires substantial complementary investments in highways, roads, ­gasoline stations, repair facilities, and a legal regulatory structure to set standards and control drivers. Research indicates that firms that support their technology investments with investments in complementary assets, such as new business models, new business processes, management behavior, organizational culture, or FIGURE 1.8 Variation in returns on information technology investment Although, on average, investments in information technology produce returns far above those returned by other investments, there is considerable variation across firms. Source: Based on Brynjolfsson and Hitt (2000). 27 28 Part One Organizations, Management, and the Networked Enterprise training, receive superior returns, whereas those firms failing to make these complementary investments receive less or no returns on their information technology investments (Brynjolfsson, 2003; Brynjolfsson and Hitt, 2000; Laudon, 1974). These investments in organization and management are also known as organizational and management capital. Table 1.3 lists the major complementary investments that firms need to make to realize value from their information technology investments. Some of this investment involves tangible assets, such as buildings, machinery, and tools. However, the value of investments in information technology depends to a large extent on complementary investments in management and organization. Key organizational complementary investments are a supportive business culture that values efficiency and effectiveness, an appropriate business model, efficient business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team. Important managerial complementary assets are strong senior management support for change, incentive systems that monitor and reward individual ­innovation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge. Important social investments (not made by the firm but by the society at large, other firms, governments, and other key market actors) are the Internet and the supporting Internet culture, educational systems, network and computing standards, regulations and laws, and the presence of technology and service firms. Throughout the book we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Perhaps the single most important theme in the book, reflected in case studies and exercises, is that managers need to consider the broader organization and TABLE 1.3 Complementary Social, Managerial, and Organizational Assets Required to Optimize Returns from Information Technology Investments Organizational assets Supportive organizational culture that values efficiency and effectiveness Appropriate business model Efficient business processes Decentralized authority Distributed decision-making rights Strong IS development team Managerial assets Strong senior management support for technology investment and change Incentives for management innovation Teamwork and collaborative work environments Training programs to enhance management decision skills Management culture that values flexibility and knowledge-based decision making. Social assets The Internet and telecommunications infrastructure IT-enriched educational programs raising labor force computer literacy Standards (both government and private sector) Laws and regulations creating fair, stable market environments Technology and service firms in adjacent markets to assist implementation Chapter 1 Information Systems in Global Business Today management dimensions of information systems to understand current ­problems as well as to derive substantial above-average returns from their ­information technology investments. As you will see throughout the text, firms that can address these related dimensions of the IT investment are, on average, richly rewarded. 1.3 What academic disciplines are used to study information systems and how does each contribute to an understanding of information systems? The study of information systems is a multidisciplinary field. No single theory or perspective dominates. Figure 1.9 illustrates the major disciplines that contribute problems, issues, and solutions in the study of information systems. In general, the field can be divided into technical and behavioral approaches. Information systems are sociotechnical systems. Though they are composed of machines, devices, and “hard” physical technology, they require substantial social, organizational, and intellectual investments to make them work properly. Technical Approach The technical approach to information systems emphasizes mathematically based models to study information systems, as well as the physical technology and formal capabilities of these systems. The disciplines that contribute to the technical approach are computer science, management science, and operations research. FIGURE 1.9 Contemporary approaches to information systems The study of information systems deals with issues and insights contributed from technical and behavioral disciplines. 29 30 Part One Organizations, Management, and the Networked Enterprise Computer science is concerned with establishing theories of computability, methods of computation, and methods of efficient data storage and access. Management science emphasizes the development of models for decision-making and management practices. Operations research focuses on mathematical techniques for optimizing selected parameters of organizations, such as transportation, inventory control, and transaction costs. Behavioral Approach An important part of the information systems field is concerned with ­behavioral issues that arise in the development and long-term maintenance of information systems. Issues such as strategic business integration, design, implementation, utilization, and management cannot be explored usefully with the models used in the technical approach. Other behavioral disciplines contribute important concepts and methods. For instance, sociologists study information systems with an eye toward how groups and organizations shape the development of systems and also how ­systems affect individuals, groups, and organizations. Psychologists study ­information systems with an interest in how human decision makers perceive and use formal information. Economists study information systems with an interest in understanding the production of digital goods, the dynamics of ­digital markets, and how new information systems change the control and cost structures within the firm. The behavioral approach does not ignore technology. Indeed, information systems technology is often the stimulus for a behavioral problem or issue. But the focus of this approach is generally not on technical solutions. Instead, it concentrates on changes in attitudes, management and organizational policy, and behavior. Approach of This Text: Sociotechnical Systems Throughout this book you will find a rich story with four main actors: s­ uppliers of hardware and software (the technologists); business firms making i­nvestments and seeking to obtain value from the technology; managers and employees seeking to achieve business value (and other goals); and the c­ ontemporary legal, social, and cultural context (the firm’s environment). Together these actors produce what we call management information systems. The study of management information systems (MIS) arose to focus on the use of computer-based information systems in business firms and government agencies. MIS combines the work of computer science, management ­science, and operations research with a practical orientation toward developing system solutions to real-world problems and managing information technology resources. It is also concerned with behavioral issues surrounding the development, use, and impact of information systems, which are typically discussed in the fields of sociology, economics, and psychology. Our experience as academics and practitioners leads us to believe that no single approach effectively captures the reality of information systems. The ­successes and failures of information are rarely all technical or all behavioral. Our best advice to students is to understand the perspectives of many ­disciplines. Indeed, the challenge and excitement of the information systems field is that it requires an appreciation and tolerance of many different approaches. Chapter 1 Information Systems in Global Business Today The view we adopt in this book is best characterized as the sociotechnical view of systems. In this view, optimal organizational performance is achieved by jointly optimizing both the social and technical systems used in production. Adopting a sociotechnical systems perspective helps to avoid a purely ­technological approach to information systems. For instance, the fact that ­information technology is rapidly declining in cost and growing in power does not necessarily or easily translate into productivity enhancement or bottomline profits. The fact that a firm has recently installed an enterprise-wide ­financial reporting system does not necessarily mean that it will be used, or used effectively. Likewise, the fact that a firm has recently introduced new business procedures and processes does not necessarily mean employees will be more productive in the absence of investments in new information systems to enable those processes. In this book, we stress the need to optimize the firm’s performance as a whole. Both the technical and behavioral components need attention. This means that technology must be changed and designed in such a way as to fit organizational and individual needs. Sometimes, the technology may have to be “de-optimized” to accomplish this fit. For instance, mobile phone users adapt this technology to their personal needs, and as a result manufacturers quickly seek to adjust the technology to conform with user expectations. Organizations and individuals must also be changed through training, learning, and planned organizational change to allow the technology to o ­ perate and prosper. Figure 1.10 illustrates this process of mutual adjustment in a sociotechnical system. FIGURE 1.10 A sociotechnical perspective on information systems In a sociotechnical perspective, the performance of a system is optimized when both the technology and the organization mutually adjust to one another until a satisfactory fit is obtained. 31 32 Part One Organizations, Management, and the Networked Enterprise Review Summary 1. How are information systems transforming business, and why are they essential for running and managing a business today? E-mail, online conferencing, smartphones, and tablet computers have become essential tools for conducting business. Information systems are the foundation of fast-paced supply chains. The Internet allows many businesses to buy, sell, advertise, and solicit customer feedback online. Organizations are trying to become more competitive and efficient by digitally enabling their core business processes and evolving into digital firms. The Internet has stimulated globalization by ­dramatically reducing the costs of producing, buying, and selling goods on a global scale. New ­information system trends include the emerging mobile digital platform, online software as a ­service, and cloud computing. Information systems are a foundation for conducting business today. In many industries, survival and the ability to achieve strategic business goals are difficult without extensive use of information technology. Businesses today use information systems to achieve six major objectives: operational excellence; new products, services, and business models; customer/supplier intimacy; improved ­decision making; competitive advantage; and day-to-day survival. 2. What is an information system? How does it work? What are its management, organization, and ­technology components and why are complementary assets essential for ensuring that information systems provide genuine value for organizations? From a technical perspective, an information system collects, stores, and disseminates information from an organization’s environment and internal operations to support organizational functions and decision making, communication, coordination, control, analysis, and visualization. Information ­systems transform raw data into useful information through three basic activities: input, processing, and output. From a business perspective, an information system provides a solution to a problem or c­ hallenge facing a firm and represents a combination of management, organization, and technology elements. The management dimension of information systems involves issues such as leadership, strategy, and management behavior. The technology dimension consists of computer hardware, software, data ­ m anagement technology, and networking/telecommunications technology ­(including the Internet). The organization dimension of information systems involves issues such as the organization’s h ­ ierarchy, functional specialties, business processes, culture, and political interest groups. In order to obtain meaningful value from information systems, organizations must support their technology investments with appropriate complementary investments in organizations and ­management. These complementary assets include new business models and business processes, supportive organizational culture and management behavior, appropriate technology standards, ­regulations, and laws. New information technology investments are unlikely to produce high returns unless ­businesses make the appropriate managerial and organizational changes to support the ­technology. 3. What academic disciplines are used to study information systems and how does each contribute to an understanding of information systems? The study of information systems deals with issues and insights contributed from technical and behavioral disciplines. The disciplines that contribute to the technical approach focusing on formal models and capabilities of systems are computer science, management science, and operations research. The disciplines contributing to the behavioral approach focusing on the design, implementation, management, and business impact of systems are psychology, sociology, and economics. A ­sociotechnical view of systems considers both technical and social features of systems and solutions that represent the best fit between them. Chapter 1 Information Systems in Global Business Today 33 Key Terms Business functions, 19 Business model, 14 Business processes, 19 Complementary assets, 27 Computer hardware, 21 Computer literacy, 18 Computer software, 21 Culture, 20 Data, 16 Data management technology, 21 Data workers, 19 Digital firm, 12 Extranets, 22 Feedback, 18 Information, 16 Information system, 16 Information systems literacy, 18 Information technology (IT), 16 Information technology (IT) infrastructure, 22 Input, 16 Internet, 21 Intranets, 22 Knowledge workers, 21 Management information systems (MIS), 18 Middle management, 19 Network, 21 Networking and telecommunications technology, 21 Operational management, 19 Organizational and management capital, 28 Output, 17 Processing, 17 Production or service workers, 21 Senior management, 21 Sociotechnical view, 31 World Wide Web, 22 MyMISLab Go to to complete the problems marked with this icon . Review Questions 1-1 How are information systems transforming business, and why are they so essential for ­running and managing a business today? • Describe how information systems have changed the way businesses operate and their products and services. • Identify three major new information ­system trends. • Describe the characteristics of a digital firm. • Describe the challenges and opportunities of globalization in a “flattened” world. • List and describe six reasons why information systems are so important for business today. 1-2 What is an information system? How does it work? What are its management, organization, and technology components and why are complementary assets essential for ensuring that information systems provide genuine value for organizations? • Define an information system and describe the activities it performs. • List and describe the organizational, management, and technology dimensions of information systems. • Distinguish between data and information and between information systems literacy and computer literacy. • Explain how the Internet and the World Wide Web are related to the other technology ­components of information systems. • Define complementary assets and describe their relationship to information technology. • Describe the complementary social, managerial, and organizational assets required to ­optimize returns from information technology investments. 1-3 What academic disciplines are used to study information systems and how does each ­contribute to an understanding of information systems? • List and describe each discipline that contributes to a technical approach to information ­systems. • List and describe each discipline that contributes to a behavioral approach to information systems. • Describe the sociotechnical perspective on information systems. 34 Part One Organizations, Management, and the Networked Enterprise Discussion Questions 1-4  Information systems are too important to be left to computer specialists. Do you agree? Why or why not? 1-5  If you were setting up the Web site for another Major League Baseball team, what management, organization, and technology issues might you encounter? 1-6  What are some of the organizational, managerial, and social complementary assets that help make UPS’s information systems so successful? Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing financial reporting and inventory management problems, using data management software to improve management decision making about increasing sales, and using Internet software for researching job requirements. Management Decision Problems 1-7 Snyders of Hanover, which sells about 80 million bags of pretzels, snack chips, and organic snack items each year, had its financial department use spreadsheets and manual processes for much of its data ­gathering and reporting. Hanover’s financial analyst would spend the entire final week of every month collecting ­spreadsheets from the heads of more than 50 departments worldwide. She would then ­consolidate and ­re-enter all the data into another spreadsheet, which would serve as the company’s monthly profit-and-loss statement. If a department needed to update its data after submitting the ­spreadsheet to the main office, the analyst had to return the original spreadsheet, then wait for the department to re-submit its data before finally submitting the updated data in the consolidated document. Assess the impact of this situation on business performance and management decision making. 1-8 Dollar General Corporation operates deep-discount stores offering housewares, cleaning supplies, ­clothing, health and beauty aids, and packaged food, with most items selling for $1. Its business model calls for keeping costs as low as possible. The company has no automated method for keeping track of inventory at each store. Managers know approximately how many cases of a particular product the store is supposed to receive when a delivery truck arrives, but the stores lack technology for scanning the cases or verifying the item count inside the cases. Merchandise losses from theft or other mishaps have been rising and now ­represent over 3 percent of total sales. What decisions have to be made before investing in an information system solution? I m p r o v i n g D e c i s i o n M a k i n g : U s i n g D a t a b a s e s t o A n a l y z e S a l e s Tr e n d s Software skills: Database querying and reporting Business skills: Sales trend analysis 1-9  In this project, you will start out with raw transactional sales data and use Microsoft Access database software to develop queries and reports that help managers make better decisions about product ­pricing, sales promotions, and inventory replenishment. In MyMISLab, you can find a Store and Regional Sales Database developed in Microsoft Access. The database contains raw data on weekly store sales of ­computer equipment in various sales regions. The database includes fields for store ­identification number, sales region, item number, item description, unit price, units sold, and the weekly sales period when the sales were made. Use Access to develop some reports and queries to make this information more useful for running the business. Sales and production managers want answers to the following questions: • • • Which products should be restocked? Which stores and sales regions would benefit from a promotional campaign and additional marketing? When (what time of year) should products be offered at full price, and when should discounts be used? Chapter 1 Information Systems in Global Business Today 35 You can easily modify the database table to find and report your answers. Print your reports and results of queries. I m p r ov i n g D e c i s i o n M a k i n g : U s i n g t h e I n t e r n e t t o L o c a t e Jo b s R e q u i r i n g I n fo r m a t i o n S y s t e m s K n o w l e d g e Software skills: Internet-based software Business skills: Job searching 1-10  Visit a job-posting Web site such as Spend some time at the site examining jobs for ­accounting, finance, sales, marketing, and human resources. Find two or three descriptions of jobs that require some information systems knowledge. What information systems knowledge do these jobs require? What do you need to do to prepare for these jobs? Write a one- to two-page report summarizing your findings. Collaboration and Teamwork Project 1-11  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this ­chapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open-source collaboration tools to complete the ­assignment. Home Depot Renovates Itself with New Systems and Ways of Working case study W hen embarking on household improvement projects, you might very well start at The Home Depot. This company is the world’s largest home improvement specialty retailer, the fourth largest retailer in the U.S, and the fifth largest retailer in the world, operating 2,256 stores in the US, Canada, and Mexico, as well as an online business. It also has been the fastestgrowing retailer in U.S. history. The Home Depot targets the do-it-yourself (DIY) and professional ­markets with its selection of some 40,000 items, including lumber, flooring, plumbing supplies, garden products, tools, paint, and appliances. Home Depot also offers ­installation services for carpeting, cabinetry, and other products. The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank as a source of one-stop shopping for both do-it-yourself homeowners as well as contractors seeking hardware and home ­renovation materials. The first two Home Depot stores opened on June 22, 1979, in Atlanta, Georgia. At around 60,000 square feet each, these stores were cavernous warehouses stocking 25,000 different products, much more than the average hardware store at that time. Empty boxes piled high on the shelves gave the illusion of even more product. The Home Depot dwarfed the competition. From the start, trained Home Depot store ­associates were able to offer the best customer ­service in the industry, guiding customers through projects such as laying tile, changing a fill valve or handling a power tool. The Home Depot revolutionized the home improvement industry by bringing the ­know-how and the tools to consumers while ­saving them money. The Home Depot’s initial success was based on a decentralized business model, where stores were almost independently managed and filled with highly knowledgeable sales people who had ­backgrounds in various building trades. Regional and store-level managers made the decisions on what merchandise to carry in each store and how much of each item to keep in stock. Individual stores were large enough (around 100,000 square feet, 36 Part One Organizations, Management, and the Networked Enterprise with annual revenues of $60-$80 million) to store huge inventories of building materials and supplies. Suppliers shipped merchandise directly to the Home Depot warehouse stores, which served as their own distribution centers. During these early years, The Home Depot was very low-tech. Former Home Depot chief information officer (CIO) Bob DeRhodes observed that the company’s most important piece of information ­technology was the No. 2 pencil. Every Monday morning, Home Depot department managers would mark up orders in an inventory list, then hand the list to a data entry staff member who would key the data into the computer. Even by 2000, The Home Depot lacked the hardware infrastructure for its CEO to send a companywide e-mail. Items were often out of out of stock because the inventory system was so poor. This business model and information systems strategy served The Home Depot well up to a point. For its first 25 years, The Home Depot’s management focused on growing the business, setting up as many stores as it could in prime locations. Eventually The Home Depot had saturated all the major metropolitan markets, and turned to secondary markets to continue its growth. The company began building smaller stores whose size was more appropriate for those markets. These smaller stores lacked the space to warehouse large inventories, which meant they didn’t have all items in stock when customers wanted to purchase them. Trucks carrying supplies to each store often arrived half-empty. Store employees spent 60% of their work day on stocking, and just 40% helping customers. The Home Depot also had dozens of distribution centers for lumber, warehouses for storing imports, and “carton distribution centers” designed to handle bulky items such as lawn tractors. This was a very large and expensive logistics infrastructure to maintain for a company where 75 percent of deliveries went directly to individual stores. When Marcus and Blank retired in 2000, they were succeeded by Robert Nardelli from GE, who became the company’s chairman, president, and CEO. By the time Nardelli took over, The Home Depot had lost its competitive edge to Lowe’s. Its stores looked too much like lumberyards, whereas Lowe’s were more modern and inviting, carrying more upscale goods aimed at women. Nardelli pushed hard to make the company more efficient, instituting many metrics and centralizing operations, while cutting jobs to meet quarterly earnings targets. Although these measures initially doubled earnings and reduced expenses, they alienated many of the store managers, rank and file sales staff and customers. Nardelli believed home improvement store-bystore sales were less important due to market saturation from competition such as Lowe’s. He expected The Home Depot’s fastest-growing area of business to be in-home installation services, Web retailing, sales to commercial contractors, and international operations. The company’s homegrown systems had become increasingly expensive to run and modify. Nardelli’s information technology plans called for a “Large IT” approach. In 2002, The Home Depot invested $1 billion in overhauling its IT infrastructure, including replacing point-of-sale (POS) systems, creating a huge data repository for accessing sales and labor management information, and implementing software from PeopleSoft and SAP to provide a standard enterprise software platform for all of the company’s basic operations, from financial reporting to inventory tracking. The enterprise software was expected to enable sales associates to access details on ­products for sale, their features, and availability, and also find information about customers they were serving, including their past transaction history with the company. This software promised to ­determine the right mix of products for retail outlets, set regional prices, and track inventory from manufacturers’ assembly lines to store cash registers. Nardelli believed self-checkout systems could replace all the store cashiers. Nardelli started to centralize purchasing, merchandizing, store planning, and marketing to achieve economies of scale and he invested $2 million in workload management software to make work activities more efficient. His primary goal was to lower the overall costs of operating the business and raise the returns to Home Depot shareholders. The selfservice checkout aisles and these other measures produced some savings, but not enough. Under Nardelli’s leadership, The Home Depot continued to lose ground to Lowe’s, which paid much more ­attention to customers in its stores. In January 2007, Nardelli was replaced by Frank Blake, who put more emphasis on serving and cultivating customers. Blake also began investing in information systems to help the company with competitive pricing. The Home Depot purchased BlackLocus, a provider of competitive price intelligence software, to help it find out how its prices compare with those of competitors and help it maintain its reputation for Chapter 1 Information Systems in Global Business Today having the lowest prices. BlackLocus provides automated and optimized pricing tools for mid-market and large online retailers, which are able to combine competitive pricing data from across the Web with customers’ online store data. Although Nardelli had made heavy investments in technology, Home Depot still had many outdated ways of working. In 2008, Home Depot hired CIO Matt Carey, who had been in charge of information systems at eBay and at Walmart before that. Carey said that when he arrived at Home Depot, the company’s retail technology was comparable to what other chains possessed in 1990. To determine which products were out of stock, sales associates still had to physically inspect shelves. Mobile computing at Home Depots boiled down to a computer terminal atop a cart “powered by a boat battery,” with a scanner attached. When merchandise was determined to be running low, the store’s manager re-ordered the items himself — inventory replenishment was still not fully automated. Carey worked with Mark Holifield, Home Depot’s Senior Vice President of Supply Chain to make the process of managing suppliers more streamlined and efficient. Holifield turned the company’s supply chain design on its head by calling for 75 percent of Home Depot inventory to move through regional distribution centers called rapid deployment centers (RDCs) that would take over inventory replenishment decisions formerly made by individual stores. This plan called for The Home Depot to construct 24 RDCs strategically located in the United States where each could serve about 100 stores. The RDCs are flow-through distribution centers designed for swift cross-docking of large volumes of merchandise. In flow-through distribution, inbound shipments are organized so that they are typically sent out to their delivery destination within the same day, thereby eliminating the need to store them. Most products leave for stores within 24 hours of their arrival at the RDCs. About 75 percent of Home Depot merchandise is now centrally ordered through these centers. About 20 percent of items, such as products from regional suppliers or trees and live plants requiring special handling will ship directly from suppliers to the stores. Inventory management became more automated, so that Home Depot could replenish items by predicting depletion of stock, rather than waiting for items to run out. The new improved inventory management system took day-to-day general stock level decisions out of the hands of local managers 37 and automated those orders, allowing the managers to concentrate more on purchases for special store displays or other areas that are specific to an individual location. One tool for helping Home Depot manage inventory is demand-planning software from Demand Foresight, which uses a state-of-the art forecasting engine to help manufacturers and ­distributors reduce forecasting errors and increase profitability. The software targets specific, measurable improvements to customer service, inventory performance, working capital levels, and supply chain efficiency. The vendor actually backs the ­product with a money-back guarantee that clients will achieve at least a 25% reduction in forecasting error and increase pre-tax profitability by 5 percent or more. Demand Foresight software is able to work within existing IT environments. As a result of all these organizational and technological changes, inventory forecasting errors have dropped significantly. The percentage of outof-stock items has been cut in half, and customers are ­finding products available 98.8 percent of the time. For example, in the unusually harsh winter of 2010, Lowe’s had run out inventory, but The Home Depot was able to respond immediately to an upsurge in demand for snow blowers, shovels, and other storm-related needs. Truck trips to make deliveries have been halved, and the job responsibilities of Home Depot store workers have shifted from the shipping docks to store aisles where they can help more ­customers. Savings on delivery, service, inventory, and transportation costs have increased Home Depot’s annual cash flow by $1 billion. By the autumn of 2012, Home Depot had recaptured its lead over Lowe’s. The Home Depot spent $64 million to supply sales people with 30,000 Motorola handheld devices called First Phones. In addition to serving as phones and walkie-talkies, the handhelds allow sales associates to use scanners on the device to continuously update and review inventory levels. Associates have instant access to product information, making them more helpful to customers, who often need specific, technical information on tools and parts, and they are able to check on the spot to see if an item is in stock. The mobile devices also help speed checkout times, allowing employees to scan items for customers as they wait on line, instead of waiting until they reach the cashier. Management expected the mobile investment to pay for itself within a year by reducing labor costs, but its true value may be in enabling employees to serve customers better with real-time 38 Part One Organizations, Management, and the Networked Enterprise information in store aisles. The helpful mobile ­technology could increase the amount customers spend on each trip to the store, as well as sales to new customers, an area of focus as the chain has slowed the opening of new stores. The Home Depot has also redesigned its Web site to be more appealing, customer-friendly, and ­competitive. The company had initially operated the Web site as a separate business that sold items such as Xbox video games that were not carried in its retail stores. The Web site lacked capabilities for ­having customers order online and pick up ­merchandise in stores, as was possible at Lowe’s. The Web site now sells what its stores do, allows in-store pickups, and features do-it-yourself videos to help customers with their home projects. It also offers many more items than a typical store—more than 600,000 items—compared with 35,000 in a ­typical store. Home Depot expects most Web site sales to consist of fast-moving smaller products like light fixtures and extension cords, as well as large bulky items like vanities and appliances that people don’t want to maneuver out of the store themselves. Sources: “An Update on Home Depot’s Supply Chain Transformation Project,” SupplyChainBrain, January 16, 2014; Shelly Banjo, “Home Depot Lumbers into E-Commerce,” Wall Street Journal, April 16, 2014 and “Home Depot Looks to Offer Same-Day Shipping,” Wall Street Journal, December 11, 2013; Paula Rosenbloom, “Home Depot’s Resurrection: How One Retailer Made Its Own Home Improvement,” Forbes, August 21, 2013; Home Depot FORM 10-K Annual Report for the Fiscal Year ended February 3, 2013; Bob Ferrari, “ Home Improvement Retailer Wars-August 2012 Update,” Supply Chain Matters, August 28, 2012 and “Can Home Depot Close It Supply Chain Gap?” Supply Chain Matters, March 1, 2010; Miguel Bustillo, “Home Depot Undergoes Renovation,” Wall Street Journal, February 24, 2010; Adam Blair, “Home Depot’s $64 Million Mobile Investment Rolls Out to 1,970 Stores,” Retail Information Systems News, December 7, 2010; Dan Gilmore, “Aggressive Supply Chain Transformation at Home Depot,” SupplyChainDigest, June 11, 2009; and Charlie Russo, “SAP Nails Home Depot for SCM Software,”, May 18, 2005. Case Study Questions 1-12 What problems and challenges did Home Depot experience? 1-13 Describe the relationship between management, organization, and technology at Home Depot. How did this relationship change over time? 1-14 How much was Home Depot’s management responsible for its problems? What about the role of technology and organizational factors? 1-15 Mark Holifield, Home Depot’s Vice President of Supply Chain, has noted that the company didn’t have the most leading-edge technology but it was still able to make a major change in its supply chain. Discuss the implications of this statement. MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions. 1-16 1-17 What are the strategic objectives that firms try to achieve by investing in information systems and t­ echnologies? For each strategic objective, give an example of how a firm could use information systems to achieve the ­objective. Describe the complementary assets that firms need in order to optimize returns from their information system investments. For each type of complementary asset, give an example of a specific asset a firm should have. Chapter 1 Information Systems in Global Business Today 39 Chapter 1 References Brynjolfsson, Erik and Lorin M. Hitt. “Beyond Computation: Information Technology, Organizational Transformation, and Business Performance.” Journal of Economic Perspectives 14, No. 4 (2000). Brynjolfsson, Erik. “VII Pillars of IT Productivity.” Optimize (May 2005). Bureau of Economic Analysis. National Income and Product, accessed August 19, 2014. Carr, Nicholas. “IT Doesn’t Matter.” Harvard Business Review (May 2003). Chae, Ho-Chang, Chang E. Koh, and Victor Prybutok. “Information Technology Capability and Firm Performance: Contradictory Findings and Their Possible Causes.” MIS Quarterly 38, No. 1 (March 2014). Dedrick, Jason, Vijay Gurbaxani, and Kenneth L. Kraemer. “Information Technology and Economic Performance: A Critical Review of the Empirical Evidence.” Center for Research on Information Technology and Organizations, University of California, Irvine (December 2001)., accessed September 28, 2014. eMarketer. “US Ad Spending Forecast 2014.” (March 2014). eMarketer. “US Internet Users Complete Forecast.” (March 2014). FedEx Corporation. “SEC Form 10-K For the Fiscal Year Ended 2014.” Friedman, Thomas. The World is Flat. New York: Picador (2007). Garretson, Rob. “IT Still Matters.” CIO Insight 81 (May 2007). Hughes, Alan and Michael S. Scott Morton. “The Transforming Power of Complementary Assets.” MIT Sloan Management Review 47. No. 4 (Summer 2006). Lamb, Roberta, Steve Sawyer, and Rob Kling. “A Social Informatics Perspective of Socio-Technical Networks.” (2004). Laudon, Kenneth C. Computers and Bureaucratic Reform. New York: Wiley (1974). Lev, Baruch. “Intangibles: Management, Measurement, and Reporting.” The Brookings Institution Press (2001). Nevo, Saggi and Michael R. Wade. “The Formation and Value of IT-Enabled Resources: Antecedents and Consequences of Synergistic Relationships.” MIS Quarterly 34, No. 1 (March 2010). Otim, Samual, Dow, Kevin E. , Grover, Varun and Wong, Jeffrey A. “The Impact of Information Technology Investments on Downside Risk of the Firm: Alternative Measurement of the Business Value of IT.” Journal of Management Information Systems 29, No. 1 (Summer 2012). Pew Internet and American Life Project. “What Internet Users Do Online.” (May 2013) Ross, Jeanne W. And Peter Weill. “Four Questions Every CEO Should Ask About IT.” Wall Street Journal (April 25, 2011). Sampler, Jeffrey L. and Michael J. Earl. “What’s Your Information Footprint?” MIT Sloan Management Review (Winter 2014). Teece David. Economic Performance and Theory of the Firm: The Selected Papers of David Teece. London: Edward Elgar Publishing (1998). U.S. Bureau of Labor Statistics. Occupational Outlook Handbook, 2014–2015. (April 15, 2014). U.S. Census.”Statistical Abstract of the United States 2013.”U.S. Department of Commerce (2013). Weill, Peter and Jeanne Ross. IT Savvy: What Top Executives Must Know to Go from Pain to Gain. Boston: Harvard Business School Press (2009). Wurmser, Yory. “US Retail Ecommerce: 2014 Trends and Forecast,” eMarketer (April 29, 2014). Global E-business and Collaboration 2 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. What are business processes? How are they related to information systems? 2. How do systems serve the different management groups in a business and how do systems that link the enterprise improve organizational performance? 3. Why are systems for collaboration and social business so important and what technologies do they use? 4. What is the role of the information systems function in a business? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 40 Chapter Cases Video Cases Social Networking Takes Off at Kluwer Vail Ski Resorts Goes High-Tech for High Touch Is Social Business Working Out? Should a Computer Grade Your Essays? Walmart’s Retail Link Supply Chain The Emerging Social Enterprise How FedEx Works: Inside the Memphis Hub Instructional Video: US Foodservice Grows Market with Oracle CRM on Demand Social Networking Takes Off at Kluwer W olters Kluwer is a market-leading global information services and ­publishing company focused on professionals working in law, taxation, finance, and healthcare. Kluwer provides information, software, and services that deliver vital insights, intelligent tools, and guidance from subject-matter experts. Headquartered in Alphen aan den Rijn, the Netherlands, the ­company, in 2012, had 19,000 employees, revenue of 3.6 billion Euros (about US $4.8 billion), and ­operations in 40 different ­countries across Europe, North America, Asia-Pacific, and Latin America. Although Kluwer has been able to provide professionals in the specialties it served with the up-to-date information they needed to do their jobs efficiently and effectively, it was unable to do so for its own employees. Management believed the company was not making the most of its own internal knowledge resources. So in early 2012, the company initiated a study of its communications channels. The study found that employees were not using Kluwer’s existing corporate intranet, and that they were not meeting management goals for collaboration and knowledge sharing. The existing intranet was “static.” In other words, it published information about the company for internal use, but the information was not updated quickly enough and the intranet lacked tools to help staff have dialogues, share ideas, and work with other members of the company, including people that they might not know. In addition, it was unclear which department or individual was responsible for maintaining this content, making it more difficult for people to add new information or updates. What Kluwer needed was a central resource that would support dynamic knowledge-sharing. The entire staff would be able to easily locate information about the company as well as updates on the latest developments of current © Cseke Timea/Shutterstock 41 42 Part One Organizations, Management, and the Networked Enterprise initiatives and projects. Tools that would help employees work more closely together—including the ability to locate employees in other parts of the ­company who were experts in specific subjects—would help streamline ­operations and speed up key business functions. Kluwer decided to base its solution on Microsoft Yammer, an enterprise social networking platform used by over 200,000 organizations worldwide. Yammer enables employees to create groups to collaborate on projects and share and edit documents. The service can be accessed through the Web, ­desktop, and mobile devices and can be integrated with other systems such as Microsoft SharePoint, to make other applications more “social.” Management saw that early adopters of this software tool were indeed sharing information and ideas, and that Yammer could provide the foundation for a dynamic social network linking the entire company. Yammer quickly became Kluwer’s central resource for sharing company news and updates. Employees are using Yammer to collaborate on projects, share ideas, and discover people in other departments with useful expertise that could help them in their work. Yammer has even encouraged more employee interaction offline, as employees get to know their fellow workers better from their online experiences. Management believes Yammer has been hugely successful. Over 80 percent of employees, including managers, regularly log onto Yammer to locate and share information. Staff are creating their own work spaces and groups on their own to further pool their experience and expertise. Kluwer today boasts over 21 active groups, including ones dealing with the legal field, customer experience, and innovation. The social network has been especially helpful as an incubator for new business ideas. And it is obvious that internal social networking has helped transform corporate culture into one that genuinely fosters openness and a strong sense of community. Many more employees feel closely involved with the business as a whole—something that could not have been achieved with the old system. Sources: “Social Networking Trumps a Static Intranet,”, accessed March 2, 2014 and, accessed March 2, 2014. T he experience of Kluwer illustrates how much organizations today rely on information systems to improve their performance and remain ­competitive. It also shows how much systems supporting collaboration and teamwork make a difference in an organization’s ability to innovate, execute, and grow profits. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Kluwer itself is very much a knowledge-intensive company, but it was hampered by outdated processes and tools for managing information that prevented employees and managers from working efficiently and effectively. This impacted the company’s ability to create and deliver ­leading-edge knowledge products and services. Kluwer management decided that the best solution was to deploy new ­technology to move from a static corporate knowledge and work environment to one in which actively engaged employees and enabled them to obtain more knowledge from colleagues. The company implemented Microsoft Yammer as a company-wide platform for collaboration, knowledge acquisition, and ­knowledge transfer, and it took advantage of the software’s new “social” tools to increase employee collaboration and engagement. Kluwer now relies on its internal enterprise social network for much of employee learning and problemsolving, and Yammer integrates all of the ways employees share knowledge. Chapter 2 Global E-business and Collaboration There is more effective sharing of institutional knowledge and the company has become more innovative and efficient. New technology alone would not have solved Kluwer’s problem. To make the solution effective, Kluwer had to change its organizational culture and business processes for knowledge dissemination and collaborative work, and the new technology made these changes possible. Here are some questions to think about: How are collaboration and employee engagement keeping Kluwer competitive? How did using Yammer change the way work was performed at Kluwer? 2.1 I What are business processes? How are they related to information systems? n order to operate, businesses must deal with many different pieces of information about suppliers, customers, employees, invoices, and ­payments, and of course their products and services. They must organize work activities that use this information to operate efficiently and enhance the overall performance of the firm. Information systems make it possible for firms to manage all their information, make better decisions, and improve the execution of their business processes. Business Processes Business processes, which we introduced in Chapter 1, refer to the manner in which work is organized, coordinated, and focused to produce a ­valuable ­product or service. Business processes are the collection of activities required to ­produce a product or service. These activities are supported by flows of ­material, i­nformation, and knowledge among the participants in b ­ usiness p rocesses. Business processes also refer to the unique ways in which ­ ­organizations ­coordinate work, information, and knowledge, and the ways in which ­management chooses to coordinate work. To a large extent, the performance of a business firm depends on how well its business processes are designed and coordinated. A company’s business processes can be a source of competitive strength if they enable the company to innovate or to execute better than its rivals. Business processes can also be liabilities if they 43 44 Part One Organizations, Management, and the Networked Enterprise TABLE 2.1 Examples of Functional Business Processes Functional Area Business Process Manufacturing and production Assembling the product Checking for quality Producing bills of materials Sales and marketing Identifying customers Making customers aware of the product Selling the product Finance and accounting Paying creditors Creating financial statements Managing cash accounts Human resources Hiring employees Evaluating employees’ job performance Enrolling employees in benefits plans are based on outdated ways of working that impede organizational responsiveness and efficiency. The chapter-opening case describing Kluwer’s improvements in knowledge-sharing processes clearly illustrates these points, as do many of the other cases in this text. Every business can be seen as a collection of business processes, some of which are part of larger encompassing processes. For instance, uses of ­mentoring, wikis, blogs, and videos are all part of the overall k ­ nowledge ­management ­process. Many business processes are tied to a specific ­functional area. For example, the sales and marketing function is responsible for ­identifying c­ ustomers, and the human resources function is responsible for hiring ­employees. Table 2.1 describes some typical business processes for each of the functional areas of business. Other business processes cross many different functional areas and require coordination across departments. For instance, consider the seemingly simple FIGURE 2.1 The Order Fulfillment Process Fulfilling a customer order involves a complex set of steps that requires the close coordination of the sales, accounting, and manufacturing functions. Chapter 2 Global E-business and Collaboration business process of fulfilling a customer order (see Figure 2.1). Initially, the sales department receives a sales order. The order passes first to accounting to ensure the customer can pay for the order either by a credit verification or request for immediate payment prior to shipping. Once the customer credit is established, the production department pulls the product from inventory or produces the product. Then the product is shipped (and this may require ­working with a ­logistics firm, such as UPS or FedEx). A bill or invoice is ­generated by the accounting department, and a notice is sent to the customer indicating that the product has shipped. The sales department is notified of the shipment and prepares to support the customer by answering calls or fulfilling warranty claims. What at first appears to be a simple process, fulfilling an order, turns out to be a very complicated series of business processes that require the close coordination of major functional groups in a firm. Moreover, to efficiently perform all these steps in the order fulfillment process requires a great deal of information. The required information must flow rapidly both within the firm from one ­decision maker to another; with business partners, such as delivery firms; and with the customer. Computer-based information systems make this possible. How Information Technology Improves Business Processes Exactly how do information systems improve business processes? Information systems automate many steps in business processes that were formerly ­performed manually, such as checking a client’s credit, or generating an invoice and shipping order. But today, information technology can do much more. New technology can actually change the flow of information, making it possible for many more people to access and share information, replacing sequential steps with tasks that can be performed simultaneously, and eliminating delays in decision making. New information technology frequently changes the way a business works and supports entirely new business models. Downloading a Kindle e-book from Amazon, buying a computer online at Best Buy, and downloading a music track from iTunes are entirely new business processes based on new business models that would be inconceivable without today’s information technology. That’s why it’s so important to pay close attention to business processes, both in your information systems course and in your future career. By ­analyzing ­business processes, you can achieve a very clear understanding of how a ­business actually works. Moreover, by conducting a business process ­analysis, you will also begin to understand how to change the business by improving its ­processes to make it more efficient or effective. Throughout this book, we examine business processes with a view to understanding how they might be improved by using information technology to achieve greater efficiency, ­innovation, and customer service. 2.2 How do systems serve the different management groups in a business and how do systems that link the enterprise improve organizational performance? Now that you understand business processes, it is time to look more closely at how information systems support the business processes of a firm. Because there are different interests, specialties, and levels in an organization, there are 45 46 Part One Organizations, Management, and the Networked Enterprise different kinds of systems. No single system can provide all the information an organization needs. A typical business organization has systems supporting processes for each of the major business functions—sales and marketing, manufacturing and production, finance and accounting, and human resources. You can find examples of systems for each of these business functions in the Learning Tracks for this chapter. Functional systems that operate independently of each other are becoming a thing of the past because they cannot easily share information to support cross-functional business processes. Many have been replaced with large-scale cross-functional systems that integrate the activities of related ­business processes and organizational units. We describe these integrated ­cross-functional applications later in this section. A typical firm also has different systems supporting the decision-making needs of each of the main management groups we described in Chapter 1. Operational management, middle management, and senior management each use systems to support the decisions they must make to run the company. Let’s look at these systems and the types of decisions they support. Systems for Different Management Groups A business firm has systems to support different groups or levels of ­management. These systems include transaction processing systems and systems for ­business intelligence. Tr a n s a c t i o n P r o c e s s i n g S y s t e m s Operational managers need systems that keep track of the elementary a­ ctivities and transactions of the organization, such as sales, receipts, cash deposits, ­payroll, credit decisions, and the flow of materials in a factory. Transaction processing systems (TPS) provide this kind of information. A transaction ­processing system is a computerized system that performs and records the daily routine transactions necessary to conduct business, such as sales order entry, hotel reservations, payroll, employee record keeping, and shipping. The principal purpose of systems at this level is to answer routine questions and to track the flow of transactions through the organization. How many parts are in inventory? What happened to Mr. Smith’s payment? To answer these kinds of questions, information generally must be easily available, current, and accurate. At the operational level, tasks, resources, and goals are predefined and highly structured. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor according to predefined criteria. All that must be ­determined is whether the customer meets the criteria. Figure 2.2 illustrates a TPS for payroll processing. A payroll system keeps track of money paid to employees. An employee time sheet with the employee’s name, social security number, and number of hours worked per week ­represents a single transaction for this system. Once this transaction is input into the system, it updates the system’s master file (or database—see Chapter 6) that permanently maintains employee information for the organization. The data in the system are combined in different ways to create reports of interest to management and government agencies and to send paychecks to employees. Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other systems and business functions. For example, the payroll system illustrated in Figure 2.2, along with other accounting TPS, s­ upplies data to Chapter 2 Global E-business and Collaboration FIGURE 2.2 A payroll TPS A TPS for payroll processing captures employee payment transaction data (such as a time card). System outputs include online and hard-copy reports for management and employee paychecks. the company’s general ledger system, which is responsible for maintaining records of the firm’s income and expenses and for producing reports such as income statements and balance sheets. It also supplies employee payment history data for insurance, pension, and other benefits calculations to the firm’s human resources function, and employee payment data to government agencies such as the U.S. Internal Revenue Service and Social Security Administration. Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it. Imagine what would happen to UPS if its package tracking system was not working! What would the airlines do without their computerized reservation systems? S y s t e m s fo r B u s i n e s s I n t e l l i g e n c e Firms also have business intelligence systems that focus on delivering ­information to support management decision making. Business intelligence is a ­contemporary term for data and software tools for organizing, analyzing, and providing access to data to help managers and other enterprise users make more informed decisions. Business intelligence addresses the decision-making needs of all levels of management. This section provides a brief introduction to business intelligence. You’ll learn more about this topic in Chapters 6 and 12. Business intelligence systems for middle management help with monitoring, controlling, decision-making, and administrative activities. In Chapter 1, we defined management information systems as the study of information ­systems in business and management. The term management information 47 48 Part One Organizations, Management, and the Networked Enterprise ­systems (MIS) also designates a specific category of information systems ­serving middle management. MIS provide middle managers with reports on the ­organization’s current performance. This information is used to monitor and control the ­business and predict future performance. MIS summarize and report on the company’s basic operations using data ­supplied by transaction processing systems. The basic transaction data from TPS are compressed and usually presented in reports that are produced on a regular schedule. Today, many of these reports are delivered online. Figure 2.3 shows how a typical MIS transforms transaction-level data from inventory, ­production, and accounting into MIS files that are used to provide managers with reports. Figure 2.4 shows a sample report from this system. MIS typically provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a ­fast-food chain or, as illustrated in Figure 2.4, compare total annual sales figures for ­specific products to planned targets. These systems generally are not flexible and have little analytical capability. Most MIS use simple routines, such as ­summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques. Other types of business intelligence systems support more non-routine ­decision making. Decision-support systems (DSS) focus on problems that are unique and rapidly changing, for which the procedure for arriving at a ­solution may not be fully predefined in advance. They try to answer questions such as these: What would be the impact on production schedules if we were to double sales in the month of December? What would happen to our return on investment if a factory schedule were delayed for six months? Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product FIGURE 2.3 How Management Information Systems Obtain Their Data from the Organization’s TPS In the system illustrated by this diagram, three TPS supply summarized transaction data to the MIS reporting system at the end of the time period. Managers gain access to the organizational data through the MIS, which provides them with the appropriate reports. Chapter 2 Global E-business and Collaboration FIGURE 2.4 Sample MIS Report This report, showing summarized annual sales data, was produced by the MIS in Figure 2.3. prices of competitors. These systems are employed by “super-user” managers and business analysts who want to use sophisticated analytics and models to analyze data. An interesting, small, but powerful DSS is the voyage-estimating system of a large global shipping company that transports bulk cargoes of coal, oil, ores, and finished products. The firm owns some vessels, charters others, and bids for shipping contracts in the open market to carry general cargo. A voyage-­ estimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for ­various types of cargo, and port expenses. Technical details include a myriad of factors, such as ship cargo capacity, speed, port distances, fuel and water ­consumption, and loading patterns (location of cargo for different ports). The system can answer questions such as the following: Given a customer delivery schedule and an offered freight rate, which vessel should be assigned at what rate to maximize profits? What is the optimal speed at which a particular vessel can optimize its profit and still meet its delivery schedule? What is the optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia? Figure 2.5 illustrates the DSS built for this company. The system operates on a powerful desktop personal computer, providing a system of menus that makes it easy for users to enter data or obtain information. The voyage-estimating DSS we have just described draws heavily on models. Other business intelligence systems are more data-driven, focusing instead on extracting useful information from massive quantities of data. For example, large ski resort companies such as Intrawest and Vail Resorts collect and store large amounts of customer data from call centers, lodging and dining reservations, ski schools, and ski equipment rental stores. They use special software to analyze these data to determine the value, revenue potential, and loyalty of each customer to help managers make better decisions about how to target their marketing programs. The Interactive Session on Technology provides more detail on how Vail Resorts uses these data to cultivate customers and improve the customer e ­ xperience. As 49 50 Part One Organizations, Management, and the Networked Enterprise I n t e r a c t i v e S e s s i o n : T e c h n o l og y Vail Ski Resorts Goes High-Tech for High Touch Vail Ski Resort is the largest single mountain ski resort in the United States, with 5,289 acres of the most diverse and expansive skiing in the world. To match its world-class skiing, Vail is also trying to offer world-class customer care—fine dining; spas and ski valets ready to haul, stow, and retrieve your equipment; heated boots; and hand-warming packets. Vail’s season pass is a top value industry-wide, and its free PEAKS Rewards membership program further inculcates customer loyalty. Members can purchase the most economical lift tickets online, link the PEAKS card to a credit card, and accumulate points that can be redeemed for free lift tickets, ski school lessons, and various discounts. In 2012, Vail Ski Resort installed the fastest, highest capacity gondola in the United States. Seating ten people per cabin, and with an uphill speed of 1200 feet per minute, the state-of-the-art gondola carries 3600 skiers per hour while decreasing ride time from 9 to 7.5 minutes. Heated seats and Wi-Fi access make it one of the world’s most customer-friendly ski lifts as well. Long lift lines have always created a big headache for skiers. In the past, the only way to gauge the flow of the crowd was to ask lift operators or check postings on bulletin boards at the bottom of the lifts. Now Vail skiers are able to obtain accurate up-to-the minute lift line information by using social networking, streaming alerts, and the resort’s own Twitter account. Slope congestion can be alleviated by offering special pins or prizes to coax guests to move to a different slope. Guests can be directed to on-mountain dining locations at lunch time. Vail now uses radio frequency identification (RFID) lift tickets and ski passes. Part of the EpicMix social media program, the tickets and passes are scanned at the base of each lift so that skiers and snowboarders can track how many lifts they ride and the vertical feet ascended each day. The scanned data are automatically transferred to an EpicMix application which can be accessed from either a smartphone or a computer. The basic program is free and confers various pins and virtual awards based on user statistics. For example, you earn the “Connoisseur” pin after 75 lifts and the “Over the Moon” pin when you surpass 350,000 vertical feet skied. After you create your EpicMix account, you can view and share stats by linking to your Facebook and Twitter accounts. The EpicMix Racing program provides additional fun. At one of six race courses, you can compete against friends and family, all skiers, and even 2010 Olympic women’s downhill gold medalist Lindsey Vonn. At the beginning of each season, the four-time overall World Cup champion establishes a course time for race courses at Vail, Beaver Creek, Breckenridge, Keystone, Heavenly and Northstar. Race pros then ski the courses to establish their “seconds behind Lindsey.” To factor in changing course conditions, every day one of the race pros skis each course and uses his or her “seconds behind Lindsey” to determine a course time for Vonn on that particular day. When you ski a course, your actual time is automatically recorded and then adjusted for gender, age, and ­discipline. Snowboarders, telemark skiers, and adaptive skiers with disabilities and special needs can also participate. Scores are computed based on each skier’s “seconds behind Lindsey,” and gold, silver, and bronze medals are awarded to the top three daily. Race results and leaderboards are accessed on or the EpicMix mobile app, available for Apple and Android smartphones. Your dashboard tallies your Lindsey Vonn Race Series points, EpicMix Racing medals, total number of resort check-ins, total days on a mountain, vertical feet, pins earned, and number of EpicMix photos taken. The six race course mountains are staffed by 140 professional photographers. Photos are automatically identified and uploaded by scanning the intelligent chip embedded in the skier’s lift ticket. Photos can be captioned and shared for free on Facebook and Twitter, or you can purchase prints at a number of locations, including, of course, the Children’s Ski Schools. You can also purchase a $30.00 season package for unlimited downloads of all images taken at all locations and print them out later. All of these amenities turn a ski vacation into an “experience” that can be shared with family and friends, increasing emotional attachment and promoting customer retention. Still, to ensure that it is fully leveraging the wealth of customer data it collects, Vail Ski Resorts’ parent company Vail Resorts implemented SAS Customer Intelligence software. Customer data were previously collected and stored in a number of unrelated systems. Now, the data are compiled in a single database that includes all customer points of contact, allowing a complete picture Chapter 2 Global E-business and Collaboration of customer habits and preferences to emerge. Rather than one or two versions of a marketing campaign, Vail Resorts now runs 30 to 50, targeted to ­specific groups. In the future, the company expects to expand to hundreds or even thousands of ­personalized, individual communications. SAS predictive analytics will help Vail Resorts to ­identify guest motivations and anticipate customer desires, while customer segmentation models ­identify ­profitable segments to which they might 51 be steered. Vail Resorts plans to further ­personalize its ­engagement with its guests and enrich their ­mountain experiences before they have even begun. Sources: “EpicMix,”, accessed February 16, 2014; Bill Pennington, “Getting Comfortable With the New Vail,” New York Times, March 1, 2013; “EpicMix FAQ,”, accessed February 16, 2014;, accessed March 1, 2014; Spencer Reiss, “Vail Resorts Creates Epic Experiences with Customer Intelligence,” SAS Case Study, March 20, 2013; and Nicole Perlroth, “Nine Ski Apps to Make the Most of the Mountain,” New York Times, December 26, 2012. 7 , 2013. c a s e s t u dy q u e s t i o n s 1. List and describe the types of systems described in this case study. 2. How do these systems improve the operation of the business? 3. How do these systems support decision-making? Identify 3 different decisions that can be ­supported by these systems. 4. Why is improving the guest experience so ­important at Vail Mountain Resort? you read this case, try to identify the problems solved by Vail Resorts’ information systems and how the systems improve business ­operations and decision making. Business intelligence systems also address the decision-making needs of senior management. Senior managers need systems that focus on strategic issues and long-term trends, both in the firm and in the external environment. They are concerned with questions such as: What will employment levels be in five years? What are the long-term industry cost trends? What products should we be making in five years? FIGURE 2.5 Voyage-Estimating Decision-Support System This DSS operates on a powerful PC. It is used daily by managers who must develop bids on shipping contracts. 52 Part One Organizations, Management, and the Networked Enterprise Executive support systems (ESS) help senior management make these decisions. They address non-routine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS present graphs and data from many sources through an interface that is easy for senior managers to use. Often the information is delivered to senior executives through a portal, which uses a Web interface to present integrated personalized business content. ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. Increasingly, such systems include business intelligence analytics for analyzing trends, forecasting, and “drilling down” to data at greater levels of detail. For example, the CEO of Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the United States, has an ESS that provides on his desktop a minute-to-minute view of the firm’s financial ­performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory. The information is presented in the form of a digital dashboard, which displays on a single screen graphs and charts of key performance indicators for managing a company. Digital dashboards are becoming an increasingly popular tool for management decision makers. Contemporary business intelligence and analytics technology have ­promoted data-driven management, where decision makers rely heavily on analytical tools and data at their fingertips to guide their work. Data captured at the factory or sales floor level are immediately available for high-level or detailed views in executive dashboards and reports. It's real-time ­management. A digital dashboard delivers comprehensive and accurate information for decision making often using a single screen. The graphical overview of key performance indicators helps managers quickly spot areas that need attention. Chapter 2 Global E-business and Collaboration Systems for Linking the Enterprise Reviewing all the different types of systems we have just described, you might wonder how a business can manage all the information in these different ­systems. You might also wonder how costly it is to maintain so many ­different systems. And you might wonder how all these different systems can share ­information and how managers and employees are able to coordinate their work. In fact, these are all important questions for businesses today. Enterprise Applications Getting all the different kinds of systems in a company to work together has proven a major challenge. Typically, corporations are put together both through normal “organic” growth and through acquisition of smaller firms. Over a period of time, corporations end up with a collection of systems, most of them older, and face the challenge of getting them all to “talk” with one another and work together as one corporate system. There are several s­ olutions to this problem. One solution is to implement enterprise applications, which are systems that span functional areas, focus on executing business processes across the business firm, and include all levels of management. Enterprise applications help businesses become more flexible and productive by coordinating their business processes more closely and integrating groups of processes so they focus on efficient management of resources and customer service. There are four major enterprise applications: enterprise systems, supply chain management systems, customer relationship management systems, and knowledge management systems. Each of these enterprise applications i­ntegrates a related set of functions and business processes to enhance the ­performance of the organization as a whole. Figure 2.6 shows that the ­architecture for these enterprise applications encompasses processes ­spanning the entire organization and, in some cases, extending beyond the organization to customers, suppliers, and other key business partners. Enterprise Systems Firms use enterprise systems, also known as ­enterprise resource planning (ERP) systems, to integrate business processes in manufacturing and production, finance and accounting, sales and ­marketing, and human resources into a single software system. Information that was previously fragmented in many different systems is stored in a single comprehensive data repository where it can be used by many different parts of the business. For example, when a customer places an order, the order data flow ­automatically to other parts of the company that are affected by them. The order transaction triggers the warehouse to pick the ordered products and schedule shipment. The warehouse informs the factory to replenish whatever has been depleted. The accounting department is notified to send the ­customer an invoice. Customer service representatives track the progress of the order through every step to inform customers about the status of their orders. Managers are able to use firmwide information to make more precise and timely decisions about daily operations and longer-term planning. Supply Chain Management Systems Firms use supply chain ­management (SCM) systems to help manage relationships with their suppliers. These ­systems help suppliers, purchasing firms, distributors, and logistics companies share information about orders, production, inventory levels, and delivery of products and services so they can source, produce, and deliver goods and ­services efficiently. The ultimate objective is to get the right amount of their 53 54 Part One Organizations, Management, and the Networked Enterprise FIGURE 2.6 Enterprise Application Architecture Enterprise applications automate processes that span multiple business functions and organizational levels and may extend outside the organization. products from their source to their point of consumption in the least amount of time and at the lowest cost. These systems increase firm profitability by ­lowering the costs of moving and making products and by enabling managers to make better decisions about how to organize and schedule sourcing, production, and distribution. Supply chain management systems are one type of interorganizational system because they automate the flow of information across organizational boundaries. You will find examples of other types of interorganizational ­information systems throughout this text because such systems make it ­possible for firms to link electronically to customers and to outsource their work to other companies. Customer Relationship Management Systems Firms use customer r­elationship management (CRM) systems to help manage their relationships with their customers. CRM systems provide information to coordinate all of the business processes that deal with customers in sales, marketing, and ­service to optimize revenue, customer satisfaction, and customer retention. This information helps firms identify, attract, and retain the most profitable customers; provide better service to existing customers; and increase sales. Knowledge Management Systems Some firms perform better than others because they have better knowledge about how to create, produce, and deliver products and services. This firm knowledge is unique, difficult to imitate, and can be leveraged into long-term strategic benefits. Knowledge management systems (KMS) enable organizations to better manage ­processes for capturing Chapter 2 Global E-business and Collaboration and applying knowledge and expertise. These systems collect all relevant knowledge and experience in the firm, and make it available wherever and whenever it is needed to improve business processes and management ­decisions. They also link the firm to external sources of knowledge. We examine enterprise systems and systems for supply chain management and customer relationship management in greater detail in Chapter 9. We discuss collaboration systems that support knowledge management in this chapter and cover other types of knowledge management applications in Chapter 11. Intranets and Extranets Enterprise applications create deep-seated changes in the way the firm c­ onducts its business, offering many opportunities to integrate important b ­ usiness data into a single system. They are often costly and difficult to implement. Intranets and extranets deserve mention here as alternative tools for increasing ­integration and expediting the flow of information within the firm, and with customers and suppliers. Intranets are simply internal company Web sites that are accessible only by employees. The term “intranet” refers to an internal network, in contrast to the Internet, which is a public network linking organizations and other external networks. Intranets use the same technologies and techniques as the larger Internet, and they often are simply a private access area in a larger company Web site. Likewise with extranets. Extranets are company Web sites that are accessible to authorized vendors and suppliers, and are often used to c­ oordinate the movement of supplies to the firm’s production apparatus. For example, Six Flags, which operates 19 theme parks throughout North America, maintains an intranet for its 2,500 full-time employees that provides company-related news and information on each park’s day-to-day operations, including weather forecasts, performance schedules, and details about groups and celebrities visiting the parks. The company also uses an extranet to ­broadcast information about schedule changes and park events to its 30,000 seasonal employees. We describe the technology for intranets and extranets in more detail in Chapter 7. E-Business, E-Commerce, and E-Government The systems and technologies we have just described are transforming firms’ relationships with customers, employees, suppliers, and logistic partners into digital relationships using networks and the Internet. So much business is now enabled by or based upon digital networks that we use the terms “electronic business” and “electronic commerce” frequently throughout this text. Electronic business, or e-business, refers to the use of digital technology and the Internet to execute the major business processes in the enterprise. E-business includes activities for the internal management of the firm and for coordination with suppliers and other business partners. It also includes ­electronic commerce, or e-commerce. E-commerce is the part of e-business that deals with the buying and selling of goods and services over the Internet. It also encompasses activities supporting those market transactions, such as advertising, marketing, customer support, security, delivery, and payment. The technologies associated with e-business have also brought about similar changes in the public sector. Governments on all levels are using Internet technology to deliver information and services to citizens, employees, and businesses with which they work. E-government refers to the application of the Internet 55 56 Part One Organizations, Management, and the Networked Enterprise and networking technologies to digitally enable government and public sector agencies’ relationships with citizens, businesses, and other arms of government. In addition to improving delivery of government services, e-government makes government operations more efficient and also empowers citizens by giving them easier access to information and the ability to network electronically with other citizens. For example, citizens in some states can renew their driver’s licenses or apply for unemployment benefits online, and the Internet has become a powerful tool for instantly mobilizing interest groups for political action and fund-raising. 2.3 Why are systems for collaboration and social business so important and what technologies do they use? With all these systems and information, you might wonder how is it possible to make sense of them? How do people working in firms pull it all together, work towards common goals, and coordinate plans and actions? Information s­ ystems can’t make decisions, hire or fire people, sign contracts, agree on deals, or adjust the price of goods to the marketplace. In addition to the types of s­ ystems we have just described, businesses need special systems to support collaboration and teamwork. What is Collaboration? Collaboration is working with others to achieve shared and explicit goals. Collaboration focuses on task or mission accomplishment and usually takes place in a business, or other organization, and between businesses. You ­collaborate with a colleague in Tokyo having expertise on a topic about which you know nothing. You collaborate with many colleagues in publishing a company blog. If you’re in a law firm, you collaborate with accountants in an accounting firm in servicing the needs of a client with tax problems. Collaboration can be short-lived, lasting a few minutes, or longer term, depending on the nature of the task and the relationship among participants. Collaboration can be one-to-one or many-to-many. Employees may collaborate in informal groups that are not a formal part of the business firm’s organizational structure or they may be organized into formal teams. Teams have a specific mission that someone in the business assigned to them. Team members need to collaborate on the accomplishment of specific tasks and collectively achieve the team mission. The team mission might be to “win the game,” or “increase online sales by 10 percent.” Teams are often short-lived, depending on the problems they tackle and the length of time needed to find a solution and accomplish the mission. Collaboration and teamwork are more important today than ever for a v ­ ariety of reasons. • Changing nature of work. The nature of work has changed from factory ­manufacturing and pre-computer office work where each stage in the ­production process occurred independently of one another, and was ­coordinated by supervisors. Work was organized into silos. Within a silo, work passed from one machine tool station to another, from one desktop to another, until the finished product was completed. Today, jobs require much Chapter 2 Global E-business and Collaboration • • • • • closer coordination and interaction among the ­parties involved in producing the service or product. A recent report from the consulting firm McKinsey & Company argued that 41 percent of the U.S. labor force is now composed of jobs where interaction (talking, e-mailing, presenting, and persuading) is the primary value-adding activity. Even in factories, workers today often work in production groups, or pods. Growth of professional work. “Interaction” jobs tend to be professional jobs in the service sector that require close coordination and collaboration. Professional jobs require substantial education, and the sharing of ­information and opinions to get work done. Each actor on the job brings ­specialized expertise to the problem, and all the actors need to take one another into account in order to accomplish the job. Changing organization of the firm. For most of the industrial age, managers organized work in a hierarchical fashion. Orders came down the hierarchy, and responses moved back up the hierarchy. Today, work is organized into groups and teams, and the members are expected to develop their own methods for accomplishing the task. Senior managers observe and ­measure results, but are much less likely to issue detailed orders or ­operating ­procedures. In part, this is because expertise and decision-making power have been pushed down in organizations. Changing scope of the firm. The work of the firm has changed from a single ­location to multiple locations—offices or factories throughout a region, a nation, or even around the globe. For instance, Henry Ford developed the first ­mass-production automobile plant at a single Dearborn, Michigan factory. In 2014, Ford employed 180,000 people at around 965 plants and facilities ­worldwide. With this kind of global presence, the need for close coordination of design, production, marketing, distribution, and service obviously takes on new importance and scale. Large global companies need to have teams ­working on a global basis. Emphasis on innovation. Although we tend to attribute innovations in ­business and science to great individuals, these great individuals are most likely working with a team of brilliant colleagues. Think of Bill Gates and Steve Jobs (founders of Microsoft and Apple), both of whom are highly regarded innovators, and both of whom built strong collaborative teams to nurture and support innovation in their firms. Their initial innovations derived from close collaboration with colleagues and partners. Innovation, in other words, is a group and social process, and most innovations derive from collaboration among individuals in a lab, a business, or government agencies. Strong collaborative practices and technologies are believed to increase the rate and quality of innovation. Changing culture of work and business. Most research on collaboration ­supports the notion that diverse teams produce better outputs, faster, than individuals working on their own. Popular notions of the crowd ­(“crowdsourcing,” and the “wisdom of crowds”) also provide cultural support for collaboration and teamwork. What Is Social Business? Many firms today enhance collaboration by embracing social business—the use of social networking platforms, including Facebook, Twitter, and ­internal corporate social tools—to engage their employees, customers, and suppliers. These tools enable workers to set up profiles, form groups, and “follow” each other’s status updates. The goal of social business is to deepen interactions with groups inside and outside the firm to expedite and enhance information-­ sharing, innovation, and decision making. 57 58 Part One Organizations, Management, and the Networked Enterprise A key word in social business is “conversations.” Customers, s­uppliers, employees, managers, and even oversight agencies continually have ­conversations about firms, often without the knowledge of the firm or its key actors (employees and managers). Supporters of social business argue that, if firms could tune into these ­conversations, they would strengthen their bonds with consumers, suppliers, and employees, increasing their emotional involvement in the firm. All of this requires a great deal of information transparency. People need to share opinions and facts with others quite directly, without intervention from executives or others. Employees get to know directly what customers and other employees think; suppliers will learn very directly the opinions of supply chain partners; and even managers presumably will learn more directly from their employees how well they are doing. Nearly everyone involved in the creation of value will know much more about everyone else. If such an environment could be created, it is likely to drive operational ­efficiencies, spur innovation, and accelerate decision making. If ­product ­designers can learn directly about how their products are doing in the market in ­real time, based on consumer feedback, they can speed up the r­ edesign ­process. If employees can use social connections inside and outside the c­ ompany to ­capture new knowledge and insights, they will be able to work more efficiently and solve more business problems. Table 2.2 describes important applications of social business inside and ­outside the firm. This chapter focuses on enterprise social business—its ­internal corporate uses. Chapters 7 and 10 describe social business applications relating to customers and suppliers outside the company. Business Benefits of Collaboration and Social Business Although many articles and books have been written about collaboration, nearly all of the research on this topic is anecdotal. Nevertheless, there is a general belief among both business and academic communities that the more a b ­ usiness firm is “collaborative,” the more successful it will be, and that collaboration within and among firms is more essential than in the TABLE 2.2 Applications of Social Business SOCIAL BUSINESS APPLICATION Description Social networks Connect through personal and business profiles Crowdsourcing Harness collective knowledge to generate new ideas and solutions Shared workspaces Coordinate projects and tasks; co-create content Blogs and wikis Social commerce File sharing Social marketing Communities Publish and rapidly access knowledge; discuss opinions and experiences Share opinions about purchasing or purchase on social platforms Upload, share, and comment on photos, videos, audio, text documents Use social media to interact with customers; derive customer insights Discuss topics in open forums; share expertise Chapter 2 Global E-business and Collaboration past. A recent global survey of business and information systems managers found that ­investments in ­collaboration technology produced organizational improvements that returned over four times the amount of the investment, with the greatest b ­ enefits for sales, marketing, and research and development ­functions (Frost and White, 2009). Another study of the value of collaboration also found that the o ­ verall economic benefit of c­ ollaboration was significant: for every word seen by an employee in e-mails from others, $70 of additional ­revenue was generated (Aral, Brynjolfsson, and Van Alstyne, 2007). McKinsey & Company consultants predict that social ­technologies used within and across enterprises could potentially raise the p ­ roductivity of interaction workers by 20 to 25 ­percent (McKinsey, 2012). Table 2.3 summarizes some of the benefits of collaboration and social ­business that have been identified. Figure 2.7 graphically illustrates how c­ ollaboration is believed to impact business performance. Building a Collaborative Culture and Business Processes Collaboration won’t take place spontaneously in a business firm, especially if there is no supportive culture or business processes. Business firms, e ­ specially large firms, had a reputation in the past for being “command and control” ­organizations where the top leaders thought up all the really important ­matters, and then ordered lower-level employees to execute senior management plans. The job of middle management supposedly was to pass messages back and forth, up and down the hierarchy. Command and control firms required lower-level employees to carry out orders without asking too many questions, with no responsibility to improve ­processes, and with no rewards for teamwork or team performance. If your work group needed help from another work group, that was something for the bosses to figure out. You never communicated horizontally, always v ­ ertically, so ­management could control the process. Together, the expectations of TABLE 2.3 B  usiness Benefits of Collaboration and Social Business BENEFIT Productivity Quality Innovation Customer service Financial performance (profitability, sales, and sales growth) RATIONALE People interacting and working together can capture expert knowledge and solve problems more rapidly than the same number of people working in isolation from one another. There will be fewer errors. People working collaboratively can communicate errors, and corrective actions faster than if they work in isolation. Collaborative and take social technologies help reduce time delays in design and production. People working collaboratively can come up with more innovative ideas for products, services, and administration than the same number working in isolation from one another. Advantages to diversity and the “wisdom of crowds.” People working together using collaboration and social tools can solve customer complaints and issues faster and more effectively than if they were working in isolation from one another. As a result of all of the above, collaborative firms have superior sales, sales growth, and financial performance. 59 60 Part One Organizations, Management, and the Networked Enterprise FIGURE 2.7 Requirements for Collaboration Successful collaboration requires an appropriate organizational structure and culture, along with appropriate collaboration technology. management and employees formed a culture, a set of assumptions about common goals and how people should behave. Many business firms still ­operate this way. A collaborative business culture and business processes are very different. Senior managers are responsible for achieving results, but rely on teams of employees to achieve and implement the results. Policies, products, designs, processes, and systems are much more dependent on teams at all levels of the organization to devise, to create, and to build. Teams are rewarded for their ­performance, and individuals are rewarded for their performance in a team. The function of middle managers is to build the teams, coordinate their work, and monitor their performance. The business culture and business ­processes are more “social.” In a collaborative culture, senior management establishes ­collaboration and teamwork as vital to the organization, and it actually ­implements collaboration for the senior ranks of the business as well. Tools and Technologies for Collaboration and Social Business A collaborative, team-oriented culture won’t produce benefits without information systems in place to enable collaboration and social business. Currently there are hundreds of tools designed to deal with the fact that, in order to succeed in our jobs, we are all much more dependent on one another, our fellow employees, customers, suppliers and managers. Some of these tools are ­expensive, but others are available online for free (or with premium versions for a modest fee). Let’s look more closely at some of these tools. Chapter 2 Global E-business and Collaboration E - m a i l a n d I n s t a n t M e s s a g i n g ( IM ) E-mail and instant messaging (including text messaging) have been major communication and collaboration tools for interaction jobs. Their software operates on computers, cell phones, and other wireless devices and includes features for sharing files as well as transmitting messages. Many instant messaging systems allow users to engage in real-time conversations with multiple participants simultaneously. In recent years, e-mail use has declined, with messaging and social media becoming preferred channels of communication. Wikis Wikis are a type of Web site that makes it easy for users to contribute and edit text content and graphics without any knowledge of Web page development or programming techniques. The most well-known wiki is Wikipedia, the largest collaboratively edited reference project in the world. It relies on volunteers, makes no money and accepts no advertising. Wikis are very useful tools for storing and sharing corporate knowledge and insights. Enterprise software vendor SAP AG has a wiki that acts as a base of information for people outside the company, such as customers and software developers who build programs that interact with SAP software. In the past, those people asked and sometimes answered questions in an informal way on SAP online forums, but that was an inefficient system, with people asking and answering the same questions over and over. V i r t u a l Wo r l d s Virtual worlds, such as Second Life, are online 3-D environments populated by “residents” who have built graphical representations of themselves known as avatars. Companies like IBM, Cisco, and Intel Corporations use the online world for meetings, interviews, guest speaker events, and employee training. Real-world people represented by avatars meet, interact, and exchange ideas at these virtual locations using gestures, chat box conversations, and voice communication. C o l l a b o r a t i o n a n d S o c i a l B u s i n e s s P l a t fo r m s There are now suites of software products providing multi-function platforms for collaboration and social business among teams of employees who work together from many different locations. The most widely used are Internetbased audio conferencing and video conferencing systems, cloud collaboration services such as Google’s online tools and cyberlockers, corporate collaboration systems such as Microsoft SharePoint, and enterprise social networking tools such as Salesforce Chatter, Microsoft’s Yammer, Jive, and IBM Connections. Virtual Meeting Systems In an effort to reduce travel expenses, many c­ ompanies, both large and small, are adopting videoconferencing and Web ­conferencing technologies. Companies such as Heinz, General Electric, and Pepsico are using virtual meeting systems for product briefings, training courses, strategy sessions, and even inspirational chats. A videoconference allows individuals at two or more locations to communicate simultaneously through two-way video and audio transmissions. High-end videoconferencing systems feature telepresence technology, an integrated audio and visual environment which allows a person to give the appearance of being present at a location other than his or her true physical location. Free or low-cost Internet-based systems such as Skype group videoconferencing, Google+ Hangouts, Zoom, and ooVoo are of lower quality, but 61 62 Part One Organizations, Management, and the Networked Enterprise still useful for smaller companies. Apple’s FaceTime is useful for one-to-one videoconferencing. Companies of all sizes are finding Web-based online meeting tools such as Cisco WebEx, Microsoft Lync, and Adobe Connect especially helpful for ­training and sales presentations. These products enable participants to share documents and presentations in conjunction with audioconferencing and live video via Webcam. Cloud Collaboration Services: Google Tools and Cyberlockers Google offers many online tools and services, and some are suitable for collaboration. They include Google Drive, Google Docs, Google Apps, Google Sites, and Google +. Most are free of charge. Google Drive is a file storage and synchronization service for cloud ­storage, file sharing and collaborative editing. Google Drive is an example of a ­cloud-based cyberlocker. Cyberlockers are online file-sharing services that allow users to upload files to secure online storage sites from which the files can be shared with others. Microsoft OneDrive and Dropbox are other l­eading cyberlocker services. They feature both free and paid services, depending on the amount of storage space and administration required. Users are able to synchronize their files stored online with their local PCs and other kinds of devices, with options for making the files private or public and for sharing them with designated contacts. Google Drive and Microsoft OneDrive are integrated with tools for document creation and sharing. OneDrive provides online storage for Microsoft Office documents and other files and works with Microsoft Office apps, both installed and on the Web. It can share to Facebook as well. Google Drive is integrated with Google Docs, a suite of productivity applications that offer collaborative editing on documents, spreadsheets, and presentations. Google’s cloud-based productivity suite for businesses (word processing, spreadsheets, presentations, calendars, and mail) called Google Apps for Business also works with Google Drive. Google Sites allows users to quickly create online team-oriented sites where multiple people can collaborate and share files. Google+ is Google’s effort to make these tools and other products and services it offers more “social” for both consumer and business use. Google+ users can create a profile as well as “Circles,” for organizing people into specific groups for sharing and collaborating. “Hangouts” enable people to engage in group video chat, with a maximum of 10 people participating at any point in time. Microsoft SharePoint Microsoft SharePoint is a browser-based collaboration and document management platform, combined with a powerful search engine that is installed on corporate servers. SharePoint has a Web-based interface and close integration with everyday tools such as Microsoft Office desktop software products. SharePoint software makes it possible for employees to share their documents and collaborate on projects using Office documents as the ­foundation. SharePoint can be used to host internal Web sites that organize and store ­information in one central workspace to enable teams to coordinate work ­activities, collaborate on and publish documents, maintain task lists, implement workflows, and share information via wikis and blogs. Users are able to control versions of documents and document security. Because SharePoint stores and organizes information in one place, users can find relevant information quickly and efficiently while working together closely on tasks, projects, and documents. Enterprise search tools help locate people, expertise, and content. SharePoint now features social tools. Chapter 2 Global E-business and Collaboration The Fair Work Ombudsman (FWO) is an independent statutory office of the Australian federal government that provides advice and related services to employers and employees on workplace relations and entitlements. FWO has around 800 full time staff in offices in all Australian capital cities and 18 regional locations. FWO had been overwhelmed with the details of project management and compliance, with staff having to draw information from many different ­systems and piece it together manually. FWO implemented Microsoft Sharepoint Server to create a single organization-wide secure and reliable platform for ­managing and reporting on Projects, Programs, and Portfolios that would also facilitate collaboration. The Sharepoint system captures all project types undertaken by FWO; supports built-in user roles, views and security; provides storage and access to data, including project documentation; and automates workflows, including approvals, alerts and communication (Microsoft, 2014). IBM Notes IBM Notes (formerly Lotus Notes)is a collaborative software ­system with capabilities for sharing calendars, e-mail, messaging, collective writing and editing, shared database access, and electronic meetings. Notes software installed on desktop or laptop computers obtains applications stored on an IBM Domino server. Notes is Web-enabled, and offers an application development environment so that users can build custom applications to suit their unique needs. Notes has also added capabilities for blogs, microblogs, wikis, RSS ­aggregators, help desk systems, voice and video conferencing, and online ­meetings. A related IBM product called Quickr provides more specialized tools for teamwork (team spaces, content libraries, discussion forums, wikis) and is able to access information from Notes. IBM Notes promises high levels of security and reliability, and the ability to retain control over sensitive corporate information. Finncontainers, a Helsinki, Finland logistics company specializing in the sale, rental, and transportation of new and used shipping containers, selected Notes as a dependable ­collaboration platform on which to build a strong network of partners, suppliers and customers. The company did not want to miss sales opportunities if its e-mail system went down suddenly. (IBM, 2013). Enterprise Social Networking Tools The tools we have just described include capabilities for supporting social business, but there are also more ­specialized social tools for this purpose, such as Salesforce Chatter, Microsoft’s Yammer, Jive, and IBM Connections. Enterprise social networking tools create business value by connecting the members of an organization through profiles, updates, and notifications, similar to Facebook features, but tailored to internal corporate uses. Table 2.4 provides more detail about these internal social ­capabilities. Although companies have benefited from enterprise social networking, internal social networking has not caught on as quickly as consumer uses of Facebook, Twitter, and other public social networking products. The Interactive Session on Management addresses this topic. C h e c k l i s t fo r M a n a g e r s : E v a l u a t i n g a n d S e l e c t i n g C o l l a b o r a t i o n a n d S o c i a l S o f t w a r e To o l s With so many collaboration and social business tools and services ­available, how do you choose the right collaboration technology for your firm? To answer this question, you need a framework for understanding just what problems these tools are designed to solve. One framework that has been helpful for us to talk about collaboration tools is the time/space collaboration and social tool matrix ­developed in the early 1990s by a number of collaborative work ­scholars (Figure 2.8). 63 64 Part One Organizations, Management, and the Networked Enterprise TABLE 2.4 Enterprise Social Networking Software Capabilities Social Software Capability Description Profiles Ability to set up member profiles describing who individuals are, educational background, interests. Includes work-related associations and expertise (skills, projects, teams). Content Sharing Share, store, and manage content including documents, presentations, images, and videos. Feeds and Notifications Real-time information streams, status updates, and announcements from designated individuals and groups. Groups and Team Workspaces Establish groups to share information, collaborate on documents, and work on projects, with the ability to set up private and public groups and to archive conversations to preserve team knowledge. Tagging and Social Bookmarking Indicate preferences for specific pieces of content, similar to the Facebook “like” button. Tagging lets people add keywords to identify content they like. Permissions and Privacy Ability to make sure private information stays within the right circles, as determined by the nature of relationships. In enterprise social networks,there is a need to establish who in the company has permission to see what information. The time/space matrix focuses on two dimensions of the collaboration ­problem: time and space. For instance, you need to collaborate with people in different time zones and you cannot all meet at the same time. Midnight in New York is noon in Bombay, so this makes it difficult to have a videoconference (the people in New York are too tired). Time is clearly an obstacle to ­collaboration on a global scale. FIGURE 2.8 The Time/Space Collaboration AND SOCIAL Tool Matrix Collaboration and social technologies can be classified in terms of whether they support interactions at the same or different time or place, and whether these interactions are remote or colocated. Chapter 2 Global E-business and Collaboration 65 I n t e r a c t i v e S e s s i o n : Ma n ag e m e n t Is Social Business Working Out? Social networking has never been more popular, with social tools accounting for 20 percent of all online activity, according to ComScore. Many of today’s employees are already well versed in the basics of public social networking using tools such as Facebook, Twitter, and Instagram. Larry Ellison, head of the giant software firm Oracle, even went so far as to declare that social networking should be the backbone of business applications and that Facebook is a good model for how users should interact with software. But when it comes to actually using social tools for internal business purposes, the results have been mixed. Information Week’s 2013 Social Networking in the Enterprise Survey found that only 18 percent of respondents believed their internal social networking programs were successful. The Information Week survey cited lackluster adoption as a major obstacle to success. As with many technology upgrades, companies that have tried to deploy internal social networks have found that employees are used to doing business in a certain way, and overcoming that organizational inertia can prove difficult. IT leaders hoping to switch to a more social, collaborative office culture usually find that most employees still prefer to use e-mail, for example. The employees may feel too time-pressed to learn a new software tool. Employees who are used to collaborating and doing business in more traditional ways need an incentive to use social software. Most companies are not providing that incentive: only 22 percent of social software users believe the technology to be necessary to their jobs. You might join Facebook because all your friends are on it, but in the workplace, ease of use and increased job efficiency are more important than peer pressure in driving adoption. IT organizations need to take charge to ensure that the internal and external social networking efforts of the company are providing genuine value to the business. Content on the networks needs to be relevant, up-to-date, and easy to access; users need to be able to connect to people that have the information they need and that would otherwise be out of reach or difficult to reach. Social business tools should be appropriate for the tasks on hand and the organization’s business processes, and users need to understand how and why to use them. In the summer of 2009, the NASA’s Goddard Space Flight Center launched a custom-built enterprise social network called Spacebook to help small teams collaborate without e-mailing larger groups. Spacebook featured user profiles, group workspaces (wikis, file sharing, discussion forums, groups), and social bookmarks. Very few users adopted it, and Spacebook was decommissioned on June 1, 2012. According to Kevin Jones, a consulting social and organizational strategist at NASA’s Marshall and Goddard Space Flight Centers, Spacebook failed because it didn’t focus enough on people. It had been designed and developed without taking into ­consideration the organization’s culture and ­politics. No one knew how Spacebook would help them do their jobs, as opposed to an existing method of ­collaboration such as e-mail. Despite the pitfalls associated with launching an internal social network, there are companies using these networks successfully. For example, Red Robin, a chain of 355 restaurants with over 20,000 ­employees, uses social networking to give its front-line employees who interact with customers a greater voice in the company. Chris Laping, Red Robin’s CIO and senior vice-president of business transformation believed that engaging these workers would also increase employee loyalty. Red Robin decided to try out Yammer, which is referred to as a “Facebook for business.” Yammer lets people create conversations, perform ­status updates, upload and share files, and set up ­workgroups for small project teams. The social ­collaboration software would allow Red Robin to get out a message and receive immediate feedback, so that the company could rapidly make modifications. For example, when Red Robin introduced its new Tavern Burger product line in April, 2012, it was able to refine the recipes and operational ­procedures in restaurants in about four weeks. The process would have taken 6 to 18 months in the past. Guests reported their feedback to servers in the restaurants, who relayed this information to their managers. Then all the managers got together right away on Yammer. Red Robin used a viral approach to drive ­adoption. In the first month, 20 to 25 employees started using it and invited others. Membership spread quickly and Red Robin wound up with two Yammer networks: 66 Part One Organizations, Management, and the Networked Enterprise “Yummversity” is a network for ­training employees, while “Yummer” is a network for ­restaurant ­managers, regional managers, and ­corporate office members to exchange information and respond to questions from the field staff. Yummer provides a voice for the company’s front-line workers. In the past they would pass information up the corporate management chain, but rarely received feedback about what was done with the information. Yummer also provided the foundation for the company’s “Blueprint Project” designed to identify the best employee idea for cutting expenses ­without negatively impacting the customer experience. Thousands of people contributed ideas to compete for a $1000 prize. The winning entry was from a Seattle location manager who proposed replacing disposable child beverage cups with reusable ones. This seemingly small change produced a six-figure savings for the company. Sources: David Lavenda, “How Red Robin Transformed Its Business with Yammer,” Fast Company, February 6, 2014; James Niccolai, “Ellison: Facebook the New Model for Business Applications,” IDG News Service, January 30, 2014; Margaret Jones, “Top Four Social Collaboration Software Fails,”, accessed February 3, 2014; Michael Healey, “Why Enterprise Social Networking Falls Short,” Information Week, March 4, 2013; Debra Donston-Miller, “10 Ways to Foster Effective Social Employees,” Information Week, March 6, 2013; Jacob Morgan, “How to Market Collaboration to Employees,” Information Week, March 21, 2013; “, accessed February 20, 2014; and Justin Kern, “Enterprises ‘Like’ Social Networks, Don’t ‘Love’ Results,” Information Management, February 28, 2012. c a s e s t u dy q u e s t i o n s 1. Identify the management, organization, and ­technology factors responsible for impeding adoption of internal corporate social networks. 2. Compare the experiences for implementing ­internal social networks of the two organizations. Why was one more successful than the other? What role did management play in this process? 3. Should all companies implement internal ­enterprise social networks? Why or why not? Place (location) also inhibits collaboration in large global or even national and regional firms. Assembling people for a physical meeting is made difficult by the physical dispersion of distributed firms (firms with more than one ­location), the cost of travel, and the time limitations of managers. The collaboration and social technologies we have just described are ways of overcoming the limitations of time and space. Using this time/space framework will help you to choose the most appropriate collaboration and teamwork tools for your firm. Note that some tools are applicable in more than one time/ place scenario. For example, Internet collaboration suites such as Lotus Notes have capabilities for both synchronous (instant messaging, electronic meeting tools) and asynchronous (e-mail, wikis, document editing) interactions. Here’s a “to-do” list to get started. If you follow these six steps, you should be led to investing in the correct collaboration software for your firm at a price you can afford, and within your risk tolerance. 1. What are the collaboration challenges facing the firm in terms of time and space? Locate your firm in the time/space matrix. Your firm can occupy more than one cell in the matrix. Different collaboration tools will be needed for each situation. 2. Within each cell of the matrix where your firm faces challenges, exactly what kinds of solutions are available? Make a list of vendor products. 3. Analyze each of the products in terms of their cost and benefits to your firm. Be sure to include the costs of training in your cost estimates, and the costs of involving the information systems department, if needed. Chapter 2 Global E-business and Collaboration 4. Identify the risks to security and vulnerability involved with each of the products. Is your firm willing to put proprietary information into the hands of external service providers over the Internet? Is your firm willing to risk its important operations to systems controlled by other firms? What are the financial risks facing your vendors? Will they be here in three to five years? What would be the cost of making a switch to another vendor in the event the vendor firm fails? 5. Seek the help of potential users to identify implementation and training issues. Some of these tools are easier to use than others. 6. Make your selection of candidate tools, and invite the vendors to make presentations. 2.4 What is the role of the information systems function in a business? We’ve seen that businesses need information systems to operate today and that they use many different kinds of systems. But who is responsible for ­running these systems? Who is responsible for making sure the hardware, software, and other technologies used by these systems are running properly and are up to date? End users manage their systems from a business standpoint, but managing the technology requires a special information systems function. In all but the smallest of firms, the information systems department is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm’s IT infrastructure. We describe IT infrastructure in detail in Chapter 5. The Information Systems Department The information systems department consists of specialists, such as programmers, systems analysts, project leaders, and information systems managers. Programmers are highly trained technical specialists who write the software instructions for computers. Systems analysts constitute the principal liaisons between the information systems groups and the rest of the organization. It is the systems analyst’s job to translate business problems and requirements into information requirements and systems. Information systems managers are leaders of teams of programmers and analysts, project managers, physical facility managers, telecommunications managers, or database specialists. They are also managers of computer operations and data entry staff. Also, external specialists, such as hardware vendors and manufacturers, software firms, and consultants, frequently participate in the day-to-day operations and long-term planning of information systems. In many companies, the information systems department is headed by a chief information officer (CIO). The CIO is a senior manager who oversees the use of information technology in the firm. Today’s CIOs are expected to have a strong business background as well as information systems expertise and to play a l­eadership role in integrating technology into the firm’s business strategy. Large firms today also have positions for a chief security officer, chief knowledge ­officer, and chief privacy officer, all of whom work closely with the CIO. The chief security officer (CSO) is in charge of information systems ­security for the firm and is responsible for enforcing the firm’s information 67 68 Part One Organizations, Management, and the Networked Enterprise security policy (see Chapter 8). (Sometimes this position is called the chief information security officer [CISO] where information systems security is ­separated from physical security.) The CSO is responsible for educating and training users and information systems specialists about security, keeping management aware of security threats and breakdowns, and maintaining the tools and policies chosen to implement security. Information systems security and the need to safeguard personal data have become so important that corporations collecting vast quantities of personal data have established positions for a chief privacy officer (CPO). The CPO is responsible for ensuring that the company complies with existing data privacy laws. The chief knowledge officer (CKO) is responsible for the firm’s ­knowledge management program. The CKO helps design programs and systems to find new sources of knowledge or to make better use of existing knowledge in ­organizational and management processes. The chief data officer (CDO) is responsible for enterprise-wide ­governance and utilization of information to maximize the value the organization can ­realize from its data. The CDO ensures that the firm is collecting the appropriate data to serve its needs, deploying appropriate technologies for analyzing the data and using the results to support business decisions. This position arose to deal with the massive amounts of data organizations are now generating and ­collecting (see Chapter 6). End users are representatives of departments outside of the information ­systems group for whom applications are developed. These users are playing an increasingly large role in the design and development of information systems. In the early years of computing, the information systems group was c­ omposed mostly of programmers who performed highly specialized but limited technical functions. Today, a growing proportion of staff members are systems analysts and network specialists, with the information systems department acting as a powerful change agent in the organization. The information systems department suggests new business strategies and new information-based products and services, and coordinates both the development of the technology and the planned changes in the organization. In the next five years, employment growth in IS/MIS jobs will be about 50 ­percent greater than the average job growth in other fields. Out of 114 occupations, MIS is ranked 15th in terms of salaries. While all IS occupations show above-average growth, the fastest growing occupations are computer ­support specialists (30%), systems analysts (21%), software engineers and ­programmers (20%), and information systems managers (17%) (Bureau of Labor Statistics, 2012). With businesses and government agencies increasingly relying on the Internet for computing and communication resources, system and network security management positions are especially in demand. See the Learning Track for this chapter titled “Occupational and Career Outlook for Information Systems Majors 2012–2018” for more details on IS job opportunities. Organizing the Information Systems Function There are many types of business firms, and there are many ways in which the IT function is organized within the firm. A very small company will not have a formal information systems group. It might have one employee who is ­responsible for keeping its networks and applications running, or it might Chapter 2 Global E-business and Collaboration use consultants for these services. Larger companies will have a separate ­information systems department, which may be organized along several ­different lines, depending on the nature and interests of the firm. Our Learning Track describes alternative ways of organizing the information systems f­ unction within the business. The question of how the information systems department should be ­organized is part of the larger issue of IT governance. IT governance includes the ­strategy and policies for using information technology within an o ­ rganization. It ­specifies the decision rights and framework for accountability to ensure that the use of information technology supports the organization’s strategies and objectives. How much should the information systems function be c­ entralized? What decisions must be made to ensure effective management and use of ­information technology, including the return on IT investments? Who should make these decisions? How will these decisions be made and monitored? Firms with superior IT governance will have clearly thought out the answers (Weill and Ross, 2004). Review Summary 1. What are business processes? How are they related to information systems? A business process is a logically related set of activities that defines how specific business tasks are performed, and it represents a unique way in which an organization coordinates work, information, and knowledge. Managers need to pay attention to business processes because they determine how well the organization can execute its business, and they may be a source of strategic advantage. There are business processes specific to each of the major business functions, but many business processes are cross-functional. Information systems automate parts of business processes, and they can help organizations redesign and streamline these processes. 2. How do systems serve the different management groups in a business and how do systems that link the enterprise improve organizational performance? Systems serving operational management are transaction processing systems (TPS), such as payroll or order processing, that track the flow of the daily routine transactions necessary to conduct business. Management information systems (MIS) produce reports serving middle management by condensing information from TPS, and these are not highly analytical. Decision-support systems (DSS) support management decisions that are unique and rapidly changing using advanced analytical models. All of these types of systems provide business intelligence that helps managers and enterprise employees make more informed decisions. These systems for business intelligence serve multiple levels of ­management, and include executive support systems (ESS) for senior management that provide data in the form of graphs, charts, and dashboards delivered via portals using many sources of internal and external information. Enterprise applications are designed to coordinate multiple functions and business processes. Enterprise systems integrate the key internal business processes of a firm into a single software ­system to improve coordination and decision making. Supply chain management systems help the firm ­manage its relationship with suppliers to optimize the planning, sourcing, manufacturing, and d ­ elivery of products and services. Customer relationship management (CRM) systems coordinate the business processes surrounding the firm’s customers. Knowledge management systems enable firms to ­optimize the creation, sharing, and distribution of knowledge. Intranets and extranets are private corporate ­networks based on Internet technology that assemble information from disparate systems. Extranets make portions of private corporate intranets available to outsiders. 69 70 Part One Organizations, Management, and the Networked Enterprise 3. Why are systems for collaboration and social business so important and what technologies do they use? Collaboration is working with others to achieve shared and explicit goals. Social business is the use of internal and external social networking platforms to engage employees, customers, and suppliers, and it can enhance collaborative work. Collaboration and social business have become increasingly important in ­business because of globalization, the decentralization of decision making, and growth in jobs where interaction is the primary value-adding activity. Collaboration and social business enhance innovation, productivity, quality, and customer service. Tools for collaboration and social business include e-mail and instant messaging, wikis, virtual meeting systems, virtual worlds, cloud-based cyberlockers and online services such as those of Google and Microsoft, corporate collaboration systems such as Microsoft Sharepoint, and e ­ nterprise social networking tools such as Chatter, Yammer, Jive, and IBM Connections. 4. What is the role of the information systems function in a business? The information systems department is the formal organizational unit responsible for information ­technology services. It is responsible for maintaining the hardware, software, data storage, and ­networks that comprise the firm’s IT infrastructure. The department consists of specialists, such as programmers, systems analysts, project leaders, and information systems managers, and is often headed by a CIO. Key Terms Business intelligence, 47 Chief data officer (CDO), 68 Chief information officer (CIO), 67 Chief knowledge officer (CKO), 68 Chief privacy officer (CPO), 68 Chief security officer (CSO), 67 Collaboration, 56 Customer relationship management (CRM) systems, 54 Cyberlockers, 62 Decision-support systems (DSS), 48 Digital dashboard, 52 Electronic business (e-business), 55 Electronic commerce (e-commerce), 55 E-government, 55 End users, 68 Enterprise applications, 53 Enterprise systems, 53 Executive support systems (ESS), 52 Information systems department, 67 Information systems managers, 67 Interorganizational system, 54 IT governance, 69 Knowledge management systems (KMS), 54 Management information systems (MIS), 47 Portal, 52 Programmers, 67 Social business, 57 Supply chain management (SCM) systems, 53 Systems analysts, 67 Teams, 56 Telepresence, 61 Transaction processing systems (TPS), 46 MyMISLab Go to to complete the problems marked with this icon . Review Questions 2-1 What are business processes? How are they related to information systems? • Define business processes and describe the role they play in organizations. • Describe the relationship between i nformation systems and business pro­ cesses. 2-2  How do systems serve the different management groups and how do systems that link the enterprise improve organizational performance? • Describe the characteristics of transaction ­processing systems (TPS) and the roles they play in a business and how do systems that Chapter 2 Global E-business and Collaboration • • • • • • link the enterprise improve organizational performance? Describe the characteristics of management information systems (MIS) and explain how MIS differ from TPS and from DSS. Describe the characteristics of decision-­ support systems (DSS) and how they benefit businesses. Describe the characteristics of executive ­support systems (ESS) and explain how these systems differ from DSS. Explain how enterprise applications improve organizational performance. Define enterprise systems, supply chain ­management systems, customer relationship management systems, and knowledge management systems and describe their business benefits. Explain how intranets and extranets help firms integrate information and business ­processes. 71 2-3 Why are systems for collaboration and social business so important and what technologies do they use? • Define collaboration and social business, and explain why they have become so important in business today. • List and describe the business benefits of ­collaboration and social business. • Describe a supportive organizational culture and business processes for collaboration. • List and describe the various types of ­collaboration and social business tools. 2-4 What is the role of the information systems function in a business? • Describe how the information systems ­function supports a business. • Compare the roles played by programmers, systems analysts, information systems managers, the chief information officer (CIO), chief security officer (CSO), chief data ­officer (CDO), and chief knowledge officer (CKO). Discussion Questions 2-5  How could information systems be used to ­support the order fulfillment process illustrated in Figure 2.1? What are the most important pieces of information these systems should capture? Explain your answer. 2-6  Identify the steps that are performed in the ­process of selecting and checking out a book from your college library and the information that flows among these activities. Diagram the ­process. Are there any ways this process could be changed to improve the performance of your library or your school? Diagram the improved process. 2-7  Use the Time/Space Collaboration and Social Tool Matrix to classify the collaboration and social technologies used by Kluwer.. Hands-On MIS Projects The projects in this section give you hands-on experience analyzing opportunities to improve business ­processes with new information system applications, using a spreadsheet to improve decision making about suppliers, and using Internet software to plan efficient transportation routes. M a n a g e m e n t D e c i s i o n P r o bl e m s 2-8  Don’s Lumber Company on the Hudson River features a large selection of materials for flooring, decks, moldings,windows, siding, and roofing. The prices of lumber and other building materials are ­constantly changing. When a customer inquires about the price on pre-finished wood flooring, sales representatives consult a manual price sheet and then call the supplier for the most recent price. The supplier in turn uses a manual price sheet, which has been updated each day. Often, the supplier must call back Don’s sales reps because the ­company does not have the newest pricing information immediately on hand. Assess the ­business impact of this situation, describe how this process could be improved with information technology, and identify the decisions that would have to be made to implement a solution. 72 Part One Organizations, Management, and the Networked Enterprise 2-9  Henry’s Hardware is a small family business in Sacramento, California. The owners, Henry and Kathleen, must use every square foot of store space as profitably as possible. They have never kept detailed ­inventory or sales records. As soon as a shipment of goods arrives, the items are immediately placed on store shelves. Invoices from suppliers are only kept for tax purposes. When an item is sold, the item ­number and price are rung up at the cash r­ egister. The owners use their own judgment in identifying items that need to be reordered.What is the ­business impact of this situation? How could information systems help Henry and Kathleen run their b ­ usiness? What data should these systems capture? What decisions could the systems improve? I m p r ov i n g D e c i s i o n M a k i n g : U s i n g a S p r e a d s h e e t t o S e l e c t S u p p l i e r s Software skills: Spreadsheet date functions, data filtering, DAVERAGE function Business skills: Analyzing supplier performance and pricing 2-10  In this exercise, you will learn how to use spreadsheet software to improve management decisions about selecting suppliers. You will filter transactional data on suppliers based on several different criteria to select the best suppliers for your company. You run a company that manufactures aircraft components. You have many competitors who are trying to offer lower prices and better service to customers, and you are trying to determine whether you can benefit from better supply chain management. In MyMISLab, you will find a spreadsheet file that ­contains a list of all of the items that your firm has ordered from its suppliers during the past three months. The fields in the spreadsheet file include vendor name, vendor identification number, p ­ urchaser’s order number, item identification number and item description (for each item ordered from the vendor), cost per item, number of units of the item ordered (quantity), total cost of each order, v ­ endor’s accounts payable terms, order date, and actual arrival date for each order. Prepare a recommendation of how you can use the data in this spreadsheet database to improve your decisions about selecting suppliers. Some criteria to consider for identifying preferred suppliers include the supplier’s track record for on-time deliveries, suppliers offering the best accounts payable terms, and suppliers offering lower pricing when the same item can be provided by multiple suppliers. Use your spreadsheet software to prepare reports to support your recommendations. A c h i ev i n g O p e r a t i o n a l E x c e l l e n c e : U s i n g I n t e r n e t S o f t w a r e t o P l a n E f fi c i e n t Tr a n s p o r t a t i o n R o u t e s Software skills: Internet-based software Business skills: Transportation planning 2-11  In this exercise, you will use MapQuest software to map out transportation routes for a business and select the most efficient route. You have just started working as a dispatcher for Cross-Country Transport, a new trucking and ­ elivery service based in Cleveland, Ohio. Your first assignment is to plan a delivery of office equipment d and furniture from Elkhart, Indiana (at the corner of E. Indiana Ave. and Prairie Street) to Hagerstown, Maryland (corner of Eastern Blvd. N. and Potomac Ave.).To guide your trucker, you need to know the most efficient route between the two cities. Use MapQuest to find the route that is the shortest distance between the two cities. Use MapQuest again to find the route that takes the least time. Compare the results. Which route should Cross-Country use? Collaboration and Teamwork Project 2-12  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this ­chapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open-source collaboration tools to complete the ­assignment. Chapter 2 Global E-business and Collaboration 73 S houl d a C omputer Grade Your Essays? case study W ould you like your college essays graded by a computer? Well, you just might find that happening in your next course. In April 2013, EdX, a Harvard/MIT joint venture to develop massively open online courses (MOOCs), launched an essay scoring p ­ rogram. Using artificial intelligence technology, essays and short answers are immediately scored and feedback ­tendered, allowing students to revise, resubmit, and improve their grade as many times as necessary. The non-profit organization is offering the software free to any institution that wants to use it. From a pedagogical standpoint—if the guidance is sound—immediate feedback and the ability to directly act on it is an optimal learning environment. But while proponents trumpet automated essay grading’s superiority to students waiting days or weeks for returned papers— which they may or may not have the opportunity to revise—as well as the time-saving benefit for instructors, critics doubt that humans can be replaced. In 2012, Les Perelman, the former director of writing at MIT, countered a paper touting the proficiency of automated essay scoring (AES) software. University of Akron College of Education dean, Mark Shermis, and co-author, data scientist Ben Hamner used AES programs from nine companies, ­including Pearson and McGraw-Hill, to rescore over 16,000 middle and high school essays from six different state standardized tests. Their Hewlett Foundation sponsored study found that machine scoring closely tracked human grading, and in some cases, produced a more accurate grade. Perelman, however, found that no direct statistical comparison between the human graders and the programs was performed. While Shermis concedes that regression analysis was not performed—because the software companies imposed this condition in order to allow him and Hamner to test their products—he unsurprisingly accuses Perelman of evaluating their work without performing research of his own. Perelman has in fact conducted studies on the Electronic Essay Rater (e-rater) developed by the Educational Testing Service (ETS)—the only organization that would allow him access. The e-rater uses syntactic variety, discourse structure (like PEG) and content analysis (like IEA)and is based on natural language processing technology. It applies statistical analysis to linguistic features like argument formation and syntactic variety to determine scores, but also gives weight to vocabulary and topical content. In the month granted him, Perelman analyzed the algorithms and toyed with the e-Rater, confirming his prior critiques. The major problem with AES programs (so far) is that they cannot distinguish fact from fiction. For example, in response to an essay prompt about the causes for the steep rise in the cost of higher education, Perelman wrote that the main driver was greedy teaching assistants whose salaries were six times that of college presidents with exorbitant benefits packages including South Seas vacations, private jets, and movie contracts. He supplemented the argument with a line from Allen Ginsberg’s “Howl,” and received the top score of 6. The metrics that merited this score included ­overall length, paragraph length, number of words per sentence, word length, and the use of conjunctive adverbs such as “however” and “moreover.” Since computer programs cannot divine meaning, essay length is a proxy for writing fluency, conjunctive adverb use for complex thinking, and big words for vocabulary aptitude. Program vendors such as Pearson and Vantage Learning defend these parameters, asserting that they are highly correlated. Good writers have acquired skills that enable them to write more under time constraints; they use more complex vocabulary, and they understand how to introduce, interrupt, connect, and conclude complex ideas—the jobs of conjunctive adverbs. AES programs also recognize sentence fragments and dock students for sentences that begin with “and” or “or.” However, professional writers know how to employ both to great effect. Perelman and a newly formed group of ­educators, Professionals Against Machine Scoring of Student Essays in High-Stakes Assessment, warn that writing instruction will be dumbed down to meet the limited and rigid metrics machines are capable of measuring. The productivity gains from using automated essay-grading software will undoubtedly take away some of the jobs of the graders hired by the standardized test companies. Pearson, for example, ostensibly pays its graders between $40 and $60 per hour. In that hour, a grader is expected to score between 20 74 Part One Organizations, Management, and the Networked Enterprise and 30 essays—that’s two to three minutes (and dollars) per essay. Clearly graders must use some type of shorthand metrics in order to score this quickly, but at least they can recognize as false the statement that on July 4, 2013, the United States observed its 2,013th birthday, even if it is contained in a wellconstructed sentence. While the e-Rater can score 16,000 essays in 20 seconds, it cannot make this ­distinction. And presumably, a 716-word essay containing ­multiple nonsense sentences will not receive a 6 from a human grader while a 150-word shorter, factual, well-reasoned essay scores a 5, as Perelman was able to demonstrate. ETS, developer of the SAT, GRE, Praxis, and K-12 standardized tests for multiple states, counters that the e-Rater is not replacing human graders in highstakes tests; it is supplementing them. Essays are scored by both human and machine and when the scores do not match, a second human breaks the impasse. Furthermore, they posit that the test prep course Perelman developed to teach students how to beat AES software requires higher-order thinking skills—precisely those the tests seek to measure. Thus, if students can master Perelman’s techniques, they have likely earned their 6. Pearson adds that its Intelligent Essay Assessor is primarily a classroom tool, allowing students to revise their essays multiple times before turning them in to a teacher to be graded. But for many states looking to introduce writing sections to their battery of K-12 standardized tests, and for those that abandoned the effort due to the cost, eliminating graders altogether will make them affordable. And the stakes are not insubstantial for failure to achieve passing grades on state standardized tests, ranging from retesting, to remedial programs, to summer school, to non-promotion. The free EdXtool appears to be more sophisticated than some vendor offerings in that it is “trainable” with at least some ability to develop grading standards and to adapt to grading preferences. First, instructors grade 100 essays or essay questions, and these are input to the program. Using these guidelines, the tool develops customized grading metrics and follows the scoring method preferred by the instructor, either a numerical system or letter grade. As noted by Shermis, in many lesser-ranked colleges than those of the critics, classes are now so large as to render comprehensive writing feedback infeasible. Moreover, at top universities, the instructional level is higher with fewer students in need of remediation. Down in the educational trenches, a tool that can adequately simulate human scoring, with no greater variation than that seen from instructor to instructor, and that provides immediate guidance, is a welcome addition to the instructional toolbox. But as demands on instructor’s time decrease, will university administrators push staff cutbacks to meet budgetary constraints? Will fewer and fewer instructors be teaching more and more students? As MOOC and AES proliferate, the answer is: most likely. EdX is quickly becoming controversial in academic circles. Presently, its course offerings are free and students earn a certificate of completion, but not course credit. To become self-sustaining, however, the non-profit plans to offer its MOOC platform as a “self-service” system, which faculty members can use to develop courses specifically branded for their universities. EdX will then receive the first $50,000 in revenue generated from the course or $10,000 for a recurring course. Thereafter, revenue will be split 50–50 between the university and EdX. A second revenue-generating model offers universities “production help” with course development, charging them $250,000 for a new course and $50,000 each term the course is offered again. If a course is successful, the university receives 70% of the revenue, as long as EdX has been fully compensated for any self-service courses. However, in order to generate enough ­revenue to share with its 12 university partners, which now include University of California, Berkeley, Wellesley, Georgetown, and the University of Texas, a licensing model is likely. Tested at no charge at San Jose State University in 2012, an EdX MOOC served as the basis for a blended online ­engineering course. The enriched curriculum resulted in an increased passing rate from 60% to 91%. If course licensing becomes the key revenue stream, Anant Agarwal, the electrical engineer ­president of EdX, foresees this happening in closed classrooms with limited enrollment. But some members of the San Jose State ­faculty are nonetheless alarmed. When a second EdX MOOC, JusticeX, was considered, the Philosophy department sent a sharply-worded letter addressed to Harvard course developer, Michael Sandel, but ­actually leveled at university administrators. Asserting that the department did not have an ­academic problem in need of remediation and was not lacking faculty to teach its equivalent course, it did not shy from attacking the economic motives behind public universities’ embrace of MOOCs. The authors further asserted that MOOCs represented a decline in educational quality and noted the irony involved when a social justice course was the vehicle for ­perpetrating a social injustice—a long-term effort to “dismantle departments and replace professors.” Chapter 2 Global E-business and Collaboration Sandel’s conciliatory response expressed his desire to share free educational resources, his aversion to undercutting colleagues, and a call for a ­serious debate at both EdX and in the higher education community. Other universities are similarly pushing back, against both EdX and other new MOOC ventures such as Coursera and Udacity, founded by Stanford faculty members. MOOCs and AES are inextricably linked. Massive online courses require automated assessment systems. And both Coursera and Udacity have expressed their commitment to using them due to the value of immediate feedback. Amherst College ­faculty voted against joining the EdX consortium. Duke University faculty members thwarted administration attempts to join nine other universities and educational technology company 2U in a venture to develop a collection of for-credit undergraduate courses. But EdX was founded by two of the most prominent universities in the United States, has gathered prestigious partners, and is already shaping educational standards. Stanford, for one, has decided to get on board; it adopted the OpenEdX open-source platform and began offering a summer reading program for freshman and two public courses in the summer of 2013. Stanford will collaborate with EdX on the future development of OpenEdX and will offer both public and university classes on it. So while Professor Perelman jokes that his former computer science major students could develop an Android app capable of spitting out formulaic essays that would get a 6 from e-Rater, cutting humans completely out of the equation, he knows that serious issues are in play. What educational outcomes will result from diminishing human interaction and input? Will AI develop to the point that truth, ­accuracy, effective organization, persuasiveness, argumentation and supporting evidence can be ­evaluated? And how many more jobs in education will disappear as a result? Sources: Caralee J. Adams, “Essay-Grading Software Seen as Time-Saving Tool,” Education Week, March 10, 2014; www., accessed August 1, 2014; www.humanreaders. org, accessed July 28, 2014; Michael Gonchar, “How Would You Feel About a Computer Grading Your Essays?” New York Times, April 5, 2013; John Markoff, “Essay-Grading Software Offers Professors a Break,” New York Times, April 4, 2013; Ry Rivard, “Humans Fight Over Robo-Readers,” Inside Higher Ed, March 15, 2013; David Rotman, “How Technology Is Destroying Jobs, MIT Technology Review, June 12, 2013; Randall Stross, “The Algorithm Didn’t Like My Essay, New York Times, June 9, 2012; Michael Winerip, “Facing a Robo-Grader? Just Keep Obfuscating Mellifluously,” New York Times, April 22, 2012; Paul Wiseman, Bernard Condon, and Jonathan Fahey, “Can smart machines take your job? Middle class jobs increasingly being replaced by technology,” The Associated Press, January 24, 2013;and “San Jose State University Faculty Pushes Back Against EdX,” Inside Higher Ed, May 3, 2013. Case Study Questions 2-13 Identify the kinds of systems described in this case. 2-14 What are the benefits of automated essay ­grading? What are the drawbacks? 2-15 Can automated essay grading replace a human grader? Why or why not? 2-16 What management, organization, and ­technology factor should be considered when deciding whether to use AES? 2-17 Would you be suspicious of a low grade you received on a paper graded by AES software? Why or why not? Would you request a review by a human grader? MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions. 2-18 2-19 75 Identify and describe the capabilities of enterprise social networking software. Describe how a firm could use each of these capabilities. Describe the systems used by various management groups within the firm in terms of the information they use, their outputs, and groups served. 76 Part One Organizations, Management, and the Networked Enterprise Chapter 2 References Aral, Sinan; Erik Brynjolfsson; and Marshall Van Alstyne, “Productivity Effects of Information Diffusion in Networks,” MIT Center for Digital Business (July 2007). Banker, Rajiv D., Nan Hu, Paul A. Pavlou, and Jerry Luftman. “CIO Reporting Structure, Strategic Positioning, and Firm Performance .” MIS Quarterly 35. No. 2 (June 2011). Bernoff, Josh and Charlene Li. “Harnessing the Power of Social Applications.” MIT Sloan Management Review (Spring 2008). Bughin, Jacques, Angela Hung Byers, and Michael Chui. “How Social Technologies Are Extending the Organization.” McKinsey Quarterly (November 2011). Bureau of Labor Statistics. “Occupational Outlook Handbook 20122013 Edition.” Bureau of Labor Statistics (July 2012). Forrester Consulting, “Total Economic Impact of IBM Social Collaboration Tools” (September 2010). Forrester Research. “Social Business: Delivering Critical Business Value” (April 2012). Karen A. Frenkel. “How the CIO’s Role Will Change by 2018.” CIO Insight (January 31, 2014). Dwoskin, Elizabeth. “Big Data’s High-Priests of Algorithms.” Wall Street Journal (August 8, 2014). Frost & White. “Meetings Around the World II: Charting the Course of Advanced Collaboration.” (October 14, 2009). Greengard, Samuel. “Collaboration: At the Center of Effective Business.” Baseline (January 24, 2014). ___________. “The Social Business Gets Results.” Baseline (June 19, 2014). Guillemette, Manon G. and Guy Pare.“Toward a New Theory of the Contribution of the IT Function in Organizations.” MIS Quarterly 36, No. 2 (June 2012). IBM. “Finncontainers Grows into a Nimble, Efficient Enterprise.” (June 27, 2013). Johnson, Bradford, James Manyika, and Lareina Yee. “The Next Revolution in Interactions,” McKinsey Quarterly No. 4 (2005). Kane, Gerald C., Doug Palmer, Anh Nguyen Phillips and David Kiron. “Finding the Value in Social Business. MIT Sloan Management Review, 55, No. 3 (Spring 2014). Kiron, David, Doug Palmer, Anh Nguyen Phillips and Nina Kruschwitz. “What Managers Really Think About Social Business.” MIT Sloan Management Review 53, No. 4 (Summer 2012). Kolfschoten, Gwendolyn L. , Niederman, Fred, Briggs, Robert O. and Vreede, Gert-Jan De. “Facilitation Roles and Responsibilities for Sustained Collaboration Support in Organizations.” Journal of Management Information Systems 28, No. 4 (Spring 2012). Li, Charlene. “Making the Business Case for Enterprise Social Networks.” Altimeter Group (February 22, 2012). Malone, Thomas M., Kevin Crowston, Jintae Lee, and Brian Pentland. “Tools for Inventing Organizations: Toward a Handbook of Organizational Processes.” Management Science 45, No. 3 (March 1999). McKinsey Global Institute. “The Social Economy: Unlocking Value and Productivity Through Social Technologies.” McKinsey & Company (July 2012). Microsoft Corporation. “Fair Work OmbudsmanAustralian Government Body Increases Compliance through LOB Connection.” (February 2, 2014). Poltrock, Steven and Mark Handel. “Models of Collaboration as the Foundation for Collaboration Technologies.” Journal of Management Information Systems 27, No. 1 (Summer 2010). Saunders, Carol, A. F. Rutkowski, Michiel van Genuchten, Doug Vogel, and Julio Molina Orrego. “Virtual Space and Place: Theory and Test.” MIS Quarterly 35, No. 4 (December 2011). Siebdrat, Frank, Martin Hoegl, and Holger Ernst. “How to Manage Virtual Teams.” MIT Sloan Management Review 50, No. 4 (Summer 2009). Tallon, Paul P. , Ronald V.Ramirez, and James E. Short . “The Information Artifact in IT Governance: Toward a Theory of Information Governance.” Journal of Management Information Systems 30, No. 3 (Winter 2014). Violino, Bob. “What Is Driving the Need for Chief Data Officers?” Information Management (February 3, 2014). Weill, Peter and Jeanne W. Ross. IT Governance. Boston: Harvard Business School Press (2004). This page intentionally left blank Information Systems, Organizations, and Strategy 3 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. Which features of organizations do managers need to know about to build and use information systems successfully? 2. What is the impact of information systems on organizations? 3. How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems? 4. What are the challenges posed by strategic information systems and how should they be addressed? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 78 Chapter Cases Video Cases Should T.J. Maxx Sell Online? Nike Becomes a Technology Company Identifying Market Niches in the Age of Big Data Who’s The World’s Top Retailer? Walmart and Amazon Duke It Out National Basketball Association: Competing on Global Delivery with Akamai OS Streaming IT and Geo-Mapping Help a Small Business Succeed Materials Handling Equipment Corp: Enterprise Systems Drive Corporate Strategy for a Small Business Instructional Video: SAP BusinessOne ERP: From Orders to Payment Should T.J. Maxx Sell Online? T .J. Maxx, the giant off-price clothing retailer with over 1,000 stores across the U.S., has been a relative latecomer to online selling. It didn’t launch its e-commerce platform until September 2013, many years after rivals such as Target and Kohl’s did so. (The company made a feeble effort to sell online in 2004, but quickly pulled back after a year of lower than expected sales and too much time and money spent on updating inventory.) So why did T.J. Maxx wait so long to try again? There are several reasons. First, it is difficult for an off-price store like T.J. Maxx to provide a stable and predictable inventory for online purchases. T.J. Maxx buys excess inventory and off-season fashions from a vast network of department stores and manufacturers, 15 percent of which are merchandise left over from the year before. But it buys these items in much smaller lots than traditional retailers such as Nordstrom or Macy’s, with much of its inventory consisting of one-time items in small quantities. Macy’s might order 1,000 Under Armour blue zippered long-sleeve tops for all sizes small through extra-large, whereas T.J. Maxx might have 20 blue Under Armour zippered long-sleeve tops, 30 pairs of purple Nike basketball shoes in assorted sizes, and 3 pairs of Adidas soccer socks in extra-small size. Whereas traditional department stores tend to buy seasonally, T.J. Maxx has new brand name and designer fashions arriving every week. The inventory varies a great deal from one store to the next, and you never knew what you’ll find when you visit a T.J. Maxx store. Shoppers are lured into the stores in the hope that they might find a really hot bargain and that only might be available for a few days. High-end clothing brands such as Polo Ralph Lauren or Nicole Miller do not want to see their merchandise deeply © Jeff Greenberg/Alamy 79 80 Part One Organizations, Management, and the Networked Enterprise discounted online. Additionally, an online storefront can cannibalize in-store sales, and management was worried about that as well. On the other hand, ignoring e-commerce can mean losing market share to competitors. And e-commerce has opened the doors to many more competitors for T.J. Maxx. Today’s budget shopper is bombarded with bargains and discount shopping opportunities from many more sources. These include Web-only ­off-price stores such as and sites such as Rue LaLa and Gilt Groupe with short-term deals known as “flash sales.” Brick-andmortar outlet stores have also expanded, occupying 68 million square feet of retail space, compared to 56 million in 2006, according to Value Retail News. Even high-end retailers such as Neiman Marcus and Bloomingdales have set up discount outlets. T.J. Maxx management felt it had to take the online leap. In 2012, T.J. Maxx’s parent company TJX purchased off-price Internet retailer Sierra Trading Post to learn about selling online. The new T.J. Maxx site tries to preserve the feel of its stores. You can’t just search “Nanette Lepore”— you must comb through all women’s dresses or shoes. Online shoppers may or may not like that. The retailer is also experimenting with its own flash sale site called Maxx Flash. Unlike other flash sites, this one can accept returns at stores and resell items there. T.J. Maxx has not yet furnished performance metrics for the site, so analysts still don’t have a precise idea of how much value is being created. But it is possible to roughly estimate the platform’s potential contribution to profit once it ramps up after three or four years. Profit margins from online sales tend to be higher by 7 percentage points on average than those from brick-and-mortar stores. If T.J. Maxx’s operating margin was 12% (as occurred in fiscal 2012) and it obtained 10% of its revenue from e-commerce, an operating margin of 18% would add about 45 cents, or 13.6%, to fiscal 2014 earnings per share, according to financial services firm Sterne Agee estimates. A more conservative estimate, with e-commerce making up only 6% of sales and margins coming in at 16%, would still add 24 cents to earnings per share. At this point, company management feels the plunge into e-commerce is worth the risk. Sources:, accessed March 5, 2014; Miriam Gottfried,” Get Caught Up in T.J. Maxx’s Web,” Wall Street Journal, December 1, 2013; Chris Reidy, “TJX: 2013 Was Another Successful Year’,” Boston Globe, February 26, 2014; and “T.J. Maxx Revisits Online Strategy,” Seeking Alpha, Oct. 7, 2013. T .J. Maxx’s story illustrates some of the ways that information systems help businesses compete, as well as the challenges of finding the right business strategy and how to use technology in that strategy. Retailing today is an extremely crowded playing field, both online and in physical brick-andmortar stores. Even though T.J. Maxx is a leading off-price retailer, it has many competitors, and it is searching for a way to use the Internet that will work with its particular business model. The chapter-opening diagram calls attention to important points raised by this case and this chapter. T.J. Maxx, part of the TJX group of retail stores, including Marshall’s and Home Goods, has been a highly successful off-price retailer, with over 1,000 stores in the US alone. Its business model depends on picking up department store and designer excess inventory or last year’s ­fashions and selling at low prices to appeal to opportunistic shoppers. That business model is being challenged by more off-price competitors, both ­physical stores, and off-price and “flash sale” sites on the Internet. T.J. Maxx would like to do more selling online because profit margins are higher, but its inability to provide a reliable and stable inventory has impeded this effort. Chapter 3 Information Systems, Organizations, and Strategy The company is making one more big push into online retailing, learning from the experience of Sierra Trading Post, but it is still unclear if an online business strategy will work. Here are some questions to think about: How do the competitive forces and value chain models apply to T.J. Maxx? Visit the T.J. Maxx Web site and ­examine its offerings and ease of use. Do you thing selling on the Internet will work for T.J. Maxx? Why or why not? 3.1 I Which features of organizations do managers need to know about to build and use information systems successfully? nformation systems and organizations influence one another. Information systems are built by managers to serve the interests of the business firm. At the same time, the organization must be aware of and open to the ­influences of information systems to benefit from new technologies. The interaction between information technology and organizations is ­complex and is influenced by many mediating factors, including the organization’s structure, business processes, politics, culture, surrounding environment, and management decisions (see Figure 3.1). You will need to understand how information systems can change social and work life in your firm. You will not be able to design new systems successfully or understand existing systems ­without understanding your own business organization. As a manager, you will be the one to decide which systems will be built, what they will do, and how they will be implemented. You may not be able to anticipate all of the consequences of these decisions. Some of the changes that occur in business firms because of new information technology (IT) investments cannot be foreseen and have results that may or may not meet your expectations. Who would have imagined fifteen years ago, for instance, that e-mail and instant messaging would become a dominant form of business 81 82 Part One Organizations, Management, and the Networked Enterprise FIGURE 3.1 The two-way relationship between organizations and information technology This complex two-way relationship is mediated by many factors, not the least of which are the decisions made—or not made—by managers. Other factors mediating the relationship include the organizational culture, structure, politics, business processes, and environment. c­ ommunication and that many managers would be inundated with more than 200 e-mail ­messages each day? What Is an Organization? An organization is a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This technical ­definition focuses on three elements of an organization. Capital and labor are primary production factors provided by the environment. The organization (the firm) transforms these inputs into products and services in a production function. The products and services are consumed by environments in return for supply inputs (see Figure 3.2). FIGURE 3.2 The technical microeconomic definition of the organization In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop. Chapter 3 Information Systems, Organizations, and Strategy An organization is more stable than an informal group (such as a group of friends that meets every Friday for lunch) in terms of longevity and routineness. Organizations are formal legal entities with internal rules and p ­ rocedures that must abide by laws. Organizations are also social structures because they are a collection of social elements, much as a machine has a structure—a particular arrangement of valves, cams, shafts, and other parts. This definition of organizations is powerful and simple, but it is not very descriptive or even predictive of real-world organizations. A more realistic behavioral definition of an organization is a collection of rights, ­privileges, ­obligations, and responsibilities delicately balanced over a period of time through conflict and conflict resolution (see Figure 3.3). In this behavioral view of the firm, people who work in organizations develop customary ways of working; they gain attachments to existing relationships; and they make arrangements with subordinates and superiors about how work will be done, the amount of work that will be done, and under what conditions work will be done. Most of these arrangements and feelings are not discussed in any formal rulebook. How do these definitions of organizations relate to information systems technology? A technical view of organizations encourages us to focus on how inputs are combined to create outputs when technology changes are introduced into the company. The firm is seen as infinitely malleable, with capital and labor substituting for each other quite easily. But the more ­realistic behavioral definition of an organization suggests that building new information systems, or rebuilding old ones, involves much more than a technical rearrangement of machines or workers—that some information systems change the organizational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of time. Changing these elements can take a long time, be very disruptive, and requires more resources to support training and learning. For instance, the length of time required to implement a new information system effectively is much longer than usually anticipated simply because there is a lag between implementing a technical system and teaching employees and managers how to use the system. FIGURE 3.3 The behavioral view of organizations The behavioral view of organizations emphasizes group relationships, values, and structures. 83 84 Part One Organizations, Management, and the Networked Enterprise Technological change requires changes in who owns and controls i­nformation, who has the right to access and update that information, and who makes decisions about whom, when, and how. This more complex view forces us to look at the way work is designed and the procedures used to achieve outputs. The technical and behavioral definitions of organizations are not contradictory. Indeed, they complement each other: The technical definition tells us how thousands of firms in competitive markets combine capital, labor, and information technology, whereas the behavioral model takes us inside the individual firm to see how that technology affects the organization’s inner workings. Section 3.2 describes how each of these definitions of ­o rganizations can help explain the relationships between information ­systems and organizations. Features of Organizations All modern organizations share certain characteristics. They are bureaucracies with clear-cut divisions of labor and specialization. Organizations arrange ­specialists in a hierarchy of authority in which everyone is accountable to someone and authority is limited to specific actions governed by abstract rules or procedures. These rules create a system of impartial and universal d ­ ecision making. Organizations try to hire and promote employees on the basis of ­technical qualifications and professionalism (not personal connections). The organization is devoted to the principle of efficiency: maximizing output using limited inputs. Other features of organizations include their business processes, organizational culture, organizational politics, surrounding environments, structure, goals, constituencies, and leadership styles. All of these features affect the kinds of information systems used by organizations. Routines and Business Processes All organizations, including business firms, become very efficient over time because individuals in the firm develop routines for producing goods and ­services. Routines—sometimes called standard operating procedures—are precise rules, procedures, and practices that have been developed to cope with virtually all expected situations. As employees learn these routines, they become highly productive and efficient, and the firm is able to reduce its costs over time as efficiency increases. For instance, when you visit a doctor’s office, receptionists have a well-developed set of routines for gathering basic information from you; nurses have a different set of routines for preparing you for an interview with a doctor; and the doctor has a well-developed set of routines for diagnosing you. Business processes, which we introduced in Chapters 1 and 2, are collections of such routines. A business firm, in turn, is a collection of business processes (Figure 3.4). O r g a n i z a t i o n a l Po l i t i c s People in organizations occupy different positions with different specialties, ­concerns, and perspectives. As a result, they naturally have divergent ­viewpoints about how resources, rewards, and punishments should be ­distributed. These differences matter to both managers and employees, and they result in p ­ olitical struggle for resources, competition, and conflict within every organization. Political resistance is one of the great difficulties of ­bringing about organizational change—especially the development of new information systems. Virtually all large information systems investments by a firm that bring about significant Chapter 3 Information Systems, Organizations, and Strategy FIGURE 3.4 Routines, business processes, and firms All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance. changes in strategy, business objectives, business p ­ rocesses, and procedures become politically charged events. Managers who know how to work with the politics of an organization will be more successful than less-skilled managers in implementing new information systems. Throughout this book, you will find many examples where internal politics defeated the best-laid plans for an ­information system. Organizational Culture All organizations have bedrock, unassailable, unquestioned (by the ­members) assumptions that define their goals and products. Organizational culture encompasses this set of assumptions about what products the organization should produce, how it should produce them, where, and for whom. Generally, these cultural assumptions are taken totally for granted and are rarely publicly announced or discussed. Business processes—the actual way business firms produce value—are usually ensconced in the organization’s culture. You can see organizational culture at work by looking around your university or college. Some bedrock assumptions of university life are that professors know more than students, the reason students attend college is to learn, and classes follow a regular schedule. Organizational culture is a powerful 85 86 Part One Organizations, Management, and the Networked Enterprise unifying force that restrains political conflict and promotes common understanding, agreement on procedures, and common practices. If we all share the same basic cultural assumptions, agreement on other matters is more likely. At the same time, organizational culture is a powerful restraint on change, especially technological change. Most organizations will do almost anything to avoid making changes in basic assumptions. Any technological change that threatens commonly held cultural assumptions usually meets a great deal of resistance. However, there are times when the only sensible way for a firm to move forward is to employ a new technology that directly opposes an existing organizational culture. When this occurs, the technology is often stalled while the culture slowly adjusts. O r g a n i z a t i o n a l E nv i r o n m e n t s Organizations reside in environments from which they draw resources and to which they supply goods and services. Organizations and environments have a reciprocal relationship. On the one hand, organizations are open to, and dependent on, the social and physical environment that surrounds them. Without financial and human resources—people willing to work reliably and consistently for a set wage or revenue from customers—organizations could not exist. Organizations must respond to legislative and other requirements imposed by government, as well as the actions of customers and competitors. On the other hand, organizations can influence their environments. For example, business firms form alliances with other businesses to influence the political process; they advertise to influence customer acceptance of their products. Figure 3.5 illustrates the role of information systems in helping organizations perceive changes in their environments and also in helping organizations act on their environments. Information systems are key instruments for FIGURE 3.5 Environments and organizations have a reciprocal relationship Environments shape what organizations can do, but organizations can influence their environments and decide to change environments altogether. Information technology plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment. Chapter 3 Information Systems, Organizations, and Strategy environmental scanning, helping managers identify external changes that might require an organizational response. Environments generally change much faster than organizations. New ­technologies, new products, and changing public tastes and values (many of which result in new government regulations) put strains on any organization’s culture, politics, and people. Most organizations are unable to adapt to a rapidly changing environment. Inertia built into an organization’s standard operating procedures, the political conflict raised by changes to the existing order, and the threat to closely held cultural values inhibit organizations from making significant changes. Young firms typically lack resources to sustain even short periods of troubled times. It is not surprising that only 10 percent of the Fortune 500 companies in 1919 still exist today. Disruptive Technologies: Riding the Wave. Sometimes a technology and resulting business innovation comes along to radically change the business landscape and environment. These innovations are loosely called “disruptive.” (Christensen, 2003). What makes a technology disruptive? In some cases, ­disruptive technologies are substitute products that perform as well as or better (often much better) than anything currently produced. The car substituted for the horse-drawn carriage; the word processor for typewriters; the Apple iPod for portable CD players; digital photography for process film photography. In these cases, entire industries were put out of business. In other cases, ­disruptive technologies simply extend the market, usually with less functionality and much less cost, than existing products. Eventually they turn into low-cost competitors for whatever was sold before. Disk drives are an e ­ xample: Small hard disk drives used in PCs extended the market for disk drives by ­offering cheap digital storage for small files. Eventually, small PC hard disk drives became the largest segment of the disk drive marketplace. Some firms are able to create these technologies and ride the wave to p ­ rofits; others learn quickly and adapt their business; still others are obliterated because their products, services, and business models become obsolete. They may be very efficient at doing what no longer needs to be done! There are also cases where no firms benefit, and all the gains go to consumers (firms fail to capture any profits). Table 3.1 describes just a few disruptive technologies from the past. Disruptive technologies are tricky. Firms that invent disruptive technologies as “first movers” do not always benefit if they lack the resources to exploit the technology or fail to see the opportunity. The MITS Altair 8800 is widely regarded as the first PC, but its inventors did not take advantage of their first mover status. Second movers, so-called “fast followers” such as IBM and Microsoft, reaped the rewards. Citibank’s ATMs revolutionized retail banking, but they were copied by other banks. Now all banks use ATMs, with the benefits going mostly to the consumers. Organizational Structure All organizations have a structure or shape. Mintzberg’s classification, described in Table 3.2, identifies five basic kinds of organizational structure (Mintzberg, 1979). The kind of information systems you find in a business firm—and the nature of problems with these systems—often reflects the type of organizational ­structure. For instance, in a professional bureaucracy such as a hospital, it is not unusual to find parallel patient record systems operated by the administration, another by doctors, and another by other professional staff such as nurses and social workers. In small entrepreneurial firms, you will often find poorly 87 88 Part One Organizations, Management, and the Networked Enterprise TABLE 3.1 Disruptive Technologies: Winners and Losers Technology Description Winners and Losers Microprocessor chips (1971) Thousands and eventually millions of transistors on a silicon chip Microprocessor firms win (Intel, Texas Instruments) while transistor firms (GE) decline. Personal computers (1975) Small, inexpensive, but fully functional desktop computers PC manufacturers (HP, Apple, IBM), and chip manufacturers prosper (Intel), while mainframe (IBM) and minicomputer (DEC) firms lose. Digital photography Using CCD (charge-coupled device) image sensor chips to record images CCD manufacturers and traditional camera companies win, manufacturers of film products lose. World Wide Web (1989) A global database of digital files and “pages” instantly available Owners of online content, news benefit while traditional publishers (newspapers, magazines, and broadcast television) lose. Internet music, video, TV services Repositories of downloadable music, video, TV broadcasts on the Web Owners of Internet platforms, telecommunications providers owning Internet backbone (ATT, Verizon), local Internet service providers win, while content owners and physical retailers lose (Tower Records, Blockbuster). PageRank algorithm A method for ranking Web pages in terms of their popularity to supplement Web search by key terms Google is the winner (they own the patent), while traditional key word search engines (Alta Vista) lose. Software as Web service Using the Internet to provide remote access to online software Online software services companies ( win, while traditional “boxed” software companies (Microsoft, SAP, Oracle) lose. (1975) (1998) designed systems developed in a rush that often quickly outgrow their usefulness. In huge multidivisional firms operating in hundreds of locations, you will often find there is not a single integrating information system, but instead each locale or each division has its set of information systems. TABLE 3.2 Organizational Structures Organizational Type Description Examples Entrepreneurial structure Young, small firm in a fast-changing environment. It has a simple structure and is managed by an entrepreneur serving as its single chief executive officer. Small start-up business Machine bureaucracy Large bureaucracy existing in a slowly changing environment, producing standard products. It is dominated by a centralized management team and centralized decision making. Midsize manufacturing firm Divisionalized bureaucracy Combination of multiple machine bureaucracies, each producing a different product or service, all topped by one central headquarters. Fortune 500 firms, such as General Motors Professional bureaucracy Knowledge-based organization where goods and services depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority. Law firms, school systems, hospitals Adhocracy Task force organization that must respond to rapidly changing environments. Consists of large groups of specialists organized into short-lived multidisciplinary teams and has weak central management. Consulting firms, such as the Rand Corporation Chapter 3 Information Systems, Organizations, and Strategy O t h e r O r g a n i z a t i o n a l Fe a t u r e s Organizations have goals and use different means to achieve them. Some ­organizations have coercive goals (e.g., prisons); others have utilitarian goals (e.g., businesses). Still others have normative goals (universities, religious groups). Organizations also serve different groups or have different constituencies, some primarily benefiting their members, others benefiting clients, stockholders, or the public. The nature of leadership differs greatly from one organization to another—some organizations may be more democratic or authoritarian than others. Another way organizations differ is by the tasks they perform and the technology they use. Some organizations perform primarily routine tasks that can be reduced to formal rules that require little judgment (such as m ­ anufacturing auto parts), whereas others (such as consulting firms) work primarily with nonroutine tasks. 3.2 What is the impact of information systems on organizations? Information systems have become integral, online, interactive tools deeply involved in the minute-to-minute operations and decision making of large organizations. Over the last decade, information systems have fundamentally altered the economics of organizations and greatly increased the possibilities for organizing work. Theories and concepts from economics and sociology help us understand the changes brought about by IT. Economic Impacts From the point of view of economics, IT changes both the relative costs of capital and the costs of information. Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. Hence, information technology should result in a decline in the number of middle managers and clerical ­workers as information technology substitutes for their labor. As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain relatively expensive. Hence, over time we should expect managers to increase their investments in IT because of its declining cost relative to other capital investments. IT also affects the cost and quality of information and changes the economics of information. Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the marketplace what it cannot make itself. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production costs. Using markets is expensive because of costs such as ­locating and communicating with distant suppliers, monitoring ­contract compliance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985). Traditionally, firms have tried to reduce ­transaction costs through vertical integration, by getting bigger, hiring more employees, and buying their own suppliers and distributors, as both General Motors and Ford used to do. Information technology, especially the use of networks, can help firms lower the cost of market participation (transaction costs), making it worthwhile for 89 90 Part One Organizations, Management, and the Networked Enterprise firms to contract with external suppliers instead of using internal sources. As a result, firms can shrink in size (numbers of employees) because it is far less expensive to outsource work to a competitive marketplace rather than hire employees. For instance, by using computer links to external suppliers, auto makers such as Chrysler, Toyota, and Honda can achieve economies by obtaining more than 70 percent of their parts from the outside. Information systems make it possible for companies such as Cisco Systems and Dell Inc. to o ­ utsource their production to contract manufacturers such as Flextronics instead of making their products themselves. As transaction costs decrease, firm size (the number of employees) should shrink because it becomes easier and cheaper for the firm to contract for the purchase of goods and services in the marketplace rather than to make the product or offer the service itself. Firm size can stay constant or contract even as the company increases its revenues. For example, when Eastman Chemical Company split off from Kodak in 1994, it had $3.3 billion in revenue and 24,000 full-time employees. In 2013, it generated over $9.3 billion in revenue with only 14,000 employees. Information technology also can reduce internal management costs. According to agency theory, the firm is viewed as a “nexus of contracts” among self-interested individuals rather than as a unified, profit-maximizing entity (Jensen and Meckling, 1976). A principal (owner) employs “agents” (employees) to perform work on his or her behalf. However, agents need ­constant supervision and management; otherwise, they will tend to pursue their own interests rather than those of the owners. As firms grow in size and scope, agency costs or coordination costs rise because owners must expend more and more effort supervising and managing employees. Information technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce agency costs because it becomes easier for managers to oversee a greater number of employees. By reducing overall management costs, information technology enables firms to increase revenues while shrinking the number of middle managers and clerical w ­ orkers. We have seen examples in earlier chapters where information technology expanded the power and scope of small organizations by enabling them to perform coordinating activities such as processing orders or keeping track of inventory with very few clerks and managers. Because IT reduces both agency and transaction costs for firms, we should expect firm size to shrink over time as more capital is invested in IT. Firms should have fewer managers, and we expect to see revenue per employee increase over time. Organizational and Behavioral Impacts Theories based in the sociology of complex organizations also provide some understanding about how and why firms change with the implementation of new IT applications. IT Flattens Organizations Large, bureaucratic organizations, which primarily developed before the ­computer age, are often inefficient, slow to change, and less competitive than newly ­created organizations. Some of these large organizations have downsized, reducing the number of employees and the number of levels in their organizational hierarchies. Chapter 3 Information Systems, Organizations, and Strategy Behavioral researchers have theorized that information technology f­acilitates flattening of hierarchies by broadening the distribution of ­information to empower lower-level employees and increase management efficiency (see Figure 3.6). IT pushes decision-making rights lower in the organization because lower-level employees receive the information they need to make decisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees the capabilities to make intelligent decisions.) Because managers now receive so much more accurate information on time, they become much faster at making decisions, so fewer managers are required. Management costs decline as a percentage of revenues, and the hierarchy becomes much more efficient. These changes mean that the management span of control has also been broadened, enabling high-level managers to manage and control more workers spread over greater distances. Many companies have eliminated thousands of middle managers as a result of these changes. Po s t i n d u s t r i a l O r g a n i z a t i o n s Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In postindustrial societies, authority increasingly relies on knowledge and competence, and not merely on formal positions. Hence, the shape of organizations flattens because ­professional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more ­widespread throughout the firm (Drucker, 1988). FIGURE 3.6 Flattening organizations Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower-level employees more decision-making authority. 91 92 Part One Organizations, Management, and the Networked Enterprise Information technology may encourage task force-networked organizations in which groups of professionals come together—face to face or electronically— for short periods of time to accomplish a specific task (e.g., designing a new automobile); once the task is accomplished, the individuals join other task forces. The global consulting service Accenture is an example. Many of its 293,000 employees move from location to location to work on projects at client locations in more than 56 different countries. Who makes sure that self-managed teams do not head off in the wrong direction? Who decides which person works on which team and for how long? How can managers evaluate the performance of someone who is ­constantly rotating from team to team? How do people know where their careers are headed? New approaches for evaluating, organizing, and ­informing workers are required, and not all companies can make virtual work effective. Understanding Organizational Resistance to Change Information systems inevitably become bound up in organizational ­politics because they influence access to a key resource—namely, information. Information systems can affect who does what to whom, when, where, and how in an organization. Many new information systems require changes in ­personal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because information systems potentially change an organization’s structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced. There are several ways to visualize organizational resistance. Research on organizational resistance to innovation suggests that four factors are ­paramount: the nature of the IT innovation, the organization’s structure, the culture of people in the organization, and the tasks impacted by the innovation (see Figure 3.7). Here, changes in technology are absorbed, interpreted, deflected, and defeated by organizational task arrangements, structures, and people. In this model, the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. Other authors have spoken about the need to “unfreeze” organizations before i­ntroducing an ­innovation, quickly implementing it, and “refreezing” or institutionalizing the change (Kolb, 1970). Because organizational resistance to change is so powerful, many information technology investments flounder and do not increase productivity. Indeed, research on project implementation failures demonstrates that the most ­common reason for failure of large projects to reach their objectives is not the failure of the technology, but organizational and political resistance to change. Chapter 14 treats this issue in detail. Therefore, as a manger involved in future IT investments, your ability to work with people and organizations is just as important as your technical awareness and knowledge. The Internet and Organizations The Internet, especially the World Wide Web, has an important impact on the relationships between many firms and external entities, and even on the ­organization of business processes inside a firm. The Internet increases the accessibility, storage, and distribution of information and knowledge for ­organizations. In essence, the Internet is capable of dramatically lowering the ­transaction and agency costs facing most organizations. For instance, b ­ rokerage firms and banks Chapter 3 Information Systems, Organizations, and Strategy FIGURE 3.7 Organizational Resistance TO INFORMATION SYSTEM INNOVATIONS Implementing information systems has consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously. in New York can now deliver their internal o ­ perating p ­ rocedures manuals to their employees at distant locations by posting them on the corporate Web site, saving millions of dollars in distribution costs. A global sales force can receive nearly instant product price information updates using the Web or instructions from management sent by e-mail or text messaging on smartphones or mobile laptops. Vendors of some large retailers can access retailers’ internal Web sites directly to find ­up-to-the-minute sales information and to initiate replenishment orders instantly. Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a key component of their IT infrastructures. If prior networking is any guide, one result will be simpler b ­ usiness processes, fewer employees, and much flatter organizations than in the past. Implications for the Design and Understanding of Information Systems To deliver genuine benefits, information systems must be built with a clear understanding of the organization in which they will be used. In our experience, the central organizational factors to consider when planning a new system are the following: • The environment in which the organization must function • The structure of the organization: hierarchy, specialization, routines, and business processes • The organization’s culture and politics • The type of organization and its style of leadership 93 94 Part One Organizations, Management, and the Networked Enterprise • The principal interest groups affected by the system and the attitudes of workers who will be using the system • The kinds of tasks, decisions, and business processes that the information system is designed to assist 3.3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems? In almost every industry you examine, you will find some firms do better than most others. There’s almost always a stand-out firm. In the automotive i­ ndustry, Toyota is considered a superior performer. In pure online retail, Amazon is the leader; in off-line retail, Walmart, the largest retailer on earth, is the leader. In online music, Apple’s iTunes is considered the leader with more than 60 percent of the downloaded music market and in the related ­industry of digital music players, the iPod is the leader. In Web search, Google is ­considered the leader. Firms that “do better” than others are said to have a competitive ­advantage over others: They either have access to special resources that others do not, or they are able to use commonly available resources more efficiently—­usually because of superior knowledge and information assets. In any event, they do better in terms of revenue growth, profitability, or productivity growth (­efficiency), all of which ultimately in the long run translate into higher stock market valuations than their competitors. But why do some firms do better than others and how do they achieve ­competitive advantage? How can you analyze a business and identify its ­strategic advantages? How can you develop a strategic advantage for your own ­business? And how do information systems contribute to strategic advantages? One answer to that question is Michael Porter’s competitive forces model. Porter’s Competitive Forces Model Arguably, the most widely used model for understanding competitive a­ dvantage is Michael Porter’s competitive forces model (see Figure 3.8). This model ­provides a general view of the firm, its competitors, and the firm’s environment. Earlier in this chapter, we described the importance of a firm’s e ­ nvironment and the dependence of firms on environments. Porter’s model is all about the firm’s general business environment. In this model, five competitive forces shape the fate of the firm. Tr a d i t i o n a l C o m p e t i t o r s All firms share market space with other competitors who are continuously devising new, more efficient ways to produce by introducing new products and services, and attempting to attract customers by developing their brands and imposing switching costs on their customers. Chapter 3 Information Systems, Organizations, and Strategy FIGURE 3.8 Porter’s Competitive Forces Model In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers. N ew M a r k e t E n t r a n t s In a free economy with mobile labor and financial resources, new companies are always entering the marketplace. In some industries, there are very low ­barriers to entry, whereas in other industries, entry is very difficult. For instance, it is fairly easy to start a pizza business or just about any small retail business, but it is much more expensive and difficult to enter the computer chip business, which has very high capital costs and requires significant expertise and knowledge that is hard to obtain. New companies have several possible advantages: They are not locked into old plants and equipment, they often hire younger workers who are less expensive and perhaps more innovative, they are not encumbered by old worn-out brand names, and they are “more hungry” (more highly motivated) than traditional occupants of an industry. These advantages are also their weakness: They depend on outside financing for new plants and equipment, which can be expensive; they have a less-experienced workforce; and they have little brand recognition. Substitute Products and Services In just about every industry, there are substitutes that your customers might use if your prices become too high. New technologies create new substitutes all the time. Ethanol can substitute for gasoline in cars; vegetable oil for diesel fuel in trucks; and wind, solar, coal, and hydro power for industrial electricity generation. Likewise, Internet and wireless telephone service can substitute for traditional telephone service. And, of course, an Internet music ­service that allows you to download music tracks to an iPod or smartphone has become a substitute for CD-based music stores. The more substitute products and s­ ervices in your industry, the less you can control pricing and the lower your profit margins. Customers A profitable company depends in large measure on its ability to attract and retain customers (while denying them to competitors), and charge high prices. The power of customers grows if they can easily switch to a competitor’s p ­ roducts and services, or if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is little product differentiation, 95 96 Part One Organizations, Management, and the Networked Enterprise Supermarkets and large retail stores such as Walmart use sales data captured at the checkout counter to determine which items have sold and need to be reordered. Walmart’s continuous replenishment system transmits orders to restock directly to its suppliers. The system enables Walmart to keep costs low while fine-tuning its ­merchandise to meet customer demands. © Betty LaRue/Alamy and all prices are known instantly (such as on the Internet). For instance, in the used college textbook market on the Internet, students (customers) can find multiple suppliers of just about any current college textbook. In this case, online customers have extraordinary power over used-book firms. Suppliers The market power of suppliers can have a significant impact on firm profits, especially when the firm cannot raise prices as fast as can suppliers. The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality, and delivery schedules. For instance, manufacturers of laptop PCs almost always have multiple competing suppliers of key ­components, such as keyboards, hard drives, and display screens. Information System Strategies for Dealing with Competitive Forces What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technology and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy. Low-Cost Leadership Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Walmart. By keeping prices low and shelves well stocked using a legendary inventory replenishment system, Walmart became the leading retail business in the United States. Walmart’s continuous replenishment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale terminals Chapter 3 Information Systems, Organizations, and Strategy record the bar code of each item passing the checkout counter and send a ­purchase transaction directly to a central computer at Walmart headquarters. The computer collects the orders from all Walmart stores and transmits them to ­suppliers. Suppliers can also access Walmart’s sales and inventory data using Web technology. Because the system replenishes inventory with lightning speed, Walmart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Walmart to adjust ­purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep operating costs low, Walmart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.) Walmart’s continuous replenishment system is also an example of an ­efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response. Product Differentiation Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and ­services. For instance, Google continuously introduces new and unique search services on its Web site, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created the iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for $.69 to $1.29 each. Apple has continued to innovate with its multimedia iPhone, iPad tablet computer, and iPod video player. Manufacturers and retailers are using information systems to create products and services that are customized and personalized to fit the precise specifications of individual customers. For example, Nike sells customized sneakers through its NIKEiD program on its Web site. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to eight characters. Nike transmits the orders via computers to specially equipped plants in China and Korea. The sneakers take about three weeks to reach the customer. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization. In addition to customized shoes, Nike is using technology in other ways to distinguish its products. The Interactive Session on Technology describes some of Nike’s new technology-based products and services. Table 3.3 lists a number of companies that have developed IT-based products and services that other firms have found difficult to copy, or at least a long time to copy. Fo c u s o n M a r k e t N i c h e Use information systems to enable a specific market focus, and serve this narrow target market better than competitors. Information systems s­ upport this strategy by producing and analyzing data for finely tuned sales and ­marketing techniques. Information systems enable companies to a­ nalyze ­c ustomer buying patterns, tastes, and preferences closely so that they ­efficiently pitch advertising and marketing campaigns to smaller and smaller target markets. 97 98 Part One Organizations, Management, and the Networked Enterprise I n t e r a ct i v e S e ss i o n : T e c h n o l o g y Nike Becomes a Technology Company Named for the Greek goddess of victory, Nike is the biggest sports footwear and apparel company in the world. Nike designs, develops, and sells a variety of products and services to help in playing basketball and soccer, as well as in running, men’s and women’s training, and other action sports. Nike also markets sports-inspired products for children and various competitive and recreational activities, such as ­baseball, golf, tennis, volleyball, and walking. Nike is known for its leading-edge technologies to make its products more appealing and enhance user performance, including the advanced technology used to support the sports superstars associated with Nike as well as the technology used in the running shoes you can buy online. For example, Nike Air technology uses “supergases” encased in urethane plastic to provide superior cushioning for running shoes that minimizes stress on runners’ joints each time their feet hit the ground. The make-up of the gas, the strength of the plastic, and their placement within the shoe give great cushioning without ­losing performance. Nike Air was the first major piece of shoe technology to come out of Nike and it has ­influenced every other running shoe since. Of course, Nike has been using information ­technology in the design and manufacture of these leading-edge products, and now it is embracing ­information technology in new, more far-reaching ways. Some of Nike’s most recent offerings are ­actually information technology products. Take the Nike+ FuelBand, for example. The FuelBand is an activity tracker that is worn on the wrist and is used with an Apple iPhone or iPad device. The FuelBand enables its wearers to track their ­physical activity, steps taken daily, and amount of calories burned. The information from the wristband is integrated into the Nike+ online community and phone application, allowing wearers to set their own fitness goals, monitor their progress on the LED ­display, and compare themselves to others part of the community. And with Bluetooth 4.0 wireless technology, the FuelBand stays constantly connected, syncing the data it collects with the user’s Nike+ account and ­giving feedback and motivation when needed. The Nike FuelBand has competitors, including trackers from Fitbit and Jawbone. Nike has made some improvements to its FuelBand SE to keep up with these competing devices, such as the ability to remind users to get up and walk around periodi- cally, to measure specific workouts, and to measure activities such as yoga or bicycling. As Fitbit trackers have been able to do, the new FuelBand also ­measures sleep. However, the key differentiator of the FuelBand is not hardware or a feature; it’s the point system created in conjunction with the gadget called NikeFuel. Nike’s proprietary software turns all tracked ­movement into NikeFuel points, which can show achievements, can be shared with friends, or can be used to engage others in competition. According to Nike, NikeFuel is its universal way for measuring movement for all kinds of activities. NikeFuel provides users with a metric that would enable comparisons—no matter what height, weight, gender or activity—to past performance, another person, or a daily average, which Nike defines as 2,000 Fuel points. Nike won’t divulge exactly how the metric is calculated. Nike increasingly wants other fitness technology products to integrate with Nike+, and is provided funding and assistance to small companies that were building applications for this purpose. The more ­people measure their activity with NikeFuel, the more they are locked in to the Nike+ ecosystem of movement-tracking devices—and the harder it will be to switch to other wearable computing devices. There’s no way to get credit for the Fuel points you’ve accumulated if you decide to switch to a Fitbit wristband. Nike’s integration of information and information technology into its products keeps ­people coming back to Nike’s own Website and apps. In October 2013, Apple Computer stated that its new iPhone would have sensors allowing people to use their phones to keep track of their NikeFuel points. Although Apple may be developing a ­competing smartwatch, Nike feels comfortable ­working with Apple. Other Nike+ devices include the Nike+ SportWatch GPS and the Nike+ Running App, ­available for both Apple and Android mobile devices. The Nike+ SportWatch GPS keeps track of your ­location, pace, distance, laps, calories burned, and (with the Polar Wearlink+) heart rate. After ­recording a run on the Nike+ SportWatch GPS, you can upload workout information to by plugging the SportWatch into your computer’s USB port. Once your data have been uploaded, nikeplus. com enables you to track your progress, set goals, see where you ran and find great routes. Chapter 3 Information Systems, Organizations, and Strategy The Nike+ Running App maps your runs using GPS, tracks your progress, and provides the motivation you need to keep going. The Nike+ Running app tracks distance, pace, time and calories burned, giving you audio feedback as you run. Users can automatically upload to to see their runs, ­including the route, elevation and NikeFuel points. They can even post the start of their run to Facebook and hear real-time cheers for each “Like” or comment they receive. The latest version of this software includes training programs, coaching tips, and daily workouts. A new “Next Moves” feature on the home screen allows runners to easily flip through suggested ­challenges: for example, to run their fastest 5 kilometers or go their farthest distance. Users of ­multiple Nike+ devices can visit the site to access all their data—including lifetime NikeFuel points accumulated from all their NIKE+ devices. The Nike+ ecosystem is part of a larger phenomenon called the “Internet of Things” (see Chapter 7), in which individual devices such as sensors, meters, and electrical appliances are connected to the Internet so that their performance can be monitored and analyzed. Other consumer product companies besides Nike are embracing this technology, with gadgets such as Internet-connected water bottles to gather water consumption data or Procter & Gamble’s Web-enabled toothbrush, which links to a smartphone and records brushing habits. Nike has no interest in making money by selling the detailed information it gathers about users’ workout routines to help companies and advertisers target their ads. That information may be valuable to other companies, but what Nike really wants to do is build cool-looking devices that closely connect to its own software. It’s all about serving one particular kind of customer: the athlete. Sources: Joshua Brustein, “Nike’s Fuelband Hits the Wall,” Business Week, April 21, 2014;, accessed March 1, 2014; Sam Schechner, “These Gadgets Aim to Put Some Teeth into the Internet of Things,” Wall Street Journal, March 2, 2014; Joshua Brustein,” Sorry Nike, You’re a Technology Company Now,” Bloomberg Business Week, October 15. 2013; Danny Fankhauser, “The Tiny, Powerful Brain Inside Nike’s FuelBand.” Mashable, January 31, 2013. c a s e st u dy q u e st i o n s 1. Evaluate Nike using the competitive forces and value chain models. 2. What competitive strategies are Nike pursuing? How is information technology related to these strategies? 99 3. In what sense is Nike a “technology company”? Explain your answer. 4. How much of an edge does Nike have over its competitors? Explain your answer. The data come from a range of sources—credit card transactions, ­demographic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with Web sites. Sophisticated software tools find patterns in these large pools of data and TABLE 3.3 IT-Enabled New Products and Services Providing Competitive Advantage Amazon: One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers. Online music: Apple iPod and iTunes The iPod is an integrated handheld player backed up with an online library of over 13 million songs. Golf club customization: Ping Customers can select from more than 1 million different golf club options; a build-to-order system ships their customized clubs within 48 hours. Online person-to-person payment: PayPal PayPal enables the transfer of money between individual bank accounts and between bank accounts and credit card accounts. 100 Part One Organizations, Management, and the Networked Enterprise infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. For example, Hilton Hotels’ OnQ system analyzes detailed data collected on active guests in all of its properties to determine the preferences of each guest and each guest’s profitability. Hilton uses this information to give its most profitable customers additional privileges, such as late checkouts. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis (see Chapters 2 and 9). The Interactive Session on Organizations provides more examples of how companies are benefiting from this fine-grained data analysis. Credit card companies are able to use this strategy to predict their most ­profitable cardholders. The companies gather vast quantities of data about ­consumer purchases and other behaviors and mine these data to construct detailed profiles that identify cardholders who might be good or bad credit risks. We discuss the tools and technologies for data analysis in Chapters 6 and 12. Strengthen Customer and Supplier Intimacy Use information systems to tighten linkages with suppliers and develop ­intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access by suppliers to production schedules, and even permits ­suppliers to decide how and when to ship supplies to Chrysler factories. This allows ­suppliers more lead time in producing goods. On the customer side, Amazon keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product), and loyalty to your firm. Table 3.4 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see ­companies pursuing several of them simultaneously. For example, Starbucks, the world’s largest specialty coffee retailer, offers unique high-end specialty coffees and beverages, but is also trying to compete by lowering costs. The Internet’s Impact on Competitive Advantage Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense (Porter, 2001). Internet TABLE 3.4 Four Basic Competitive Strategies Strategy Description Example Low-cost leadership Use information systems to produce products and services at a lower price than competitors while enhancing quality and level of service Walmart Product differentiation Use information systems to differentiate products, and enable new services and products Google, eBay, Apple, Lands’ End Focus on market niche Use information systems to enable a focused strategy on a single market niche; specialize Hilton Hotels, Harrah’s Customer and supplier intimacy Use information systems to develop strong ties and loyalty with customers and suppliers Chrysler Corporation, Amazon Chapter 3 Information Systems, Organizations, and Strategy 101 I n t e r a ct i v e S e ss i o n : O R G ANIZA T ION S Identifying Market Niches in the Age of Big Data With the amount of data available to companies doubling every year, new sources of data, and innovations in data collection, possibilities for ­marketers to identify market niches and finely tune campaigns are boundless. In the e-book market, for example, three reading subscription service startups—Scribd, Oyster, and Entitle—aim to turn a profit by discovering exactly what makes readers tick. A flat monthly fee gives users unlimited access to a broad selection of titles from these companies’ ­digital libraries. Like Barnes and Noble and Amazon, the newcomers will collect an assortment of data from their customers’ digital reading devices (e-readers, tablets, smartphones), including whether a book is completed, if pages are skimmed or skipped, and which genres are most often finished. These subscription services intend to disseminate what they have learned. The idea is that writers can use it to better tailor their work to their readership, and book editors can use it to choose which manuscripts to publish. When customers sign up with these services, they are informed that some of their data will be collected and used but assured that their identities will be ­protected. Large independent publisher Smash words is enthusiastic about the value of such data to the authors who use its platform to self-publish and ­distribute their work. Many contemporary authors have already explored the feedback opportunities available through their own Web sites, social networking sites, and Goodreads, a user-populated database of books, annotations, and reviews now owned by Amazon. The subscription services will take this type of ­market research to a more quantifiable level. Preliminary data analysis has already revealed that as the length of a mystery novel increases so does the likelihood that a reader will skip to the end to discover the resolution. Business books are less likely to be finished than biographies, most readers complete just a single chapter of a yoga book, and some of the quickest reading is recorded for romance novels, with erotica leading the pack. Shorter ­chapters entice readers on e-readers, tablets, and smartphones to finish a book 25 percent more often than books with long chapters. But does book completion translate to book sales? And how will this knowledge impact the ­creative process? Will quality be negatively impacted to satisfy reader preferences? Before any of these ­ uestions can be answered, authors will need q access to comprehensive data. And that depends on the large publishing houses signing deals with the ­subscription services. After nearly two decades of market disruptions spearheaded by Amazon, publishers are not flocking to supply titles. So far, only Harper Collins has signed with Oyster and Scribd, while Random House, Penguin, and Simon & Schuster remain on the sidelines. In the airline industry, nearly all carriers collect passenger data, but some are aggressively pursuing data mining to personalize the flying experience. Previously unlinked data sets can now be consolidated to build comprehensive customer profiles. Cabin crews equipped with tablets or smartphones can identify the top five customers on the plane, passengers with special diets or allergies, seat ­preferences, newlyweds embarking on their honeymoon, and customers whose luggage was misplaced or who experienced flight delays on their previous flights. In-flight browsing history and Facebook likes are even used to fashion relevant marketing pitches. This “captive audience” aspect of air travel in ­conjunction with the sheer volume of information ­airlines collect presents a unique opportunity to ­marketers. Allegiant Travel company has already been able to sell show tickets, car rentals, and helicopter tours to Las Vegas travelers. United Airlines’ revamp of its Web site, kiosks, and mobile app, along with its data ­integration initiative, have enabled it to target flyers predisposed to upgrading to an economy plus seat. Not all customers are pleased. A user on Delta’s FlyerTalk forum complained that a link from the new Web site led to a personal profile that included a lot more than her miles accumulated and home airport. Annual income, home value, and the age ranges of her children were included along with expected data such as amount spent on airfare, hotel preference, and type of credit card. The resulting negative publicity prompted Delta to apologize, but it defended its use of demographic data and data not covered under its privacy policy. Credit-card partner American Express had ­supplied some data, as allowed under the policy. Global ­information ­services group Experian supplied the rest, ­unbeknownst to consumers. These data-driven marketing approaches are not flawless. Even customers who accept the inevitability 102 Part One Organizations, Management, and the Networked Enterprise of profiling are miffed when they receive ­unsuitable offers based on faulty personal information. A Qantas survey of frequent fliers found that most ­customers want a line drawn between data ­collection to facilitate useful offers and data collection that is too intrusive. British Airways crossed the line with its “Know Me” program. Google Image searches were used to identify VIP customers as they entered the airport and first class lounge. The practice has since been discontinued. Customers can opt out of British Airways personalization services—but not its data collection. Upon request, a note is added to the ­customer profile, which nonetheless continues to grow. None of the carriers currently allow customers to opt out of their data programs. As car companies explore their Big Data ­opportunities, customer privacy will become an issue for them as well. Ford Motor Company began ­exploring how integrating databases and using complex algorithms could lead to increased sales three years ago when it developed a program for its dealerships to more closely match car lot inventory to buyer demand. Using buying trends, local and national vehicle supply, and current car lot ­inventory, Ford devised a program to make purchasing recommendations to dealers. Not only did vehicle turnover rate improve, but net price—the price a consumer pays minus the manufacturer subsidy— rose, fueling an upturn in Ford’s profits. But Ford is thinking even bigger. Performance monitoring using vehicle Internet connections to collect fuel economy, mechanical failure, and other safety and performance metrics could soon be used to improve product engineering. What’s more, onboard connections can be used to message drivers about potential breakdown issues, perhaps heading off an expensive recall. Since Ford estimates that by 2016, up to a third of all its consumer communication will occur inside vehicles, possibilities abound. Leased vehicle usage data could inform end-of-lease marketing pitches; driving pattern, schedule, and driving maneuver data could suggest routes most compatible to a driver’s habits; car location data could be sent to traffic management systems to ­control stop lights; data from networked cars could alert other drivers to hazardous conditions and traffic jams, and current car value and payment data can advise drivers of their optimal trade-in date. It’s not hard to foresee the privacy issues that could come into play as drivers realize that not only their location, but their every movement inside their vehicle is being tracked. There are implications for law enforcement—traffic tickets and accident blame attribution. Balancing privacy dilemmas with convenience, security, and expediency of transactions will be the challenge going forward for all companies as they explore emerging big data analysis capabilities. Sources: Tim Winship, “Big Brother Unmasked as ... Delta Air Lines,”, January 28, 2013; Jack Nicas, “When Is Your Birthday? The Flight Attendant Knows,” Wall Street Journal, November 7, 2013 and “How Airlines Mine Personal Data In-Flight,” Wall Street Journal, November 8, 2013; David Streitfeld, “As New Services Track Habits, the E-Books Are Reading You,” New York Times, December 24, 2013; Ian Sherr and Mike Ramsey, “Drive into the Future,” Wall Street Journal, March 7, 2013. c a s e st u dy q u e st i o n s 1. Describe the kinds of data being analyzed by the companies in this case. 2. How is this fine-grained data analysis improving operations and decision making in the companies described in this case? What business strategies are being supported? 3. Are there any disadvantages to mining customer data? Explain your answer. 4. How do you feel about airlines mining your ­in-flight data? Is this any different from ­companies mining your credit card purchases or Web surfing? t­ echnology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost ­provider on the Web. Profits have been dampened. Table 3.5 summarizes some of the potentially n ­ egative impacts of the Internet on business firms identified by Porter. Chapter 3 Information Systems, Organizations, and Strategy 103 TABLE 3.5 Impact of the Internet on Competitive Forces and Industry Structure Competitive Force Impact of the Internet Substitute products or services Enables new substitutes to emerge with new approaches to meeting needs and performing functions Customers’ bargaining power Availability of global price and product information shifts bargaining power to customers Suppliers’ bargaining power Procurement over the Internet tends to raise bargaining power over suppliers; suppliers can also benefit from reduced barriers to entry and from the elimination of distributors and other intermediaries standing between them and their users Threat of new entrants Internet reduces barriers to entry, such as the need for a sales force, access to channels, and physical assets; it provides a technology for driving business processes that makes other things easier to do Positioning and rivalry among existing competitors Widens the geographic market, increasing the number of competitors, and reducing differences among competitors; makes it more difficult to sustain operational advantages; puts pressure to compete on price The Internet has nearly destroyed some industries and has severely t­ hreatened more. For instance, the printed encyclopedia industry and the travel agency industry have been nearly decimated by the availability of ­substitutes over the Internet. Likewise, the Internet has had a significant impact on the retail, music, book, retail brokerage, software, telecommunications, and ­newspaper industries. However, the Internet has also created entirely new markets, formed the basis for thousands of new products, services, and business models, and p ­ rovided new opportunities for building brands with very large and loyal customer bases. Amazon, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are ­examples. In this sense, the Internet is “transforming” entire ­industries, forcing firms to change how they do business. For most forms of media, the Internet has posed a threat to business models and profitability. Growth in book sales other than textbooks and professional publications has been sluggish, as new forms of entertainment continue to compete for consumers’ time. Newspapers and magazines have been hit even harder, as their readerships diminish, their advertisers shrink, and more people get their news for free online. The television and film industries have been forced to deal with pirates who are robbing them of some of their profits, as well as with online services streaming videos and TV shows. The Business Value Chain Model Although the Porter model is very helpful for identifying competitive forces and suggesting generic strategies, it is not very specific about what exactly to do, and it does not provide a methodology to follow for achieving competitive advantages. If your goal is to achieve operational excellence, where do you start? Here’s where the business value chain model is helpful. The value chain model highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985) and where information systems are most likely to have a strategic impact. This model identifies specific, critical leverage points where a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a series or chain of basic activities that add a margin of 104 Part One Organizations, Management, and the Networked Enterprise value to a firm’s products or services. These activities can be categorized as either primary activities or support activities (see Figure 3.9). Primary activities are most directly related to the production and ­distribution of the firm’s products and services, which create value for the ­customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes r­ eceiving and s­ toring materials for distribution to production. Operations transforms inputs into finished products. Outbound logistics entails storing and distributing ­finished products. Sales and marketing includes promoting and selling the firm’s ­products. The service activity includes maintenance and repair of the firm’s goods and services. Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchasing input). Now you can ask at each stage of the value chain, “How can we use i­ nformation systems to improve operational efficiency, and improve customer and ­supplier intimacy?” This will force you to critically examine how you ­perform value-­ adding activities at each stage and how the business processes might be improved. You can also begin to ask how information systems can be used to improve the relationship with customers and with suppliers who lie outside the FIGURE 3.9 The Value Chain Model This figure provides examples of systems for both primary and support activities of a firm and of its value partners that can add a margin of value to a firm’s products or services. Chapter 3 Information Systems, Organizations, and Strategy firm’s value chain but belong to the firm’s extended value chain where they are ­absolutely critical to your success. Here, supply chain management systems that ­coordinate the flow of resources into your firm, and customer relationship management systems that coordinate your sales and support employees with customers, are two of the most common system applications that result from a business value chain analysis. We discuss these enterprise applications in detail later in Chapter 9. Using the business value chain model will also cause you to consider ­benchmarking your business processes against your competitors or others in related industries, and identifying industry best practices. Benchmarking involves comparing the efficiency and effectiveness of your business p ­ rocesses against strict standards and then measuring performance against those ­standards. Industry best practices are usually identified by consulting companies, research organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective. Once you have analyzed the various stages in the value chain at your ­business, you can come up with candidate applications of information systems. Then, once you have a list of candidate applications, you can decide which to develop first. By making improvements in your own business value chain that your competitors might miss, you can achieve competitive advantage by attaining operational excellence, lowering costs, improving profit margins, and forging a closer relationship with customers and suppliers. If your competitors are making similar improvements, then at least you will not be at a competitive disadvantage—the worst of all cases! E x t e n d i n g t h e V a l u e C h a i n : T h e V a l u e We b Figure 3.9 shows that a firm’s value chain is linked to the value chains of its suppliers, distributors, and customers. After all, the performance of most firms depends not only on what goes on inside a firm but also on how well the firm coordinates with direct and indirect suppliers, delivery firms (logistics partners, such as FedEx or UPS), and, of course, customers. How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use information technology to develop industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industry-wide, IT-supported consortia, symposia, and communications networks to coordinate activities concerning government agencies, foreign competition, and competing industries. Looking at the industry value chain encourages you to think about how to use information systems to link up more efficiently with your suppliers, ­strategic partners, and customers. Strategic advantage derives from your ability to relate your value chain to the value chains of other partners in the process. For instance, if you are, you want to build systems that: • Make it easy for suppliers to display goods and open stores on the Amazon site • Make it easy for customers to pay for goods • Develop systems that coordinate the shipment of goods to customers • Develop shipment tracking systems for customers 105 106 Part One Organizations, Management, and the Networked Enterprise Internet technology has made it possible to create highly synchronized i­ndustry value chains called value webs. A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer driven and operates in a less linear fashion than the traditional value chain. Figure 3.10 shows that this value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in response to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location. Synergies, Core Competencies, and NetworkBased Strategies A large corporation is typically a collection of businesses. Often, the firm is organized financially as a collection of strategic business units and the returns to the firm are directly tied to the performance of all the strategic business units. Information systems can improve the overall performance of these ­business units by promoting synergies and core competencies. FIGURE 3.10 The Value Web The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand. Chapter 3 Information Systems, Organizations, and Strategy Synergies The idea of synergies is that when the output of some units can be used as inputs to other units, or two organizations pool markets and expertise, these relationships lower costs and generate profits. Recent bank and financial firm mergers, such as the merger of JPMorgan Chase and Bank of New York as well as Bank of America and Countrywide Financial Corporation occurred precisely for this purpose. One use of information technology in these synergy situations is to tie together the operations of disparate business units so that they can act as a whole. For example, acquiring Countrywide Financial enabled Bank of America to extend its mortgage lending business and to tap into a large pool of new customers who might be interested in its credit card, consumer banking, and other financial products. Information systems would help the merged companies consolidate operations, lower retailing costs, and increase cross-marketing of financial products. Enhancing Core Competencies Yet another way to use information systems for competitive advantage is to think about ways that systems can enhance core competencies. The ­argument is that the performance of all business units will increase insofar as these b ­ usiness units develop, or create, a central core of competencies. A core ­competency is an activity for which a firm is a world-class leader. Core ­competencies may involve being the world’s best miniature parts designer, the best package d ­ elivery service, or the best thin-film manufacturer. In general, a core competency relies on knowledge that is gained over many years of practical field experience with a technology. This practical knowledge is typically supplemented with a long-term research effort and committed employees. Any information system that encourages the sharing of knowledge across business units enhances competency. Such systems might encourage or enhance existing competencies and help employees become aware of new external knowledge; such systems might also help a business leverage existing competencies to related markets. For example, Procter & Gamble, a world leader in brand management and consumer product innovation, uses a series of systems to enhance its core ­competencies. An intranet called InnovationNet helps people working on ­similar problems share ideas and expertise. InnovationNet connects those ­working in research and development (R&D), engineering, purchasing, m ­ arketing, legal affairs, and business information systems around the world, using a portal to provide browser-based access to documents, reports, charts, videos, and other data from various sources. It includes a directory of subject matter experts who can be tapped to give advice or collaborate on problem solving and product development, and links to outside research scientists and entrepreneurs who are searching for new, innovative products worldwide. Network-Based Strategies The availability of Internet and networking technology have inspired strategies that take advantage of firms’ abilities to create networks or network with each other. Network-based strategies include the use of network economics, a virtual company model, and business ecosystems. Network Economics. Business models based on a network may help firms strategically by taking advantage of network economics. In traditional 107 108 Part One Organizations, Management, and the Networked Enterprise ­ conomics—the economics of factories and agriculture—production e e ­ xperiences diminishing returns. The more any given resource is applied to production, the lower the marginal gain in output, until a point is reached where the additional inputs produce no additional outputs. This is the law of diminishing returns, and it is the foundation for most of modern economics. In some situations, the law of diminishing returns does not work. For instance, in a network, the marginal costs of adding another participant are about zero, whereas the marginal gain is much larger. The larger the number of subscribers in a telephone system or the Internet, the greater the value to all participants because each user can interact with more people. It is not much more expensive to operate a television station with 1,000 subscribers than with 10 million subscribers. The value of a community of people grows with size, whereas the cost of adding new members is inconsequential. From this network economics perspective, information technology can be strategically useful. Internet sites can be used by firms to build communities of users—like-minded customers who want to share their experiences. This builds customer loyalty and enjoyment, and builds unique ties to customers. EBay, the giant online auction site, and iVillage, an online community for women, are examples. Both businesses are based on networks of millions of users, and both companies have used the Web and Internet communication tools to build c­ ommunities. The more people offering products on eBay, the more ­valuable the eBay site is to everyone because more products are listed, and more competition among suppliers lowers prices. Network economics also provides strategic benefits to commercial software vendors. The value of their software and complementary software products increases as more people use them, and there is a larger installed base to justify continued use of the product and vendor support. Virtual Company Model. Another network-based strategy uses the model of a virtual company to create a competitive business. A virtual company, also known as a virtual organization, uses networks to link people, assets, and ideas, enabling it to ally with other companies to create and distribute ­products and services without being limited by traditional organizational boundaries or physical locations. One company can use the capabilities of another company without being physically tied to that company. The virtual company model is useful when a company finds it cheaper to acquire products, services, or ­capabilities from an external vendor or when it needs to move quickly to exploit new market opportunities and lacks the time and resources to respond on its own. Fashion companies, such as GUESS, Ann Taylor, Levi Strauss, and Reebok, enlist Hong Kong-based Li & Fung to manage production and shipment of their garments. Li & Fung handles product development, raw material sourcing, ­production planning, quality assurance, and shipping. Li & Fung does not own any fabric, factories, or machines, outsourcing all of its work to a network of more than 15,000 suppliers in 40 countries all over the world. Customers place orders to Li & Fung over its private extranet. Li & Fung then sends instructions to appropriate raw material suppliers and factories where the clothing is ­produced. The Li & Fung extranet tracks the entire production process for each order. Working as a virtual company keeps Li & Fung flexible and adaptable so that it can design and produce the products ordered by its clients in short order to keep pace with rapidly changing fashion trends. Business Ecosystems: Keystone and Niche Firms. The Internet and the emergence of digital firms call for some modification of the industry competitive forces model. The traditional Porter model assumes a relatively static Chapter 3 Information Systems, Organizations, and Strategy industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers, with the focus on industry players in a market environment. Instead of participating in a single industry, some of today’s firms are much more aware that they participate in industry sets—collections of industries that provide related services and products (see Figure 3.11). Business ecosystem is another term for these loosely ­coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers (Iansiti and Levien, 2004). The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference being that cooperation takes place across many industries rather than many firms. For instance, both Microsoft and Walmart provide platforms composed of information systems, technologies, and services that thousands of other firms in different industries use to enhance their own capabilities. Microsoft has estimated that more than 40,000 firms use its Windows platform to deliver their own products, support Microsoft products, and extend the value of Microsoft’s own firm. Walmart’s order entry and inventory management system is a platform used by ­thousands of suppliers to obtain real-time access to customer demand, track shipments, and control inventories. Business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. Keystone firms in the Microsoft ecosystem include Microsoft and technology producers such as Intel and IBM. Niche firms include thousands of software application firms, software developers, service firms, networking firms, and ­consulting firms that both support and rely on the Microsoft products. Information technology plays a powerful role in establishing business ­ecosystems. Obviously, many firms use information systems to develop into keystone firms by building IT-based platforms that other firms can use. In the digital firm era, we can expect greater emphasis on the use of IT to build FIGURE 3.11 An ecosystem strategic model The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays an important role in enabling a dense network of interactions among the participating firms. 109 110 Part One Organizations, Management, and the Networked Enterprise industry ecosystems because the costs of participating in such ecosystems will fall and the benefits to all firms will increase rapidly as the platform grows. Individual firms should consider how their information systems will enable them to become profitable niche players in larger ecosystems created by ­keystone firms. For instance, in making decisions about which products to build or which services to offer, a firm should consider the existing business ecosystems related to these products and how it might use IT to enable participation in these larger ecosystems. A powerful, current example of a rapidly expanding ecosystem is the mobile Internet platform. In this ecosystem there are four industries: device makers (Apple iPhone, Samsung Galaxy, Motorola, LG, and others), wireless telecommunication firms (AT&T, Verizon, T-Mobile, Sprint, and others), independent software applications providers (generally small firms selling games, applications, and ring tones), and Internet service providers (who participate as ­providers of Internet service to the mobile platform). Each of these industries has its own history, interests, and driving forces. But these elements come together in a sometimes cooperative, and ­sometimes competitive, new industry we refer to as the mobile digital platform ecosystem. More than other firms, Apple has managed to combine these industries into a system. It is Apple’s mission to sell physical devices (iPhones) that are nearly as powerful as today’s personal computers. These devices work only with a high-speed broadband network supplied by the wireless phone carriers. In order to attract a large customer base, the iPhone had to be more than just a cell phone. Apple differentiated this product by making it a “smart phone,” one capable of running over one million different, useful applications. Apple could not develop all these applications itself. Instead it relies on ­generally small, independent software developers to provide these applications, which can be purchased at the iTunes store. In the background is the Internet service provider industry, which makes money whenever iPhone users connect to the Internet. 3.4 What are the challenges posed by strategic information systems and how should they be addressed? Strategic information systems often change the organization as well as its ­products, services, and operating procedures, driving the organization into new behavioral patterns. Successfully using information systems to achieve a ­competitive advantage is challenging and requires precise coordination of ­technology, organizations, and management. SUSTAINING Competitive Advantage The competitive advantages that strategic systems confer do not necessarily last long enough to ensure long-term profitability. Because competitors can r­ etaliate and copy strategic systems, competitive advantage is not always ­sustainable. Markets, customer expectations, and technology change; ­globalization has made these changes even more rapid and unpredictable. The Internet can make competitive advantage disappear very quickly because ­virtually all ­companies can use this technology. Classic strategic systems, such as American Airlines’s Chapter 3 Information Systems, Organizations, and Strategy SABRE computerized reservation system, Citibank’s ATM system, and FedEx’s package tracking system, benefited by being the first in their industries. Then rival systems emerged. Amazon was an e-commerce leader but now faces ­competition from eBay, Yahoo, and Google. Information systems alone cannot provide an enduring business advantage. Systems ­originally intended to be ­strategic frequently become tools for s­ urvival, required by every firm to stay in business, or they may inhibit organizations from making the strategic changes essential for future success. Aligning IT with Business Objectives The research on IT and business performance has found that (a) the more ­successfully a firm can align information technology with its business goals, the more profitable it will be, and (b) only one-quarter of firms achieve ­alignment of IT with the business. About half of a business firm’s profits can be explained by alignment of IT with business (Luftman, 2003). Most businesses get it wrong: Information technology takes on a life of its own and does not serve management and shareholder interests very well. Instead of business people taking an active role in shaping IT to the ­enterprise, they ignore it, claim not to understand IT, and tolerate failure in the IT area as just a nuisance to work around. Such firms pay a hefty price in poor p ­ erformance. Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on revenues and profits. M a n a g e m e n t C h e c k l i s t : P e r fo r m i n g a S t r a t e g i c Systems Analysis To align IT with the business and use information systems effectively for ­competitive advantage, managers need to perform a strategic systems a­ nalysis. To identify the types of systems that provide a strategic advantage to their firms, managers should ask the following questions: 1. What is the structure of the industry in which the firm is located? • What are some of the competitive forces at work in the industry? Are there new entrants to the industry? What is the relative power of suppliers, ­customers, and substitute products and services over prices? • Is the basis of competition quality, price, or brand? • What are the direction and nature of change within the industry? From where are the momentum and change coming? • How is the industry currently using information technology? Is the ­organization behind or ahead of the industry in its application of information systems? 2. What are the business, firm, and industry value chains for this particular firm? • How is the company creating value for the customer—through lower prices and transaction costs or higher quality? Are there any places in the value chain where the business could create more value for the customer and ­additional profit for the company? • Does the firm understand and manage its business processes using the best practices available? Is it taking maximum advantage of supply chain ­management, customer relationship management, and enterprise systems? • Does the firm leverage its core competencies? • Is the industry supply chain and customer base changing in ways that ­benefit or harm the firm? 111 112 Part One Organizations, Management, and the Networked Enterprise • Can the firm benefit from strategic partnerships and value webs? • Where in the value chain will information systems provide the greatest value to the firm? 3. Have we aligned IT with our business strategy and goals? • Have we correctly articulated our business strategy and goals? • Is IT improving the right business processes and activities to promote this strategy? • Are we using the right metrics to measure progress toward those goals? Managing Strategic Transitions Adopting the kinds of strategic systems described in this chapter generally requires changes in business goals, relationships with customers and ­suppliers, and business processes. These sociotechnical changes, affecting both social and technical elements of the organization, can be considered strategic transitions—a movement between levels of sociotechnical systems. Such changes often entail blurring of organizational boundaries, both external and internal. Suppliers and customers must become intimately linked and may share each other’s responsibilities. Managers will need to devise new business processes for coordinating their firms’ activities with those of customers, suppliers, and other organizations. The organizational change requirements surrounding new information systems are so important that they merit attention throughout this text. Chapter 14 examines organizational change issues in more detail. Review Summary 1. Which features of organizations do managers need to know about to build and use information ­systems successfully? All modern organizations are hierarchical, specialized, and impartial, using explicit routines to maximize efficiency. All organizations have their own cultures and politics arising from differences in interest groups, and they are affected by their surrounding environment. Organizations differ in goals, groups served, social roles, leadership styles, incentives, types of tasks performed, and type of structure. These features help explain differences in organizations’ use of information systems. Information systems and the organizations in which they are used interact with and influence each other. 2. What is the impact of information systems on organizations? The introduction of a new information system will affect organizational structure, goals, work design, values, competition between interest groups, decision making, and day-to-day behavior. At the same time, information systems must be designed to serve the needs of important organizational groups and will be shaped by the organization’s structure, business processes, goals, culture, politics, and management. Information technology can reduce transaction and agency costs, and such changes have been accentuated in organizations using the Internet. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are ­introduced. 3. How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems? In Porter’s competitive forces model, the strategic position of the firm, and its strategies, are ­determined by competition with its traditional direct competitors, but they are also greatly affected by new market entrants, substitute products and services, suppliers, and customers. Information systems help companies compete by maintaining low costs, differentiating products or services, focusing on Chapter 3 Information Systems, Organizations, and Strategy 113 market niche, strengthening ties with customers and suppliers, and increasing barriers to market entry with high levels of operational excellence. The value chain model highlights specific activities in the business where competitive strategies and information systems will have the greatest impact. The model views the firm as a series of ­primary and support activities that add value to a firm’s products or services. Primary activities are directly related to production and distribution, whereas support activities make the delivery of primary ­activities possible. A firm’s value chain can be linked to the value chains of its suppliers, distributors, and customers. A value web consists of information systems that enhance competitiveness at the industry level by promoting the use of standards and industry-wide consortia, and by enabling ­businesses to work more efficiently with their value partners. Because firms consist of multiple business units, information systems achieve additional e ­ fficiencies or enhance services by tying together the operations of disparate business units. Information systems help ­businesses leverage their core competencies by promoting the sharing of knowledge across ­business units. Information systems facilitate business models based on large networks of users or ­subscribers that take advantage of network economics. A virtual company strategy uses networks to link to other firms so that a company can use the capabilities of other companies to build, market, and distribute products and services. In business ecosystems, multiple industries work together to deliver value to the customer. Information ­systems support a dense network of interactions among the ­participating firms. 4. What are the challenges posed by strategic information systems and how should they be addressed? Implementing strategic systems often requires extensive organizational change and a transition from one sociotechnical level to another. Such changes are called strategic transitions and are often difficult and painful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive to build. Many strategic information systems are easily copied by other firms so that s­ trategic advantage is not always sustainable. Key Terms Agency theory, 90 Benchmarking, 105 Best practices, 105 Business ecosystem, 109 Competitive forces model, 94 Core competency, 107 Disruptive technologies, 87 Efficient customer response system, 97 Mass customization, 97 Network economics, 107 Organization, 82 Primary activities, 104 Product differentiation, 95 Routines, 84 Strategic transitions, 112 Support activities, 104 Switching costs, 100 Transaction cost theory, 89 Value chain model, 103 Value web, 106 Virtual company, 108 MyMISLab Go to to complete the problems marked with this icon . Review Questions 3-1 Which features of organizations do managers need to know about to build and use information systems successfully? • Define an organization and compare the ­technical definition of organizations with the behavioral definition. • Identify and describe the features of ­organizations that help explain differences in organizations’ use of information systems. 3-2 What is the impact of information systems on organizations? 114 Part One Organizations, Management, and the Networked Enterprise • Describe the major economic theories that help explain how information systems affect organizations. • Describe the major behavioral theories that help explain how information systems affect organizations. • Explain why there is considerable organizational resistance to the introduction of information systems. • Describe the impact of the Internet and ­disruptive technologies on organizations. • • 3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems? • Define Porter’s competitive forces model and explain how it works. • Describe what the competitive forces model explains about competitive advantage. • List and describe four competitive strategies enabled by information systems that firms can pursue. • Describe how information systems can ­support each of these competitive strategies and give examples. • Explain why aligning IT with business objectives is essential for strategic use of systems. • • • • • • • Define and describe the value chain model. Explain how the value chain model can be used to identify opportunities for information systems. Define the value web and show how it is related to the value chain. Explain how the value web helps businesses identify opportunities for strategic information systems. Describe how the Internet has changed competitive forces and competitive advantage. Explain how information systems promote synergies and core competencies. Describe how promoting synergies and core competencies enhances competitive ­advantage. Explain how businesses benefit by using ­network economics. Define and describe a virtual company and the benefits of pursuing a virtual company strategy. 3-4 What are the challenges posed by strategic ­information systems and how should they be addressed? • List and describe the management challenges posed by strategic information ­systems. • Explain how to perform a strategic systems analysis. Discussion Questions 3-5  It has been said that there is no such thing as a sustainable strategic advantage. Do you agree? Why or why not? 3-6  It has been said that the advantage that leading-edge retailers such as Dell and Walmart have over their competition isn’t technology; it’s their management. Do you agree? Why or why not? 3-7  What are some of the issues to consider in d etermining whether the Internet would ­ ­provide your business with a competitive advantage? Hands-On MIS Projects The projects in this section give you hands-on experience identifying ­information systems to support a business strategy and to solve a customer retention problem, using a database to improve decision making about b ­ usiness strategy, and using Web tools to configure and price an automobile. Management Decision Problems 3-8  Macy’s, Inc., through its subsidiaries, operates approximately 840 d ­ epartment stores in the United States. Its retail stores sell a range of m ­ erchandise, including apparel, home furnishings, and housewares. Senior management has decided that Macy’s needs to tailor merchandise more to local tastes, and that the Chapter 3 Information Systems, Organizations, and Strategy 115 c­ olors, sizes, brands, and styles of clothing and other merchandise should be based on the sales patterns in each individual Macy’s store. How could information systems help Macy’s management implement this new strategy? What pieces of data should these systems collect to help management make merchandising decisions that support this strategy? 3-9  Despite aggressive campaigns to attract customers with lower mobile phone prices, T-Mobile has been losing large numbers of its most lucrative two-year contract subscribers. Management wants to know why so many customers are leaving T-Mobile and what can be done to entice them back. Are customers deserting because of poor customer service, uneven network coverage, wireless service charges, or competition from carriers with Apple iPhone service? How can the company use information systems to help find the answer? What management decisions could be made using information from these systems? Improving Decision Making: Using a Database to Clarify Business Strategy Software skills: Database querying and reporting; database design Business skills: Reservation systems; customer analysis 3-10  In this exercise, you will use database software to analyze the reservation ­transactions for a hotel and use that information to fine-tune the hotel’s ­business strategy and marketing activities. In MyMISLab, you will find a database for hotel reservation transactions developed in Microsoft Access with information about The President’s Inn in Cape May, New Jersey. At the Inn, 10 rooms overlook side streets, 10 rooms have bay windows that offer limited views of the ocean, and the remaining 10 rooms in the front of the hotel face the ocean. Room rates are based on room choice, length of stay, and number of guests per room. Room rates are the same for one to four guests. Fifth and sixth guests must pay an additional $20 charge each per person per day. Guests s­ taying for seven days or more receive a 10 percent discount on their daily room rates. The owners currently use a manual reservation and bookkeeping system, which has caused many problems. Use the database to develop reports on average length of stay, average visitors per room, base revenue per room (i.e., length of visit multiplied by the daily rate), and strongest customer base. After answering these questions write a brief report about the Inn’s current business situation and suggest future strategies. I m p r o v i n g D e c i s i o n M a k i n g : U s i n g We b To o l s t o C o n f i g u r e a n d P r i c e a n Automobile Software skills: Internet-based software Business skills: Researching product information and pricing 3-11  In this exercise, you will use software at car Web sites to find product information about a car of your choice and use that information to make an important purchase decision. You will also evaluate two of these sites as selling tools. You are interested in purchasing a new Ford Escape (or some other car of your choice). Go to the Web site of CarsDirect ( and begin your investigation. Locate the Ford Escape. Research the various Escape models, choose one you prefer in terms of price, features, and safety ratings. Locate and read at least two reviews. Surf the Web site of the manufacturer, in this case Ford ( com). Compare the information available on Ford’s Web site with that of CarsDirect for the Ford Escape. Try to locate the lowest price for the car you want in a local dealer’s inventory. Suggest improvements for and Collaboration and Teamwork Project 3-12  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this ­chapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open-source collaboration tools to complete the ­assignment. 116 Part One Organizations, Management, and the Networked Enterprise Who’s The World’s Top Retailer? Walmart and Amazon Duke It Out case study W almart is the world’s largest and most successful retailer, with $476 billion in fiscal 2014 sales and nearly 11,000 stores world-wide, including over 4,000 in the United States. Walmart has 2 million employees, and ranks Number 1 on the Fortune 500 list of companies. Walmart had such a large and powerful selling machine that it really didn’t have any serious competitors. No other retailer came close—until now. Today Walmart’s greatest threat is no other than Amazon. com, often called the “Walmart of the Web.” Amazon sells not only books but just about everything else people want to buy—DVDs, video and music streaming downloads, software, video games, electronics, apparel, furniture, food, toys, and jewelry. The company also produces consumer electronics—notably the Amazon Kindle e-book reader. No other online retailer can match Amazon’s breadth of selection, low prices, and fast, reliable shipping. For many years, Amazon has been the leader in online retail and is now the world’s largest e-commerce retailer. It, too, has a very large and powerful selling machine, although it has primarily focused on selling through the Internet. But if Amazon has its way, that’s about to change, because it dearly wants to move in on Walmart’s turf. Walmart was founded as a traditional, ­off-line, physical store in 1962, and that’s still what it does best. But it is being forced to compete in ­e-commerce, whether it likes it or not. Six or seven years ago, only one-fourth of all Walmart ­customers shopped at, according to data from researcher Kantar Retail. Today, however, half of Walmart customers say they’ve shopped at both retailers. Online competition from Amazon has become too tough to ignore. Why is this happening to Walmart? There are two trends that threaten its dominance. First, Walmart’s traditional customers—who are primarily bargain hunters making less than $50,000 per year—are becoming more comfortable using technology. More affluent customers who started shopping at Walmart during the recession are returning to Amazon as their finances improve. Amazon has started stocking merchandise categories that Walmart traditionally sold, such as vacuum bags, diapers,and apparel, and its revenue is growing much faster than Walmart’s. In 2013, Amazon had sales of nearly $67 billion, compared to online sales of about $9 billion for Walmart. If more people want to do even some of their shopping online, Amazon has some clear cut ­advantages. Amazon has created a recognizable and highly successful brand in online retailing. The ­company has developed extensive warehousing ­facilities and an extremely efficient distribution ­network specifically designed for Web shopping. Its premium shipping service, Amazon Prime, ­provides fast “free” two-day shipping at an affordable fixed annual subscription price ($99 per year), often considered to be a weak point for online ­retailers. According to the Wall Street Journal, Amazon’s ­shipping costs are lower than Walmart’s, ranging from $3 to $4 per package, while Walmart’s online shipping can run $5–$7 per parcel. Walmart’s ­massive supply chain needs to support more than 4,000 physical stores worldwide, which Amazon doesn’t have to worry about. Shipping costs can make a big difference for a store like Walmart where popular purchases tend to be low-cost items like $10 packs of underwear. It makes no sense for Walmart to create a duplicate supply chain for e-commerce. However, Walmart is no pushover. It is an even larger and more recognizable brand than Amazon. Consumers associate Walmart with the lowest price, which Walmart has the flexibility to offer on any given item because of its size. The company can lose money selling a hot product at extremely low ­margins and expect to make money on the strength of the large quantities of other items it sells. Walmart also has a significant physical presence, with stores all across the United States, and its stores provide the instant gratification of shopping, buying an item, and taking it home immediately, as opposed to waiting when ordering from Amazon. Two-thirds of the U.S. population is within five miles of a Walmart store, according to company management. Walmart has steadily increased its investment in its online business, spending more than $300 million to acquire five tech firms, including Small Society, One Riot, Kosmix, and Grabble, while hiring more than 300 engineers and code writers. Other recent acquisitions include Torbit, OneOps, Tasty Labs, and Inkiru, that will help give Walmart more expertise in things like improving the product recommendations for Web visitors to, using smartphones Chapter 3 Information Systems, Organizations, and Strategy as a marketing channel, and personalizing the shopping experience. Walmart has been steadily adding new applications to its mobile and online shopping channels, and is expanding its integration with social networks such as Pinterest The company’s technology team is working on an application called Endless Aisle, which would allow shoppers to immediately order from using their smartphones if an item is out of stock. A Pay With Cash program enables the 25 percent of Walmart customers who don’t have credit cards or bank accounts to order their products online and then pay for them in cash at their nearest Walmart store. Walmart’s online and digital development division @WalmartLabs acquired the recipe technology startup Yumprint in order to expand its online grocery delivery services. Management hopes that Yumprint will help Walmart customers more easily make shopping lists from recipes they find in Yumprint before they shop. The company also hired former eBay executive Jamie Iannone to manage the integration of Sam’s Club’s Website with Walmart’s global e-commerce unit. Walmart’s Sam’s Club has been testing a new subscription service called My Subscriptions that allows its 47 million members to order over 700 items, including baby, beauty, and office supplies in order to compete with Amazon’s Subscribe & Save program. Online customers will not need to pay shipping fees for these subscription items. Sam’s Club used to be unaffected by competitors like Amazon among shoppers of fresh food, groceries, and basic products that were either not sold on Amazon, or were more expensive online. Now 35-40 million households enrolled in Amazon Prime, and many Sam’s Club members tend to belong to Amazon Prime as well. Sam’s Club is starting to feel the pressure. Amazon is looking into starting a new business called “Pantry,” which would allow customers to purchase goods like toilet paper and cleaning supplies in bigger bundles for cheaper shipping costs. Walmart is also trying to improve links between its store inventory, Web site, and mobile phone apps so that more customers can order online and pick up their purchases at stores. Shoppers can order items online and pick them up from lockers in local stores without waiting in line. (Walmart already offers instore pick up of online orders.) Walmart’s lockers are similar to Amazon’s recent deal with Staples and 7-Eleven to do the same.The idea is to be able to offer Walmart products anywhere a consumer prefers to shop, whether that’s online, in stores, or on the phone. 117 The company is re-thinking its in-store experience to draw more people into its stores. More than half of Walmart customers own smartphones. Walmart has designed its mobile app to maximize Walmart’s advantage over Amazon: its physical locations. About 140 million people visit a Walmart store each week. The company started testing the app’s in-store mode, which detects when a customer is in a physical store. When the mode is activated, customers can check their wish lists, locate items of interest in the store, and see local promotions. The app’s “Scan & Go” ­feature lets customers scan items as they shop so they can move quickly through self-checkout. Shoppers can add items to their lists using voice or by scanning bar codes. The Walmart Web site uses software to monitor prices at competing retailers in real time and lower its online prices if necessary. The company is also doubling inventory sold from third-party retailers in its online marketplace and tracking patterns in search and social media data to help it select more trendy products. This strikes directly at Amazon’s third party marketplace which accounts for a ­significant revenue stream for Amazon. Additionally, Walmart is expanding its online offerings to include upscale items like $146 Nike sunglasses and wine refrigerators costing more than $2,500 to attract ­customers who never set foot in a Walmart store. Amazon is working on expanding its selection of goods to be as exhaustive as Walmart’s. Amazon has allowed third-party sellers to sell goods through its Web site for a number of years, and it has dramatically expanded product selection via acquisitions such as its 2009 purchase of online shoe shopping site to give Amazon an edge in footwear. On June 18, 2014, Amazon announced its own Fire Phone to provide a better mobile platform for selling its products and services online. Amazon’s smartphone has four cameras that can track faces to show images that appear to have depth similar to a hologram. Users are able to scroll through Web or book pages just by tilting the device or to quickly navigate menus, access shortcuts, and view notifications. Mayday is a 24-hour customer support ­service for users of Amazon’s devices, offering one-tap access to Amazon customer service agents who can talk to phone users via video chat, and take over the screen on their devices to show them exactly how to do something. Firefly is a tool that automatically ­recognizes through the camera over 100 million items, including merchandise, music, or ­television shows, then offers a way to buy them through Amazon’s online store. For example, a user could 118 Part One Organizations, Management, and the Networked Enterprise point the phone at a pair of running shoes and then order them immediately from Amazon continues to build more fulfillment ­centers closer to urban centers and expand its ­same-day delivery services, and it has a supply chain optimized for online commerce that Walmart just can’t match. But Walmart has thousands of stores, in almost every neighborhood that Amazon won’t ever be able to match. The winner of this epic struggle will be which company leverages its ­advantage ­better. Walmart’s technology initiative looks ­promising, but it still hasn’t succeeded in getting its local stores to be anything more than local stores. Still up in the air is the question of the ­relationship of online selling to Walmart’s overall business model. Should Walmart try to best Amazon as the world’s dominant e-commerce site? Or would it be ­better off using online selling to boost revenue for all of Walmart. Would more companywide profits be ­generated by having a modest online site and using technology to boost store profits? Sources: Shelly Banjo, “Wal-Mart Looks to Grow by Embracing Smaller Stores, “Wall Street Journal, July 8, 2014; Greg Bensinger, “Amazon Unveils ‘Fire Phone’ Smartphone,” Wall Street Journal, June 18, 2014 and “Amazon Raises Prime Subscription Price To $99 A Year,” Wall Street Journal, March 13, 2014; Anna Rose Welch, “Walmart, Sam’s Club Amp Up Online Shopping Experiences, “Integrated Solutions for Retailers, February 28, 2014; Donna Tam, “Walmart: Amazon image recognition a ‘shiny object’,” CNET, February 6, 2014; Brian O’Keefe, “Walmart Plans to Be an Online Juggernaut,” Fortune, July 23, 2013; Claire Cain Miller and Stephanie Clifford, “To Catch Up, Walmart Moves to Amazon Turf,” New York Times, October 19, 2013; Claire Cain Miller, “Wall-Mart Introduces Lockers as It Battles Amazon in E-Commerce,” New York Times, March 27, 2013; Evan Schuman, “Amazon’s Supply Chain Kicking the SKUs Out of Walmart’s,” StorefrontBacktalk, June 19, 2013; and David Welch, “Walmart Is Worried About Amazon,” Business Week, March 29, 2012. Case Study Questions 3-13 Analyze Walmart and using the competitive forces and value chain models. 3-14 Compare Walmart and Amazon’s business models and business strategies. 3-15 What role does information technology play in each of these businesses? How is it helping them refine their business strategies? 3-16 Will Walmart be successful against Amazon. com? Explain your answer. MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions. 3-17 3-18 Describe the impact of the Internet on each of the five competitive forces. What are the main factors that mediate the relationship between information technology and organizations, and that managers need to take into account when developing new information systems? Give a business example of how each factor would influence the development of new information systems. 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Information Rules. Boston, MA: Harvard Business School Press (1999). Starbuck, William H. “Organizations as Action Generators.” American Sociological Review 48 (1983). Tallon, Paul P. “Value Chain Linkages and the Spillover Effects of Strategic Information Technology Alignment: A Process-Level View.” Journal of Management Information Systems 28, No. 3 (Winter 2014). Tushman, Michael L., and Philip Anderson. “Technological Discontinuities and Organizational Environments.” Administrative Science Quarterly 31 (September 1986). Weber, Max. The Theory of Social and Economic Organization. Translated by Talcott Parsons. New York: Free Press (1947). Williamson, Oliver E. The Economic Institutions of Capitalism. New York: Free Press, (1985). This page intentionally left blank Ethical and Social Issues in Information Systems 4 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. What ethical, social, and political issues are raised by information systems? 2. What specific principles for conduct can be used to guide ethical decisions? 3. Why do contemporary information systems technology and the Internet pose challenges to the p ­ rotection of individual privacy and intellectual property? 4. How have information systems affected laws for establishing accountability, liability, and the quality of everyday life? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 122 Chapter Cases Video Cases Content Pirates Sail the Web Edward Snowden: Traitor or Protector of Privacy? Big Data Gets Personal: Behavioral Targeting Facebook: It’s About the Money What Net Neutrality Means for You Facebook Privacy Data Mining for Terrorists and Innocents Instructional Video: Viktor Mayer Schönberger on the Right to Be Forgotten Content Pirates Sail the Web M ore than 11 million HBO subscribers watched each episode of Game of Thrones in 2012, but another 3.7 to 4.2 million were able to watch the same shows without p ­ aying a cent. They were ­watching pirated versions of each episode that were made ­available by companies specializing in distributing digital content for free without paying the owners and creators of that content for using it. Television shows, music, movies, and videogames have all been plundered this way. Such “content pirates” have sailed the World Wide Web since its earliest days, but today they are bolder, faster and better equipped than ever. The ­antipiracy and security firm Irdeto detected 14 billion instances of pirated online content in 2012, up from 5.4 billion instances in 2009. Pirated content threatens television industry profits, much of which comes from ­subscription fees on cable channels like HBO and USA. Viewers ­watching pirated ­versions of shows are less likely to pay for cable subscriptions or to buy movies or rent them from services such as Netflix. According to one ­estimate, pirated content costs the U.S. economy $58 billion a year, including theft of ­content, lost entertainment jobs and taxes lost to federal and state ­governments. The explosion in pirated TV shows and movies has been made possible by faster Internet speeds. Longer videos can be downloaded within minutes from peer-to-peer networks and online cyberlockers. A great deal of illegal content, including live sports, is also available through instant streaming. Online ad ­networks also help finance piracy by placing ads on sites that traffic in unauthorized content. A summer 2012 study commissioned in part by Google found that 86 percent of peer-to-peer sharing sites depend on advertising for income. © Eldeiv/Shutterstock 123 124 Part One Organizations, Management, and the Networked Enterprise One of the biggest content pirate sites is The Pirate Bay, based in Sweden, which offers free access to millions of copyrighted songs and thousands of copyrighted movies. The Pirate Bay uses BitTorrent file-sharing technology, which breaks up large computer files into small pieces so they can zip across the Web. In April 2014, The Pirate Bay had over 6.5 million registered users and was the 87th most trafficked site in the world. There have been many legal efforts to shut it down, but The Pirate Bay finds ways to keep going. What can be done to stop this pirating? Google adjusted its search algorithm to obscure search results for sites with pirated content. NBCUniversal uses armies of automated “­crawlers” to scour the Web for unauthorized videos and also applies “content recognition” t­ echnology to its programming, which it then passes on to video sites like YouTube to help block illegal uploads. NBC sends out digital snapshots of its shows to YouTube and other video sites to prevent users from putting up copyrighted shows. The five major Internet service ­providers, including NBC’s parent company, Comcast, ­initiated an alert system which notifies users suspected of piracy and results in progressive penalties, including slowed Web access in some cases. Digital content owners are t­aking much harder stance with advertising networks and payment platforms supporting piracy to encourage them to close down ad-funded pirate sites. New products and services have made pirated content less attractive. Highquality content now can be streamed for a small fee to both tethered and mobile devices. Apple’s iTunes made buying individual songs inexpensive and easy, while new subscription-based services such as Spotify and Rhapsody have attracted 20 million paying subscribers. Netflix and other video services offer access to movies and television shows at low prices. Right now content pirates are still sailing, but new and better ways to listen to music and view videos may eventually put them out of business. Sources: Jack Marshall, “More Ad Dollars Flow to Pirated Video,” Wall Street Journal, May 7, 2014; Adam Nightingale, “Will 2014 Be the Year of IPTV Streaming Piracy? RapidTVNews. com, accessed April 11, 2014;, accessed April 10, 2014; Christopher S. Stuart, “As TV Pirates Run Rampant, TV Studios Dial Up Pursuit,” The Wall Street Journal, March 3, 2013; “Pirate Bay Sails to the Caribbean,” I4U News, May 2, 2013; and L. Gordon Crovitz, “A Six-Strike Rule for Internet Privacy,” The Wall Street Journal, March 3, 2013. T he prevalence and brazen activities of “content pirates” described in the ­chapter-opening case show that technology can be a double-edged sword. It can be the source of many benefits, including the ability to share and ­transmit legitimate photos, music, videos, and information over the Internet at high speeds. But, at the same time, digital technology creates new opportunities for breaking the law or taking benefits away from others, including owners of ­valuable ­intellectual property, such as music, videos, and television shows that are ­protected by copyright law. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Content pirating has become rampant because of opportunities created by broadband communications technology and the global nature of the Internet. Various policies and technology solutions have been put in place to put a stop to content piracy, but the practice still prevails. New technology-based products and services that make online content purchase and downloads very quick and inexpensive may eventually provide a solution. This case illustrates an ethical dilemma because it shows two sets of ­interests at work— the interests of people and organizations that have worked to develop intellectual property and need to be rewarded versus those of groups who ­fervently believe the Internet should foster the free exchange of c­ ontent Chapter 4 Ethical and Social Issues in Information Systems and ideas. As a manager, you will need to be sensitive to both the positive and ­negative impacts of information systems for your firm, employees and ­customers. You will need to learn how to resolve ethical dilemmas involving information systems. 4.1 I What ethical, social, and political issues are raised by information systems? n the past 10 years, we have witnessed, arguably, one of the most ­ethically challenging ­periods for U.S. and global business. Table 4.1 provides a small sample of recent cases ­demonstrating failed ethical ­judgment by senior and middle managers. These lapses in ethical and business judgment occurred across a broad spectrum of industries. In today’s new legal environment, managers who violate the law and are convicted will most likely spend time in prison. U.S. federal sentencing g­ uidelines adopted in 1987 ­mandate that federal judges impose stiff sentences on ­business executives based on the ­monetary value of the crime, the ­presence of a conspiracy to prevent discovery of the crime, the use of s­ tructured ­financial transactions to hide the crime, and failure to cooperate with prosecutors (U.S. Sentencing Commission, 2004). Although business firms would, in the past, often pay for the legal defense of their employees enmeshed in civil charges and criminal investigations, firms are ­now encouraged to cooperate with prosecutors to reduce charges against the entire firm for obstructing ­investigations. These developments mean that, more than ever, as a manager or an employee, you will have to decide for ­yourself what constitutes proper legal and ethical ­conduct. Although these major instances of failed ethical and legal judgment were not ­masterminded by information systems departments, information systems were ­instrumental in many of these frauds. In many cases, the perpetrators of these crimes artfully used f­ inancial reporting information systems to bury their ­decisions from public scrutiny in the vain hope they would never be caught. 125 126 Part One Organizations, Management, and the Networked Enterprise TABLE 4.1 Recent Examples Of Failed Ethical Judgment by Senior Managers General Motors Inc. (2014) General Motors CEO admits the firm covered up faulty ignition switches for more than a decade resulting in the deaths of at least thirteen customers. The firm has recalled 2.7 million cars. Endo Health Solutions, Inc. (2014) Pharmaceutical company Endo Health Solutions Inc. agreed to pay $192.7 million to resolve criminal and civil liability arising from Endo’s marketing of the prescription drug Lidoderm for uses not approved as safe and effective by the Food and Drug Administration (FDA). SAC Capital (2013) SAC Capital, a hedge fund led by founder Steven Cohen, pleads guilty to insider trading charges and agreed to pay a record $1.2 billion penalty. The firm was also forced to leave the money management business. Individual traders for SAC were found guilty of criminal charges and were sentenced to prison. Barclays Bank PLC (2012) One of the world’s largest banks admitted to manipulating its submissions for the LIBOR benchmark interest rates in order to benefit its trading positions and the media’s perception of the bank’s financial health. Fined $160 million. GlaxoSmithKline LLC (2012) The global health care giant admitted to unlawful and criminal promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices. Fined $3 billion, the largest health care fraud settlement in U.S. history and the largest payment ever by a drug company. Walmart Inc. (2012) Walmart executives in Mexico accused of paying millions in bribes to Mexican officials in order to receive building permits. Under investigation by the Department of Justice. Galleon Group (2011) Founder of the Galleon Group sentenced to 11 years in prison for trading on insider information. Found guilty of paying $250 million to Wall Street banks, and in return received market information that other investors did not get. Siemens (2009) The world’s largest engineering firm paid over $4 billion to German and U.S. authorities for a decades-long, worldwide bribery scheme approved by corporate executives to influence potential customers and governments. Payments concealed from normal reporting accounting systems. McKinsey & Company (2011) CEO Rajat Gupta heard on tapes leaking insider information. The former CEO of prestigious management consulting firm McKinsey & Company was found guilty in 2012 and sentenced to two years in prison. Bank of America (2012) Federal prosecutors accused Bank of America and its affiliate Countrywide Financial of defrauding government-backed mortgage agencies by churning out loans at a rapid pace without proper controls. Prosecutors are seeking $1 billion in penalties from the bank as compensation for the behavior that they say forced taxpayers to guarantee billions in bad loans. We deal with the issue of control in information systems in Chapter 8. In this chapter, we will talk about the ethical dimensions of these and other actions based on the use of information systems. Ethics refers to the principles of right and wrong that individuals, acting as free moral agents, use to make choices to guide their behaviors. Information systems raise new e ­ thical questions for both individuals and societies because they create opportunities for intense social change, and thus threaten ­existing distributions of power, money, rights, and ­obligations. Like other technologies, such as steam engines, electricity, the telephone, and the radio, information technology can be used to achieve social progress, but it can also be used to commit crimes and threaten cherished social values. The development of ­information technology will produce benefits for many and costs for others. Ethical issues in information systems have been given new urgency by the rise of the Internet and electronic commerce. Internet and digital firm ­technologies make it easier than ever to assemble, integrate, and distribute information, unleashing new concerns about the appropriate use of customer information, the protection of personal privacy, and the ­protection of intellectual property. Chapter 4 Ethical and Social Issues in Information Systems Other pressing ethical issues raised by information systems include ­ stablishing ­accountability for the consequences of information systems, e ­setting standards to safeguard system quality that protects the safety of the individual and society, and preserving values and institutions c­ onsidered essential to the ­q uality of life in an information society. When using ­information systems, it is essential to ask, “What is the ethical and socially responsible course of action?” A Model for Thinking About Ethical, Social, and Political Issues Ethical, social, and political issues are closely linked. The ethical dilemma you may face as a manager of information systems typically is reflected in social and political debate. One way to think about these relationships is shown in Figure 4.1. Imagine society as a more or less calm pond on a summer day, a ­delicate ecosystem in partial equilibrium with ­individuals and with social and political institutions. Individuals know how to act in this pond because social institutions (family, education, organizations) have developed w ­ ell-honed rules of behavior, and these are supported by laws developed in the political sector that ­prescribe behavior and promise sanctions for v ­ iolations. Now toss a rock into the center of the pond. What ­happens? Ripples, of course. FIGURE 4.1 The Relationship Between Ethical, Social, and Political Issues in an Information Society The introduction of new information technology has a ripple effect, raising new ethical, social, and political issues that must be dealt with on the individual, social, and political levels. These issues have five moral dimensions: information rights and obligations, property rights and obligations, system quality, quality of life, and accountability and control. 127 128 Part One Organizations, Management, and the Networked Enterprise Imagine instead that the disturbing force is a powerful shock of new information t­echnology and systems hitting a society more or less at rest. Suddenly, individual actors are confronted with new situations often not ­covered by the old rules. Social institutions ­cannot respond overnight to these ripples—it may take years to develop etiquette, expectations, social responsibility, politically correct attitudes, or approved rules. Political institutions also require time before developing new laws and often require the demonstration of real harm before they act. In the meantime, you may have to act. You may be forced to act in a legal gray area. We can use this model to illustrate the dynamics that connect ethical, social, and p ­ olitical issues. This model is also useful for identifying the main moral dimensions of the i­nformation society, which cut across various levels of action—individual, social, and ­political. Five Moral Dimensions of the Information Age The major ethical, social, and political issues raised by information systems include the ­following moral dimensions: • Information rights and obligations. What information rights do individuals and ­organizations possess with respect to themselves? What can they protect? • Property rights and obligations. How will traditional intellectual property rights be ­protected in a digital society in which tracing and accounting for ownership are difficult and ignoring such property rights is so easy? • Accountability and control. Who can and will be held accountable and liable for the harm done to individual and collective information and property rights? • System quality. What standards of data and system quality should we demand to protect individual rights and the safety of society? • Quality of life. What values should be preserved in an information- and ­knowledge-based society? Which institutions should we protect from ­violation? Which cultural values and practices are supported by the new information technology? We explore these moral dimensions in detail in Section 4.3. Key Technology Trends That Raise Ethical Issues Ethical issues long preceded information technology. Nevertheless, ­information technology has heightened ethical concerns, taxed existing social ­arrangements, and made some laws obsolete or severely crippled. There are five key ­technological trends responsible for these ethical stresses and they are summarized in Table 4.2. The doubling of computing power every 18 months has made it possible for most o ­ rganizations to use information systems for their core production processes. As a result, our dependence on systems and our vulnerability to ­system errors and poor data quality have increased. Social rules and laws have not yet adjusted to this dependence. Standards for ensuring the accuracy and reliability of information systems (see Chapter 8) are not ­universally accepted or enforced. Advances in data storage techniques and rapidly declining storage costs have been responsible for the multiplying databases on individuals—employees, ­customers, and p ­ otential customers—maintained by private and public ­organizations. These advances in data storage have made the routine violation Chapter 4 Ethical and Social Issues in Information Systems TABLE 4.2 Technology Trends That Raise Ethical Issues Trend Impact Computing power doubles every 18 months More organizations depend on computer systems for critical operations. Data storage costs rapidly decline Organizations can easily maintain detailed databases on individuals. Data analysis advances Companies can analyze vast quantities of data gathered on individuals to develop detailed profiles of individual behavior. Networking advances The cost of moving data and making it accessible from anywhere falls exponentially . Mobile device growth Impact Individual cell phones may be tracked without user consent or knowledge. of i­ndividual privacy both cheap and effective. Enormous data storage ­systems for terabytes and petabytes of data are now available on-site or as online ­services for firms of all sizes to use in identifying customers. Advances in data analysis techniques for large pools of data are another ­technological trend that heightens ethical concerns because companies and government agencies are able to find out highly detailed personal information about individuals. With contemporary data management tools (see Chapter 6), companies can assemble and combine the myriad pieces of information about you stored on computers much more easily than in the past. Think of all the ways you generate computer information about yourself— credit card purchases, telephone calls, magazine subscriptions, video ­rentals, mail-order purchases, banking records, local, state, and federal government records (including court and police records), and visits to Web sites. Put together and mined properly, this information could reveal not only your credit ­information but also your driving habits, your tastes, your a­ ssociations, what you read and watch, and your political interests. Companies with products to sell purchase relevant information from these sources to help them more finely target their marketing campaigns. Chapters 6 and 11 describe how companies can analyze large pools of data from m ­ ultiple sources to rapidly identify ­buying patterns of customers and suggest individual responses. The use of computers to c­ ombine data from multiple sources and create electronic dossiers of detailed information on ­individuals is called profiling. For example, several thousand of the most popular Web sites allow DoubleClick (owned by Google), an Internet advertising broker, to track the activities of their visitors in exchange for revenue from advertisements based on visitor information DoubleClick gathers. DoubleClick uses this information to create a profile of each online visitor, adding more detail to the profile as the visitor accesses an associated DoubleClick site. Over time, DoubleClick can create a detailed dossier of a person’s spending and ­computing habits on the Web that is sold to companies to help them target their Web ads more ­precisely. The top 50 Web sites in the United States contain on average over 100 tracking programs installed by advertising firms to track your online behavior. ChoicePoint gathers data from police, criminal, and motor vehicle records, credit and employment histories, current and previous addresses, p ­ rofessional licenses, and insurance claims to assemble and maintain electronic ­dossiers on almost every adult in the United States. The company sells this p ­ ersonal ­information to businesses and government agencies. Demand for p ­ ersonal 129 130 Part One Organizations, Management, and the Networked Enterprise data is so enormous that data broker businesses such as ChoicePoint are ­flourishing. The two largest credit card networks, Visa Inc. and MasterCard Inc., have agreed to link credit card purchase information with consumer social network and other information to create customer profiles that could be sold to advertising firms. In 2013, Visa processed more than 45 billion transactions a year and MasterCard processed more than 23 b ­ illion transactions. Currently, this transactional information is not linked with ­consumer Internet activities. A new data analysis technology called nonobvious relationship awareness (NORA) has given both the government and the private sector even more ­powerful profiling ­capabilities. NORA can take information about p ­ eople from many disparate sources, such as employment applications, ­telephone records, customer listings, and “wanted” lists, and correlate r­elationships to find obscure hidden connections that might help identify criminals or t­ errorists (see Figure 4.2). NORA technology scans data and extracts information as the data are being generated so that it could, for example, instantly discover a man at an airline ticket counter who shares a phone number with a known ­terrorist before that person boards an airplane. The technology is considered a ­valuable tool for homeland security but does have privacy implications because it can provide such a detailed picture of the activities and associations of a single individual. An example of how government and private industry not only use the same data mining techniques to identify and track individuals, but in cases of national security, closely cooperate with one another in gathering data, was provided by the unauthorized release of documents describing the ­electronic surveillance activities of the U.S. National Security Agency (NSA). The Interactive Session on Management describes this program and the ­controversy it has generated. Finally, advances in networking, including the Internet, promise to greatly reduce the costs of moving and accessing large quantities of data and open Credit card purchases can make personal information available to market researchers, telemarketers, and direct mail companies. Advances in information technology facilitate the invasion of privacy. © LDprod/Shutterstock Chapter 4 Ethical and Social Issues in Information Systems FIGURE 4.2 Nonobvious Relationship Awareness (NORA) NORA technology can take information about people from disparate sources and find obscure, ­nonobvious relationships. It might discover, for example, that an applicant for a job at a casino shares a telephone number with a known criminal and issue an alert to the hiring manager. the possibility of mining large pools of data remotely using small desktop machines, permitting an invasion of privacy on a scale and with a precision heretofore unimaginable. 4.2 What specific principles for conduct can be used to guide ethical decisions? Ethics is a concern of humans who have freedom of choice. Ethics is about ­individual choice: When faced with alternative courses of action, what is the correct moral choice? What are the main features of ethical choice? Basic Concepts: Responsibility, Accountability, and Liability Ethical choices are decisions made by individuals who are responsible for the ­consequences of their actions. Responsibility is a key element of ethical action. Responsibility means that you accept the potential costs, duties, and obligations for the decisions you make. Accountability is a feature of systems and social 131 132 Part One Organizations, Management, and the Networked Enterprise Interactive Session: management Edward Snowden: Traitor or Protector of Privacy? In June 2013, Edward Snowden, a technology contract worker for the NSA, provided details of the NSA surveillance program called PRISM to the British newspaper The Guardian. Mr. Snowden had broad access to NSA files because he was working for the agency in Hawaii, helping to manage the NSA’s ­computer systems in an outpost that focuses on China and North Korea. He was one of 1.2 million people in the United States who have top security clearance. Snowden used inexpensive and widely available “web crawler” software to scrape data out of NSA systems and kept at it even after he was briefly ­challenged by agency officials. A web crawler ­automatically moves from Web site to Web site, ­following links embedded in each document, and can be programmed to copy everything in its path. U.S. intelligence officials believe Snowden accessed roughly 1.7 million files this way. Because Snowden worked at a NSA outpost that had not yet been upgraded with modern security measures, his ­copying of huge ­volumes of data raised few alarms. Snowden told The Guardian that he had grown concerned about how massive and invasive the NSA system had become. He described how NSA collects information on telephone calls, e-mails, social network postings, search queries, and other Web communications of Internet users in the United States. The data are provided to the government by the datagathering giants of Silicon Valley—Google, Facebook, Twitter, Microsoft, Yahoo, and other large Internet firms—as well as telecommunications service providers such as Verizon. The availability and relatively low cost of contemporary data management and analytics technologies described earlier in this chapter make it possible for the NSA to store and conduct very sophisticated analysis of massive quantities of data. The purpose of PRISM is to identify terrorists and their plans before the plans can be executed. PRISM does not collect the contents of Internet communications, but only the meta-data (essentially who is communicating with whom). Using this data, PRISM constructs a social graph of some Americans’ social connections, identifying their associates, their locations at certain times, their traveling companions and other personal information. Once PRISM identifies suspicious patterns, it then requests more detailed information from these firms that can include the contents of the communication. NSA and government officials claim the program is legal under existing statutes, has been in operation for many years with Congressional oversight, and provides for judicial review of active surveillance of specific people. The phone-records program was built upon a provision in the USA Patriot Act, passed a month after the 9/11 terrorist attacks. While aimed at communications with and among foreign nationals, it is apparent that the entire U.S. population, citizens and non-citizens, is included in the NSA data gathering effort. The NSA programs are approved and overseen by the secret Foreign Intelligence Surveillance Court. The documents leaked by Snowden included details about the NSA data analysis and data visualization tool Boundless Informant, a secret court order requiring Verizon to hand the NSA millions of Americans’ phone records daily, and the surveillance of French citizens’ phone and Internet records, along with those of high-profile individuals from the world of business or politics. The documents also described XKeyscore, which allows for the collection of almost anything done on the Internet, including the content of personal email, Web search history, and browsing patterns. The documents revealed that the NSA was harvesting ­millions of email and instant messaging contact lists, searching email content, tracking and mapping the location of cell phones, and undermining attempts at encryption to pinpoint targets for government ­hacking and to bolster surveillance. The NSA was shown to be secretly tapping into Yahoo and Google data ­centers to collect information from hundreds of millions of account holders worldwide by tapping undersea cables using the MUSCULAR program. Additionally, the NSA, the U.S. Central Intelligence Agency (CIA) and British intelligence agency GCHQ spied on users of Second Life and World of Warcraft by creating make-believe characters to hide in plain sight. NSA intelligence-gathering operations had targeted Brazil’s largest oil company, Petrobras. Tensions flared between the U.S. and some of its close allies after it was revealed that the U.S. had spied on Brazil, France, Mexico, Britain, China, Germany and Spain, as well as 35 world leaders, including German Chancellor Angela Merkel. Snowden’s revelations reignited the public debate about how to strike a balance between security and Chapter 4 Ethical and Social Issues in Information Systems liberty in the age of global terrorism and powerful technology. U.S. officials have stated that PRISM, in concert with other techniques, has helped thwart dozens of terrorist plots in the U.S. and overseas. President Obama argued that modest encroachments on privacy, including keeping records of phone numbers called and the length of calls that can be used to track terrorists, though not listening in to calls, were worthwhile to protect the country. These programs were authorized by Congress and regularly reviewed by federal courts. Critics charge that PRISM represents a massive invasion of privacy. They believe that routinely giving phone records and e-mail contents to the federal government is a violation of the Fourth Amendment’s prohibition against search and seizure without a warrant and probable cause, even though this Amendment applies only to personal papers in the home. More than half of Americans surveyed by a Washington Post-ABC News Poll in November 2013 said that the NSA surveillance has intruded on their personal privacy rights. However, U.S. courts have ruled that modern communication tools effectively bypass the Fourth Amendment. Under these rulings, our telephone data—whom we call and how long we are connected—are not considered to be under traditional Fourth Amendment protection (through something called the Third Party Doctrine, which holds that knowingly disclosing information to a third party—in this case, an Internet service provider— abrogates that protection). By the same reasoning, our e-mails are generally considered unprotected as well (though there is some legal ambiguity here). A panel appointed by President Obama has called for a major overhaul of NSA operations. In the meantime, Snowden has been charged with espionage and theft and has been living in Russia. Among those worried about NSA encroachment on individual privacy, Snowden has been praised as a hero. Among those more concerned with national security and the need to protect the nation and its citizens from terrorist and other attacks, Snowden is vilified as a traitor. The debate—and it is a very heated one—continues. Sources: James Glanz, Jeff Larson, and Andrew W. Lehren, “Spy Agencies Tap Data Streaming from Phone Apps,” New York Times, January 27, 2014;“Edward Snowden, Whistle-Blower,” New York Times, January 1, 2014; Liam Fox, “Snowden and His Accomplices,” Wall Street Journal, Aprpil 15, 2014; Derek Satya Khanna, “The NSA Scandal: Is It ‘Anything Goes’ in the War on Terror?” National Review Online, June 12, 2013; James Risen and Laura Poitras, “N. S.A. Gathers Data on Social Connections of U.S. Citizens,” New York Times, September 28, 2013;Siobhan Gorman and Jennifer Valentino-Devries,” New Details Show Broader NSA Surveillance Reach,” Wall Street Journal August 21, 2013; James Risen and Eric Lichtblau, “How the U.S. Uses Technology to Mine More Data More Quickly, New York Times, June 8, Paul Ford, “Balancing Security and Liberty in the Age of Big Data,” Bloomberg Businessweek, June 13, 2013; and Scott Shane, “No Morsel Too Minuscule for AllConsuming NSA,” New York Times, November 2, 2013. case study questions 1. Perform an ethical analysis of the PRISM program and NSA surveillance activities. What is the ethical dilemma presented by this case? 2. Describe the role of information technology in ­creating this ethical dilemma. 133 3. Do you think the NSA should be allowed to ­continue its electronic surveillance programs? Why or why not? institutions: It means that ­mechanisms are in place to determine who took ­responsible action, and who is ­responsible. Systems and institutions in which it is impossible to find out who took what action are ­inherently ­incapable of ­ethical analysis or ethical action. Liability extends the concept of ­responsibility further to the area of laws. Liability is a feature of political ­systems in which a body of laws is in place that permits individuals to recover the damages done to them by other actors, s­ ystems, or organizations. Due ­process is a related feature of law-governed societies and is a process in which laws are known and understood, and there is an ability to appeal to higher authorities to ensure that the laws are applied correctly. These basic concepts form the underpinning of an ethical analysis of ­information ­systems and those who manage them. First, information technologies are filtered through social institutions, organizations, and individuals. 134 Part One Organizations, Management, and the Networked Enterprise Systems do not have impacts by ­themselves. Whatever information system impacts exist are products of institutional, organizational, and individual actions and behaviors. Second, responsibility for the consequences of ­technology falls clearly on the institutions, organizations, and individual managers who choose to use the ­technology. Using information technology in a socially responsible manner means that you can and will be held accountable for the consequences of your actions. Third, in an e ­ thical, political society, individuals and others can recover damages done to them through a set of laws ­characterized by due process. Ethical Analysis When confronted with a situation that seems to present ethical issues, how should you ­analyze it? The following five-step process should help: 1. Identify and describe the facts clearly. Find out who did what to whom, and where, when, and how. In many instances, you will be surprised at the errors in the initially reported facts, and often you will find that simply getting the facts straight helps define the solution. It also helps to get the opposing parties involved in an ethical dilemma to agree on the facts. 2. Define the conflict or dilemma and identify the higher-order values involved. Ethical, social, and political issues always reference higher values. The parties to a ­dispute all claim to be pursuing higher values (e.g., freedom, privacy, protection of property, and the free enterprise system). Typically, an ethical issue involves a dilemma: two ­diametrically opposed courses of action that support ­worthwhile values. For example, the ­chapter-opening case study illustrates two competing values: the need to improve access to digital content and the need to respect the property rights of the owners of that content. 3. Identify the stakeholders. Every ethical, social, and political issue has stakeholders: ­players in the game who have an interest in the outcome, who have invested in the ­situation, and usually who have vocal opinions. Find out the identity of these groups and what they want. This will be useful later when designing a solution. 4. Identify the options that you can reasonably take. You may find that none of the options satisfy all the interests involved, but that some options do a better job than ­others. Sometimes arriving at a good or ethical solution may not always be a balancing of ­consequences to stakeholders. 5. Identify the potential consequences of your options. Some options may be ethically ­correct but disastrous from other points of view. Other options may work in one instance but not in other similar instances. Always ask yourself, “What if I choose this option consistently over time?” Candidate Ethical Principles Once your analysis is complete, what ethical principles or rules should you use to make a decision? What higher-order values should inform your judgment? Although you are the only one who can decide which among many ethical ­principles you will follow, and how you will prioritize them, it is helpful to consider some ethical principles with deep roots in many cultures that have survived throughout recorded history: 1. Do unto others as you would have them do unto you (the Golden Rule). Putting yourself into the place of others, and thinking of yourself as the object of the decision, can help you think about fairness in decision making. 2. If an action is not right for everyone to take, it is not right for anyone (Immanuel Kant’s Categorical Imperative). Ask yourself, “If everyone did this, could the organization, or society, survive?” Chapter 4 Ethical and Social Issues in Information Systems 3. If an action cannot be taken repeatedly, it is not right to take at all. This is the slippery-slope rule: An action may bring about a small change now that is acceptable, but if it is repeated, it would bring ­unacceptable changes in the long run. In the vernacular, it might be stated as “once started down a slippery path, you may not be able to stop.” 4. Take the action that achieves the higher or greater value (Utilitarian Principle). This rule assumes you can prioritize values in a rank order and understand the consequences of various courses of action. 5. Take the action that produces the least harm or the least potential cost (Risk Aversion Principle). Some actions have extremely high failure costs of very low probability (e.g., building a nuclear generating facility in an urban area) or extremely high failure costs of moderate probability (speeding and automobile accidents). Avoid these ­high-failure-cost actions, paying greater attention to high-failure-cost potential of moderate to high ­probability. 6. Assume that virtually all tangible and intangible objects are owned by someone else unless there is a specific declaration otherwise. (This is the ethical “no free lunch” rule.) If something someone else has created is useful to you, it has value, and you should assume the creator wants compensation for this work. Actions that do not easily pass these rules deserve close attention and a great deal of ­caution. The appearance of unethical behavior may do as much harm to you and your ­company as actual unethical behavior. Professional Codes of Conduct When groups of people claim to be professionals, they take on special rights and obligations because of their special claims to knowledge, wisdom, and respect. Professional codes of conduct are promulgated by associations of professionals, such as the American Medical Association (AMA), the American Bar Association (ABA), the Association of Information Technology Professionals (AITP), and the Association for Computing Machinery (ACM). These professional groups take responsibility for the partial regulation of their professions by ­determining entrance qualifications and competence. Codes of ethics are promises by ­professions to regulate themselves in the general interest of society. For example, ­avoiding harm to others, honoring property rights (including i­ ntellectual ­property), and r­ especting privacy are among the General Moral Imperatives of the ACM’s Code of Ethics and Professional Conduct. Some Real-World Ethical Dilemmas Information systems have created new ethical dilemmas in which one set of interests is pitted against another. For example, many of the large telephone companies in the United States are using information technology to reduce the sizes of their workforces. Voice r­ecognition software reduces the need for human operators by enabling computers to ­ recognize a ­ customer’s responses to a series of computerized questions. Many companies monitor what their employees are doing on the Internet to prevent them from wasting company resources on non-business activities. Facebook monitors its subscribers and then sells the information to advertisers and app developers (see the chapterending case study). In each instance, you can find competing values at work, with groups lined up on either side of a debate. A company may argue, for example, that it has a right to use ­information s­ ystems to increase productivity and reduce the size 135 136 Part One Organizations, Management, and the Networked Enterprise of its workforce to lower costs and stay in business. Employees displaced by information systems may argue that employers have some responsibility for their welfare. Business owners might feel obligated to monitor employee e-mail and Internet use to minimize drains on productivity. Employees might believe they should be able to use the Internet for short personal tasks in place of the ­telephone. A close analysis of the facts can sometimes produce compromised solutions that give each side “half a loaf.” Try to apply some of the principles of ethical analysis described to each of these cases. What is the right thing to do? 4.3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property? In this section, we take a closer look at the five moral dimensions of information ­systems first described in Figure 4.1. In each dimension, we i­dentify the ethical, social, and p ­ olitical levels of analysis and use real-world examples to illustrate the values involved, the ­stakeholders, and the options chosen. Information Rights: Privacy and Freedom in the Internet Age Privacy is the claim of individuals to be left alone, free from surveillance or interference from other individuals or organizations, including the state. Claims to privacy are also involved at the workplace: Millions of employees are subject to electronic and other forms of high-tech surveillance. Information technology and systems threaten individual claims to privacy by making the invasion of privacy cheap, profitable, and effective. The claim to privacy is protected in the U.S., Canadian, and German ­constitutions in a variety of different ways and in other countries through ­various statutes. In the United States, the claim to privacy is protected primarily by the First Amendment guarantees of freedom of speech and association, the Fourth Amendment protections against unreasonable search and seizure of one’s ­personal documents or home, and the guarantee of due process. Table 4.3 describes the major U.S. federal statutes that set forth the ­conditions for h ­ andling information about individuals in such areas as credit ­reporting, ­education, ­financial records, newspaper records, and electronic ­communications. The Privacy Act of 1974 has been the most important of these laws, regulating the federal government’s collection, use, and disclosure of information. At present, most U.S. federal privacy laws apply only to the ­federal ­government and regulate very few areas of the private sector. Most American and European privacy law is based on a regime called Fair Information Practices (FIP) first set forth in a report written in 1973 by a ­federal government advisory committee and updated most recently in 2010 to take into account new privacy-invading technology (FTC, 2010; U.S. Department of Health, Education, and Welfare, 1973). FIP is a set of principles governing the collection and use of information about individuals. FIP principles are based on the notion of a mutuality of interest between the record holder and the individual. The individual has an interest in engaging in a transaction, and the record keeper—usually a business or government agency—requires Chapter 4 Ethical and Social Issues in Information Systems 137 TABLE 4.3 Federal Privacy Laws in the United States General Federal Privacy Laws Privacy Laws Affecting Private Institutions Freedom of Information Act of 1966 as Amended (5 USC 552) Fair Credit Reporting Act of 1970 Privacy Act of 1974 as Amended (5 USC 552a) Family Educational Rights and Privacy Act of 1974 Electronic Communications Privacy Act of 1986 Right to Financial Privacy Act of 1978 Computer Matching and Privacy Protection Act of 1988 Privacy Protection Act of 1980 Computer Security Act of 1987 Cable Communications Policy Act of 1984 Federal Managers Financial Integrity Act of 1982 Electronic Communications Privacy Act of 1986 Driver’s Privacy Protection Act of 1994 Video Privacy Protection Act of 1988 E-Government Act of 2002 The Health Insurance Portability and Accountability Act of 1996 (HIPAA) Children’s Online Privacy Protection Act (COPPA) of 1998 Financial Modernization Act (Gramm-Leach-Bliley Act) of 1999 information about the i­ndividual to support the transaction. Once information is ­gathered, the individual maintains an i­nterest in the record, and the record may not be used to support other a­ ctivities without the i­ndividual’s consent. In 1998, the FTC restated and extended the original FIP to provide guidelines for protecting online privacy. Table 4.4 describes the FTC’s Fair Information Practice principles. The FTC’s FIP principles are being used as guidelines to drive changes in ­privacy ­legislation. In July 1998, the U.S. Congress passed the Children’s Online Privacy Protection Act (COPPA), requiring Web sites to obtain parental permission before c­ ollecting i­nformation on children under the age of 13. The FTC has recommended additional ­legislation to ­protect online consumer privacy in advertising networks that collect records of consumer Web ­activity to develop detailed profiles, which are then used by other ­companies to target online ads. In 2010, the FTC added three practices to its framework for privacy. Firms should adopt “privacy by design,” building products and services that protect privacy. Firms should increase the transparency of their data practices. And firms should require consumer consent and provide clear options to opt out of TABLE 4.4 Federal Trade Commission Fair Information Practice Principles 1. Notice/awareness (core principle). Web sites must disclose their information practices before collecting data. Includes identification of collector; uses of data; other recipients of data; nature of collection (active/inactive); voluntary or required status; consequences of refusal; and steps taken to protect confidentiality, integrity, and quality of the data. 2. Choice/consent (core principle). There must be a choice regime in place allowing consumers to choose how their information will be used for secondary purposes other than supporting the transaction, including internal use and transfer to third parties. 3. Access/participation. Consumers should be able to review and contest the accuracy and completeness of data collected about them in a timely, inexpensive process. 4. Security. Data collectors must take responsible steps to assure that consumer information is accurate and secure from unauthorized use. 5. Enforcement. There must be in place a mechanism to enforce FIP principles. This can involve self-regulation, legislation giving consumers legal remedies for violations, or federal statutes and regulations. 138 Part One Organizations, Management, and the Networked Enterprise data collection schemes (FTC, 2010). Other proposed Internet privacy legislation focuses on protecting the online use of personal identification n ­ umbers, such as social security numbers; protecting personal information ­collected on the Internet that deals with individuals not covered by COPPA; and limiting the use of data mining for homeland security. Beginning in 2009 and continuing through 2012, the FTC extended its FIP doctrine to address the issue of behavioral targeting. The FTC held hearings to discuss its program for voluntary industry principles for regulating behavioral ­targeting. The online advertising trade group Network Advertising Initiative (discussed later in this section), published its own ­self-regulatory principles that largely agreed with the FTC. Nevertheless, the government, privacy groups, and the online ad industry are still at loggerheads over two issues. Privacy advocates want both an opt-in policy at all sites and a national Do Not Track list. The industry opposes these moves and continues to insist on an opt-out capability being the only way to avoid tracking. In May 2011, Senator Jay D. Rockefeller (D-WV), Chairman of the Senate Commerce Subcommittee on Consumer Protection, Product Safety, and Insurance, held hearings to discuss consumer privacy c­ oncerns and to explore the p ­ ossible role of the federal government in protecting consumers in the mobile marketplace. Rockefeller supports the Do-Not-Track Online Act of 2011 (reintroduced in 2013), which requires firms to notify consumers they are being tracked and allows consumers to opt out of the tracking (U.S. Senate, 2011). Nevertheless, there is an emerging consensus among all parties that greater transparency and user control (especially making opting out of tracking the default option) is required to deal with ­behavioral tracking. While there are many studies of privacy issues at the federal level, there has been no significant legislation in recent years. Privacy protections have also been added to recent laws deregulating ­financial services and safeguarding the maintenance and transmission of health ­information about ­individuals. The Gramm-Leach-Bliley Act of 1999, which repeals earlier restrictions on affiliations among banks, securities firms, and insurance companies, includes some privacy protection for ­consumers of ­financial services. All financial institutions are required to disclose their p ­ olicies and practices for protecting the privacy of nonpublic personal i­nformation and to allow c­ ustomers to opt out of information-sharing arrangements with ­nonaffiliated third ­parties. The Health Insurance Portability and Accountability Act (HIPAA) of 1996, which took effect on April 14, 2003, includes privacy protection for ­medical records. The law gives patients access to their personal medical records ­maintained by health care providers, hospitals, and health insurers, and the right to authorize how protected information about themselves can be used or ­disclosed. Doctors, hospitals, and other health care providers must limit the ­disclosure of personal information about patients to the minimum amount ­necessary to achieve a given purpose. The European Directive on Data Protection In Europe, privacy protection is much more stringent than in the United States. Unlike the United States, European countries do not allow businesses to use personally ­identifiable information without consumers’ prior consent. On October 25, 1998, the European Commission’s Directive on Data Protection went into effect, broadening privacy ­protection in the European Union (EU) nations. The directive requires companies to inform people when they collect information about them and disclose how it will be stored and used. Customers must provide Chapter 4 Ethical and Social Issues in Information Systems their informed consent before any company can legally use data about them, and they have the right to access that information, correct it, and request that no further data be collected. Informed consent can be defined as consent given with ­knowledge of all the facts needed to make a rational ­decision. EU member nations must translate these principles into their own laws and cannot transfer personal data to countries, such as the United States, that do not have similar privacy protection regulations. In 2009, the European Parliament passed new rules governing the use of third-party cookies for ­behavioral tracking purposes. These new rules were implemented in May 2011 and require that Web site visitors must give explicit consent to be tracked by cookies. Web sites will be required to have highly visible warnings on their pages if third-party cookies are being used (European Parliament, 2009). In January 2012, the E.U. issued significant proposed changes to its data protection rules, the first overhaul since 1995 (European Commission, 2012). The new rules would apply to all companies providing services in Europe, and require Internet companies like Amazon, Facebook, Apple, Google, and others to obtain explicit consent from consumers about the use of their personal data, delete information at the user’s request (based on the “right to be forgotten”), and retain information only as long as absolutely necessary. In 2014 the European Union is considering significant changes in privacy policies by extending greater control to users of the Internet. While the privacy policies of United States firms are largely voluntary, in Europe privacy policies are mandated, and more consistent across jurisdictions. Among the changes being discussed are a requirement that firms inform users before collecting data, and every time they collect data, and how it will be used. Users would have to give consent to any data collection. Other proposals call for users to have a “right of access” to personal data, and the “right to be forgotten.” Working with the European Commission, the U.S. Department of Commerce ­developed a safe harbor framework for U.S. firms. A safe harbor is a private, self-regulating ­policy and enforcement mechanism that meets the objectives of government regulators and ­legislation but does not involve government regulation or enforcement. U.S. businesses would be allowed to use personal data from EU countries if they develop privacy protection policies that meet EU standards. Enforcement would occur in the United States using self-policing, regulation, and government enforcement of fair trade statutes. Internet Challenges to Privacy Internet technology has posed new challenges for the protection of individual privacy. Information sent over this vast network of networks may pass through many different ­computer systems before it reaches its final destination. Each of these systems is capable of monitoring, capturing, and storing communications that pass through it. Web sites track searches that have been conducted, the Web sites and Web pages ­visited, the online content a person has accessed, and what items that p ­ erson has inspected or purchased over the Web. This monitoring and ­tracking of Web site ­visitors occurs in the background without the visitor’s knowledge. It is ­conducted not just by individual Web sites but by advertising networks such as Microsoft Advertising, Yahoo, and Google’s DoubleClick that are capable of ­tracking personal browsing behavior across thousands of Web sites. Both Web site p ­ ublishers and the advertising industry defend tracking of individuals across the Web because doing so allows more relevant ads to be targeted to users, and it pays for the cost of publishing Web sites. In this sense, it’s like broadcast t­elevision: advertiser-supported content that is free to the user. The ­commercial demand for this personal 139 140 Part One Organizations, Management, and the Networked Enterprise i­nformation is virtually insatiable. However, these practices also impinge on individual privacy, as discussed in the Interactive Session on Technology. Cookies are small text files deposited on a computer hard drive when a user visits Web sites. Cookies identify the visitor’s Web browser software and track visits to the Web site. When the visitor returns to a site that has stored a cookie, the Web site software will search the visitor’s computer, find the cookie, and know what that person has done in the past. It may also update the cookie, depending on the activity during the visit. In this way, the site can customize its content for each visitor’s interests. For example, if you purchase a book on and return later from the same browser, the site will welcome you by name and recommend other books of interest based on your past purchases. DoubleClick, described earlier in this chapter, uses cookies to build its dossiers with details of online p ­ urchases and to examine the behavior of Web site visitors. Figure 4.3 illustrates how cookies work. Web sites using cookie technology cannot directly obtain visitors’ names and addresses. However, if a person has registered at a site, that information can be combined with cookie data to identify the visitor. Web site owners can also combine the data they have gathered from cookies and other Web site monitoring tools with personal data from other sources, such as offline data collected from surveys or paper catalog purchases, to develop very detailed profiles of their visitors. There are now even more subtle and surreptitious tools for surveillance of Internet users. So-called “super cookies” or Flash cookies cannot be easily deleted and can be installed whenever a person clicks on a Flash video. These so-called “Local Shared Object” files are used by Flash to play videos and are put on the user’s computer without their consent. Marketers use Web beacons as another tool to monitor online behavior. Web beacons, also called Web bugs (or simply “tracking files”), are tiny software programs that keep a record of users’ online clickstream and report this data back to whomever owns the tracking file invisibly embedded in e-mail messages and Web pages that are designed to monitor the behavior of the user visiting a Web site or sending e-mail. Web FIGURE 4.3 How Cookies Identify Web Visitors Cookies are written by a Web site on a visitor’s hard drive. When the visitor returns to that Web site, the Web server requests the ID number from the cookie and uses it to access the data stored by that server on that visitor. The Web site can then use these data to display personalized information. Chapter 4 Ethical and Social Issues in Information Systems 141 I n teract i v e Se s s i o n : T ec h n olo g y Big Data Gets Personal: Behavioral Targeting Ever get the feeling somebody is trailing you on the Web, watching your every click? Do you wonder why you start seeing display ads and pop-ups just after you’ve been searching the Web for a car, a dress, or cosmetic product? Well, you’re right: your behavior is being tracked, and you are being targeted on the Web as you move from site to site in order to expose you to certain “targeted” ads. It’s Big Data’s dark side. Individual Web sites and companies whose business is identifying and tracking Internet users for advertisers and marketers are collecting data on your every online move. Google, which handles more than 3.5 billion Web searches each day, knows more about you than your mother does. Many of the tracking tools gather incredibly personal information such as age, gender, race, income, marital status, health concerns (health topics you search on), TV shows and movies viewed, magazines and newspapers read, and books purchased. A $31 ­billion dollar online ad industry is driving this intense data collection. Facebook, which maintains detailed data on over 1 billion users, employs its Like button to follow users around the Web even if you log off. Its social networking site is one giant tracking system that remembers what you like, what your friends like, and whatever you reveal on your Wall. (See the chapter-ending case study.) Plus, Google’s social networking tool, knows about your friendships on Gmail, the places you go on maps, and how you spend your time on the more than two million ­websites in Google’s ad network. It is able to gather this information even though relatively few people use Plus for their social network. While tracking firms claim the information they gather is anonymous, this is true in name only. Scholars have shown that with just a few pieces of information, such as age, gender, zip code, and marital status, specific individuals can be easily identified. Moreover, tracking firms combine their online data with data they purchase from offline firms who track retail store purchases of virtually all Americans. Here, personal names and other identifiers are used. Use of real identities across the Web is going mainstream at a rapid clip. A Wall Street Journal examination of nearly 1,000 top Websites found that 75% now include code from social networks, such as Facebook’s “Like” or Twitter’s “Tweet” buttons. Such code can match people’s identities with their ­Web-browsing activities on an unprecedented scale and can even track a user’s arrival on a page if the button is never clicked. In separate research, the Journal examined what happens when people logged in to roughly 70 popular Websites that request a login and found that more than a quarter of the time, the sites passed along a user’s real name, email address or other personal details to third-party companies. Online advertising titans like Google, Microsoft, and Yahoo are all looking for ways to monetize their huge collections of online behavioral data. While search engine marketing is arguably the most ­effective form of advertising in history, untargeted banner display ad marketing is highly inefficient because it displays ads to everyone regardless of their interests. As a result, these firms cannot charge much for display ads. However, by tracking the online movements of 245 million U.S. Internet users, they can develop a very clear picture of who you are, and use that information to show you ads that might be of interest to you. This would make the marketing process more efficient, and more profitable for all the parties involved. You’re also being tracked closely when you use your mobile phone to access the Internet, visit your Facebook page, get Twitter feeds, watch video, and listen to music. The mobile Web is working hard to keep track of your whereabouts, locations, habits, and friends in the hope of selling you even more products and services. New technologies found on smartphones can identify where you are located within a few yards. Performing routine actions using your smart phone makes it possible to locate you throughout the day, to report this information to corporate databases, retain and analyze the information, and then sell it to advertisers. Most of the popular apps report your location. Law enforcement agencies certainly have an interest in knowing the whereabouts of criminals and suspects. There are, of course, many times when you would like to report your location either automatically or on your command. If you were injured, for instance, you might like your cell phone to be able to automatically report your location to authorities, or, if you were in a restaurant, you might want to notify your friends where you are and what you 142 Part One Organizations, Management, and the Networked Enterprise are doing. But what about occasions when you don’t want anyone to know where you are, least of all advertisers and marketers? Location data gathered from cell phones has extraordinary commercial value because advertising companies can send you highly targeted advertisements, coupons, and flash bargains, based on where you are located. This technology is the foundation for many location-based services, which include smartphone maps and charts, shopping apps, and social apps that you can use to let your friends know where you are and what you are doing. Revenues from the global location-based services market are projected to reach reach $10.3 billion in 2015, according to Gartner. Both Apple’s iPhone and Google’s Android phones collect personal, private location data, and both firms are building massive databases that can ­pinpoint your location. Advertising firms pay Apple and Google for that information and for distributing their mobile ads, and they are becoming increasingly important sources of revenue. In 2012, Google earned $2.2 billion from its mobile ads. Smartphone apps that provide location-based services are also sources of personal, private location information based on the smartphone GPS capability. Expect those eyes to follow your movements even more in the future as behavioral targeting becomes even more precise. New software is being developed to help advertisers track users across devices by establishing cross-screen identities. That means that companies will be able to serve ads to your mobile phone based on what they learned about you from surfing the Web on your PC. Sources: Claire Cain Miller, “The Plus in Google Plus? It’s Mostly for Google,” New York Times, February 14, 2014; Elizabeth Dwoskin, “Internet Users Tap Tech Tools That Protect Them From Prying Eyes,” Wall Street Journal, March 23, 2014; Claire Cain Miller and Somni Sengupta, “Selling Secrets of Phone Users to Advertisers,” New York Times, October 5, 2013; Natasha Singer, “Their Apps Track You, Will Congress Track Them?” The New York Times, January 5, 2013; Spencer E. Ante, “Online Ads Can Now Follow Your Home,” The Wall Street Journal, April 29, 2013; Jennifer Valentino-Devries and Jeremy Singer, “They Know What You’re Shopping For,” The Wall Street Journal, December 7 , 2013. ca s e s t u dy q u e s t i o n s 1. Why is behavioral tracking such an important ethical dilemma today? Identify the stakeholders and interest groups in favor of and opposed to behavioral tracking. 2. How do businesses benefit from behavioral tracking? Do people benefit? Explain your answer. 3. What would happen if there were no behavioral tracking on the Internet? beacons are placed on popular Web sites by third-party firms who pay the Web sites a fee for access to their audience. So how common is Web tracking? In a path-breaking series of articles in the Wall Street Journal in 2010 and 2011, researchers examined the tracking files on 50 of the most popular U.S Web sites. What they found revealed a very widespread surveillance system. On the 50 sites, they discovered 3,180 tracking files installed on visitor computers. Only one site, Wikipedia, had no tracking files. Some popular sites such as Dictionary. com, MSN, and Comcast, installed more than 100 tracking files! Two-thirds of the tracking files came from 131 companies whose primary business is identifying and tracking Internet users to create consumer profiles that can be sold to advertising firms looking for specific types of customers. The biggest trackers were Google, Microsoft, and Quantcast, all of whom are in the business of selling ads to advertising firms and marketers. A follow-up study in 2012 found the situation had worsened: tracking on the 50 most popular sites had risen nearly five fold! The cause: growth of online ad auctions where advertisers buy the data about users’ Web browsing behavior. Other spyware can secretly install itself on an Internet user’s computer by piggybacking on larger applications. Once installed, the spyware calls out to Chapter 4 Ethical and Social Issues in Information Systems Web sites to send banner ads and other unsolicited material to the user, and it can report the user’s movements on the Internet to other computers. More information is available about intrusive software in Chapter 8. Nearly 80 percent of global Internet users use Google Search and other Google ­services, making Google the world’s largest collector of online user data. Whatever Google does with its data has an enormous impact on online privacy. Most experts believe that Google possesses the largest collection of personal information in the world—more data on more people than any ­government agency. The nearest competitor is Facebook. After Google acquired the advertising network DoubleClick in 2007, Google has been using behavioral targeting to help it display more relevant ads based on users’ search a­ ctivities and to target individuals as they move from one site to another in order to show them display or banner ads. Google allows ­tracking software on its search pages, and using DoubleClick, it is able to track users across the Internet. One of its programs enables advertisers to target ads based on the search histories of Google users, along with any other information the user ­submits to Google such as age, demographics, region, and other Web ­activities (such as blogging). Google’s AdSense program enables Google to help advertisers select ­keywords and design ads for various market ­segments based on search histories, such as helping a clothing Web site create and test ads ­targeted at teenage females. A recent study found that 88 percent of 400,000 Web sites had at least one Google tracking bug. Google has also been scanning the contents of messages received by users of its free Web-based e-mail service called Gmail. Ads that users see when they read their e-mail are related to the subjects of these messages. Profiles are developed on individual users based on the content in their e-mail. Google now displays targeted ads on YouTube and on Google mobile applications, and its DoubleClick ad network serves up targeted banner ads. The United States has allowed businesses to gather transaction information generated in the marketplace and then use that information for other marketing purposes without obtaining the informed consent of the individual whose information is being used. An opt-out model of informed consent permits the collection of personal information until the consumer specifically requests that the data not be collected. Privacy advocates would like to see wider use of an opt-in model of informed consent in which a business is prohibited from ­collecting any personal information unless the consumer specifically takes action to approve information collection and use. Here, the default option is no collection of user information. The online industry has preferred self-regulation to privacy legislation for ­protecting consumers. The online advertising industry formed the Online Privacy Alliance to e ­ ncourage self-regulation to develop a set of privacy guidelines for its members. The group promotes the use of online seals, such as that of TRUSTe, certifying Web sites adhering to certain privacy principles. Members of the advertising network industry, including Google’s DoubleClick, have created an additional industry association called the Network Advertising Initiative (NAI) to develop its own privacy policies to help consumers opt out of advertising network programs and provide consumers redress from abuses. Individual firms like Microsoft, Mozilla Foundation, Yahoo, and Google have recently adopted policies on their own in an effort to address public c­ oncern about tracking people online. Microsoft’s Internet Explorer 10 Web browser was shipped with the opt-out option as the default in 2013. Other browsers have opt out options but users need to turn them on, and most users fail to do this. AOL established an ­opt-out policy that allows users of its site to not be tracked. Yahoo 143 144 Part One Organizations, Management, and the Networked Enterprise follows NAI guidelines and also allows opt-out for tracking and Web ­beacons (Web bugs). Google has reduced retention time for tracking data. In general, most Internet businesses do little to protect the privacy of their customers, and consumers do not do as much as they should to p ­ rotect ­themselves. For commercial Web sites that depend on advertising to ­support themselves, most revenue derives from selling customer information. Of the companies that do post privacy polices on their Web sites, about half do not monitor their sites to ensure they adhere to these policies. The vast ­majority of online customers claim they are concerned about online privacy, but less than half read the privacy statements on Web sites. In general, Web site ­privacy ­policies require a law degree to understand and are ambiguous about key terms (Laudon and Traver, 2015). In 2014 what firms like Facebook and Google call a “Privacy Policy” is in fact a “Data Use Policy.” The concept of ­privacy is associated with consumer rights, which firms do not wish to ­recognize. A Data Use Policy simply tells customers how the information will be used without any mention of rights. In one of the more insightful studies of consumer attitudes towards Internet privacy, a group of Berkeley students conducted surveys of online users, and of complaints filed with the FTC involving privacy issues. Here are some of their results: people feel they have no control over the information collected about them, and they don’t know who to complain to. Web sites collect all this information, but do not let users have access, the Web site policies are unclear, and they share data with “affiliates” but never identify who the affiliates are and how many there are. Web bug trackers are ubiquitous and users are not informed of trackers on the pages they visit. The results of this study and others ­suggest that consumers are not saying “Take my privacy, I don’t care, send me the service for free.” They are saying “We want access to the information, we want some controls on what can be collected, what is done with the information, the ability to opt out of the entire tracking enterprise, and some clarity on what the policies really are, and we don’t want those policies changed without our participation and permission.” (The full report is available at Te c h n i c a l S o l u t i o n s In addition to legislation, there are a few technologies that can protect user privacy d ­ uring i­nteractions with Web sites. Many of these tools are used for encrypting e-mail, for m ­ aking e-mail or surfing activities appear anonymous, for preventing client computers from ­accepting cookies, or for detecting and eliminating spyware. For the most part, technical solutions have failed to ­protect users from being tracked as they move from one site to another. Because of growing public criticism of behavioral tracking, targeting of ads, and the failure of industry to self-regulate, attention has shifted to browsers. Many browsers have Do Not Track options. For users who have selected the Do Not Track browser option, their browser will send a request to Web sites requesting the user’s behavior not be tracked. But Web sites are not obligated to honor their visitors’ requests not to be tracked. There is no online advertising industry agreement on how to respond to Do Not Track requests, and ­currently no legislation requiring Web sites to stop tracking. Property Rights: Intellectual Property Contemporary information systems have severely challenged existing laws and social ­practices that protect private intellectual property. Intellectual property is considered to be intangible property created by individuals Chapter 4 Ethical and Social Issues in Information Systems or ­corporations. Information technology has made it difficult to protect ­intellectual property because computerized information can be so easily copied or distributed on networks. Intellectual property is subject to a variety of ­protections under three different legal traditions: trade secrets, copyright, and patent law. Tr a d e S e c r e t s Any intellectual work product—a formula, device, pattern, or compilation of data—used for a business purpose can be classified as a trade secret, provided it is not based on i­nformation in the public domain. Protections for trade secrets vary from state to state. In general, trade secret laws grant a monopoly on the ideas behind a work product, but it can be a very tenuous monopoly. Software that contains novel or unique elements, procedures, or compilations can be included as a trade secret. Trade secret law protects the actual ideas in a work product, not only their manifestation. To make this claim, the creator or owner must take care to bind employees and customers with ­nondisclosure agreements and to prevent the secret from f­alling into the public domain. The limitation of trade secret protection is that, although virtually all ­software programs of any complexity contain unique elements of some sort, it is difficult to prevent the ideas in the work from falling into the public domain when the software is widely distributed. Copyright Copyright is a statutory grant that protects creators of intellectual property from having their work copied by others for any purpose during the life of the author plus an additional 70 years after the author’s death. For corporate-owned works, copyright protection lasts for 95 years after their initial creation. Congress has extended copyright protection to books, periodicals, lectures, ­dramas, musical compositions, maps, drawings, artwork of any kind, and motion pictures. The intent behind copyright laws has been to encourage c­ reativity and authorship by ensuring that creative people receive the financial and other benefits of their work. Most industrial nations have their own c­ opyright laws, and there are several ­international conventions and bilateral agreements through which nations coordinate and enforce their laws. In the mid-1960s, the Copyright Office began registering software programs, and in 1980, Congress passed the Computer Software Copyright Act, which clearly provides p ­ rotection for software program code and for copies of the ­original sold in commerce, and sets forth the rights of the purchaser to use the software while the creator retains legal title. Copyright protects against copying of entire programs or their parts. Damages and relief are readily obtained for infringement. The drawback to copyright protection is that the underlying ideas behind a work are not p ­ rotected, only their manifestation in a work. A competitor can use your ­software, understand how it works, and build new software that follows the same concepts without infringing on a copyright. “Look and feel” copyright infringement lawsuits are precisely about the ­distinction between an idea and its expression. For instance, in the early 1990s, Apple Computer sued Microsoft Corporation and Hewlett-Packard for infringement of the expression of Apple’s Macintosh interface, claiming that the defendants copied the expression of overlapping ­windows. The defendants ­countered that the idea of overlapping windows can be expressed only in a s­ ingle way 145 146 Part One Organizations, Management, and the Networked Enterprise and, therefore, was not protectable under the merger d ­ octrine of ­copyright law. When ideas and their expression merge, the expression cannot be copyrighted. In general, courts appear to be following the reasoning of a 1989 case—Brown Bag Software v. Symantec Corp—in which the court dissected the elements of software alleged to be infringing. The court found that similar concept, ­function, general functional features (e.g., drop-down menus), and colors are not protectable by copyright law (Brown Bag Software v. Symantec Corp., 1992). Patents A patent grants the owner an exclusive monopoly on the ideas behind an invention for 20 years. The congressional intent behind patent law was to ensure that inventors of new machines, devices, or methods receive the full financial and other rewards of their labor and yet make widespread use of the invention ­possible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. The granting of a patent is determined by the United States Patent and Trademark Office and relies on court rulings. The key concepts in patent law are originality, novelty, and invention. The Patent Office did not accept applications for software patents routinely until a 1981 Supreme Court d ­ ecision that held that computer programs could be a part of a patentable process. Since that time, hundreds of patents have been granted and thousands await consideration. The strength of patent protection is that it grants a monopoly on the underlying concepts and ideas of software. The difficulty is passing stringent criteria of nonobviousness (e.g., the work must reflect some special understanding and contribution), originality, and novelty, as well as years of waiting to receive ­protection. In what some call the patent trial of the century, in 2011, Apple sued Samsung for violating its patents for iPhones, iPads, and iPods. On August 24, 2012, a California jury in federal district court delivered a decisive v ­ ictory to Apple and a stunning defeat to Samsung. The jury awarded Apple $1 billion in ­damages. The decision established criteria for determining just how close a competitor can come to an industry-leading and standard-setting product like Apple’s iPhone before it violates the design and utility patents of the leading firm. The same court ruled that Samsung could not sell its new tablet computer (Galaxy 10.1) in the United States. In a later patent dispute, Samsung won an infringement case against Apple. In June 2013, the United States International Trade Commission issued a ban for a handful of older iPhone and iPad devices because they violated Samsun patents from years ago. In 2014 Apple sued Samsung again, claiming infringement of five patents. The patents cover ­hardware and software techniques for handling photos, videos, and lists used on the popular Galaxy 5. Apple is seeking $2 billion in damages. To make matters more complicated, Apple has been one of Samsung’s ­largest customers for flash memory processors, graphic chips, solid-state drives and ­display parts that are used in Apple’s iPhones, iPads, iPod Touch devices, and MacBooks. The Samsung and Apple patent cases are indicative of the ­complex relationships among the leading computer firms. Challenges to Intellectual Property Rights Contemporary information technologies, especially software, pose severe ­challenges to existing intellectual property regimes and, therefore, create ­significant ethical, social, and political issues. Digital media differ from books, periodicals, and other media in terms of ease of replication; ease of transmission; Chapter 4 Ethical and Social Issues in Information Systems ease of alteration; difficulty in classifying a ­software work as a program, book, or even music; compactness—making theft easy; and difficulties in establishing uniqueness. The proliferation of electronic networks, including the Internet, has made it even more difficult to protect intellectual property. Before widespread use of ­networks, copies of ­software, books, magazine articles, or films had to be stored on physical media, such as paper, computer disks, or videotape, creating some hurdles to distribution. Using networks, information can be more widely reproduced and distributed. The Ninth Annual Global Software Piracy Study ­conducted by International Data Corporation and the Business Software Alliance reported that the rate of global software piracy climbed to 42 percent in 2013, representing $73 billion in global losses from software piracy. Worldwide, for every $100 worth of legitimate software sold that year, an additional $75 worth was obtained i­ llegally (Business Software Alliance, 2014). The Internet was designed to transmit information freely around the world, including copyrighted information. With the World Wide Web in particular, you can easily copy and distribute virtually anything to thousands and even ­millions of people around the world, even if they are using different types of computer ­systems. Information can be illicitly ­copied from one place and ­distributed through other systems and networks even though these parties do not willingly participate in the infringement. Individuals have been illegally copying and distributing digitized music files on the Internet for several decades. File-sharing services such as Napster, and later Grokster, Kazaa, and Morpheus, Megaupload, The Pirate Bay, sprung up to help users locate and swap digital music and video files, including those ­protected by copyright. Illegal file sharing became so widespread that it threatened the viability of the music recording industry and, at one point, consumed 20 ­percent of Internet bandwidth. The recording industry won several legal battles for shutting these services down, but it has not been able to halt illegal file sharing entirely. The motion picture and cable television industries are waging similar battles, as described in the chapter-opening case study. Several European nations have worked with U.S. authorities to shut down illegal sharing sites, with mixed results. In France, illegal downloaders can lose access to the Internet for a year or more. As legitimate online music stores like the iTunes Store expanded, and more recently as Internet radio services like Pandora expanded, some forms of ­illegal file sharing have declined. Technology has radically altered the prospects for ­intellectual property protection from theft, at least for music, videos, and television shows (less so for software). The Apple iTunes Store legitimated paying for music and entertainment, and created a closed environment where music and videos could not be easily copied and widely distributed unless played on Apple devices. Amazon’s Kindle also p ­ rotects the rights of publishers and writers because its books cannot be copied to the Internet and distributed. Streaming of Internet radio, on services such as Pandora and Spotify, and Hollywood movies (at sites such as Hulu and Netflix) also inhibits piracy because the streams cannot be easily recorded on separate devices and videos can be downloaded so easily. Moreover, the large Web distributors like Apple, Google, and Amazon do not want to encourage piracy in music or videos simply because they need these properties to earn revenue. The Digital Millennium Copyright Act (DMCA) of 1998 also p rovides some c­opyright protection. The DMCA implemented a World ­ Intellectual Property Organization Treaty that makes it illegal to circumvent technology-based protections of copyrighted materials. Internet service 147 148 Part One Organizations, Management, and the Networked Enterprise providers (ISPs) are required to take down sites of copyright ­infringers they are hosting once the ISPs are notified of the problem. Microsoft and other major software and information content firms are represented by the Software and Information Industry Association (SIIA), which lobbies for new laws and enforcement of existing laws to protect intellectual property around the world. The SIIA runs an antipiracy hotline for ­individuals to report piracy activities, offers educational programs to help organizations combat ­software piracy, and has published guidelines for employee use of software. 4.4 How have information systems affected laws for establishing accountability, liability, and the quality of everyday life? Along with privacy and property laws, new information technologies are ­challenging e ­ xisting liability laws and social practices for holding individuals and institutions a­ ccountable. If a person is injured by a machine controlled, in part, by software, who should be held ­accountable and, therefore, held liable? Should a social network site like Facebook or Twitter be held liable and accountable for the posting of pornographic material or racial insults, or should they be held harmless against any liability for what users post (as is true of common carriers, such as the telephone system)? What about the Internet? If you outsource your information processing, to the Cloud, and the Cloud provider fails to provide adequate service, what can you do? Cloud providers often claim the software you are using is the problem, not the Cloud servers. Some real-world examples may shed light on these questions. Computer-Related Liability Problems In the final days of the 2013 holiday shopping season, Target, one of the largest U.S. retailers, confirmed publicly that credit and debit card information for 40 million of its customers had been compromised. A few weeks later, the company said additional personal information, like email and mailing addresses, from some 70 to 110 million customers, had been exposed as well. In the meantime, security analysts noticed a huge spike in the number of credit card numbers for sale on hacker Web sites. Target’s sales took an immediate hit from which it has still not recovered. The company claims that east European hackers entered their point of sale systems by using brute force techniques to crack their security. Federal officials believe that six other large retailers also were hacked by the same group, including Nieman Marcus. Later in 2014, Target’s senior technology officer resigned from Target. Target says it has spent over $60 million to strengthen its systems. It has paid an even greater price through the loss of sales and trust. (You can find out more about Target’s hacking problems in the Chapter 8 Interactive Session on Management.) Who is liable for any economic harm caused to individuals or businesses that had their credit cards compromised? Is Target responisble for allowing the breach to occur despite efforts it did make to secure the information? Or is this just a cost of doing business in a credit card world where customers and businesses have insurance policies to protect them against losses? Customers, for instance, have a maximum liability of $50 for credit card theft under federal banking law. Chapter 4 Ethical and Social Issues in Information Systems This case reveals the difficulties faced by information systems executives who u ­ ltimately are responsible for any harm done by systems they have selected and installed. Beyond IT managers, insofar as computer ­software is part of a machine, and the machine injures someone ­p hysically or ­economically, the producer of the software and the operator can be held liable for damages. Insofar as the software acts like a book, storing and ­displaying information, courts have been reluctant to hold authors, p ­ ublishers, and booksellers liable for contents (the exception being instances of fraud or defamation), and hence courts have been wary of holding software authors liable for software. In general, it is very difficult (if not impossible) to hold software producers liable for their software products that are considered to be like books, regardless of the physical or economic harm that results. Historically, print publishers of books and periodicals have not been held liable because of fears that liability claims would interfere with First Amendment rights guaranteeing freedom of expression. And the kind of harm caused by software failures is rarely fatal and typically inconveniences users but does not physically harm them (the exception being medical devices). What about software as a service? ATM machines are a service provided to bank ­customers. Should this service fail, customers will be inconvenienced and perhaps harmed economically if they cannot access their funds in a timely manner. Should l­iability p ­ rotections be extended to software publishers and operators of defective financial, ­accounting, ­simulation, or marketing systems? Software is very different from books. Software users may develop expectations of infallibility about software; software is less easily inspected than a book, and it is more difficult to compare with other software products for quality; ­software claims to perform a task rather than describe a task, as a book does; and people come to depend on services essentially based on software. Given the centrality of software to everyday life, the chances are excellent that liability law will extend its reach to include software even when the software merely ­provides an information service. Telephone systems have not been held liable for the messages transmitted because they are regulated common carriers. In return for their right to provide telephone service, they must provide access to all, at reasonable rates, and achieve acceptable reliability. But ­broadcasters and cable television stations are subject to a wide variety of federal and local constraints on content and facilities. In the United States, with few exceptions, Web sites are not held liable for content posted on their sites regardless if it was placed their by the Web site owners or users. System Quality: Data Quality and System Errors White Christmas turned into a black out for millions of Netflix customers, and social network users, on December 25th, 2012. The blackout was caused by the failure of Amazon’s cloud computing service, which provides storage and computing power for all kinds of Web sites and services, including Netflix. The loss of service lasted for a day. Amazon blamed it on “Elastic Load Balancing,” a software program that balances the loads on all its cloud servers to prevent overload. Amazon’s cloud computing services have had several subsequent outages, although not as long-lasting as the Christmas Eve outage. Outages at cloud computing services are rare, but are recurring. These outages have 149 150 Part One Organizations, Management, and the Networked Enterprise called into question the reliability and quality of cloud services. Are these ­outages acceptable? The debate over liability and accountability for unintentional consequences of system use raises a related but independent moral dimension: What is an acceptable, technologically feasible level of system quality? At what point should ­system managers say, “Stop ­testing, we’ve done all we can to perfect this ­software. Ship it!” Individuals and organizations may be held responsible for avoidable and foreseeable consequences, which they have a duty to ­perceive and correct. The gray area is that some system errors are ­foreseeable and ­correctable only at very great expense, an expense so great that pursuing this level of p ­ erfection is not feasible economically—no one could afford the product. For example, although software companies try to debug their products before releasing them to the marketplace, they knowingly ship buggy products because the time and cost of fixing all minor errors would prevent these ­products from ever being released. What if the product was not offered on the marketplace, would social welfare as a whole not advance and perhaps even decline? Carrying this further, just what is the responsibility of a producer of computer services—should it withdraw the product that can never be perfect, warn the user, or forget about the risk (let the buyer beware)? Three principal sources of poor system performance are (1) software bugs and errors, (2) hardware or facility failures caused by natural or other causes, and (3) poor input data quality. A Chapter 8 Learning Track discusses why zero defects in software code of any complexity cannot be achieved and why the seriousness of remaining bugs cannot be ­estimated. Hence, there is a technological barrier to perfect software, and users must be aware of the potential for catastrophic failure. The software industry has not yet arrived at testing ­standards for producing software of acceptable but im­perfect performance. Although software bugs and facility catastrophes are likely to be widely reported in the press, by far the most common source of business system ­failure is data quality. Few ­companies routinely measure the quality of their data, but individual organizations report data error rates ranging from 0.5 to 30 percent. Quality of Life: Equity, Access, and Boundaries The negative social costs of introducing information technologies and systems are ­beginning to mount along with the power of the technology. Many of these negative social consequences are not violations of individual rights or property crimes. Nevertheless, these negative ­consequences can be extremely harmful to individuals, societies, and ­political ­institutions. Computers and information technologies potentially can destroy valuable e­ lements of our culture and ­society even while they bring us b ­ enefits. If there is a balance of good and bad consequences of using information s­ ystems, who do we hold responsible for the bad ­consequences? Next, we briefly examine some of the negative social consequences of systems, considering individual, social, and political responses. B a l a n c i n g P o w e r : C e n t e r Ve r s u s P e r i p h e r y An early fear of the computer age was that huge, centralized mainframe ­computers would centralize power in the nation’s capital, resulting in a Big Brother society, as was ­suggested in George Orwell’s novel 1984. The shift toward highly decentralized client-server computing, c­ oupled with an ideology of empowerment of Twitter and social media users, and the ­decentralization Chapter 4 Ethical and Social Issues in Information Systems of ­decision making to lower organizational levels, up until recently reduced the fears of power ­centralization in ­government institutions. Yet much of the empowerment described in popular business m ­ agazines is trivial. Lower-level employees may be empowered to make minor decisions, but the key policy decisions may be as centralized as in the past. At the same time, corporate Internet behemoths like Google, Apple, Yahoo, Amazon, and Microsoft have come to ­dominate the collection and analysis of personal private information of all citizens. Since the terrorist attacks against the United States on September 11, 2001, the federal government has greatly expanded its use of this private sector information, as well as other forms of digital communication, in pursuit of national security. In this sense, power has become more centralized into the hands of a few private oligopolies and large government agencies. Rapidity of Change: Reduced Response Time to Competition Information systems have helped to create much more efficient national and international markets. Today’s more efficient global marketplace has reduced the normal social buffers that permitted businesses many years to adjust to competition. Time-based competition has an ugly side: The business you work for may not have enough time to respond to global ­competitors and may be wiped out in a year, along with your job. We stand the risk of developing a “justin-time society” with “just-in-time jobs” and “just-in-time” workplaces, families, and vacations. M a i n t a i n i n g B o u n d a r i e s : Fa m i l y, Wo r k , a n d L e i s u r e Parts of this book were produced on trains and planes, as well as on vacations and ­during what otherwise might have been “family” time. The danger to ubiquitous computing, ­telecommuting, nomad computing, mobile computing, and the “do anything anywhere” computing ­environment is that it is actually coming true. The t­raditional boundaries that separate work from family and just plain leisure have been weakened. Although authors have traditionally worked just about anywhere, the advent of information s­ ystems, coupled with the growth of knowledge-work occupations, means that more and more people are working when ­traditionally they would have been playing or communicating with family and friends. The work umbrella now extends far beyond the eight-hour day into commuting time, vacation time, and leisure time. The explosive growth and use of smart phones has only heightened the sense of many employees that they are never “away from work.” Even leisure time spent on the computer threatens these close social ­relationships. Extensive Internet and cell phone use, even for entertainment or recreational purposes, takes people away from their family and friends. Among middle school and teenage children, it can lead to harmful anti-social behavior, such as the recent upsurge in cyberbullying. Weakening these institutions poses clear-cut risks. Family and friends historically have provided powerful support mechanisms for individuals, and they act as balance points in a society by preserving private life, providing a place for people to collect their thoughts, allowing people to think in ways contrary to their employer, and dream. Dependence and Vulnerability Today, our businesses, governments, schools, and private associations, such as churches, are incredibly dependent on information systems and 151 152 Part One Organizations, Management, and the Networked Enterprise are, ­therefore, highly vulnerable if these systems fail. Secondary schools, for instance, increasingly use and rely on educational software. Test results are often stored off campus. If these systems were to shut down, there is no backup educational structure or content that can make up for the loss of the system. With systems now as ubiquitous as the telephone system, it is ­startling to remember that there are no regulatory or standard-setting forces in place that are similar to telephone, electrical, radio, television, or other public utility technologies. The absence of standards and the criticality of some system applications will probably call forth demands for national standards and perhaps regulatory oversight. C o m p u t e r C r i m e a n d A bu s e New technologies, including computers, create new opportunities for committing crime by creating new valuable items to steal, new ways to steal them, and new ways to harm o ­ thers. Computer crime is the commission of illegal acts through the use of a computer or against a computer system. Computers or computer s­ ystems can be the object of the crime (­destroying a company’s computer center or a company’s computer files), as well as the instrument of a crime (stealing computer lists by illegally gaining access to a computer system using a home computer). Simply accessing a computer system without authorization or with intent to do harm, even by accident, is now a federal crime. How common is ­computer crime? One source of information is the Internet Crime Complaint Center (“IC3”), a partnership between the National White Collar Crime Center and the Federal Bureau of Investigation. The IC3 data is useful for gauging the types of e-commerce crimes most likely to be reported by consumers. In 2012, the IC3 processed about 290,000 Internet crime complaints, the second-highest number in its 11-year history. Over half the complainants reported a financial loss, with the total reported amount at $525 million. The average amount of loss for those who reported a financial loss was more Although some people enjoy the convenience of working at home, the “do anything anywhere” computing ­environment can blur the traditional boundaries between work and family time. © Monkey Business Images/Shutterstock Chapter 4 Ethical and Social Issues in Information Systems than $4,573. The most common complaints were for scams involving the FBI, ­identity theft, and advance fee fraud (National White Collar Crime Center and the Federal Bureau of Investigation, 2013). The Computer Security Institute’s annual Computer Crime and Security Survey is another source of information. In 2011, its most recent report, the survey was based on the responses of 351 security practitioners in U.S. corporations, government agencies, financial institutions, medical institutions, and universities. The survey reported that 46 percent of responding organizations experienced a computer security incident within the past year. The most common type of attack experienced was a malware infection (67%), followed by phishing fraud (39%), laptop and mobile hardware theft (34%), attacks by botnets (29%), and insider abuse (25%). The true cost of all computer crime is ­estimated to be in the billions of dollars. On average, the cost to a firm of a single computer crime averages about $8.9 million (Ponemon Institute, 2012). Computer abuse is the commission of acts involving a computer that may not be ­illegal but that are considered unethical. The popularity of the Internet and e-mail has turned one form of computer abuse—spamming—into a serious problem for both individuals and ­businesses. Originally, Spam is junk e-mail sent by an organization or individual to a mass audience of Internet users who have expressed no interest in the product or service being marketed. But as cell phone use has mushroomed, spam was certain to follow. Identity and financial theft cyber criminals are turning their attention to smart phones as users check mail, do online banking, pay bills, and reveal personal information. Cell phone spam usually comes in the form of SMS text messages, but increasingly users are receiving spam in their Facebook Newsfeed and messaging service as well. Verizon estimates that it blocks about 200 million spam messages a month using its filters and security checks. Spammers tend to ­market pornography, fraudulent deals and services, outright scams, and other products not widely approved in most civilized societies. Some countries have passed laws to outlaw ­spamming or to restrict its use. In the United States, it is still legal if it does not involve fraud and the sender and subject of the e-mail are properly identified. Spamming has mushroomed because it costs only a few cents to send ­thousands of ­messages advertising wares to Internet users. The percentage of all e-mail that is spam was estimated at around 66 percent in 2014 (Symantec, 2014). Most spam originates from bot networks, which consist of thousands of ­captured PCs that can initiate and relay spam ­messages. Spam volume has declined s­ omewhat since authorities took down the Rustock botnet in 2011. Spam is seasonally cyclical, and varies monthly due to the impact of new ­technologies (both supportive and discouraging of spammers), new prosecutions, and s­ easonal demand for p ­ roducts and services. Spam costs for b ­ usinesses are very high (estimated at over $50 billion per year) because of the ­computing and ­network resources consumed by billions of unwanted e-mail messages and the time required to deal with them. Internet service providers and individuals can combat spam by using spam filtering software to block suspicious e-mail before it enters a recipient’s e-mail inbox. However, spam filters may block legitimate messages. Spammers know how to skirt around f­ilters by continually changing their e-mail accounts, by incorporating spam messages in images, by embedding spam in e-mail attachments and electronic greeting cards, and by using other people’s computers that have been hijacked by botnets (see Chapter 8). Many spam ­messages are sent from one country while another country hosts the spam Web site. 153 154 Part One Organizations, Management, and the Networked Enterprise Spamming is more tightly regulated in Europe than in the United States. In 2002, the European Parliament passed a ban on unsolicited commercial ­messaging. Electronic m ­ arketing can be targeted only to people who have given prior consent. The U.S. CAN-SPAM Act of 2003, which went into effect in 2004, does not ­outlaw spamming but does ban deceptive e-mail practices by requiring commercial e-mail ­messages to display accurate subject lines, identify the true senders, and offer recipients an easy way to remove their names from e-mail lists. It also prohibits the use of fake return addresses. A few people have been prosecuted under the law, but it has had a negligible impact on spamming in large part because of the Internet’s ­exceptionally poor security and the use of offshore servers and botnets. In 2008, Robert Soloway, the so-called Seattle “Spam King,” was sentenced to 47 months in prison for sending over 90 ­million spam ­messages in just three months off two servers. In 2011, the socalled Facebook “Spam King,” Sanford Wallace, was indicted for sending over 27 million spam messages to Facebook users. He is facing a 40-year sentence because of prior ­spamming convictions. In 2014 most large scale spamming has moved offshore to Russia and Eastern Europe where hackers control global botnets capable of generating billions of spam messages. The largest spam network in 2013 was the Russian network Festi based in St. Petersburg. Festi is best known as the spam generator behind the global Viagra-spam industry which stretches from Russia to Indian pharmaceutical firms selling counterfeit Viagra. The spam industry in Russia generates an estimated $60 million for criminal groups (Kramer, 2013). E m p l o y m e n t : Tr i c k l e - D o w n Te c h n o l o g y a n d Reengineering Job Loss Reengineering work is typically hailed in the information systems community as a major benefit of new information technology. It is much less frequently noted that ­redesigning ­business processes has caused millions of mid-level factory ­managers, and clerical workers to lose their jobs. One economist has raised the possibility that we will create a society run by a small “high tech elite of corporate professionals . . . in a nation of the permanently u ­ nemployed” (Rifkin, 1993). In 2011, some economists have sounded new alarms about information and computer technology threatening middle-class, white-collar jobs (in ­addition to blue-­collar factory jobs). Erik Brynjolfsson and Andrew P. McAfee argue that the pace of automation has picked up in recent years because of a combination of technologies including ­robotics, numerically controlled machines, computerized inventory control, pattern recognition, voice recognition, and online commerce. One result is that machines can now do a great many jobs heretofore reserved for humans including tech support, call center work, X-ray examiners, and even legal document review (Brynjolfsson and McAfee, 2011). These views contrast with earlier assessments by economists that both labor and capital would receive stable shares of income, and that new technologies created as many or more new jobs as they destroyed old ones. But there is no guarantee this will happen in the future, and the income wealth share of labor may continue to fall relative to capital, resulting in a loss of high paying jobs and further declines in wages. Other economists are much more sanguine about the potential job losses. They believe relieving bright, educated workers from reengineered jobs will result in these workers moving to better jobs in fast-growth industries. Missing from this equation are unskilled, blue-collar workers and older, Chapter 4 Ethical and Social Issues in Information Systems less well-educated middle managers. It is not clear that these groups can be retrained easily for high-quality (high-paying) jobs. Equity and Access: Increasing Racial and Social Class Cleavages Does everyone have an equal opportunity to participate in the digital age? Will the social, economic, and cultural gaps that exist in the United States and other societies be reduced by information systems technology? Or will the cleavages be increased, permitting the better off to become even more better off relative to others? These questions have not yet been fully answered because the impact of ­systems ­technology on various groups in society has not been thoroughly ­studied. What is known is that information, knowledge, computers, and access to these resources through ­educational institutions and public libraries are inequitably distributed along ethnic and social class lines, as are many other information resources. Several studies have found that poor and minority groups in the United States are less likely to have computers or online Internet access even though computer ownership and Internet access have soared in the past five years. Although the gap is narrowing, higher-income families in each ethnic group are still more likely to have home computers and Internet access than lower-income families in the same group. A similar digital divide exists in U.S. schools, with schools in high-poverty areas less likely to have computers, high-quality educational technology ­programs, or Internet access availability for their students. Left uncorrected, the digital divide could lead to a society of information haves, computer l­ iterate and skilled, versus a large group of information ­have-nots, computer illiterate and unskilled. Public interest groups want to narrow this ­digital divide by ­making digital information services—including the Internet—available to ­virtually everyone, just as basic telephone service is now. H e a l t h R i s k s : RSI , C VS , a n d Te c h n o s t r e s s A common occupational disease today is repetitive stress injury (RSI). RSI occurs when muscle groups are forced through repetitive actions often with high-impact loads (such as tennis) or tens of thousands of repetitions under low-impact loads (such as working at a computer keyboard). The incidence of repetitive stress syndrome is estimated to be 3% to 6% of the workforce (LeBlanc and Cestia, 2011). The single largest source of RSI is computer keyboards. The most common kind of ­computer-related RSI is carpal tunnel syndrome (CTS), in which ­pressure on the median nerve through the wrist’s bony structure, called a carpal tunnel, produces pain. The ­pressure is caused by constant repetition of keystrokes: in a single shift, a word processor may p ­ erform 23,000 keystrokes. Symptoms of carpal tunnel syndrome include numbness, ­shooting pain, inability to grasp objects, and tingling. Millions of workers have been diagnosed with carpal tunnel syndrome. RSI is avoidable. Designing workstations for a neutral wrist position (using a wrist rest to support the wrist), proper monitor stands, and footrests all ­contribute to proper posture and reduced RSI. Ergonomically correct keyboards are also an option. These measures should be supported by frequent rest breaks and rotation of employees to different jobs. RSI is not the only occupational illness computers cause. Back and neck pain, leg stress, and foot pain also result from poor ergonomic designs of ­workstations. 155 156 Part One Organizations, Management, and the Networked Enterprise Repetitive stress injury (RSI) is the leading ­occupational disease today. The ­single largest cause of RSI is computer keyboard work. © Donna Cuic/Shuttertock Computer vision syndrome (CVS) refers to any eyestrain condition related to display screen use in desktop computers, laptops, e-readers, smartphones, and handheld video games. CVS affects about 90 percent of people who spend three hours or more per day at a computer (Beck, 2010). Its symptoms, which are usually ­temporary, include headaches, blurred vision, and dry and irritated eyes. The newest computer-related malady is technostress, which is stress induced by ­computer and cell phone use. Its symptoms include aggravation, hostility toward humans, impatience, and fatigue. According to experts, humans working ­continuously with computers come to expect other humans and human institutions to behave like computers, providing instant responses, attentiveness, and an absence of emotion. Technostress is thought to be related to high levels of job turnover in the computer industry, high levels of early retirement from ­computer-intense occupations, and elevated levels of drug and alcohol abuse. The incidence of technostress is not known but is thought to be in the ­millions and ­growing in the United States. Computer-related jobs now top the list of stressful occupations based on health ­statistics in several industrialized countries. In addition to these maladies, computer technology may be harming our ­cognitive f­unctions or at least changing how we think and solve problems. Although the Internet has made it much easier for people to access, create, and use information, some experts believe that it is also p ­ reventing people from focusing and thinking clearly. The computer has become a part of our lives—personally as well as socially, ­culturally, and politically. It is unlikely that the issues and our choices will become easier as ­information technology continues to transform our world. The growth of the Internet and the i­nformation economy suggests that all the ethical and social issues we have described will be heightened further as we move into the first digital century. Chapter 4 Ethical and Social Issues in Information Systems Review Summary 1. What ethical, social, and political issues are raised by information systems? Information technology is introducing changes for which laws and rules of acceptable conduct have not yet been developed. Increasing computing power, storage, and networking capabilities—including the Internet—expand the reach of individual and organizational actions and magnify their impacts. The ease and anonymity with which information is now communicated, copied, and manipulated in online environments pose new challenges to the protection of privacy and intellectual property. The main ethical, social, and political issues raised by information systems center around information rights and obligations, property rights and obligations, accountability and control, system quality, and quality of life. 2. What specific principles for conduct can be used to guide ethical decisions? Six ethical principles for judging conduct include the Golden Rule, Immanuel Kant’s Categorical Imperative, Descartes’ rule of change, the Utilitarian Principle, the Risk Aversion Principle, and the ethical “no free lunch” rule. These principles should be used in conjunction with an ethical analysis. 3. Why do contemporary information systems technology and the Internet pose challenges to the ­protection of individual privacy and intellectual property? Contemporary data storage and data analysis technology enables companies to easily gather ­personal data about individuals from many different sources and analyze these data to ­create detailed electronic profiles about individuals and their behaviors. Data flowing over the Internet can be ­monitored at many points. Cookies and other Web monitoring tools closely track the activities of Web site visitors. Not all Web sites have strong privacy protection policies, and they do not always allow for informed consent regarding the use of personal information. Traditional copyright laws are i­ nsufficient to protect against software piracy because digital material can be copied so easily and transmitted to many different locations simultaneously over the Internet. 4. How have information systems affected laws for establishing accountability, liability, and the quality of everyday life? New information technologies are challenging existing liability laws and social practices for holding individuals and institutions accountable for harm done to others. Although computer systems have been sources of efficiency and wealth, they have some negative impacts. Computer errors can cause serious harm to individuals and organizations. Poor data quality is also responsible for disruptions and losses for businesses. Jobs can be lost when computers replace workers or tasks become unnecessary in ­reengineered business processes. The ability to own and use a computer may be exacerbating ­socioeconomic disparities among different racial groups and social classes. Widespread use of computers increases opportunities for computer crime and computer abuse. Computers can also create health ­problems, such as repetitive stress injury, computer vision syndrome, and technostress. Key Terms Accountability, 131 Carpal tunnel syndrome (CTS), 155 Computer abuse, 153 Computer crime, 152 Computer vision syndrome (CVS), 156 Cookies, 140 Copyright, 145 Digital divide, 155 Digital Millennium Copyright Act (DMCA), 147 Due process, 130 Ethical “no free lunch” rule, 135 Ethics, 126 Fair Information Practices (FIP), 136 Golden Rule, 134 Immanuel Kant’s Categorical Imperative, 134 Information rights, 128 Informed consent, 139 Intellectual property, 144 Liability, 133 Nonobvious relationship awareness (NORA), 130 Opt-in, 143 Opt-out, 143 Patent, 146 Privacy, 136 Profiling, 129 Repetitive stress injury (RSI), 155 157 158 Part One Organizations, Management, and the Networked Enterprise Responsibility, 131 Risk Aversion Principle, 135 Safe harbor, 139 Spam, 153 Spyware, 142 Technostress, 156 Trade secret, 145 Utilitarian Principle, 135 Web beacons, 140 MyMISLab Go to to complete the problems marked with this icon . Review Questions 4-1 What ethical, social, and political issues are raised by information systems? • Explain how ethical, social, and political issues are connected and give some ­examples. • List and describe the key technological trends that heighten ethical concerns. • Differentiate between responsibility, accountability, and liability. 4-2  What specific principles for conduct can be used to guide ethical decisions? • List and describe the five steps in an ethical analysis. • Identify and describe six ethical principles. 4-3 Why do contemporary information systems ­technology and the Internet pose challenges to the protection of individual privacy and ­intellectual property? • Define privacy and fair information practices. • Explain how the Internet challenges the p rotection of individual privacy and ­ ­intellectual property. • Explain how informed consent, legislation, industry self-regulation, and technology tools help protect the individual privacy of Internet users. • List and define the three different regimes that protect intellectual property rights. 4-4 How have information systems affected laws for establishing accountability, liability, and the quality of everyday life? • Explain why it is so difficult to hold software services liable for failure or injury. • List and describe the principal causes of ­system quality problems. • Name and describe four quality of life impacts of computers and information ­systems. • Define and describe technostress and ­repetitive stress injury (RSI) and explain their relationship to information technology. Discussion Questions 4-5  Should producers of software-based services, such as ATMs, be held liable for economic ­injuries ­suffered when their systems fail? 4-6  Should companies be responsible for unemployment caused by their information systems? Why or why not? 4-7  Discuss the pros and cons of allowing companies to amass personal data for behavioral targeting. Chapter 4 Ethical and Social Issues in Information Systems 159 Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing the p ­ rivacy implications of using online data brokers, developing a corporate policy for employee Web usage, using blog creation tools to create a simple blog, and using Internet newsgroups for market research. Management Decision Problems 4-8 InfoFree’s Web site is linked to massive databases that consolidate personal data on millions of people and. Users can purchase marketing lists of consumers broken down by location, age, income level, home value, and interests. One could use this capability to obtain a list, for example, of everyone in Peekskill, New York, making $150,000 or more per year. Do data brokers such as InfoFree raise privacy issues? Why or why not? If your name and other personal information were in this ­database, what ­limitations on access would you want in order to preserve your ­privacy? Consider the following data users: government ­agencies, your employer, ­private business firms, other individuals. 4-9 As the head of a small insurance company with six employees, you are ­concerned about how effectively your company is using its networking and human resources. Budgets are tight, and you are struggling to meet payrolls because employees are reporting many overtime hours. You do not believe that the employees have a sufficiently heavy work load to warrant working longer hours and are looking into the amount of time they spend on the Internet. Each employee uses a computer with Internet access on the job. Review a sample of your company’s weekly report of employee Web usage, which can be found in MyMISLab™. • • • Calculate the total amount of time each employee spent on the Web for the week and the total amount of time that company computers were used for this purpose. Rank the employees in the order of the amount of time each spent online. Do your findings and the contents of the report indicate any ethical p ­ roblems employees are creating? Is the company creating an ethical ­problem by monitoring its employees’ use of the Internet? Use the guidelines for ethical analysis presented in this chapter to develop a s­ olution to the problems you have identified. Achieving Operational Excellence: Creating a Simple Blog Software skills: Blog creation Business skills: Blog and Web page design 4-10 In this project, you’ll learn how to build a simple blog of your own design using the online blog creation software available at Pick a sport, hobby, or topic of interest as the theme for your blog. Name the blog, give it a title, and choose a template for the blog. Post at least four entries to the blog, adding a label for each posting. Edit your posts, if necessary. Upload an image, such as a photo from your hard drive or the Web to your blog. Add capabilities for other registered users, such as team members, to comment on your blog. Briefly describe how your blog could be useful to a company selling products or services related to the theme of your blog. List the tools available to Blogger that would make your blog more useful for business and describe the business uses of each. Save your blog and show it to your instructor. I m p r ov i n g D e c i s i o n M a k i n g : A n a l y z i n g We b B r o w s e r P r i v a c y Software Skills: Web browser software Business Skills: Analyzing Web browser privacy protection features 4-11 This project will help develop your Internet skills for using the privacy protection features of leading Web browser software. 160 Part One Organizations, Management, and the Networked Enterprise Examine the privacy protection features and settings for two leading Web browsers, such as Internet Explorer, Mozilla Firefox or Google Chrome. Make a table comparing the features of two of these browsers in terms of functions provided and ease of use. • • • How do these privacy protection features protect individuals? How do these privacy protection features impact what businesses can do on the Internet? Which does the best job of protecting privacy. Why? Collaboration and Teamwork Project 4-12 In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this chapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open source collaboration tools to complete the assignment. Facebook Privacy: T here I s N o Privacy Case Study O ver the course of less than a decade, Facebook has morphed from a small, niche networking site for mostly Ivy League college students into a publicly traded company with a market worth of $148 billion in 2014 (up from $59 billion in 2013). Facebook boasts that it is free to join and always will be, so where’s the money coming from to service 1 billion worldwide subscribers? Just like its fellow tech titan and rival Google, Facebook’s revenue comes almost entirely from advertising. Facebook does not have a diverse array of hot new gadgets, a countrywide network of brick-and-mortar retail outlets, or a full inventory of software for sale; instead, it has your personal information, and the information of hundreds of millions of others with ­Facebook accounts. Advertisers have long understood the value of ­Facebook’s unprecedented trove of personal information. They can serve ads using highly specific details, like relationship status, location, employment status, favorite books, movies, or TV shows, and a host of other categories. For example, an Atlanta woman who posts that she has become engaged might be offered an ad for a wedding photographer on her Facebook page. When advertisements are served to finely targeted subsets of users, the response is much more successful than traditional types of advertising. A growing number of companies both big and small have taken notice: In 2014, Facebook generated $7.8 billion in revenue, 88 percent of which ($7 billion) was from selling ads, and the remainder from selling games, and virtual goods. Facebook’s ad revenues in 2012 grew by 63 percent over the previous year, driven mostly by adding new users. Existing users are not clicking on more ads. That was good news for Facebook, which launched its IPO (initial public stock offering) in May 2012, and is expected to continue to increase its revenue in coming years. But is it good news for you, the Facebook user? More than ever, companies like Facebook and Google, which made approximately $55 billion in advertising revenue in 2013, are using your online activity to develop a frighteningly accurate picture of your life. Facebook’s goal is to serve advertisements that are more relevant to you than anywhere else on the Web, but the personal information they gather about you both with and without your consent can also be used against you in other ways. Facebook has a diverse array of compelling and useful features. Facebook’s partnership with the Department of Labor helps to connect job seekers and employers; Facebook has helped families find lost pets after natural disasters, such as when tornadoes hit the Midwest in 2012; Facebook allows activeduty soldiers to stay in touch with their families; it Chapter 4 Ethical and Social Issues in Information Systems gives smaller companies a chance to further their e-commerce efforts and larger companies a chance to solidify their brands; and, perhaps most obviously, Facebook allows you to more easily keep in touch with your friends. These are the reasons why so many people are on Facebook. However, Facebook’s goal is to get its users to share as much data as possible, because the more Facebook knows about you, the more accurately it can serve relevant advertisements to you. Facebook CEO Mark Zuckerberg often says that people want the world to be more open and connected. It’s unclear whether that is truly the case, but it is ­certainly true that Facebook wants the world to be more open and connected, because it stands to make more money in that world. Critics of Facebook are concerned that the existence of a repository of personal data of the size that Facebook has amassed requires protections and privacy controls that extend far beyond those that Facebook currently offers. Facebook wanting to make more money is not a bad thing, but the company has a checkered past of privacy violations and missteps that raise doubts about whether it should be responsible for the personal data of hundreds of millions of people. There are no laws in the United States that give consumers the right to know what data companies like Facebook have compiled. You can challenge information in credit reports, but you can’t even see what data Facebook has gathered about you, let alone try to change it. It’s different in Europe: you can request Facebook to turn over a report of all the information it has about you. More than ever, your every move, every click, on social networks is being used by outside entities to assess your interests, and behavior, and then pitch you an ad based on this knowledge. Law enforcement agencies use social networks to gather evidence on tax evaders, and other criminals; employers use social networks to make ­decisions about prospective candidates for jobs; and data ­aggregators are gathering as much information about you as they can sell to the ­highest bidder. In a recent study, Consumer Reports found that of 150 million Americans on Facebook everyday, at least 4.8 million are willingly sharing information that could be used against them in some way. That includes plans to travel on a particular day, which burglars could use to time robberies, or Liking a page about a particular health condition or treatment, which insurers could use to deny coverage. Thirteen million users have never adjusted Facebook’s ­privacy controls, which allow friends using Facebook 161 applications to unwittingly transfer your data to a third party without your knowledge. Credit card companies and other similar organizations have begun engaging in “weblining”, taken from the phrase redlining, by altering their treatment of you based on the actions of other people with profiles similar to yours. Ninety-three percent of people polled believe that Internet companies should be forced to ask for permission before using your personal information, and 72 percent want the ability to opt out of online tracking. Why, then, do so many people share ­sensitive details of their life on Facebook? Often it’s because users do not realize that their data are being collected and transmitted in this way. A Facebook user’s friends are not notified if information about them is collected by that user’s applications. Many of Facebook’s features and services are enabled by default when they are launched without notifying users. And a study by Siegel+Gale found that Facebook’s privacy policy is more difficult to comprehend than government notices or typical bank credit card agreements, which are notoriously dense. Next time you visit Facebook, click on Privacy Settings, and see if you can understand your options. Facebook’s value and growth potential is determined by how effectively it can leverage the personal data it aggregated about its users to attract advertisers. Facebook also stands to gain from managing and avoiding the privacy concerns raised by its users and government regulators. For Facebook users that value the privacy of their personal data, this situation appears grim. But there are some signs that Facebook might become more responsible with its data collection processes, whether by its own volition or because it is forced to do so. As a publicly traded company, Facebook now invites more scrutiny from investors and regulators because, unlike in the past, their balance sheets, assets, and financial reporting documents are readily available. In August 2012, Facebook settled a lawsuit with the FTC in which they were barred from misrepresenting the privacy or security of users’ personal information. Facebook was charged with deceiving its users by telling them they could keep their information on Facebook private, but then repeatedly allowing it to be shared and made public. Facebook agreed to obtain user consent before making any change to that user’s privacy preferences, and to submit to bi-annual privacy audits by an independent firm for the next 20 years. Privacy advocate groups like the Electronic Privacy Information Center (EPIC) want Facebook to restore its more robust privacy settings from 2009, as well as to offer complete 162 Part One Organizations, Management, and the Networked Enterprise access to all data it keeps about its users. Facebook has also come under fire from EPIC for collecting information about users who are not even logged into Facebook or may not even have accounts on Facebook. Facebook keeps track of activity on other sites that have Like buttons or “recommendations” widgets, and records the time of your visit and your IP address when you visit a site with those features, regardless of whether or not you click on them. While U.S. Facebook users have little recourse to access data that Facebook has collected on them, users from other countries have made inroads in this regard. An Austrian law student was able to get a full copy of his personal information from Facebook’s Dublin office, due to the more stringent consumer privacy protections in Ireland. The full document was 1,222 pages long and covered three years of activity on the site, including deleted Wall posts and messages with sensitive personal information and deleted e-mail addresses. In Europe, 40,000 Facebook users have already requested their data, and European law requires that Facebook respond to these requests within 40 days. It isn’t just text-based data that Facebook is stockpiling, either. Facebook is also compiling a biometric database of unprecedented size. The company stores more than 60 billion photos on its servers and that number grows by 250 million each day. A recent feature launched by Facebook called Tag Suggest scans photographs using facial recognition technology. When Tag Suggest was launched, it was enabled for many users without opting in. This database has value to law enforcement and other organizations looking to compile profiles of users for use in advertising. EPIC also has demanded that Facebook stop creating facial recognition profiles without user consent. In 2012, as part of the settlement of another class-action lawsuit, Facebook agreed to allow users to opt in to its Sponsored Stories service, which serves advertisements in the user’s News Feed that highlight products and businesses that your Facebook friends are using. This allowed users to control which of their actions on Facebook generate advertisements that their friends will see. Sponsored Stories are one of the most effective forms of advertising on Facebook because they don’t seem like advertisements at all to most users. Facebook had previously argued that users were giving “implied consent” every time they clicked a Like button on a page. Despite this earlier settlement, in January 2014, Facebook closed down its Sponsored Stories feature entirely, after many lawsuits, attempted settlements, and criticism from privacy groups, the FTC, and annoyed parents whose children’s photos were being used throughout Facebook to sell products. In August 2013, Facebook had agreed to a settlement in a class action lawsuit brought by parents of teenagers caught up in the Facebook information machine. Every time their children liked a product on Facebook, their photos were used to promote the product not just to their friends, but to everyone on Facebook who potentially might be interested. The legal settlement only enraged privacy advocates and Congress, leading to Facebook’s abandonment of Sponsored Stories. While Facebook has shut down one of its more ­egregious privacy-invading features, the company’s Data Use policies make it very clear that, as a condition of using the service, users grant the company wide latitude in using their information in advertising. This includes a person’s name, photo, comments, and other information. Facebook’s existing policies make clear that users are required to grant the company wide permission to use their personal information in advertising as a condition of using the service. This includes “social advertising” where your personal information is broadcast to your friends, and indeed, the entire Facebook service if the company sees fit. While users can limit some uses, an advanced degree in Facebook data features is required. Despite consumer protests and government scrutiny, Facebook continues to challenge its customers’ sense of control over their personal information. In January 2013, Facebook launched its Graph Search program, a social network search engine intended to rival Google but based on a totally different approach. Rather than scour the Internet for information related to a user’s search term, Graph Search responds to user queries with information produced by all Facebook users on their personal pages, and their friends personal pages. For instance, Graph Search, without consent of the user, allows any Facebook user to type in your name, and click the link “Photos of…” which appears underneath the search bar. Complete strangers can find pictures of you. The person searched may not be able to control who sees personal photos: it depends on the privacy settings of other users with whom the photos were shared. If you shared your photos with friends who had less strict privacy settings, then those lesser settings determine who will have access to your photos. Graph Search results in new pages being created that contain the search results. These pages present Facebook with additional opportunities to sell ads, and to monetize the activities and information of its users. Chapter 4 Ethical and Social Issues in Information Systems The future of Facebook as a private corporation, and its stock price, will depend on its ability to monetize its most valuable asset: personal, private information. Sources: Elizabeth Dwoskin, “Facebook to Shut Down Ad Program,” Wall Street Journal, January 9, 2014; Vindu Goelfeb, “Facebook Deal on Privacy Is Under Attack,” New York Times, February 14, 2014; Vindu Goel and Edward Wyatt, “Facebook Privacy Change Is Subject of F.T.C. Inquiry,” New York Times. September 11, 2013; Sarah Perez, “Facebook Graph Search Didn’t Break Your Privacy Settings, It Only Feels Like That,” TechCrunch, February 4, 2013; Claire Cain Miller, “Tech Companies Concede to Surveillance Program,” New York Times, June 7, 2013; “SEC Form 10K for the Fiscal Year Ending December 31, 2013,” Facebook, March 31, 2014; “Selling You on Facebook,” Julia Angwin and Jeremy Singer-Vine, The Wall Street Journal, April 7, 2012; Consumer Reports, “Facebook and Your Privacy,” May 3, 2012; “Facebook Is Using You,” Lori Andrews, The New York Times, Feb. 4, 2012; “Personal Data’s Value? Facebook Set to Find Out,” Somini Sengupta and Evelyn M. Rusli, The New York Times, Jan. 31, 2012; “Facebook, Eye on Privacy Laws, Offers More Disclosure to Users,” Kevin J O’Brien, 163 The New York Times, April 13, 2012; “To Settle Lawsuit, Facebook Alters Policy for Its ‘Like’ Button,” Somini Sengupta, The New York Times, June 21, 2012. Case Study Questions 4-13 Perform an ethical analysis of Facebook. What is the ethical dilemma presented by this case? 4-14 What is the relationship of privacy to Facebook’s business model? 4-15 Describe the weaknesses of Facebook’s privacy policies and features. What management, ­organization, and technology factors have ­contributed to those weaknesses? 4-16 Will Facebook be able to have a successful ­business model without invading privacy? Explain your answer. Are there any measures Facebook could take to make this possible? MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions: 4-17 What are the five principles of Fair Information Practices? For each principle, describe a business situation where the principle comes into play, and how you think managers should react. 4-18 What are five digital technology trends that characterize American business today that raise ethical issues for business firms and managers? Provide an example from business or personal experience where an ethical issue resulted from each of these trends. 164 Part One Organizations, Management, and the Networked Enterprise Chapter 4 References Angwin, Julia. “Online Tracking Ramps Up.” Wall Street Journal (June 17, 2012). Ante, Spencer E. “Online Ads Can Follow You Home.” Wall Street Journal (April 29, 2013). Austen, Ian. “With Apologies, Officials Say Blackberry Service is Restored.” New York Times (October 13, 2011). Belanger, France and Robert E. Crossler. “Privacy in the Digital Age: A Review of Information Privacy Research in Information Systems.” MIS Quarterly 35, No. 4 (December 2011). Bertolucci, Jeff. “Big Data Firm Chronicles Your Online, Offline Lives.” Information Week (May 7, 2013). Bilski v. Kappos, 561 US, (2010). Brown Bag Software vs. Symantec Corp. 960 F2D 1465 (Ninth Circuit, 1992). Brynjolfsson, Erik and Andrew McAfee. Race Against the Machine. Digital Frontier Press (2011). Business Software Alliance, “Shadow Market: 2011 BSA Global Software Piracy Study,” Ninth edition (May 2012). Computer Security Institute. “CSI Computer Crime and Security Survey 2012.” (2012). Culnan, Mary J. and Cynthia Clark Williams. “How Ethics Can Enhance Organizational Privacy.” MIS Quarterly 33, No. 4 (December 2009). European Parliament. “Directive 2009/136/EC of the European Parliament and of the Council of November 25, 2009.” European Parliament (2009). Fowler, Geoffrey A. “Tech Giants Agree to Deal on Privacy Policies for Apps.” Wall Street Journal (February 23, 2012). Federal Trade Commission. “Protecting Consumer Privacy In an Era of Rapid Change.” Washington D.C. (2012). Frank, Adam. “Big Data and Its Big Problems.” NPR (September 18, 2012). Goldfarb, Avi, and Catherine Tucker. “Why Managing Consumer Privacy Can Be an Opportunity.” MIT Sloan Management Review 54, No. 3 (Spring 2013). Hsieh, J.J. Po-An, Arun Rai, and Mark Keil. “Understanding Digital Inequality: Comparing Continued Use Behavioral Models of the Socio-Economically Advantaged and Disadvantaged.” MIS Quarterly 32, No. 1 (March 2008). Laudon, Kenneth C. and Carol Guercio Traver. E-Commerce: Business, Technology, Society 9th Edition. Upper Saddle River, NJ: Prentice-Hall (2013). Laudon, Kenneth C. Dossier Society: Value Choices in the Design of National Information Systems. New York: Columbia University Press (1986b). Leblanc, KE, and W. Cestia . “Carpal Tunnel Syndrome.” American Family Physician, 83(8), 2011. Lee, Dong-Joo, Jae-Hyeon Ahn, and Youngsok Bang. “Managing Consumer Privacy Concerns in Personalization: A Strategic Analysis of Privacy Protection.” MIS Quarterly 35, No. 2 (June 2011). National White Collar Crime Center and the Federal Bureau of Investigation. “Internet Crime Complaint Center 2012 Internet Crime Report. (2013). Ponemon Institute. “2012 Cost of Cyber Crime Study: United States.” October 2012. Rifkin, Jeremy. “Watch Out for Trickle-Down Technology.” New York Times (March 16, 1993). Robinson, Francis. “EU Unveils Web-Privacy Rules.” Wall Street Journal (January 26, 2012). Singer, Natasha. “When the Privacy Button Is Already Pressed.” New York Times (September 15, 2012). Smith, H. Jeff. “The Shareholders vs. Stakeholders Debate.” MIS Sloan Management Review 44, No. 4 (Summer 2003). Symantec. “2014 Internet Security Threat Report, Volume 19” (August 2014). United States Department of Health, Education, and Welfare. Records, Computers, and the Rights of Citizens. Cambridge: MIT Press (1973). U.S. Senate. “Do-Not-Track Online Act of 2011.” Senate 913 (May 9, 2011). U.S. Sentencing Commission. “Sentencing Commission Toughens Requirements for Corporate Compliance Programs.” (April 13, 2004). P a r t T w o Information Technology Infrastructure Chapter 5 Chapter 7 IT Infrastructure and Emerging Technologies Telecommunications, the Internet, and Wireless Technology Chapter 6 Chapter 8 Foundations of Business Intelligence: Databases and Information Management Securing Information Systems Part Two provides the technical foundation for understanding information systems by examining hardware, software, database, and networking technologies along with tools and techniques for security and control. This part answers questions such as: What technologies do businesses today need to accomplish their work? What do I need to know about these technologies to make sure they enhance the performance of the firm? How are these technologies likely to change in the future? What t­echnologies and procedures are required to ensure that systems are reliable and secure? IT Infrastructure and Emerging Technologies 5 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. What is IT infrastructure and what are the stages and drivers of IT infrastructure evolution? 2. What are the components of IT infrastructure? 3. What are the current trends in computer hardware platforms? 4. What are the current trends in computer software platforms? 5. What are the challenges of managing IT infrastructure and management solutions? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 166 Chapter Cases Video Cases Portugal Telecom Offers IT Infrastructure for Sale Wearable Computers Go to Work Is It Time for Cloud Computing? The Pleasures and Pitfalls of BYOD Getting to eXtreme Scale On the Web Managing by Smartphone Acxiom’s Strategic Advantage: IBM’s Virtual Blade Platform Instructional Videos: Google and IBM Produce Cloud Computing IBM Blue Cloud Is Ready-to-Use Computing Portugal Telecom Offers IT Infrastructure for Sale P ortugal Telecom SGPS SA (Portugal Telecom, also known as PT) is a Portugal-based holding company providing telecommunications and information technology services in Portugal, Brazil, Angola, Macao, and Namibia. The company serves more than 100 million business and residential customers worldwide and generates 58 percent of its revenue outside Portugal. The global telecommunications industry is unusually ­fast-changing and competitive, due to the end of state-owned or monopoly enterprises and the emergence of new services, including mobile phones, the Internet, and digital television. PT today provides a range of telecommunications and multimedia services, including fixed line and mobile telephone services; television (TV) d ­ istribution; Internet Service Provider (ISP) services; and data transmission. These s­ ervices are delivered primarily over digital networks and are very information-­ technology intensive. Portugal Telecom has been able to l­everage its technology expertise to provide information technology (IT) systems and services to other companies of all sizes. Portugal Telecom’s newest data center is in the mountain city of Covilhã, Portugal, where it can take advantage of “free cooling” from Covilhã’s ­often-chilly mountain air 99 percent of the time, thereby reducing energy usage. The Covilhã center opened in September 2013, and combines progressive architecture, sustainability and leading-edge information technology. The entire project, once complete, will feature four block-like data center s­ tructures spanning 75,500 square meters, equivalent to about 800,000 square feet. The PT facility is built to have minimum impact on the environment and features © Nmedia/Shutterstock 167 168 Part Two Information Technology Infrastructure a rain water collection system (which forms a moat around the data center building) and a garden with more than 600 trees. Large numbers of solar panels around the facility are an additional source of clean energy. The center boasts a power usage effectiveness (PUE) rating of just 1.25, ­compared to an industry average of 1.88, making it among the most energyefficient data centers in the world. (PUE is a metric for determining the energy ­efficiency of a data center and is calculated by dividing the total amount of power consumed by a data center by the amount of power used to run the ­computer infrastructure within it. The closer PUE approaches 1.0, the greater the overall energy efficiency. ) When completely built out, the Covilhã data center will be the largest in the country and one of the largest in the world, capable of hosting 56,000 servers. The Covilhã data center is expected to achieve an annual availability of 99.98 percent. PT management estimates that just one-sixth of the Covilhã data center’s eventual c­ apacity will be required for domestic needs. The rest will provide cloud-based ­applications and services to other countries, including Brazil and African nations, enabling the company to expand its services across the globe. The Covilhã data center and six other domestic data centers run cloud-based ­information technology services for other companies known as SmartCloudPT. These cloud services include cloud storage and file synchronization services, infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS). Companies who subscribe to SmartCloudPT pay only for the services they actually use. PT and Oracle are now working on incorporating Oracle software applications into SmartCloudPT. Customers need only to ­register at the SmartCloud PT Web site and log in to purchase the available ­services that they need, which are billed in the customers’ PT invoice, together with other PT services. PT claims the benefits of its cloud services include having the information protected in the country’s largest data center network, the speed and reliability that customers’ businesses need, access to PT’s cutting-edge technology, and ­having certified security, advantages that only PT can provide. And because of its energy savings, PT estimates it can price its services 34 percent lower than the average price for premium data centers in Europe. For PT, green computing is good for business. Sources: SAP AG, “Newsbyte: Portugal Telecom Brings Customers Streamlined Operations and Increased Agility via Cloud Services for SAP® Business One Cloud Powered by SAP HANA® Available Worldwide,” February 24, 2014;, accessed March 12, 2014; Archana Venkatraman, “Portugal Telecom Opens Modular Datacentre to Boost Cloud Offering,”, September 24, 2013; Fred Sandesmark, “Core Strengths,” Profit Magazine, November 2013; and Rich Miller, “Portugal Telecom’s High-Concept Green Data Center,”, November 11, 2013. T he experience of Portugal Telecom illustrates the importance of information technology infrastructure in running a business today. The right technology at the right price will improve organizational performance. Because of the need to prevail in a highly competitive industry requiring leading-edge information technology, PT had world-class expertise in computer hardware, software, and networking technology that enabled it to run its business ­effectively. The company was then able to leverage its IT investment to sell some of its computing resources and expertise as on-line “cloud” services to other companies. This helped other companies achieve cost savings or acquire information technology resources that they were unable to manage on their own to make their businesses more competitive and efficient. Chapter 5 IT Infrastructure and Emerging Technologies The chapter-opening case diagram calls attention to important points raised by this case and this chapter. Telecommunications services today are largely ­computer-based. As a leading telecommunications provider, Portugal Telecom had huge investments in hardware, software, and networking technology and a vast pool of internal IT experts. The company could then sell this expertise and its excess computing capacity as a service to other companies in need of such resources. These services appealed to small, medium-sized businesses and even larger enterprises that were saddled with outdated or inappropriate information technology that prevented them from operating as efficiently and effectively as they could have. PT created a global data center network for itself and its business customers on several continents. These data centers provide subscribing companies with cloud computing services featuring leading-edge information technologies at very ­affordable prices. PT’s cloud services are easy to purchase and to use, the services are always available, and they include a high level of security protection. The solution is also serving important social goals: lower energy consumption and carbon emissions through more energy-efficient computing. Here are some questions to think about: How does information technology help Portugal Telecom solve its own business problems? How does PT use technology to help other companies solve their business problems? 5.1 I What is IT infrastructure and what are the stages and drivers of IT infrastructure evolution? n Chapter 1, we defined information technology (IT) infrastructure as the shared technology resources that provide the platform for the firm’s ­specific information system applications. An IT infrastructure includes ­investment in hardware, software, and services—such as consulting, ­education, and training—that are shared across the entire firm or across entire business units in the firm. A firm’s IT infrastructure provides the foundation for 169 170 Part Two Information Technology Infrastructure serving ­customers, working with vendors, and managing internal firm b ­ usiness processes (see Figure 5.1). Supplying firms worldwide with IT infrastructure (hardware and software) in 2014 is estimated to be a $3.8 trillion industry when telecommunications, ­networking equipment, and telecommunications services (Internet, telephone, and data transmission) are included. This does not include IT and related ­business process consulting services, which add another $400 billion. Investments in infrastructure account for between 25 and 50 percent of information technology expenditures in large firms, led by financial services firms where IT investment is well over half of all capital investment. Defining IT Infrastructure An IT infrastructure consists of a set of physical devices and software applications that are required to operate the entire enterprise. But an IT infrastructure is also a set of firmwide services budgeted by management and comprising both human and technical capabilities. These services include the following: • Computing platforms used to provide computing services that connect employees, customers, and suppliers into a coherent digital environment, including large mainframes, midrange computers, desktop and laptop ­computers, and mobile handheld and remote cloud computing services. • Telecommunications services that provide data, voice, and video connectivity to employees, customers, and suppliers • Data management services that store and manage corporate data and provide capabilities for analyzing the data FIGURE 5.1 Connection between the firm, IT infrastructure, and business capabilities The services a firm is capable of providing to its customers, suppliers, and employees are a direct function of its IT infrastructure. Ideally, this infrastructure should support the firm’s business and information systems strategy. New information technologies have a powerful impact on business and IT strategies, as well as the services that can be provided to customers. Chapter 5 IT Infrastructure and Emerging Technologies • Application software services, including online software services, that ­provide enterprise-wide capabilities such as enterprise resource ­planning, customer relationship management, supply chain management, and ­knowledge management systems that are shared by all business units • Physical facilities management services that develop and manage the ­physical installations required for computing, telecommunications, and data management services • IT management services that plan and develop the infrastructure, ­coordinate with the business units for IT services, manage accounting for the IT ­expenditure, and provide project management services • IT standards services that provide the firm and its business units with ­policies that determine which information technology will be used, when, and how • IT education services that provide training in system use to employees and offer managers training in how to plan for and manage IT investments • IT research and development services that provide the firm with research on potential future IT projects and investments that could help the firm ­differentiate itself in the marketplace This “service platform” perspective makes it easier to understand the ­ usiness value provided by infrastructure investments. For instance, the real b business value of a fully loaded personal computer operating at 3.4 ­gigahertz that costs about $1,000 and a high-speed Internet connection is hard to ­understand without knowing who will use it and how it will be used. When we look at the services provided by these tools, however, their value becomes more apparent: The new PC makes it possible for a high-cost employee making $100,000 a year to connect to all the company’s major systems and the public Internet. The high-speed Internet service saves this employee about one hour per day in reduced wait time for Internet information. Without this PC and Internet connection, the value of this one employee to the firm might be cut in half. Evolution of IT Infrastructure The IT infrastructure in organizations today is an outgrowth of over 50 years of evolution in computing platforms. There have been five stages in this ­evolution, each representing a different configuration of computing power and infrastructure elements (see Figure 5.2). The five eras are general-purpose mainframe and minicomputer computing, personal computers, client/ server networks, enterprise computing, and cloud and mobile computing. Technologies that characterize one era may also be used in another time period for other purposes. For example, some companies still run traditional mainframe systems or use mainframe computers as massive servers supporting large Web sites and corporate enterprise applications. General-Purpose Mainframe and Minicomputer Era: (1959 to Present) The introduction of the IBM 1401 and 7090 transistorized machines in 1959 marked the beginning of widespread commercial use of mainframe computers. In 1965, the mainframe computer truly came into its own with the introduction of the IBM 360 series. The 360 was the first commercial computer with a powerful operating system that could provide time sharing, multitasking, and virtual memory in more advanced models. IBM has dominated mainframe computing 171 172 Part Two Information Technology Infrastructure FIGURE 5.2 Eras in IT infrastructure evolution Illustrated here are the typical computing configurations characterizing each of the five eras of IT infrastructure evolution. Chapter 5 IT Infrastructure and Emerging Technologies from this point on. Mainframe computers became powerful enough to support thousands of online remote terminals connected to the centralized mainframe using proprietary communication protocols and proprietary data lines. The mainframe era was a period of highly centralized computing under the control of professional programmers and systems operators (usually in a ­corporate data center), with most elements of infrastructure provided by a single vendor, the manufacturer of the hardware and the software. This pattern began to change with the introduction of minicomputers ­produced by Digital Equipment Corporation (DEC) in 1965. DEC minicomputers (PDP-11 and later the VAX machines) offered powerful machines at far lower prices than IBM mainframes, making possible decentralized computing, customized to the specific needs of individual departments or business units rather than time sharing on a single huge mainframe. In recent years, the ­minicomputer has evolved into a midrange computer or midrange server and is part of a network. Personal Computer Era: (1981 to Present) Although the first truly personal computers (PCs) appeared in the 1970s (the Xerox Alto, the MITS Altair 8800, and the Apple I and II, to name a few), these machines had only limited distribution to computer enthusiasts. The appearance of the IBM PC in 1981 is usually considered the beginning of the PC era because this machine was the first to be widely adopted by American b ­ usinesses. At first using the DOS operating system, a text-based command ­language, and later the Microsoft Windows operating system, the Wintel PC computer (Windows ­operating system software on a computer with an Intel microprocessor) became the standard desktop personal computer. In 2014, there are an ­estimated 2 billion PCs in the world, and about 276 million new PCs were sold in 2014 (Gartner, 2014). Approximately 90 percent are thought to run a version of Windows, and 10 percent run a Macintosh OS. The Wintel d ­ ominance as a computing platform is receding as iPhone and Android device sales increase. About 1.75 billion people worldwide own smartphones, and most of these users access the Internet with their mobile devices. Proliferation of PCs in the 1980s and early 1990s launched a spate of p ­ ersonal desktop productivity software tools—word processors, spreadsheets, electronic presentation software, and small data management programs—that were very valuable to both home and corporate users. These PCs were stand-alone ­systems until PC operating system software in the 1990s made it possible to link them into networks. Client/Server Era (1983 to Present) In client/server computing, desktop or laptop computers called clients are networked to powerful server computers that provide the client computers with a variety of services and capabilities. Computer processing work is split between these two types of machines. The client is the user point of entry, whereas the server typically processes and stores shared data, serves up Web pages, or ­manages network activities. The term “server” refers to both the software application and the physical computer on which the network software runs. The server could be a mainframe, but today, server computers typically are more powerful versions of personal computers, based on inexpensive chips and often using ­multiple processors in a single computer box., or in server racks. The simplest client/server network consists of a client computer n ­ etworked to a server computer, with processing split between the two types of machines. This is called a two-tiered client/server architecture. Whereas simple client/server 173 174 Part Two Information Technology Infrastructure networks can be found in small businesses, most corporations have more ­complex, multitiered (often called N-tier) client/server ­architectures in which the work of the entire network is balanced over several ­different levels of servers, depending on the kind of service being requested (see Figure 5.3). For instance, at the first level, a Web server will serve a Web page to a client in response to a request for service. Web server software is responsible for locating and managing stored Web pages. If the client requests access to a ­corporate system (a product list or price information, for instance), the request is passed along to an application server. Application server software ­handles all application operations between a user and an organization’s back-end ­business systems. The application server may reside on the same computer as the Web server or on its own dedicated computer. Chapters 6 and 7 provide more detail on other pieces of software that are used in multitiered client/ server architectures for e-commerce and e-business. Client/server computing enables businesses to distribute computing work across a series of smaller, inexpensive machines that cost much less than ­centralized mainframe systems. The result is an explosion in computing power and applications throughout the firm. Novell NetWare was the leading technology for client/server networking at the beginning of the client/server era. Today, Microsoft is the market leader with its Windows operating systems (Windows Server, Windows 8, Windows 7, and Windows Vista). Enterprise Computing Era (1992 to Present) In the early 1990s, firms turned to networking standards and software tools that could integrate disparate networks and applications throughout the firm into an enterprise-wide infrastructure. As the Internet developed into a trusted communications environment after 1995, business firms began seriously using the Transmission Control Protocol/Internet Protocol (TCP/IP) networking standard to tie their disparate networks together. We discuss TCP/IP in detail in Chapter 7. The resulting IT infrastructure links different pieces of computer ­hardware and smaller networks into an enterprise-wide network so that information can flow freely across the organization and between the firm and other FIGURE 5.3 A multitiered client/server network (N-tier) In a multitiered client/server network, client requests for service are handled by different levels of servers. Chapter 5 IT Infrastructure and Emerging Technologies ­ rganizations. It can link different types of computer hardware, including o ­mainframes, ­servers, PCs, and mobile devices, and it includes public infrastructures such as the telephone system, the Internet, and public network services. The enterprise infrastructure also requires software to link disparate applications and enable data to flow freely among different parts of the business, such as enterprise applications (see Chapters 2 and 9) and Web services (discussed in Section 5.4). Cloud and Mobile Computing Era (2000 to Present) The growing bandwidth power of the Internet has pushed the client/server model one step further, towards what is called the “Cloud Computing Model.” Cloud computing refers to a model of computing that provides access to a shared pool of computing resources (computers, storage, applications, and ­services) over a network, often the Internet. These “clouds” of computing resources can be accessed on an as-needed basis from any connected device and location. Currently, cloud computing is the fastest growing form of ­computing, with companies spending about $175 billion on cloud infrastructure and ­services in 2014 (Hamilton, 2014). Thousands or even hundreds of thousands computers are located in cloud data centers, where they can be accessed by desktop computers, laptop computers, tablets, entertainment centers, smartphones, and other client machines linked to the Internet, with both personal and corporate computing increasingly moving to mobile platforms. Amazon, Google, IBM, and Microsoft operate huge, scalable cloud computing centers that provide computing power, data storage, and highspeed Internet connections to firms that want to maintain their IT infrastructures remotely.Firms such as Google, Microsoft, SAP, Oracle, and sell software applications as services delivered over the Internet. We discuss cloud and mobile computing in more detail in Section 5.3. The Learning Tracks include a table titled Comparing Stages in IT Infrastructure Evolution, which compares each era on the infrastructure dimensions introduced. Technology Drivers of Infrastructure Evolution The changes in IT infrastructure we have just described have resulted from developments in computer processing, memory chips, storage devices, ­telecommunications and networking hardware and software, and software design that have exponentially increased computing power while exponentially reducing costs. Let’s look at the most important developments. M o o r e ’s L a w a n d M i c r o p r o c e s s i n g Po w e r In 1965, Gordon Moore, the director of Fairchild Semiconductor’s Research and Development Laboratories, an early manufacturer of integrated circuits, wrote in Electronics magazine that since the first microprocessor chip was ­introduced in 1959, the number of components on a chip with the smallest manufacturing costs per component (generally transistors) had doubled each year. This assertion became the foundation of Moore’s Law. Moore later reduced the rate of growth to a doubling every two years. This law would later be interpreted in multiple ways. There are at least three variations of Moore’s Law, none of which Moore ever stated: (1) the power of microprocessors doubles every 18 months; (2) computing power doubles every 18 months; and (3) the price of computing falls by half every 18 months. 175 176 Part Two Information Technology Infrastructure Figure 5.4 illustrates the relationship between number of transistors on a microprocessor and millions of instructions per second (MIPS), a common measure of processor power. Figure 5.5 shows the exponential decline in the cost of transistors and rise in computing power. For instance, in 2014, you can buy an Intel i7 quad-core processor chip with 2.5 billion transistors for about one ten-millionth of a dollar per transistor. Exponential growth in the number of transistors and the power of processors coupled with an exponential decline in computing costs is likely to continue. Chip manufacturers continue to miniaturize components. Today’s transistors should no longer be compared to the size of a human hair but rather to the size of a virus. By using nanotechnology, chip manufacturers can even shrink the size of transistors down to the width of several atoms. Nanotechnology uses ­individual atoms and molecules to create computer chips and other devices that are t­housands of times smaller than current technologies permit. Chip ­manufacturers are trying to develop a manufacturing process to produce ­nanotube processors economically (Figure 5.6). Stanford University scientists have built a nanotube computer. The Law of Mass Digital Storage A second technology driver of IT infrastructure change is the Law of Mass Digital Storage. The amount of digital information is roughly doubling every year (Gantz and Reinsel, 2011; Lyman and Varian, 2003). Fortunately, the cost of storing digital information is falling at an exponential rate of 100 percent a year. Figure 5.7 shows that the number of megabytes that can be stored on ­magnetic media for $1 from 1950 to the present roughly doubled every 15 months. In 2014, a 500 gigabyte hard disk drive sells at retail for about $60. FIGURE 5.4 Moore’s Law and microprocessor performance Packing over 5 billion transistors into a tiny microprocessor has exponentially increased processing power. Processing power has increased to over 200,000 MIPS (2.6 billion instructions per second). Source: Authors’ estimate. Chapter 5 IT Infrastructure and Emerging Technologies FIGURE 5.5 Falling cost of chips Packing more transistors into less space has driven down transistor costs dramatically as well as the cost of the products in which they are used. Source: Authors’ estimate. FIGURE 5.6 Example of nanotubes Nanotubes are tiny tubes about 10,000 times thinner than a human hair. They consist of rolled-up sheets of carbon hexagons and have the potential uses as minuscule wires or in ultrasmall electronic devices and are very powerful conductors of electrical current. © Tyler Boyes/Shutterstock. 177 178 Part Two Information Technology Infrastructure FIGURE 5.7 The amount of storage per dollar rises exponentially, 1950–2014 Since the first magnetic storage device was used in 1955, the amount of storage a dollar buys has risen exponentially, doubling the amount of digital storage for each dollar expended every 15 months on average. Cloud storage services provide 100 gigabytes of storage for about $1.00 Source: Authors’ estimates. M e t c a l f e ’s L a w a n d N e t w o r k E c o n o m i c s Moore’s Law and the Law of Mass Storage help us understand why computing resources are now so readily available. But why do people want more ­computing and storage power? The economics of networks and the growth of the Internet provide some answers. Robert Metcalfe—inventor of Ethernet local area network technology— claimed in 1970 that the value or power of a network grows exponentially as a function of the number of network members. Metcalfe and others point to the increasing returns to scale that network members receive as more and more people join the network. As the number of members in a network grows ­linearly, the value of the entire system grows exponentially and continues to grow forever as members increase. Demand for information technology has been driven by the social and business value of digital networks, which rapidly multiply the number of actual and potential links among network members. Declining Communications Costs and the Internet A fourth technology driver transforming IT infrastructure is the rapid decline in the costs of communication and the exponential growth in the size of the Internet. There are over 3 billion Internet users worldwide (Internetlivestats. com, 2014). Figure 5.8 illustrates the exponentially declining cost of communication both over the Internet and over telephone networks (which increasingly are based on the Internet). As communication costs fall toward a very small number and approach 0, utilization of communication and computing facilities explode. Chapter 5 IT Infrastructure and Emerging Technologies FIGURE 5.8 Exponential declines in Internet communications costs One reason for the growth in the Internet population is the rapid decline in Internet connection and overall communication costs. The cost per kilobit of Internet access has fallen exponentially since 1995. Digital subscriber line (DSL) and cable modems now deliver a kilobit of communication for a retail price of less than one penny. Source: Authors. To take advantage of the business value associated with the Internet, firms must greatly expand their Internet connections, including wireless connectivity, and greatly expand the power of their client/server networks, desktop ­clients, and mobile computing devices. There is every reason to believe these trends will continue. Standards and Network Effects Today’s enterprise infrastructure and Internet computing would be impossible—both now and in the future—without agreements among manufacturers and widespread consumer acceptance of technology standards. Technology standards are specifications that establish the compatibility of products and the ability to communicate in a network (Stango, 2004). Technology standards unleash powerful economies of scale and result in price declines as manufacturers focus on the products built to a single standard. Without these economies of scale, computing of any sort would be far more expensive than is currently the case. Table 5.1 describes important standards that have shaped IT infrastructure. Beginning in the 1990s, corporations started moving toward standard ­computing and communications platforms. The Wintel PC with the Windows ­operating system and Microsoft Office desktop productivity applications became the ­standard desktop and mobile client computing platform. (It now shares the s­ potlight with other standards, such as Apple's iOS and Macintosh operating systems and the Android operating system.) Widespread adoption of Unix-Linux as the enterprise server operating system of choice made possible the replacement of proprietary and expensive mainframe infrastructures. In telecommunications, the Ethernet standard enabled PCs to connect together in small local area networks (LANs; see Chapter 7), and the TCP/IP standard enabled these LANs to be connected into firmwide networks, and ultimately, to the Internet. 179 180 Part Two Information Technology Infrastructure TABLE 5.1 Some Important Standards in Computing Standard Significance American Standard Code for Information Interchange (ASCII) (1958) Made it possible for computer machines from different manufacturers to exchange data; later used as the universal language linking input and output devices such as keyboards and mice to computers. Adopted by the American National Standards Institute in 1963. Common Business Oriented Language (COBOL) (1959) An easy-to-use software language that greatly expanded the ability of programmers to write business-related programs and reduced the cost of software. Sponsored by the Defense Department in 1959. Unix (1969–1975) A powerful multitasking, multiuser, portable operating system initially developed at Bell Labs (1969) and later released for use by others (1975). It operates on a wide variety of computers from different manufacturers. Adopted by Sun, IBM, HP, and others in the 1980s, it became the most widely used enterprise-level operating system. Transmission Control Protocol/Internet Protocol (TCP/IP) (1974) Suite of communications protocols and a common addressing scheme that enables millions of computers to connect together in one giant global network (the Internet). Later, it was used as the default networking protocol suite for local area networks and intranets. Developed in the early 1970s for the U.S. Department of Defense. Ethernet (1973) A network standard for connecting desktop computers into local area networks that enabled the widespread adoption of client/server computing and local area networks, and further stimulated the adoption of personal computers. IBM/Microsoft/Intel Personal Computer (1981) The standard Wintel design for personal desktop computing based on standard Intel processors and other standard devices, Microsoft DOS, and later Windows software. The emergence of this standard, low-cost product laid the foundation for a 25-year period of explosive growth in computing throughout all organizations around the globe. Today, more than 1 billion PCs power business and government activities every day. World Wide Web (1989–1993) Standards for storing, retrieving, formatting, and displaying information as a worldwide web of electronic pages incorporating text, graphics, audio, and video enables creation of a global repository of billions of Web pages. 5.2 What are the components of IT infrastructure? IT infrastructure today is composed of seven major components. Figure 5.9 illustrates these infrastructure components and the major vendors within each component category. These components constitute investments that must be coordinated with one another to provide the firm with a coherent infrastructure. In the past, technology vendors supplying these components were often in competition with one another, offering purchasing firms a mixture of ­incompatible, proprietary, partial solutions. But increasingly the vendor firms have been forced by large customers to cooperate in strategic partnerships with one another. For instance, a hardware and services provider such as IBM cooperates with all the major enterprise software providers, has strategic ­relationships with system integrators, and promises to work with whichever database products its client firms wish to use (even though it sells its own d­atabase management software called DB2). Computer Hardware Platforms Firms worldwide are expected to spend $669 billion on computer hardware devices in 2014, including mainframes, servers, PCs, tablets, and smartphones. Chapter 5 IT Infrastructure and Emerging Technologies FIGURE 5.9 The IT infrastructure ecosystem There are seven major components that must be coordinated to provide the firm with a coherent IT infrastructure. Listed here are major technologies and suppliers for each component. You can think of all these computers and their processors as the computer ­hardware platform for corporate (and personal) computing worldwide. There are approximately 2 billion PCs in the world today, 2,000 government data centers, and an estimated 8,000 corporate data centers and cloud computing centers. Nearly all their computing takes place using microprocessor “chips” manufactured or designed by Intel Corporation, and to a lesser extent, AMD Corporation. Intel and AMD processors are often referred to as “i86” processors because the original IBM PCs used an Intel 8086 processor, and all the Intel (and AMD) chips that followed are downward compatible with this processor. (For instance, you should be able to run a software application designed ten years ago on a new PC computer you bought yesterday.) Without this commonality in i86 processors, it is unlikely that today’s installed base of 2 billion PCs would exist. The computer platform has changed dramatically in the last decade, with the introduction of mobile computing devices, from the iPod in 2001, to the iPhone in 2007, and the iPad in 2010. Worldwide, 1.7 billion people use smartphones. You can think of these devices as a second computer hardware platform, one that is consumer device-driven. 181 182 Part Two Information Technology Infrastructure The computers with Intel microprocessors in the first computer hardware platform use complex instruction set computing (CISC), with several thousand native instructions built into the chip. This requires a considerable number of transistors per processor, consumes power, and generates heat. Mobile devices in the second computer hardware platform are not required to perform as many tasks as computers in the first computer hardware p ­ latform. They are able to use reduced instruction set computing (RISC), which ­contains a smaller set of instructions, consumes less power, and generates less heat. Apple and Samsung consumer devices use microprocessors designed by ARM Holdings, Inc., a British firm. RISC processors for mobile devices are manufactured by a wide range of firms, including Apple, Texas Instruments, Samsung, and Qualcomm. The server market, which includes infrastructures ranging from a few ­computers to large data centers with over 10,000 individual computers, uses mostly Intel and AMD processors in the form of blade servers on racks. Blade servers are computers consisting of a circuit board with processors, memory and network connections that are stored in racks. They take up less space than traditional box-based PC servers. Secondary storage is provided by a hard drive in each blade server, but more commonly by external mass-storage devices. Some specialized servers use Sun SPARC or IBM microprocessors specifically designed for server use. Mainframes have not disappeared. Mainframes continue to be used to ­reliably and securely handle huge volumes of transactions, for analyzing very large quantities of data, and for handling large workloads in cloud ­computing centers. The mainframe is still the digital workhorse for banking and ­telecommunications networks that are often running software ­programs that are older and require a specific hardware platform. However, the number of providers has dwindled to one:IBM. IBM has also repurposed its mainframe systems so they can be used as giant servers for massive enterprise ­networks and corporate Web sites. A single IBM mainframe can run up to 17,000 instances of Linux or Windows Server software and is capable of replacing thousands of smaller blade servers (see the discussion of virtualization in Section 5.3). Operating System Platforms Microsoft Windows Server comprises about 35 percent of the server o ­ perating system market, with 65 percent of corporate servers using some form of the Unix operating system or Linux, an inexpensive and robust open source ­relative of Unix. Microsoft Windows Server is capable of providing enterprisewide operating system and network services, and appeals to organizations ­seeking Windows-based IT infrastructures. Unix and Linux are scalable, reliable, and much less expensive than ­mainframe operating systems. They can also run on many different types of processors. The major providers of Unix operating systems are IBM, HP, and Sun, each with slightly different and partially incompatible versions. At the client level, 90 percent of PCs use some form of the Microsoft Windows ­operating system (such as Windows 8, Windows 7, or Windows Vista) to manage the resources and activities of the computer. However, there is now a much greater variety of operating systems than in the past, with new operating systems for computing on handheld mobile digital devices or cloud-connected computers. Chapter 5 IT Infrastructure and Emerging Technologies Google’s Chrome OS provides a lightweight operating system for cloud c­ omputing using a Web-connected computer. Programs are not stored on the user’s computer but are used over the Internet and accessed through the Chrome Web browser. User data reside on servers across the Internet. Android is an open source operating system for mobile devices such as smartphones and tablet computers developed by the Open Handset Alliance led by Google. It has become the most popular smartphone platform worldwide, competing with iOS, Apple's mobile operating system for the iPhone, iPad, and iPod Touch. Conventional client operating system software is designed around the mouse and keyboard, but increasingly becoming more natural and intuitive by using touch technology. iOS, the operating system for the phenomenally popular Apple iPad, iPhone, and iPod Touch, features a multitouch interface, where users employ one or more fingers to manipulate objects on a screen without a mouse or keyboard. Microsoft's Windows 8, which runs on tablets as well as PCs, has a user interface optimized for touch, but also works with a mouse and keyboard. Multitouch capabilities are also available on some Android devices. Enterprise Software Applications Firms worldwide are expected to spend about $320 billion in 2014 on software for enterprise applications that are treated as components of IT infrastructure. We introduced the various types of enterprise applications in Chapter 2, and Chapter 9 provides a more detailed discussion of each. The largest providers of enterprise application software are SAP and Oracle (which acquired PeopleSoft). Also included in this category is middleware software supplied by vendors such as IBM and Oracle for achieving firmwide integration by linking the firm’s existing application systems. Microsoft is attempting to move into the lower ends of this market by focusing on small and medium-sized businesses that have not yet implemented enterprise applications. Data Management and Storage Enterprise database management software is responsible for organizing and managing the firm’s data so that they can be efficiently accessed and used. Chapter 6 describes this software in detail. The leading database software ­providers are IBM (DB2), Oracle, Microsoft (SQL Server), and Sybase (Adaptive Server Enterprise), which supply more than 90 percent of the U.S. database ­software marketplace. MySQL is a Linux open source relational database ­product now owned by Oracle Corporation, and Apache Hadoop is an open source software framework for managing massive data sets (see Chapter 6). The physical data storage market is dominated by EMC Corporation for large-scale systems, and a small number of PC hard disk manufacturers led by Seagate and Western Digital. Digital information is doubling every two years and the market for digital data storage devices has been growing at more than 15 percent annually over the last five years. In addition to traditional disk arrays and tape libraries, large firms are turning to network-based storage technologies. Storage area networks (SANs) connect multiple storage devices on a separate high-speed network dedicated to storage. The SAN creates a large central pool of storage that can be rapidly accessed and shared by multiple servers. 183 184 Part Two Information Technology Infrastructure Networking/Telecommunications Platforms Companies worldwide are expected to spend $1.65 trillion for telecommunications services in 2014 (Gartner, 2014). Chapter 7 is devoted to an indepth description of the enterprise networking environment, including the Internet. Windows Server is predominantly used as a local area network operating system, followed by Linux and Unix. Large, enterprise wide area networks use some variant of Unix. Most local area networks, as well as wide area enterprise networks, use the TCP/IP protocol suite as a standard (see Chapter 7). The leading networking hardware providers are Cisco, Alcatel-Lucent, and Juniper Networks. Telecommunications platforms are typically provided by telecommunications/telephone services companies that offer voice and data connectivity, wide area networking, wireless services, and Internet access. Leading telecommunications service vendors include AT&T and Verizon. This market is exploding with new providers of cellular wireless, high-speed Internet, and Internet telephone services. Internet Platforms Internet platforms overlap with, and must relate to, the firm’s general ­networking infrastructure and hardware and software platforms. They include ­hardware, software, and management services to support a firm’s Web site, including Web hosting services, routers, and cabling or wireless equipment. A Web hosting service maintains a large Web server, or series of servers, and provides ­fee-paying subscribers with space to maintain their Web sites. The Internet revolution created a veritable explosion in server computers, with many firms collecting thousands of small servers to run their Internet operations. Since then there has been a steady push toward server consolidation, reducing the number of server computers by increasing the size and power of each and by using software tools that make it possible to run more ­applications on a single server. The Internet hardware server market has become increasingly concentrated in the hands of IBM, Dell, Sun (Oracle), and HP, as prices have fallen dramatically. The major Web software application development tools and suites are ­supplied by Microsoft (Microsoft Visual Studio and the Microsoft .NET family of development tools), Oracle-Sun (Sun’s Java is the most widely used tool for developing interactive Web applications on both the server and client sides), and a host of independent software developers, including Adobe (Creative Suite) and Real Networks (media software). Chapter 7 describes the components of the firm’s Internet platform in greater detail. Consulting and System Integration Services Today, even a large firm does not have the staff, the skills, the budget, or the necessary experience to deploy and maintain its entire IT infrastructure. Implementing a new infrastructure requires (as noted in Chapters 3 and 14) significant changes in business processes and procedures, training and e ­ ducation, and software integration. Leading consulting firms providing this expertise include Accenture, IBM Global Services, HP, Infosys, and Wipro Technologies. Software integration means ensuring the new infrastructure works with the firm’s older, so-called legacy systems and ensuring the new ­elements of the infrastructure work with one another. Legacy systems are Chapter 5 IT Infrastructure and Emerging Technologies generally older transaction processing systems created for mainframe computers that continue to be used to avoid the high cost of replacing or redesigning them. Replacing these systems is cost prohibitive and generally not necessary if these older systems can be integrated into a contemporary infrastructure. 5.3 What are the current trends in computer hardware platforms? The exploding power of computer hardware and networking technology has dramatically changed how businesses organize their computing power, p ­ utting more of this power on networks and mobile handheld devices. We look at seven hardware trends: the mobile digital platform, consumerization of IT, ­quantum computing, virtualization, cloud computing, green computing, and ­high-­performance/power-saving processors. The Mobile Digital Platform Chapter 1 pointed out that new mobile digital computing platforms have emerged as alternatives to PCs and larger computers. Smartphones such as the iPhone, Android, and BlackBerry smartphones have taken on many f­ unctions of PCs, including transmission of data, surfing the Web, ­transmitting e-mail and instant messages, displaying digital ­content, and exchanging data with internal corporate systems. The new mobile p ­ latform also includes small, lightweight netbooks ­optimized for wireless communication and Internet access, tablet ­computers such as the iPad, and digital e-book readers such as Amazon’s Kindle with Web access capabilities. Smartphones and tablet computers are becoming an important means of accessing the Internet. These devices are increasingly used for b ­ usiness c omputing as well as for consumer applications. For example, senior ­ ­executives at General Motors are using smartphone applications that drill down into vehicle sales information, financial performance, manufacturing metrics, and project management status. Wearable computing devices are a recent addition to the mobile digital ­platform. These include smartwatches, smart glasses, smart badges, and activity trackers. Wearable computing technology is still in its infancy, but it already has business uses, as described in the Interactive Session on Technology. Consumerization of IT and BYOD The popularity, ease of use, and rich array of useful applications for ­smartphones and tablet computers have created a groundswell of interest in allowing employees to use their personal mobile devices in the workplace, a phenomenon ­popularly called “bring your own device” (BYOD). BYOD is one aspect of the consumerization of IT, in which new information technology that first emerges in the consumer market spreads into business organizations. Consumerization of IT includes not only mobile personal devices but also ­business uses of ­software services that originated in the consumer marketplace as well, such as Google and Yahoo search, Gmail, Google Apps, Dropbox (see Chapter 2), and even Facebook and Twitter. Consumerization of IT is forcing businesses, especially large enterprises, to rethink the way they obtain and manage information technology equipment 185 186 Part Two Information Technology Infrastructure Interactive Session: Technology Wearable Computers Go to Work It looks like wearable computing is taking off! Smartwatches, smartglasses, smart ID badges, and activity trackers promise to change how we go about each day and the way we do our jobs. Tech enthusiasts have been abuzz about Google Glass, the small, wrap-around, lens-less glass frames with the built-in computer display. Google Glass ­displays information in a hands-free format. Wearers communicate with the Internet via natural language and the glasses can both snap pictures and record video. To stay competitive, Facebook purchased Oculus VR Inc. in March 2014. Facebook plans to expand the uses of Oculus’s virtual-reality goggles called Rift, from videogames to broader experiences, simulating face-to-face doctor’s appointments, classroom experiences, and premium seating at sporting events. Facebook hopes to eventually marry virtual reality and social networking to create the ultimate mobile social platform. Competition is also heating up over smartwatches that serve as wearable computers on the wrist. Many smartwatches run mobile apps, play music, make or answer phone calls, and display text messages and other notifications. Other smartwatch features include a camera, accelerometer, thermometer, altimeter, barometer, compass, calculator, map ­display, and GPS navigation. Runners, cyclists, and walkers can use these smartwatches to access speed, distance, and time data (see the Chapter 3 Interactive Session on Technology). Google has introduced the Android Wear ­operating system for wearable technology like smartwatches. Google has been working with ­companies like LG, Motorola, and Samsung on devices that use Android Wear. Android Wear ­integrates with existing Android services, including Google Maps and Google Now, Google’s contextual understanding and search service that uses location, user preferences and information from emails and schedules to ‘push’ information to the user. Competition from the Apple iWatch is expected by the end of 2014. These wearable devices are just starting to touch the lives of consumers, but they are taking off in the business world. The broad-based allure—handsfree data delivery—enable workers to perform tasks while receiving visual and aural cues. Here are some examples: The Hitachi Business Microscope (HBM), an ID badge-sized device worn on a lanyard around the neck, contains multiple sensors that track office ­temperature, light levels, and other environmental data along with employees’ movements around the office. The HBM records with whom they speak and when, how often they nod or gesture with their hands, and even their energy level. Feedback ­garnered will promote productive collaboration. An LCD screen displays real-time stats, and data review can be used to formulate personal benchmarks for effective communication. Improvements can be as elementary as increasing the number of interactions with a group or individual, or more complex, such as making adjustments in communication habits and energy level. At Duke Medical Center and other hospitals, a growing number of surgeons are using Google Glass to stream their operations online, float medical images in their field of view, and hold video consultations with colleagues as they operate. For example, orthopedic surgeon Selene Parekh uses Google Glass to record and archive all of his surgeries at Duke, with plans to stream live feeds of his operations to hospitals in India as a way to train and educate orthopedic surgeons there. Google Glass also has software that transforms the Glass projector into a medical dashboard and displays patient vital signs, urgent lab results and surgical checklists. Military equipment company Raytheon has worked with Lumus on a helmet worn by both pilots and controllers that includes a drop-down monocle equipped with the Advanced Warfighter Awareness for Real-time Engagement (AWARE) system. This situational awareness device turns a dense tree-filled hillside into a 3D smart display with blue symbols overlaid on trees to mark the location of pinned down soldiers and red symbols to mark individual enemies. The wearer can focus on a target and send the coordinates to a nearby ally. High definition smartglasses maker Vuzix teamed up with software maker SAP to create smartglasses for manufacturers, logistics companies and service technicians. The glasses connect with a smartphone to access data, which are displayed on a screen right in front of the user’s eyes. The worker interacts with the device using voice commands. Used in this manner, the devices are able to guide warehouse workers Chapter 5 IT Infrastructure and Emerging Technologies to the products on their pick lists, warn that an item is fragile, or inform an employee that he or she does not have the correct item to fill an order, all without the employee having to look away from his or her normal viewpoint. A warning is issued if a collision with another vehicle is imminent, and employees can conduct video chats to repair equipment and solve technical problems. At Walt Disney World Resort in Orlando, FL, guests are issued a MagicBand, a radio-frequency identification (RFID) wristband, which serves as their hotel room key and park entrance ticket and can be assigned a PIN and linked to a credit card to make purchases. The wristband is also used to link photos to guest accounts and will soon connect to a vacation-planning system. Staff are equipped with long-range RFID readers so they can personally greet guests. Aggregated RFID data will be used to minimize attraction wait times. Messages will entice guests to relocate to less busy areas of the park. FastPass+, Disney’s ride reservation system, allocates guests to the most popular attractions by assigning one hour return windows for express entrance. Visitors will soon be able to switch a ­previously assigned reservation without having to locate a FastPass kiosk. Buffalo Bills football players wear OptimEye sensors from Catapult Sports. Gyroscopes, ­accelerometers, and magnetometers power a matchbox-sized device embedded in their ­undershirts. 187 Communicating with GPS systems, it collects ­statistics such as top speed attained, total distance run, acceleration, and changes in direction, and ­calculates a “PlayerLoad” stat. A prime cause of football injuries is simple fatigue. A quantifiable measure now informs collaborative coaching efforts to adjust practice routines so that players’ bodies are not overstressed. One long-term goal is to ­analyze aggregate data to develop safety standards for each position. Many other businesses are salivating over the ­possibilities for using collected and consolidated data that incorporates location, environment, and health information along with purchasing, search, and interaction histories. Successful adoption of ­wearable computing depends not only on cost effectiveness, but on the development of new and better apps and integration with existing IT infrastructure and the organization’s tools for managing and securing mobile devices. Sources: Anahad O’Connor, “Google Glass Enters the Operating Room,” New York Times, June 1, 2014; Bruce Guptill, “Google Wear OS: Acknowledging the Mobile, Sensor-driven Data Age,” Information Management, March 23, 2014; Dan Howley, “Android Wear Smartwatches Put Google on Your Wrist,” Tom’s Guide, March 18, 2014; JP Gownder, “7 Ways Wearables Will Go To Work,” Information Week January 28, 2014; Reed Albergotti and Ian Sherr, “Facebook to Buy Virtual Reality Firm Oculus for $2 Billion,” Wall Street Journal March 25, 2014; Samuel Greengard, “Smartglasses Come Into View,” CIO Insight, November 12,2013; and H. James Wilson “Wearable Gadgets Transform How Companies Do Business,” Wall Street Journal, October 20, 2013. c a s e s t u dy q u e s t i o n s 1. Wearables aren’t just a consumer phenomenon: they have the potential to change the way organizations and workers conduct business. Discuss the implications of this statement. 2. What management, organization, and technology issues would have to be addressed if a company was thinking of equipping its workers with a wearable computing device? 3. What kinds of businesses are most likely to benefit from mobile computing? Select a business and describe how a mobile computing device could help that business improve operations or ­decisionmaking. and services. Historically, at least in large firms, the IT department was responsible for selecting and managing the information technology and ­applications used by the firm and its employees. It furnished employees with desktops or laptops that were able to access corporate systems securely. The IT department maintained control over the firm’s hardware and software to ensure that the business was being protected and that information systems served the purposes of the firm and its management. Today, employees and 188 Part Two Information Technology Infrastructure business departments are playing a much larger role in technology s­ election, in many cases demanding that employees be able to use their own personal ­computers, smartphones, and tablets to access the corporate network. It is more difficult for the firm to manage and control these consumer technologies, and make sure they serve the needs of the business. The chapter-ending case study explores some of these management challenges created by BYOD and IT consumerization. Quantum Computing Quantum computing is an emerging technology with the potential to dramatically boost computer processing power to find answers to problems that would take conventional computers many years to solve. Quantum computing uses the principles of quantum physics to represent data and perform operations on these data. A quantum computer would gain enormous processing power through the ability to be in many different states at once, allowing it to perform multiple operations simultaneously and solve some scientific and business problems millions of times faster than can be done today. Researchers at IBM, MIT, and the Los Alamos National Laboratory have been working on quantum computing, and the aerospace firm Lockheed Martin has purchased a quantum computer for commercial use. Virtualization Virtualization is the process of presenting a set of computing resources (such as computing power or data storage) so that they can all be accessed in ways that are not restricted by physical configuration or geographic location. Virtualization enables a single physical resource (such as a server or a storage device) to appear to the user as multiple logical resources. For example, a server or mainframe can be configured to run many instances of an operating system (or different operating systems) so that it acts like many different machines. Each virtual server “looks” like a real physical server to software programs, and multiple virtual servers can run in parallel on a single machine. Virtualization also enables multiple physical resources (such as storage devices or servers) to appear as a single logical resource, as would be the case with storage area ­networks. VMware is the leading virtualization software vendor for Windows and Linux servers. Server virtualization is a common method of reducing technology costs by providing the ability to host multiple systems on a single physical machine. Most servers run at just 15-20 percent of capacity, and virtualization can boost utilization server utilization rates to 70 percent or higher. Higher utilization rates translate into fewer computers required to process the same amount of work, reduced data center space to house machines, and lower energy usage. Virtualization also facilitates centralization and consolidation of hardware administration. It is now possible for companies and individuals to perform all of their computing work using a virtualized IT infrastructure in a remote ­location, as is the case with cloud computing. Cloud Computing Cloud computing is a model of computing in which computer processing, ­storage, software, and other services are provided as a pool of virtualized resources over a network, primarily the Internet. These “clouds” of computing Chapter 5 IT Infrastructure and Emerging Technologies resources can be accessed on an as-needed basis from any connected device and location. Figure 5.10 illustrates the cloud computing concept. The U.S. National Institute of Standards and Technology (NIST) defines cloud computing as having the following essential characteristics (Mell and Grance, 2009): • On-demand self-service: Consumers can obtain computing capabilities such as server time or network storage as needed automatically on their own. • Ubiquitous network access: Cloud resources can be accessed using ­standard network and Internet devices, including mobile platforms. • Location-independent resource pooling: Computing resources are pooled to serve multiple users, with different virtual resources dynamically assigned according to user demand. The user generally does not know where the ­computing resources are located. • Rapid elasticity: Computing resources can be rapidly provisioned, increased, or decreased to meet changing user demand. • Measured service: Charges for cloud resources are based on amount of resources actually used. Cloud computing consists of three different types of services: FIGURE 5.10 Cloud Computing Platform In cloud computing, hardware and software capabilities are a pool of virtualized resources provided over a network, often the Internet. Businesses and employees have access to applications and IT infrastructure anywhere, at any time, and on any device. 189 190 Part Two Information Technology Infrastructure • Infrastructure as a Service (IaaS):Customers use processing, storage, ­networking, and other computing resources from cloud service providers to run their information systems. For example, Amazon uses the spare capacity of its IT infrastructure to provide a broadly based cloud environment selling IT infrastructure services. These include its Simple Storage Service (S3) for ­storing customers’ data and its Elastic Compute Cloud (EC2) service for ­running their applications. Users pay only for the amount of computing and storage capacity they actually use. (See the Interactive Session on Organizations). • Platform as a Service (PaaS): Customers use infrastructure and ­programming tools supported by the cloud service provider to develop their own ­applications. For example, IBM offers a Smart Business Application Development & Test service for software development and testing on the IBM Cloud. Another example is’s, which allows developers to build ­applications that are hosted on its servers as a service. • Software as a Service (SaaS):Customers use software hosted by the vendor on the vendor’s cloud infrastructure and delivered over a network. Leading examples are Google Apps, which provides common business applications online and, which also leases customer relationship management and related software services over the Internet. Both charge users an annual subscription fee, although Google provides a free version of some of its business productivity tools. Users access these applications from a Web browser, and the data and software are maintained on the providers’ remote servers. A cloud can be private or public. A public cloud is owned and maintained by a cloud service provider, such as Amazon Web Services, and made available to the general public or industry group. A private cloud is operated solely for an organization. It may be managed by the organization or a third party and may exist on premise or off premise. Like public clouds, private clouds are able to allocate storage, computing power, or other resources seamlessly to provide computing resources on an as-needed basis. Companies that want flexible IT resources and a cloud service model while retaining control over their own IT infrastructure are gravitating toward these private clouds. (See the Interactive Session on Organizations.) Since organizations using public clouds do not own the infrastructure, they do not have to make large investments in their own hardware and software. Instead, they purchase their computing services from remote providers and pay only for the amount of computing power they actually use (utility c­ omputing) or are billed on a monthly or annual subscription basis. The term on-demand computing has also been used to describe such services. Cloud computing has some drawbacks. Unless users make provisions for storing their data locally, the responsibility for data storage and control is in the hands of the provider. Some companies worry about the security risks related to entrusting their critical data and systems to an outside vendor that also works with other companies. Companies expect their systems to be available 24/7 and do not want to suffer any loss of business capability if cloud infrastructures malfunction. Nevertheless, the trend is for companies to shift more of their computer ­processing and storage to some form of cloud infrastructure. Cloud computing is more immediately appealing to small and mediumsized businesses that lack resources to purchase and own their own hardware and software. However, large corporations have huge investments in complex ­proprietary systems supporting unique business processes, some of which give Chapter 5 IT Infrastructure and Emerging Technologies 191 I n t e r a c t i v e S e s s i o n : ORGAN I Z AT I ONS Is It Time for Cloud Computing? Cloud computing is taking off. The biggest players in the cloud computing marketplace include Amazon Web Services division (AWS), Microsoft, and Google. These companies have streamlined cloud computing and made it an affordable and sensible option for companies ranging from tiny Internet startups to established companies like FedEx. For example, AWS provides subscribing companies with flexible computing power and data storage, as well as data management, messaging, payment, and other services that can be used together or ­individually as the business requires. Anyone with an Internet connection and a little bit of money can harness the same computing systems that Amazon itself uses to run its retail business. If customers ­provide the amount of server space, bandwidth, ­storage, and any other services they require, AWS can automatically allocate those resources. Amazon’s sales pitch is that you don’t pay a monthly or yearly fee to use their computing resources – instead, you pay for exactly what you use. This appeals to many businesses because it allows Amazon to handle all of the maintenance and upkeep of IT infrastructures, leaving businesses to spend more time on higher-value work. For example, using AWS helped Merrifield Garden Center reduce costs, improve the stability and ­security of its applications and data, and eliminate the burden of managing IT infrastructure hardware so it can focus on new customer-facing initiatives to grow the business. Startup companies and smaller companies are finding that they no longer need to build their own data center. With cloud infrastructures like Amazon’s readily available, they have access to technical capability that was formerly available to only much larger businesses. San Francisco-based Socialcam provides a popular mobile social video application currently installed on over 20 million iPhone and Android smartphones. The Socialcam application makes it easy to take a video of any size, post it online, and share with friends. Socialcam became so popular that the company’s engineers couldn’t install hardware fast enough to keep up with demand. By moving to the AWS Cloud, Socialcam can quickly add or remove capacity to meet demand. Netco Sports produces the Canal+ Football app that enables viewers to replay any move from any camera angle, on any device, within 3 minutes after it happens. By using AWS, Netco Sports can scale 100 servers in under 10 ­minutes to support streaming for 500,000 viewers. Until recently, banks have been reluctant to use public cloud services due to security and regulatory concerns, but shrinking profits are encouraging them to take a second look. In the meantime, some banks are using private clouds for their sensitive financial transactions. National Australia Bank (NAB), with $793 billion in assets, uses an internal private cloud based on IBM’s infrastructure on demand. IBM had already been managing the bank’s IT infrastructure under a seven-year contract signed in 2010. The private cloud hosts the bank’s main production environment, including a new Oracle banking system, and will support short-term computing-intense projects such as marketing campaigns. NAB pays only for what it uses so that it doesn’t have to make large IT capital expenditures. The equipment is all hosted in NAB’s data centers, which is unusual for on-demand environments. Although low overhead and infrastructure ­management costs make public cloud computing especially attractive to startups, the financial benefits of cloud computing for large and midsized organizations are less apparent. Cliff Olson, director of infrastructure systems at FP International, Inc., a Fremont, California-based packaging company, notes that paying a public cloud provider a monthly service fee for 10,000 or more employees will probably be more expensive than having the company maintain its own IT infrastructure and staff. Companies also worry about unexpected “runaway costs” from using a pay-per-use model. Integrating cloud services with existing IT infrastructures, errors, mismanagement, or unusually high volumes of Web traffic will run up the bill for cloud service users. Gartner Inc. technology consultants advises ­clients contemplating public cloud services to take into account the number of machines an organization will run; the number of hours per day or per week they’ll run; and the amount of storage their data will require. Additional costs include licenses that need to be paid for on a recurring basis; the rate of change for the data; and how much new data the business is expected to generate. A very large ­company may find it cheaper to own and manage its own data center or private cloud. But as public 192 Part Two Information Technology Infrastructure clouds become more efficient and secure and the technology grows cheaper, large companies will start using more cloud resources. A major barrier to widespread cloud adoption is concern about cloud reliability and security. Amazon’s cloud experienced significant outages in April and August 2011; on June 14 and 29, 2012; on December 24, 2012; on January 31, 2013; and on August 25, 2013. Normally, cloud networks are very reliable, and often more so than private ­networks operated by individual companies. But when a cloud of significant size like Amazon’s goes down, it sends ripples across the entire Web. The August 2013 outage was caused by a hardware ­failure ­lasting 49 minutes at Amazon’s U.S.-East data c­enter in North Virginia. It led to spiraling problems at a host of well-trafficked online services, including Instagram, Vine, AirBnB, and the mobile magazine app Flipboard. Amazon attributed the ­outage to glitches with a single networking device that resulted in data loss. The outages have been proof that the vision of a cloud with 100 percent uptime is still far from ­reality. Nevertheless, some large cloud users such as Netflix believe that overall cloud service availability and reliability have steadily improved. A number of experts recommend that companies for whom an outage would be a major risk consider using another computing service as a backup. Most midsized and large companies will ­gravitate toward a hybrid approach. For example, InterContinental Hotels revamped its IT infrastructure to include both private and public cloud usage. To improve response time for customers, InterContinental moved its core room reservation transaction system onto a private cloud within its own data center, but it moved room availability and pricing Web site applications onto public cloud data centers on the East and West coasts. Customers receive data faster if the data are located on a server that is physically close to them, and cloud computing helps InterContinental to take advantage of this. Sources: Beth Pariseau, “Enterprises Hit Tipping Point in AWS Cloud vs. Private Cloud Costs,”, April 17, 2014; Penny Crosman, “Banks Pushed Toward Cloud Computing by Cost Pressures,” Information Management, March 11, 2014; “Customer Success. Powered by the AWS Cloud,”, accessed April 1, 2014; Brad Stone, “Another Amazon Outage Exposes the Cloud’s Dark Lining,” Bloomberg Business Week, August 26, 2013; Charles Babcock, “Cloud Implementation Costs, Complexity Surprise Companies,” Information Week, February 6, 2013; and Penny Crossman, “How New Core, Cloud Computing Are Transforming an Aussie Bank,” Information Management, January 2, 2013. c a s e s t u dy q u e s t i o n s 1. What business benefits do cloud computing ­services provide? What problems do they solve? 2. What are the disadvantages of cloud computing? 3. How do the concepts of capacity planning, ­scalability, and TCO apply to this case? Apply these concepts both to Amazon and to ­subscribers of its services. 4. What kinds of businesses are most likely to benefit from using cloud computing? Why? them strategic advantages. The cost savings from switching to cloud services are not always easy to determine for large companies that already have their own IT infrastructures in place. Corporate data centers typically work with an IT budget that accounts for a mix of operational and capital expenses. Pricing for cloud services is usually based on a per-hour or other per-use charge. Even if a company can approximate the hardware and software costs to run a specific computing task on premises, it still needs to figure in how much of the firm’s network management, storage management, system administration, electricity, and real estate costs should be allocated to a single on-premises IT ­service. An information systems department may not have the right information to ­analyze those factors on a service-by-service basis. Chapter 5 IT Infrastructure and Emerging Technologies Large firms are most likely to adopt a hybrid cloud computing model where they use their own infrastructure for their most essential core ­activities and adopt public cloud computing for less-critical systems or for additional processing capacity during peak business periods. Cloud computing will gradually shift firms from having a fixed infrastructure capacity toward a more flexible infrastructure, some of it owned by the firm, and some of it rented from giant computer centers owned by computer ­hardware vendors. You can find out more about cloud computing in the Learning Tracks for this chapter. Green Computing By curbing hardware proliferation and power consumption, virtualization has become one of the principal technologies for promoting green computing. Green computing or green IT, refers to practices and technologies for designing, manufacturing, using, and disposing of computers, servers, and associated devices such as monitors, printers, storage devices, and networking and ­communications systems to minimize impact on the environment. Reducing computer power consumption has been a very high “green” ­priority. Information technology is responsible for about 2 percent of total U.S. power demand and is believed to contribute about 2 percent of the world’s greenhouse gases. A corporate data center can easily consume more than 100 times more power than a standard office building. All this additional power consumption has a negative impact on the environment and corporate operating costs. The chapter-opening case on Portugal Telecom illustrates some of the technologies and data center design considerations for green computing and the business and environmental benefits of cutting power consumption in the data center. High-Performance and Power-Saving Processors Another way to reduce power requirements and hardware sprawl is to use more efficient and power-saving processors. Contemporary microprocessors now ­feature multiple processor cores (which perform the reading and ­execution of computer instructions) on a single chip. A multicore processor is an integrated circuit to which two or more processor cores have been attached for enhanced performance, reduced power consumption, and more efficient simultaneous processing of multiple tasks. This technology enables two or more processing engines with reduced power requirements and heat dissipation to perform tasks faster than a resource-hungry chip with a single processing core. Today you’ll find PCs with dual-core, quad-core, six-core, and eight core processors and servers with 16-core processors. Intel and other chip manufacturers have developed microprocessors that minimize power consumption, which is essential for prolonging battery life in small mobile digital devices. You will now find highly power-efficient microprocessors, such as the A6 and A7 processors used in the Apple iPhone and iPad, and Intel’s Atom processor for netbooks and mobile Internet devices. The Apple micrprocessors have about one-fiftieth the power consumption of a laptop ­dual-core processor. Intel recently unveiled a line of ultrasmall ­low-power microprocessors called Quark that can be used in wearable devices, skin patches, or even swallowed to gather medical data. 193 194 Part Two Information Technology Infrastructure 5.4 What are the current trends in computer software platforms? There are four major themes in contemporary software platform evolution: • • • • Linux and open source software Java, HTML, and HTML5 Web services and service-oriented architecture Software outsourcing and cloud services Linux and Open Source Software Open source software is software produced by a community of several ­hundred thousand programmers around the world. According to the leading open source professional association,, open source software is free and can be modified by users. Works derived from the original code must also be free, and the software can be redistributed by the user without additional licensing. Open source software is by definition not restricted to any specific operating system or hardware technology, although most open source software is currently based on a Linux or Unix operating system. The open source movement has been evolving for more than 30 years and has demonstrated that it can produce commercially acceptable, high-quality software. Popular open source software tools include the Linux operating system, the Apache HTTP Web server, the Mozilla Firefox Web browser, and the Apache OpenOffice desktop productivity suite. Google’s Android mobile operating system and Chrome Web browser are based on open source tools. You can find out more out more about the Open Source Definition from the Open Source Initiative and the history of open source software at the Learning Tracks for this chapter. Linux Perhaps the most well-known open source software is Linux, an operating system related to Unix. Linux was created by the Finnish programmer Linus Torvalds and first posted on the Internet in August 1991. Linux applications are embedded in cell phones, smartphones, tablet computers and consumer electronics. Linux is available in free versions downloadable from the Internet or in low-cost commercial versions that include tools and support from vendors such as Red Hat. Although Linux is not used in many desktop systems, it is a leading operating system on servers, mainframe computers, and supercomputers. Linux has become the operating system of choice in the high performance computing market, powering 97 percent of the world’s fastest computers. IBM, HP, Intel, Dell, and Oracle have made Linux a central part of their offerings to corporations. The popular Android operating system for mobile devices has a Linux foundation. The rise of open source software, particularly Linux and the applications it supports, has profound implications for corporate software platforms: cost reduction, reliability and resilience, and integration, because Linux works on all the major hardware platforms from mainframes to servers to clients. Software for the Web: Java, HTML, and HTML5 Java is an operating system-independent, processor-independent, objectoriented programming language that has become the leading interactive Chapter 5 IT Infrastructure and Emerging Technologies environment for the Web. Java was created by James Gosling and the Green Team at Sun Microsystems in 1992. In November 13, 2006, Sun released much of Java as open source software under the terms of the GNU General Public License (GPL), completing the process on May 8, 2007. The Java platform has migrated into cell phones, smartphones, ­automobiles, music players, game machines, and into set-top cable television s­ ystems s­ erving interactive content and pay-per-view services. Java s­ oftware is designed to run on any computer or computing device, regardless of the ­specific microprocessor or operating system the device uses. Java is the most popular development platform for mobile devices running the Android operating system. For each of the computing environments in which Java is used, Sun created a Java Virtual Machine that interprets Java programming code for that machine. In this manner, the code is written once and can be used on any machine for which there exists a Java Virtual Machine. Java developers can create small applet programs that can be embedded in Web pages and downloaded to run on a Web browser. A Web browser is an easy-to-use software tool with a graphical user interface for displaying Web pages and for accessing the Web and other Internet resources. Microsoft’s Internet Explorer, Mozilla Firefox, and Google Chrome browser are examples. At the enterprise level, Java is being used for more complex e-commerce and e-business applications that require communication with an organization’s back-end transaction processing systems. HTML a n d HTML 5 HTML (Hypertext Markup Language) is a page description language for specifying how text, graphics, video, and sound are placed on a Web page and for creating dynamic links to other Web pages and objects. Using these links, a user need only point at a highlighted keyword or graphic, click on it, and ­immediately be transported to another document. HTML was originally designed to create and link static documents ­composed largely of text. Today, however, the Web is much more social and interactive, and many Web pages have multimedia elements—images, audio, and video. Third-party plug-in applications like Flash, Silverlight, and Java have been required to integrate these rich media with Web pages. However, these ­add-ons require additional programming and put strains on computer ­processing. The ­next evolution of HTML, called HTML5, solves this p ­ roblem by making it ­possible to embed images, audio, video, and other elements directly into a document without processor-intensive add-ons. HTML5 makes it easier for Web pages to function across different display devices, including mobile devices as well as desktops, and it will support the storage of data offline for apps that run over the Web. Other popular programming tools for Web applications include Ruby and Python. Ruby is an object-oriented ­programming language known for speed and ease of use in building Web applications and Python (praised for its clarity) is being used for building cloud computing applications. Major Web sites such as Google, Facebook, Amazon, and Twitter use Python and Ruby as well as Java. Web Services and Service-Oriented Architecture Web services refer to a set of loosely coupled software components that exchange information with each other using universal Web communication 195 196 Part Two Information Technology Infrastructure standards and languages. They can exchange information between two ­different systems regardless of the operating systems or programming ­languages on which the systems are based. They can be used to build open standard Web-based applications linking systems of two different organizations, and they can also be used to create applications that link disparate systems within a single company. Web services are not tied to any one operating system or programming language, and different applications can use them to communicate with each other in a standard way without time-consuming custom coding. The foundation technology for Web services is XML, which stands for Extensible Markup Language. This language was developed in 1996 by the World Wide Web Consortium (W3C, the international body that oversees the development of the Web) as a more powerful and flexible markup language than hypertext markup language (HTML) for Web pages. Whereas HTML is limited to describing how data should be presented in the form of Web pages, XML can perform presentation, communication, and storage of data. In XML, a number is not simply a number; the XML tag specifies whether the number represents a price, a date, or a ZIP code. Table 5.2 illustrates some sample XML statements. By tagging selected elements of the content of documents for their meanings, XML makes it possible for computers to manipulate and interpret their data automatically and perform operations on the data without human intervention. Web browsers and computer programs, such as order processing or enterprise resource planning (ERP) software, can follow programmed rules for applying and displaying the data. XML provides a standard format for data exchange, enabling Web services to pass data from one process to another. Web services communicate through XML messages over standard Web protocols. Companies discover and locate Web services through a directory much as they would locate services in the Yellow Pages of a telephone book. Using Web protocols, a software application can connect freely to other ­a pplications without custom programming for each different application with which it wants to communicate. Everyone shares the same standards. The collection of Web services that are used to build a firm’s software ­s ystems constitutes what is known as a service-oriented architecture. A service-oriented architecture (SOA) is set of self-contained services that communicate with each other to create a working software application. Business tasks are accomplished by executing a series of these services. Software developers reuse these services in other combinations to assemble other applications as needed. Virtually all major software vendors provide tools and entire platforms for building and integrating software applications using Web services. IBM includes Web service tools in its WebSphere e-business software platform, and Microsoft has incorporated Web services tools in its Microsoft .NET platform. TABLE 5.2 Examples of XML PLAIN ENGLISH XML Subcompact 4 passenger 4 $16,800 $16,800 Chapter 5 IT Infrastructure and Emerging Technologies Dollar Rent A Car’s systems use Web services for its online booking system with Southwest Airlines’ Web site. Although both companies’ systems are based on different technology platforms, a person booking a flight on can reserve a car from Dollar without leaving the airline’s Web site. Instead of struggling to get Dollar’s reservation system to share data with Southwest’s information systems, Dollar used Microsoft .NET Web services technology as an intermediary. Reservations from Southwest are translated into Web services protocols, which are then translated into formats that can be understood by Dollar’s computers. Other car rental companies have linked their information systems to ­airline companies’ Web sites before. But without Web services, these connections had to be built one at a time. Web services provide a standard way for Dollar’s ­computers to “talk” to other companies’ information systems without having to build special links to each one. Dollar is now expanding its use of Web services to link directly to the systems of a small tour operator and a large travel reservation system as well as a wireless Web site for cell phones and smartphones. It does not have to write new software code for each new partner’s information systems or each new wireless device (see Figure 5.11). Software Outsourcing and Cloud Services Today, many business firms continue to operate legacy systems that continue to meet a business need and that would be extremely costly to replace. But they will purchase or rent most of their new software applications from external sources. Figure 5.12 illustrates the rapid growth in external sources of software for U.S. firms. FIGURE 5.11 How Dollar Rent A Car uses Web services Dollar Rent A Car uses Web services to provide a standard intermediate layer of software to “talk” to other companies’ information systems. Dollar Rent A Car can use this set of Web services to link to other companies’ information systems without having to build a separate link to each firm’s systems. 197 198 Part Two Information Technology Infrastructure FIGURE 5.12 Changing sources of firm software In 2014, U.S. firms will spend over $279 billion on software. About 35 percent of that will originate outside the firm, either from enterprise software vendors selling firmwide applications or individual application service providers leasing or selling software modules. Another 4 percent ($11 billion) will be provided by SaaS vendors as an online cloud-based service. Sources: BEA National Income and Product Accounts, 2014; authors’ estimates. There are three external sources for software: software packages from a c­ ommercial software vendor, outsourcing custom application development to an external vendor, (which may or may not be offshore), and cloud-based ­software services and tools. Software Packages and Enterprise Software We have already described software packages for enterprise applications as one of the major types of software components in contemporary IT infrastructures. A software package is a prewritten commercially available set of software ­programs that eliminates the need for a firm to write its own software programs for certain functions, such as payroll processing or order handling. Enterprise application software vendors such as SAP and Oracle-PeopleSoft have developed powerful software packages that can support the p ­ rimary business processes of a firm worldwide from warehousing, customer ­ ­relationship management, and supply chain management, to finance and human resources. These large-scale enterprise software systems provide a single, integrated, worldwide software system for firms at a cost much less than they would pay if they developed it themselves. Chapter 9 discusses enterprise systems in detail. Software Outsourcing Software outsourcing enables a firm to contract custom software development or maintenance of existing legacy programs to outside firms, which often ­operate offshore in low-wage areas of the world. According to industry a­ nalysts, spending on global IT outsourcing services was approximately $440 billion in 2014 (Kanaracus, 2014). Chapter 5 IT Infrastructure and Emerging Technologies For example, Cemex, Mexico's largest cement manufacturer, signed a 10-year $1 billion outsourcing deal with IBM in July 2012. Under the deal, IBM responsibilities include application development and maintenance as well as IT ­infrastructure management at Cemex company headquarters in Monterrey, Mexico, and around the globe. IBM will take over and run Cemex's finance, accounting, and human resources systems (McDougall, 2012). Offshore software outsourcing firms have primarily provided lower-level maintenance, data entry, and call center operations, although more sophisticated and experienced offshore firms, particularly in India, have been hired for new-program development. However, as wages offshore rise, and the costs of managing offshore projects are factored in (see Chapter 13), some work that would have been sent offshore is returning to domestic companies. C l o u d - B a s e d S o f t w a r e S e r v i c e s a n d To o l s In the past, software such as Microsoft Word or Adobe Illustrator came in a box and was designed to operate on a single machine. Today, you’re more likely to download the software from the vendor’s Web site, or to use the software as a cloud service delivered over the Internet. Cloud-based software and the data it uses are hosted on powerful servers in massive data centers, and can be accessed with an Internet connection and ­standard Web browser. In addition to free or low-cost tools for individuals and small businesses provided by Google or Yahoo, enterprise software and other complex business functions are available as services from the major commercial software vendors. Instead of buying and installing software programs, ­subscribing companies rent the same functions from these services, with users paying either on a subscription or per-transaction basis. Services for delivering and providing access to software remotely as a Web-based service are now referred to as software as a service (SaaS). A leading example is, which provides on-demand software services for customer relationship management. In order to manage their relationship with an outsourcer or technology ­service provider, firms need a contract that includes a service level ­agreement (SLA). The SLA is a formal contract between customers and their service ­providers that defines the specific responsibilities of the service provider and the level of service expected by the customer. SLAs typically specify the nature and level of services provided, criteria for performance measurement, ­support options, provisions for security and disaster recovery, hardware and software ­ownership and upgrades, customer support, billing, and conditions for ­terminating the agreement. We provide a Learning Track on this topic. Mashups and Apps The software you use for both personal and business tasks may consist of large self-contained programs, or it may be composed of interchangeable components that integrate freely with other applications on the Internet. Individual users and entire companies mix and match these software c­ omponents to create their own customized applications and to share information with others. The resulting software applications are called mashups. The idea is to take different sources and produce a new work that is “greater than” the sum of its parts. You have performed a mashup if you’ve ever personalized your Facebook profile or your blog with a capability to display videos or slide shows. Web mashups combine the capabilities of two or more online applications to create a kind of hybrid that provides more customer value than the ­original sources alone. For instance, ZipRealty uses Google Maps and data provided by 199 200 Part Two Information Technology Infrastructure online real estate database to display a complete list of ­multiple listing service (MLS) real estate listings for any zip code specified by the user. Amazon uses mashup technologies to aggregate product descriptions with ­partner sites and user profiles. Apps are small specialized software programs that run on the Internet, on your ­computer, or on your mobile phone or tablet and are generally delivered over the Internet. Google refers to its online services as apps, including the Google Apps suite of desktop productivity tools. But when we talk about apps today, most of the attention goes to the apps that have been developed for the mobile digital ­platform. It is these apps that turn smartphones and other mobile ­handheld devices into general-purpose computing tools. Some downloaded apps do not access the Web but many do, providing faster access to Web content than traditional Web browsers. They provide a ­non-browser pathway for users to experience the Web and perform a number of tasks, ranging from reading the newspaper to shopping, searching, and buying. Because so many people are now accessing the Internet from their mobile devices, some say that apps are “the new browsers.” Apps are also starting to influence the design and function of traditional Web sites as consumers are attracted to the look and feel of apps and their speed of operation. Many apps are free or purchased for a small charge, much less than ­conventional software, which further adds to their appeal. There are already over 1 million apps for the Apple iPhone and iPad platform and a similar number that run on devices using Google’s Android operating system. The ­success of these mobile platforms depends in large part on the quantity and the quality of the apps they provide. Apps tie the customer to a specific hardware platform: As the user adds more and more apps to his or her mobile phone, the cost of switching to a competing mobile platform rises. At the moment, the most commonly downloaded apps are games, news and weather, maps/navigation, social networking, music, and video/movies. But there are also serious apps for business users that make it possible to create and edit documents, connect to corporate systems, schedule and participate in meetings, track shipments, and dictate voice messages (see the Chapter 1 Interactive Session on Management). There are also a huge number of e ­ -commerce apps for researching and buying goods and services online. 5.5 What are the challenges of managing IT infrastructure and management solutions? Creating and managing a coherent IT infrastructure raises multiple challenges: dealing with platform and technology change (including cloud and mobile computing), management and governance, and making wise infrastructure investments. Dealing with Platform and Infrastructure Change As firms grow, they often quickly outgrow their infrastructure. As firms shrink, they can get stuck with excessive infrastructure purchased in better times. How can a firm remain flexible when most of the investments in IT infrastructure are fixed-cost purchases and licenses? How well does the infrastructure scale? Chapter 5 IT Infrastructure and Emerging Technologies Scalability refers to the ability of a computer, product, or system to expand to serve a large number of users without breaking down. New applications, mergers and acquisitions, and changes in business volume all impact computer workload and must be considered when planning hardware capacity. Firms using mobile computing and cloud computing platforms will require new policies and procedures for managing these platforms. They will need to inventory all of their mobile devices in business use and develop policies and tools for tracking, updating, and securing them and for controlling the data and applications that run on them. Firms using cloud computing and SaaS will need to fashion new contractual arrangements with remote vendors to make sure that the hardware and software for critical applications are always available when needed and that they meet corporate standards for information security. It is up to business management to determine acceptable levels of computer response time and availability for the firm’s mission-critical ­systems to maintain the level of business performance they expect. Management and Governance A long-standing issue among information system managers and CEOs has been the question of who will control and manage the firm’s IT infrastructure. Chapter 2 introduced the concept of IT governance and described some issues it addresses. Other important questions about IT governance are: Should departments and divisions have the responsibility of making their own information technology decisions or should IT infrastructure be centrally controlled and managed? What is the relationship between central information systems management and business unit information systems management? How will infrastructure costs be allocated among business units? Each organization will need to arrive at answers based on its own needs. Making Wise Infrastructure Investments IT infrastructure is a major investment for the firm. If too much is spent on infrastructure, it lies idle and constitutes a drag on the firm’s financial performance. If too little is spent, important business services cannot be delivered and the firm’s competitors (who spent just the right amount) will outperform the ­under-investing firm. How much should the firm spend on infrastructure? This question is not easy to answer. A related question is whether a firm should purchase and maintain its own IT infrastructure components or rent them from external suppliers, ­including those offering cloud services. The decision either to purchase your own IT assets or rent them from external providers is typically called the rent-versusbuy decision. Cloud computing may be a low-cost way to increase scalability and flexibility, but firms should evaluate this option carefully in light of security requirements and impact on business processes and workflows. In some instances, the cost of renting software adds up to more than purchasing and maintaining an application in-house. Yet there may be benefits to using cloud services, if this allows the company to focus on core business issues instead of technology challenges. To t a l C o s t o f O w n e r s h i p o f Te c h n o l o g y A s s e t s The actual cost of owning technology resources includes the original cost of acquiring and installing hardware and software, as well as ongoing administration costs for hardware and software upgrades, maintenance, technical 201 202 Part Two Information Technology Infrastructure s­ upport, training, and even utility and real estate costs for running and housing the technology. The total cost of ownership (TCO) model can be used to ­analyze these direct and indirect costs to help firms determine the actual cost of ­specific technology implementations. Table 5.3 describes the most important TCO ­components to consider in a TCO analysis. When all these cost components are considered, the TCO for a PC might run up to three times the original purchase price of the equipment. Although the purchase price of a wireless handheld for a corporate employee may run several hundred dollars, the TCO for each device is much higher, ranging from $1,000 to $3,000, according to various consultant estimates. Gains in productivity and efficiency from equipping employees with mobile computing devices must be balanced against increased costs from integrating these devices into the firm’s IT infrastructure and from providing technical support. Other cost components include fees for wireless airtime, end-user training, help desk support, and s­ oftware for special applications. Costs are higher if the mobile devices run many different applications or need to be integrated into back-end systems such as enterprise applications. Hardware and software acquisition costs account for only about 20 percent of TCO, so managers must pay close attention to administration costs to understand the full cost of the firm’s hardware and software. It is possible to reduce some of these administration costs through better management. Many large firms are saddled with redundant, incompatible hardware and software because their departments and divisions have been allowed to make their own technology purchases. In addition to switching to cloud services, these firms could reduce their TCO through greater centralization and standardization of their hardware and software resources. Companies could reduce the size of the information ­systems staff required to support their infrastructure if the firm minimizes the number of different computer models and pieces of software that employees are allowed to use. In a centralized infrastructure, systems can be ­administered from a ­central location and troubleshooting can be performed from that location. TABLE 5.3 Total Cost of Ownership (TCO) Cost Components Infrastructure Component Cost Components Hardware acquisition Purchase price of computer hardware equipment, including computers, terminals, storage, and printers Software acquisition Purchase or license of software for each user Installation Cost to install computers and software Training Cost to provide training for information systems specialists and end users Support Cost to provide ongoing technical support, help desks, and so forth Maintenance Cost to upgrade the hardware and software Infrastructure Cost to acquire, maintain, and support related infrastructure, such as networks and specialized equipment (including storage backup units) Downtime Cost of lost productivity if hardware or software failures cause the system to be unavailable for processing and user tasks Space and energy Real estate and utility costs for housing and providing power for the technology Chapter 5 IT Infrastructure and Emerging Technologies C o m p e t i t i v e Fo r c e s M o d e l fo r I T I n f r a s t r u c t u r e I nv e s t m e n t Figure 5.13 illustrates a competitive forces model you can use to address the question of how much your firm should spend on IT infrastructure. Market demand for your firm’s services. Make an inventory of the services you currently provide to customers, suppliers, and employees. Survey each group, or hold focus groups to find out if the services you currently offer are meeting the needs of each group. For example, are customers complaining of slow responses to their queries about price and availability? Are employees complaining about the difficulty of finding the right information for their jobs? Are suppliers complaining about the difficulties of discovering your production requirements? Your firm’s business strategy. Analyze your firm’s five-year business strategy and try to assess what new services and capabilities will be required to achieve strategic goals. Your firm’s IT strategy, infrastructure, and cost. Examine your firm’s ­information technology plans for the next five years and assess its alignment with the firm’s business plans. Determine the total IT infrastructure costs. You will want to perform a TCO analysis. If your firm has no IT strategy, you will need to devise one that takes into account the firm’s five-year strategic plan. Information technology assessment. Is your firm behind the technology curve or at the bleeding edge of information technology? Both situations are to be avoided. It is usually not desirable to spend resources on advanced technolo- FIGURE 5.13 Competitive forces model for IT infrastructure There are six factors you can use to answer the question, “How much should our firm spend on IT infrastructure?” 203 204 Part Two Information Technology Infrastructure gies that are still experimental, often expensive, and sometimes unreliable. You want to spend on technologies for which standards have been established and IT vendors are competing on cost, not design, and where there are multiple suppliers. However, you do not want to put off investment in new technologies or allow competitors to develop new business models and capabilities based on the new technologies. Competitor firm services. Try to assess what technology services competitors offer to customers, suppliers, and employees. Establish quantitative and qualitative measures to compare them to those of your firm. If your firm’s service levels fall short, your company is at a competitive disadvantage. Look for ways your firm can excel at service levels. Competitor firm IT infrastructure investments. Benchmark your expenditures for IT infrastructure against your competitors. Many companies are quite public about their innovative expenditures on IT. If competing firms try to keep IT expenditures secret, you may be able to find IT investment information in public companies’ SEC Form 10-K annual reports to the federal government when those expenditures impact a firm’s financial results. Your firm does not necessarily need to spend as much as, or more than, your competitors. Perhaps it has discovered much less-expensive ways of providing services, and this can lead to a cost advantage. Alternatively, your firm may be spending far less than competitors and experiencing commensurate poor ­performance and losing market share. Review Summary 1. What is IT infrastructure and what are the stages and drivers of IT infrastructure evolution? IT infrastructure is the shared technology resources that provide the platform for the firm’s s­ pecific information system applications. IT infrastructure includes hardware, software, and services that are shared across the entire firm. The five stages of IT infrastructure evolution are: the mainframe era, the personal computer era, the client/server era, the enterprise computing era, and the cloud and mobile computing era. Moore’s Law deals with the exponential increase in processing power and decline in the cost of computer technology, stating that every 18 months the power of microprocessors doubles and the price of ­computing falls in half. The Law of Mass Digital Storage deals with the exponential decrease in the cost of storing data, stating that the number of kilobytes of data that can be stored on magnetic media for $1 roughly doubles every 15 months. Metcalfe’s Law states that a network’s value to ­participants grows exponentially as the network takes on more members. The rapid decline in costs of communication and growing agreement in the technology industry to use computing and communications standards is also driving an explosion of computer use. 2. What are the components of IT infrastructure? Major IT infrastructure components include computer hardware platforms, operating system ­platforms, enterprise software platforms, networking and telecommunications platforms, database management software, Internet platforms, and consulting services and systems integrators. 3. What are the current trends in computer hardware platforms? Increasingly, computing is taking place on a mobile digital platform. Quantum computing is an emerging technology that could dramatically boost processing power through the ability to be in more than one state at the same time. Consumerization of IT is the business use of information ­technology that originated in the consumer market. Virtualization organizes computing resources so that their use is not restricted by physical configuration or geographic ­location. In cloud computing, firms and individuals obtain computing power and software as services over a network, including the Internet, rather than purchasing and installing the hardware and ­software on their own computers. A Chapter 5 IT Infrastructure and Emerging Technologies 205 multicore processor is a microprocessor to which two or more processing cores have been attached for enhanced performance. Green computing includes practices and technologies for producing, using, and ­disposing of information technology hardware to ­minimize negative impact on the environment. 4. What are the current trends in computer software platforms? Open source software is produced and maintained by a global community of programmers and is often downloadable for free. Linux is a powerful, resilient open source operating system that can run on multiple hardware platforms and is used widely to run Web servers. Java is an operating-system– and hardware-independent programming language that is the leading interactive programming ­environment for the Web. HTML5 makes it possible to embed images, audio, and video directly into a Web document without add-on programs. Web services are loosely coupled software components based on open Web standards that work with any application software and operating system. They can be used as components of Web-based applications linking the systems of two different organizations or to link disparate systems of a single company. Companies are purchasing their new software applications from outside sources, including software ­packages, by outsourcing custom application development to an external vendor (that may be offshore), or by renting online software services (SaaS). Mashups combine two different software services to create new s­ oftware applications and services. Apps are small pieces of software that run on the Internet, on a computer, or on a mobile phone and are generally delivered over the Internet. 5. What are the challenges of managing IT infrastructure and management solutions? Major challenges include dealing with platform and infrastructure change, infrastructure ­management and governance, and making wise infrastructure investments. Solution guidelines include using a competitive forces model to determine how much to spend on IT infrastructure and where to make strategic infrastructure investments, and establishing the total cost of ownership (TCO) of information technology assets. The total cost of owning technology resources includes not only the original cost of computer hardware and software but also costs for hardware and software upgrades, maintenance, technical support, and training. Key Terms Android, 183 Application server, 174 Apps, 200 Blade servers, 182 Chrome OS, 183 Clients, 173 Client/server computing, 173 Cloud computing, 175 Consumerization of IT, 185 Extensible Markup Language (XML), 196 Green computing, 193 HTML (Hypertext Markup Language), 195 HTML5, 195 Hybrid cloud, 193 iOS, 183 Java, 194 Legacy systems, 184 Linux, 182 Mainframe, 171 Mashup, 199 Minicomputers, 173 Moore’s Law, 175 Multicore processor, 193 Multitiered (N-tier) client/server architecture, 174 Multitouch, 183 Nanotechnology, 176 On-demand computing, 190 Open source software, 194 Operating system, 182 Outsourcing, 198 Private cloud, 190 Public cloud, 190 Quantum computing, 188 SaaS (Software as a Service), 199 Scalability, 201 Service level agreement (SLA),199 Server, 173 Service-oriented architecture (SOA), 196 Software package, 198 Storage area network (SAN), 183 Tablet computers, 185 Technology standards, 179 Total cost of ownership (TCO), 202 Unix, 182 Virtualization, 188 Web browser, 195 Web hosting service, 184 Web server, 174 Web services, 195 Windows, 174 Windows 8, 183 Wintel PC, 173 206 Part Two Information Technology Infrastructure MyMISLab Go to to complete the problems marked with this icon . Review Questions 5-1 What is IT infrastructure and what are the stages and drivers of IT infrastructure evolution? • Define IT infrastructure from both a ­technology and a services perspective. • List each of the eras in IT infrastructure ­evolution and describe its distinguishing characteristics. • Define and describe the following: Web server, application server, multitiered ­client/server architecture. • Describe Moore’s Law and the Law of Mass Digital Storage. • Describe how network economics, declining communications costs, and technology ­standards affect IT infrastructure. 5-2 What are the components of IT infrastructure? • List and describe the components of IT infrastructure that firms need to manage. 5-3 What are the current trends in computer ­hardware platforms? • Describe the evolving mobile platform, consumerization of IT, and cloud computing. • Explain how businesses can benefit from ­irtualization, green computing, and v ­multicore processors. 5-4 What are the current trends in computer ­software ­platforms? • Define and describe open source software and Linux and explain their business ­benefits. • Define Java and HTML5 and explain why they are important. • Define and describe Web services and the role played by XML. • Name and describe the three external sources for software. • Define and describe software mashups and apps. 5-5 What are the challenges of managing IT ­infrastructure and management solutions? • Name and describe the management ­challenges posed by IT infrastructure. • Explain how using a competitive forces model and calculating the TCO of technology assets help firms make good infrastructure ­investments. Discussion Questions 5-6  Why is selecting computer hardware and ­software for the organization an important management decision? What management, organization, and technology issues should be considered when selecting computer h ­ ardware and software? 5-7  Should organizations use software service providers for all their software needs? Why or why not? What management, organization, and technology factors should be considered when making this decision? 5-8  What are the advantages and disadvantages of cloud computing? Chapter 5 IT Infrastructure and Emerging Technologies 207 Hands-On MIS Projects The projects in this section give you hands-on experience in developing ­solutions for managing IT ­infrastructures and IT outsourcing, using spreadsheet software to evaluate alternative desktop systems, and using Web research to budget for a sales conference. M a n a g e m e n t D e c i s i o n P r o bl e m s 5-9 The University of Pittsburgh Medical Center (UPMC) relies on information systems to operate 19 ­hospitals, a network of other care sites, and international and commercial ventures. Demand for ­additional servers and storage technology was growing by 20 percent each year. UPMC was setting up a separate server for every application, and its servers and other computers were running a number of ­different operating systems, including several versions of Unix and Windows. UPMC had to manage ­technologies from many different vendors, including Hewlett-Packard (HP), Sun Microsystems, Microsoft, and IBM. Assess the impact of this situation on business performance. What factors and management decisions must be considered when ­developing a solution to this problem? 5-10 Qantas Airways, Australia’s leading airline, faces cost pressures from high fuel prices and lower levels of global airline traffic. To remain competitive, the airline must find ways to keep costs low while providing a high level of ­customer service. Qantas had a 30-year-old data center. Management had to decide whether to replace its IT infrastructure with newer technology or ­outsource it. What factors should be considered by Qantas management when deciding whether to outsource? If Qantas decides to outsource, list and describe points that should be addressed in a service level agreement. I m p r ov i n g D e c i s i o n M a k i n g : U s i n g a S p r e a d s h e e t t o E v a l u a t e H a r d w a r e and Software Options Software skills: Spreadsheet formulas Business skills: Technology pricing 5-11  In this exercise, you will use spreadsheet software to calculate the cost of d ­ esktop systems, printers, and software. Use the Internet to obtain pricing information on hardware and software for an office of 30 people. You will need to price 30 PC desktop systems (monitors, computers, and keyboards) manufactured by Lenovo, Dell, and HP. (For the purposes of this exercise, ignore the fact that desktop systems usually come with preloaded software packages.) Also obtain pricing on 15 desktop printers manufactured by HP, Canon, and Dell. Each desktop system must satisfy the minimum specifications shown in tables which you can find in MyMISLab. Also obtain pricing on 30 copies of the most recent versions of Microsoft Office and Apache OpenOffice (formerly Oracle Open Office), and on 30 copies of Microsoft Windows 7 Professional or Windows 8 Pro. Each desktop ­productivity package should contain programs for word processing, spreadsheets, database, and ­presentations. Prepare a spreadsheet showing your research results for the s­ oftware and the desktop system, printer, and software combination offering the best performance and pricing per worker. Because every two workers share one printer (15 printers/30 systems), your calculations should assume only half a printer cost per worker. I m p r ov i n g D e c i s i o n M a k i n g : U s i n g We b R e s e a r c h t o B u d g e t fo r a S a l e s Conference Software skills: Internet-based software Business skills: Researching transportation and lodging costs 5-12  The Foremost Composite Materials Company is planning a two-day sales c­ onference for October 19–20, starting with a reception on the evening of October 18. The conference consists of all-day meetings that the entire sales force, numbering 120 sales representatives and their 16 managers, must attend. Each sales representative requires his or her own room, and the company needs two common 208 Part Two Information Technology Infrastructure meeting rooms, one large enough to hold the entire sales force plus a few visitors (200) and the other able to hold half the force. Management has set a budget of $175,000 for the representatives’ room rentals. The company would like to hold the conference in either Miami or Marco Island, Florida, at a Hilton- or Marriott-owned hotel. Use the Hilton and Marriott Web sites to select a hotel in whichever of these cities that would enable the company to hold its sales conference within its budget and meet its sales conference requirements. Then locate flights ­arriving the afternoon prior to the conference. Your attendees will be coming from Los Angeles (54), San Francisco (32), Seattle (22), Chicago (19), and Pittsburgh (14). Determine costs of each airline ticket from these cities. When you are finished, create a budget for the conference. The budget will include the cost of each airline ticket, the room cost, and $70 per attendee per day for food. Collaboration and Teamwork Project 5-13  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this c­ hapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open-source ­collaboration tools to complete the ­assignment. Chapter 5 IT Infrastructure and Emerging Technologies 209 T he Pleasures and Pitfalls of BYO D case study J ust about everyone who has a smartphone wants to be able to bring it to work and use it on the job. And why not? Employees using their own smartphones would allow c­ompanies to enjoy all of the same benefits of a mobile workforce without spending their own money to purchase these devices. Smaller companies are able to go mobile without making large investments in devices and mobile services. One IBM-sponsored study by Forrester Consulting found that a BYOD program using mobile enterprise services from IBM achieved a 108 percent return on investment and p ­ ayback within one month. “Anywhere/anytime” access to computing tools increased workplace p ­ roductivity and raised effective employee work time by 45–60 minutes per week. According to Gartner Inc., by 2017, 50 p ­ ercent of employers will require employees to supply their own mobile devices for the workplace. BYOD is becoming the “new normal.” But...wait a minute. Nearly three out of five enterprises believe that BYOD represents a growing problem for their organizations, according to a survey of 162 enterprises conducted by Osterman Research on behalf of Dell Inc. Although BYOD can improve employee job satisfaction and productivity, it also can cause a number of problems if not managed properly: support for personally owned devices is more difficult than it is for company-supplied devices, the cost of managing mobile devices can increase, and protecting corporate data and networks becomes more difficult. Research conducted by the Aberdeen Group found that on average, an enterprise with 1,000 mobile devices spends an extra $170,000 per year when it allows BYOD. So it’s not that simple. BYOD requires a significant portion of corporate IT resources dedicated to managing and maintaining a large number of devices within the organization. In the past, companies tried to limit business smartphone use to a single platform. This made it easier to keep track of each mobile device and to roll out software upgrades or fixes, because all employees were using the same devices, or at the very least, the same operating system. The most popular employer-issued smartphone used to be Research in Motion’s BlackBerry, because it was considered the “most secure” mobile platform available. (BlackBerry mobile devices access corporate e-mail and data using a proprietary software and networking ­platform that is company-controlled and protected from outsiders.) Today, the mobile digital landscape is much more complicated, with a variety of devices and operating systems on the market that do not have well-developed tools for administration and security. Android has over 79 percent of the worldwide smartphone market, but it is more difficult to use for corporate work than Apple mobile devices using the iOS ­operating system. IOS is considered a closed system and runs only on a limited number of different Apple mobile devices. In contrast, Android’s fragmentation makes it more difficult and costly for corporate IT to manage. As of July 2013, there were at least 11,868 different Android-based devices were available from more than 1,700 different brands, according to a report by OpenSignal, which researches wireless networks and devices. Android’s huge consumer market share attracts many hackers. Android is also ­vulnerable because it has an opensource architectureand comes in multiple versions. If employees are allowed to work with more than one type of mobile device and operating system, companies need an effective way to keep track of all the devices employees are using. To access company information, the company’s networks must be configured to receive connections from that device. When employees make changes to their personal phone, such as switching cellular carriers, changing their phone number, or buying a new mobile device altogether, companies will need to quickly and flexibly ensure that their employees are still able to remain productive. Firms need an efficient inventory management system that keeps track of which devices employees are using, where the device is located, whether it is being used, and what software it is equipped with. For unprepared companies, ­keeping track of who gets access to what data could be a nightmare. With the large variety of phones and operating systems available, providing adequate technical ­support for every employee could be difficult. When employees are not able to access critical data or encounter other problems with their mobile devices, they will need assistance from the information ­systems department. Companies that rely on desktop computers tend to have many of the same computers 210 Part Two Information Technology Infrastructure with the same specs and operating systems, making tech support that much easier. Mobility introduces a new layer of variety and complexity to tech support that companies need to be prepared to handle. There are significant concerns with securing company information accessed with mobile devices. If a device is stolen or compromised, companies need ways to ensure that sensitive or confidential information isn’t freely available to anyone. Mobility puts assets and data at greater risk than if they were only located within company walls and on company machines. Companies often use technologies that allow them to wipe data from devices remotely, or encrypt data so that if it is stolen, it cannot be used. You’ll find a detailed discussion of mobile security issues in Chapter 8. IBM’s CIO Jeanette Horan believes that BYOD may cause as many problems as it solves. BYOD was not saving IBM any money and had actually ­created new challenges for the IT department because employees’ devices are full of software that IBM doesn’t control. IBM provides secure BlackBerrys for about 40,000 of its 400,000 workers while ­allowing 80,000 more employees to use their own ­smartphones or tablets to access IBM networks. The IBM IT department found it had no grasp of which apps and services employees were using on their personal devices, and employees themselves were “blissfully unaware” of the security risks posed by popular apps. IBM decided to ban the use of such popular services as the Dropbox cloud-based cyberlocker, fearing that employees would put IBMsensitive information in their personal Dropbox accounts, forward internal email to public Web mail services, or use their smartphones as mobile Wi-Fi hotspots. According to research by the International Data Company (IDC), 20 percent of corporate employees using personal cloud storage services admitted to using them to store enterprise data, so this is becoming a serious problem. IBM will not allow an employee to access its corporate networks with his or her personal device unless it secures the device. The IT department ­configures the device so that its memory can be erased remotely if it is lost or stolen. The IT group also disables public file-transfer programs like Apple’s iCloud; instead, employees use an ­IBM-hosted version called MyMobileHub. IBM even turns off Siri, the voice-activated personal assistant, on employees’ iPhones because the spoken queries are uploaded to Apple servers. Each employee’s device is treated differently, depending on the model and the job responsibilities of the person using it. Some people are only allowed to receive IBM e-mail, calendars, and contacts on their portable devices, while others can access ­internal IBM applications and files (see Chapter 8). IBM equips the mobile devices of the latter ­category of employees with additional software, such as ­programs that encrypt information as it travels to and from corporate networks. One company that has successfully implemented BYOD is Intel Corporation, the giant semiconductor company. About 70 percent of the 39,000 devices registered on its network are personal devices. Intel approached in BYOD in a positive manner, trying to find ways to make it work rather than to defeat it. Diane Bryant, then Intel’s CIO, didn’t want to be dependent on a single mobile vendor or device. Intel hammered out a BYOD strategy and ­created an end-user service-level agreement that clarified that end users were voluntarily using BYOD rather than being mandated by Intel. The company developed different policies, rules, and access limits for each type of device-smartphone, tablet, or laptop—with multiple levels of controls in place. Intel maintains a list of approved devices. If a device does not meet its requirements, it is blocked from the network. Intel’s BYOD program today offers 40 proprietary applications, including travel tools to help schedule a flight and conference room finders. The company has an internal “app store” and uses a ­variety of software and security tools, including mobile device management (MDM) software and mobile app management (MAM) software. Intel’s goal for BYOD is not to save money but to make employees happier and more productive. Employees like being able to use their own device and apps alongside specialized Intel apps. On average, Intel workers report that bringing their own devices saves them about 57 minutes per day, which amounts to 5 million hours annually company-wide. Canadian Tire decided not to allow BYOD at all and issued new BlackBarry Q10 and Z10 smartphones to its 3,000 corporate employees. (Canadian Tire is one of Canada’s largest companies, with an online e-commerce store and 1,200 retail outlets selling automotive, sports, leisure, home products, and apparel; petroleum outlets; and financial services.) The company felt that for its purposes, the bringyour-own-device model was not sufficiently secure. Canadian Tire’s chief technology officer (CTO) Eugene Roman worries that an email could sent a virus into the company’s core infrastructure. At ­present, Canadian Tire’s management thinks BYOD Chapter 5 IT Infrastructure and Emerging Technologies is interesting but is not yet ready for the company’s mainstream business applications. In order to successfully deploy mobile devices, companies need to carefully examine their business processes and determine whether or not mobility makes sense for them. Not every firm will benefit from mobility to the same degree. Without a clear idea of how exactly mobile devices fit into the long term plans for the firm, companies will end up wasting their money on unnecessary devices and programs. Sources: Dennis McCafferty, “Surprising Facts About Mobility and BYOD,” Baseline, January 29, 2014; Beatrice Piquer-Durand, “BYOD and BYOA: Dangers and Complications,” Techradar Pro, March 24, 2014; Tam Harbert, “Android Invades the Enterprise,” Computerworld BYOD Consumerization of IT,” November 2013; Forrester Consulting, “The Total Economic Impact of IBM Managed Mobility for BYOD,” May 2013; Fred Donovan, “The Growing BYOD Problem,” FierceMobileIT, February 13, 2013; Brian Bergstein, “IBM Faces the Perils of ‘Bring Your Own Device’,” MIT Technology Review, May 21, 2013; and Matt Hamblen, “Canadian Tire forgoes BYOD, Issues BlackBerries to Workers,” Computerworld, May 20, 2013. Case Study Questions 5-14 What are the advantages and disadvantages of allowing employees to use their personal smartphones for work? 5-15 What management, organization, and technology factors should be addressed when deciding whether to allow employees to use their ­personal smartphones for work? 5-16 Compare the BYOD experiences of IBM and Intel. Why did BYOD at Intel work so well? 5-17 Allowing employees use their own smartphones for work will save the company money. Do you agree? Why or why not? MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions. 5-18 5-19 211 What are the distinguishing characteristics of cloud computing and what are the three types of cloud services? What is the total cost of ownership of technology assets and what are its cost components? 212 Part Two Information Technology Infrastructure Chapter 5 References Andersson, Henrik, James Kaplan, and Brent Smolinski. “Capturing Value from IT Infrastructure Innovation.” McKinsey Quarterly (October 2012). Babcock, Charles. “Cloud’s Thorniest Question: Does It Pay Off?” Information Week (June 4, 2012). Benlian , Alexander, Marios Koufaris and Thomas Hess. “Service Quality in Software-as-a-Service: Developing the SaaS-Qual Measure and Examining Its Role in Usage Continuance.” Journal of Management Information Systems, 28, No. 3 (Winter 2012). Carr, Nicholas. The Big Switch. New York: Norton (2008). Clark, Don. “Intel Unveils Tiny Quark Chips for Wearable Devices.” Wall Street Journal (September 10, 2013). Choi, Jae, Derek L. Nazareth, and Hemant K. Jain. “Implementing Service-Oriented Architecture in Organizations.” Journal of Management Information Systems 26, No. 4 (Spring 2010). David, Julie Smith, David Schuff, and Robert St. Louis. “Managing Your IT Total Cost of Ownership.” Communications of the ACM 45, No. 1 (January 2002). EMarketer. “Smartphone Users Worldwide Will Total 1.75 Billion in 2014.” (Jan 16, 2014). Evangelista, Michelle. “The Total Impact of IBM Managed Mobility for BYOD.” IBM (2013). Fitzgerald, Brian. “The Transformation of Open Source Software.” MIS Quarterly 30, No. 3 (September 2006). Gartner, Inc. “Gartner Says Worldwide IT Spending on Pace to Reach $3.8 Trillion in 2014.” (January 6, 2014). Gartner, Inc. “Gartner Says Worldwide Traditional PC, Tablet, Ultramobile and Mobile Phone Shipments to Grow 4.2 Percent in 2014.” (July 7, 2014). Grossman, Lev. “Quantum Leap.” Time (February 17, 2014). Hagel III, John and John Seeley Brown. “Your Next IT Strategy.” Harvard Business Review (October, 2001). Hamilton, David. “Enterprise Cloud IT Spending to Grow 20% in 2014, Reaching $174.2B: IHS Research.” The (February 19, 2014). 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McCafferty, Dennis. “Eight Interesting Facts About Java.” CIO Insight (June 16, 2014). Mell, Peter and Tim Grance. “The NIST Definition of Cloud Computing” Version 15. NIST (October 17, 2009). Moore, Gordon. “Cramming More Components Onto Integrated Circuits,” Electronics 38, Number 8 (April 19, 1965). Mueller, Benjamin, Goetz Viering, Christine Legner, and Gerold Riempp. “Understanding the Economic Potential of ServiceOriented Architecture.” Journal of Management Information Systems 26, No. 4 (Spring 2010). Schuff, David and Robert St. Louis. “Centralization vs. Decentralization of Application Software.” Communications of the ACM 44, No. 6 (June 2001). Stango, Victor. “The Economics of Standards Wars.” Review of Network Economics 3, Issue 1 (March 2004). Susarla, Anjana, Anitesh Barua, and Andrew B. Whinston. “A Transaction Cost Perspective of the ‘Software as a Service’ Business Model. “ Journal of Management Information Systems 26, No. 2 (Fall 2009). Taft, Darryl K. “Application Development: Java Death Debunked: 10 Reasons Why It’s Still Hot.” eWeek (February 22, 2012). Torode, Christine, Linda Tucci and Karen Goulart. “Managing the Next-Generation Data Center.” Modern Infrastructure CIO Edition (January 2013). Weill, Peter, and Marianne Broadbent. Leveraging the New Infrastructure. Cambridge, MA: Harvard Business School Press (1998). Weitzel, Tim. Economics of Standards in Information Networks. Springer (2004). This page intentionally left blank Foundations of Business Intelligence: Databases and 6 C H A P T E R Information Management Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. What are the problems of managing data resources in a traditional file environment? 2. What are the major capabilities of database management systems (DBMS) and why is a relational DBMS so powerful? 3. What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? 4. Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 214 Chapter Cases Video Cases Better Data Management Helps the Toronto Globe and Mail Reach Its Customers Driving ARI Fleet Management with RealTime Analytics American Water Keeps Data Flowing Does Big Data Bring Big Rewards? Dubuque Uses Cloud Computing and Sensors to Build a Smarter City Data Warehousing at REI: Understanding the Customer Maruti Suzuki Business Intelligence and Enterprise Databases Better Data Management Helps the Toronto Globe and Mail Reach Its Customers H ave you ever received a new subscription offer from a newspaper or ­magazine to which you already subscribed? In addition to being an ­annoyance, sending a superfluous offer to customers increases marketing costs. So why is this happening? The answer is probably because of poor data management. The newspaper most likely was unable to match its existing subscriber list, which it maintained in one place, with another file containing its list of ­marketing prospects. The Globe and Mail, based in Toronto, Canada, was one of those publications that had these problems. In print for 167 years, it is Canada’s largest newspaper, with a cumulative six-day readership of nearly 3.3 million. The paper has a very ambitious marketing program, viewing every Canadian household that does not already subscribe as a prospect. But it has had trouble housing and managing the data on these prospects. Running a major newspaper requires managing huge amounts of data, including circulation data, advertising revenue data, marketing prospect and “do not contact” data, and data on logistics and deliveries. Add to that the data required to run any business, including finance and human resources data. For many years The Globe and Mail housed much of its data in a ­mainframe system where the data were not easy to access and analyze. If users needed any information, they had to extract the data from the ­mainframe and bring it to one of a number of local databases for analysis, including those maintained in Microsoft Access, Foxbase Pro, and Microsoft Excel. This practice created numerous pockets of data maintained in i­solated databases for specific ­purposes but no central repository where the most up-to-date data could be © Semisatch/Shutterstock 215 216 Part Two Information Technology Infrastructure accessed from a single place. With data scattered in so many different systems throughout the company, it was very difficult to cross-reference subscribers with prospects when developing the mailing list for a marketing campaign. There were also security issues: The Globe and Mail collects and stores c­ ustomer payment information, and housing this confidential data in multiple places makes it more difficult to ensure that proper data security controls are in place. In 2002, the newspaper began addressing these problems by implementing a SAP enterprise system with a SAP NetWeaver BW data warehouse that would contain all of the company’s data from its various data sources in a single ­location where the data could be easily accessed and analyzed by business users. The first data to populate the data warehouse was advertising sales data, which is a major source of revenue. In 2007, The Globe and Mail added circulation data to the warehouse, including delivery data details such as how much time is left on a customer’s subscription and data on marketing prospects from third-party sources. Data on prospects were added to the warehouse as well. With all these data in a single place, the paper can easily match prospect and customer data to avoid targeting existing customers with subscription promotions. It can also match the data to “do not contact” and delivery area data to determine if a newspaper can be delivered or whether a customer should be targeted with a promotion for a digital subscription. Despite the obvious benefits of the new data warehouse, not all of The Globe and Mail’s business users immediately came on board. People who were used to extracting data from the mainframe system and manipulating it in their own local databases or file continued to do the same thing after the data warehouse went live. They did not understand the concept of a data warehouse or the need to work towards enterprise-wide data management. The Globe and Mail’s management decided to tackle this new problem by educating its users, especially its marketing professionals, with the value of having all the organization’s data in a data warehouse and the tools available for accessing and analyzing these data. The Globe and Mail’s new data analysis capabilities produced savings from efficiencies and streamlined processes that paid for the investment in one year. Marketing campaigns that previously took two weeks to complete now only take one day. The newspaper can determine its saturation rates in a given area to guide its marketing plans. And there are fewer complaints from subscribers and potential subscribers about being contacted unnecessarily. To capitalize further on data management and analytics, The Globe and Mail turned to the cloud. A key business goal for the company was to beef up online content and increase the paper’s digital subscriber base. The Globe and Mail devoted more resources to digital online content, with different subscription rates for online-only customers and print customers. To aggressively court digital subscribers, The Globe and Mail had to mine its clickstream data logging user actions on the Web to target potential digital subscribers based not only on their specific interests but also their interests on a particular day. The volume of data was too large to be handled by the company’s conventional Oracle database. The solution was to use SAP HANA ONE in-memory computing software running on the Amazon Web Services cloud computing platform, which accelerates data analysis and processing by storing data in the computer’s main memory (RAM) rather than on external storage devices. This cloud solution lets The Globe and Mail pay for only what capabilities it uses on an hourly basis. Sources:, accessed March 1, 2014; “The Globe and Mail Uses SAP HANA in the Cloud to row Its Digital Audience,” SAP Insider Profiles, April 1, 2013; and David Hannon, “Spread the News,” SAP Insider Profiles, October-December 2012. Chapter 6 Foundations of Business Intelligence: Databases and Information Management T he experience of The Globe and Mail illustrates the importance of data ­management. Business performance depends on what a firm can or ­cannot do with its data. The Globe and Mail was a large and thriving business, but both operational efficiency and management decision making were ­hampered by fragmented data stored in multiple systems that were difficult to access. How businesses store, organize, and manage their data has an e ­ normous impact on organizational effectiveness. The chapter-opening diagram calls attention to important points raised by this case and this chapter. The Globe and Mail’s business users were maintaining their own local databases because the company’s data were so difficult to access in the newspaper’s traditional mainframe system. Marketing campaigns took much longer than necessary because the required data took so long to assemble. The solution was to consolidate organizational data in an enterprisewide data ­warehouse that provided a single source of data for reporting and analysis. The newspaper had to reorganize its data into a standard companywide format, establish rules, responsibilities, and procedures for accessing and using the data, provide tools for making the data accessible to users for querying and reporting, and educate its users about the benefits of the warehouse. The data warehouse boosted efficiency by making the Globe’s data easier to locate and assemble for reporting. The data warehouse integrated company data from all of its disparate sources into a single comprehensive database that could be queried directly. The data were reconciled to prevent errors such as contacting existing subscribers with subscription offers. The solution improved customer service while reducing costs. The Globe and Mail increased its ability to quickly analyze vast quantities of data by using SAP HANA running on Amazon’s cloud service. Here are some questions to think about: What was the business impact of The Globe and Mail’s data management problems? What work had to be done by both business and technical staff to make sure that the data warehouse ­produced the results envisioned by management? 217 218 Part Two Information Technology Infrastructure 6.1 A What are the problems of managing data resources in a traditional file environment? n effective information system provides users with accurate, timely, and relevant information. Accurate information is free of errors. Information is timely when it is available to decision makers when it is needed. Information is relevant when it is useful and appropriate for the types of work and decisions that require it. You might be surprised to learn that many businesses don’t have timely, accurate, or relevant information because the data in their information systems have been poorly organized and maintained. That’s why data management is so essential. To understand the problem, let’s look at how information systems arrange data in computer files and traditional methods of file management. File Organization Terms and Concepts A computer system organizes data in a hierarchy that starts with bits and bytes and progresses to fields, records, files, and databases (see Figure 6.1). A bit represents the smallest unit of data a computer can handle. A group of bits, called a byte, represents a single character, which can be a letter, a number, or another symbol. A grouping of characters into a word, a group of words, or a complete number (such as a person’s name or age) is called a field. A group of related fields, such as the student’s name, the course taken, the date, and the grade, comprises a record; a group of records of the same type is called a file. For example, the records in Figure 6.1 could constitute a student course file. A group of related files makes up a database. The student course file illustrated in Figure 6.1 could be grouped with files on students’ personal histories and financial backgrounds to create a student database. A record describes an entity. An entity is a person, place, thing, or event on which we store and maintain information. Each characteristic or quality describing a particular entity is called an attribute. For example, Student_ID, Course, Date, and Grade are attributes of the entity COURSE. The specific values that these attributes can have are found in the fields of the record describing the entity COURSE. Problems with the Traditional File Environment In most organizations, systems tended to grow independently without a ­company-wide plan. Accounting, finance, manufacturing, human resources, and sales and marketing all developed their own systems and data files. Figure 6.2 illustrates the traditional approach to information processing. Each application, of course, required its own files and its own computer ­program to operate. For example, the human resources functional area might have a personnel master file, a payroll file, a medical insurance file, a p ­ ension file, a mailing list file, and so forth until tens, perhaps hundreds, of files and programs existed. In the company as a whole, this process led to multiple master files created, maintained, and operated by separate divisions or departments. As this process goes on for 5 or 10 years, the organization is saddled with hundreds of programs and applications that are very difficult to maintain Chapter 6 Foundations of Business Intelligence: Databases and Information Management FIGURE 6.1 The data hierarchy A computer system organizes data in a hierarchy that starts with the bit, which represents either a 0 or a 1. Bits can be grouped to form a byte to represent one character, number, or symbol. Bytes can be grouped to form a field, and related fields can be grouped to form a record. Related records can be collected to form a file, and related files can be organized into a database. and manage. The resulting problems are data redundancy and inconsistency, program-data dependence, inflexibility, poor data security, and an inability to share data among applications. Data Redundancy and Inconsistency Data redundancy is the presence of duplicate data in multiple data files so that the same data are stored in more than one place or location. Data redundancy occurs when different groups in an organization independently collect the same piece of data and store it independently of each other. Data redundancy wastes storage resources and also leads to data inconsistency, where the same attribute may have different values. For example, in instances of the entity COURSE illustrated in Figure 6.1, the Date may be updated in some systems but not in others. The same attribute, Student_ID, may also have different names in different systems throughout the organization. Some systems might use Student_ID and others might use ID, for example. Additional confusion might result from using different coding systems to represent values for an attribute. For instance, the sales, inventory, and 219 220 Part Two Information Technology Infrastructure FIGURE 6.2 Traditional file processing The use of a traditional approach to file processing encourages each functional area in a corporation to develop specialized applications. Each application requires a unique data file that is likely to be a subset of the master file. These subsets of the master file lead to data redundancy and inconsistency, processing inflexibility, and wasted storage resources. ­ anufacturing systems of a clothing retailer might use different codes to m ­represent clothing size. One system might represent clothing size as “extra large,” whereas another might use the code “XL” for the same purpose. The resulting confusion would make it difficult for companies to create customer relationship management, supply chain management, or enterprise systems that integrate data from different sources. Program-Data Dependence Program-data dependence refers to the coupling of data stored in files and the specific programs required to update and maintain those files such that changes in programs require changes to the data. Every traditional computer program has to describe the location and nature of the data with which it works. In a traditional file environment, any change in a software program could require a change in the data accessed by that program. One program might be modified from a five-digit to a nine-digit zip code. If the original data file were changed from five-digit to nine-digit zip codes, then other programs that required the five-digit zip code would no longer work properly. Such changes could cost ­millions of dollars to implement properly. L a c k o f F l ex i b i l i t y A traditional file system can deliver routine scheduled reports after extensive programming efforts, but it cannot deliver ad hoc reports or respond to unanticipated information requirements in a timely fashion. The information required by ad hoc requests is somewhere in the system but may be too expensive to Chapter 6 Foundations of Business Intelligence: Databases and Information Management retrieve. Several programmers might have to work for weeks to put together the required data items in a new file. Po o r S e c u r i t y Because there is little control or management of data, access to and dissemination of information may be out of control. Management may have no way of knowing who is accessing or even making changes to the organization’s data. L a c k o f D a t a S h a r i n g a n d Av a i l a b i l i t y Because pieces of information in different files and different parts of the ­organization cannot be related to one another, it is virtually impossible for ­information to be shared or accessed in a timely manner. Information cannot flow freely across different functional areas or different parts of the organization. If users find different values of the same piece of information in two ­different systems, they may not want to use these systems because they cannot trust the accuracy of their data. 6.2 What are the major capabilities of database management systems (dbms) and why is a relational dbms so powerful? Database technology cuts through many of the problems of traditional file organization. A more rigorous definition of a database is a collection of data organized to serve many applications efficiently by centralizing the data and controlling redundant data. Rather than storing data in separate files for each application, data appears to users as being stored in only one location. A single database services multiple applications. For example, instead of a corporation storing employee data in separate information systems and separate files for personnel, payroll, and benefits, the corporation could create a single common human resources database. Database Management Systems A database management system (DBMS) is software that permits an ­organization to centralize data, manage them efficiently, and provide access to the stored data by application programs. The DBMS acts as an interface between application programs and the physical data files. When the application program calls for a data item, such as gross pay, the DBMS finds this item in the database and presents it to the application program. Using traditional data files, the programmer would have to specify the size and format of each data element used in the program and then tell the computer where they were located. The DBMS relieves the programmer or end user from the task of understanding where and how the data are actually stored by separating the logical and physical views of the data. The logical view presents data as they would be perceived by end users or business specialists, whereas the physical view shows how data are actually organized and structured on physical storage media. The database management software makes the physical database a­ vailable for different logical views required by users. For example, for the human resources database illustrated in Figure 6.3, a benefits specialist might require a view consisting of the employee’s name, social security number, and health 221 222 Part Two Information Technology Infrastructure FIGURE 6.3 Human Resources Database with Multiple Views A single human resources database provides many different views of data, depending on the ­information requirements of the user. Illustrated here are two possible views, one of interest to a benefits specialist and one of interest to a member of the company’s payroll department. insurance coverage. A payroll department member might need data such as the employee’s name, social security number, gross pay, and net pay. The data for all these views are stored in a single database, where they can be more easily managed by the organization. H o w a D B M S S o l v e s t h e P r o bl e m s o f t h e Tr a d i t i o n a l F i l e E nv i r o n m e n t A DBMS reduces data redundancy and inconsistency by minimizing ­isolated files in which the same data are repeated. The DBMS may not enable the ­organization to eliminate data redundancy entirely, but it can help ­control redundancy. Even if the organization maintains some redundant data, using a DBMS eliminates data inconsistency because the DBMS can help the ­organization ensure that every occurrence of redundant data has the same values. The DBMS uncouples programs and data, enabling data to stand on their own. The description of the data used by the program does not have to be ­specified in detail each time a different program is written. Access and availability of information will be increased and ­program development and maintenance costs reduced because users and programmers can perform ad hoc queries of the database for many simple applications without having to write complicated programs. The DBMS enables the organization to centrally manage data, their use, and ­security. Datasharing throughout the organization is easier because the data are presented to users as being in a single location rather than fragmented in many different systems and files. Relational DBMS Contemporary DBMS use different database models to keep track of e ­ ntities, attributes, and relationships. The most popular type of DBMS today for PCs as well as for larger computers and mainframes is the relational DBMS. Relational databases represent data as two-dimensional tables (called relations). Tables may be referred to as files. Each table contains data on an entity and its attributes. Microsoft Access is a relational DBMS for desktop systems, whereas Chapter 6 Foundations of Business Intelligence: Databases and Information Management 223 DB2, Oracle Database, and Microsoft SQL Server are relational DBMS for large mainframes and midrange computers. MySQL is a popular open source DBMS. Let’s look at how a relational database organizes data about suppliers and parts (see Figure 6.4). The database has a separate table for the entity SUPPLIER and a table for the entity PART. Each table consists of a grid of columns and rows of data. Each individual element of data for each entity is stored as a ­separate field, and each field represents an attribute for that entity. Fields in a ­relational database are also called columns. For the entity SUPPLIER, the ­supplier ­identification number, name, street, city, state, and zip code are stored as separate fields within the SUPPLIER table and each field represents an ­attribute for the entity SUPPLIER. The actual information about a single supplier that resides in a table is called a row. Rows are commonly referred to as records, or in very technical terms, as tuples. Data for the entity PART have their own separate table. The field for Supplier_Number in the SUPPLIER table uniquely identifies each record so that the record can be retrieved, updated, or sorted. It is called a key field. Each table in a relational database has one field that is d ­ esignated as its primary key. This key field is the unique identifier for all the information FIGURE 6.4 Relational Database Tables A relational database organizes data in the form of two-dimensional tables. Illustrated here are tables for the entities SUPPLIER and PART showing how they represent each entity and its attributes. Supplier_Number is a primary key for the SUPPLIER table and a foreign key for the PART table. 224 Part Two Information Technology Infrastructure in any row of the table and this primary key cannot be duplicated. Supplier_ Number is the primary key for the SUPPLIER table and Part_Number is the primary key for the PART table. Note that Supplier_Number appears in both the SUPPLIER and PART tables. In the SUPPLIER table, Supplier_Number is the primary key. When the field Supplier_Number appears in the PART table, it is called a foreign key and is essentially a lookup field to look up data about the supplier of a specific part. Operations of a Relational DBMS Relational database tables can be combined easily to deliver data required by users, provided that any two tables share a common data element. Suppose we wanted to find in this database the names of suppliers who could provide us with part number 137 or part number 150. We would need information from two tables: the SUPPLIER table and the PART table. Note that these two files have a shared data element: Supplier_Number. In a relational database, three basic operations, as shown in Figure 6.5, are used to develop useful sets of data: select, join, and project. The select operation creates a subset consisting of all records in the file that meet stated criteria. Select creates, in other words, a subset of rows that meet certain criteria. In our example, we want to select records (rows) from the PART table where the Part_Number equals 137 or 150. The join operation combines relational tables to provide the user with more information than is available in individual tables. In our example, we want to join the now-shortened PART table (only parts 137 or 150 will be presented) and the SUPPLIER table into a single new table. The project operation creates a subset consisting of columns in a table, permitting the user to create new tables that contain only the information required. In our example, we want to extract from the new table only the following columns: Part_Number, Part_Name, Supplier_Number, and Supplier_Name. Non-Relational Databases and Databases in the Cloud For over 30 years, relational database technology has been the gold s­ tandard. Cloud computing, unprecedented data volumes, massive workloads for Web services, and the need to store new types of data require database alternatives to the traditional relational model of organizing data in the form of tables, ­columns, and rows. Companies are turning to “NoSQL” non-relational database technologies for this purpose. Non-relational database management ­systems use a more flexible data model and are designed for managing large data sets across many distributed machines and for easily scaling up or down. They are useful for accelerating simple queries against large volumes of structured and unstructured data, including Web, social media, graphics, and other forms of data that are difficult to analyze with traditional SQL-based tools. There are several different kinds of NoSQL databases, each with its own technical features and behavior. Oracle NoSQL Database is one example, as is Amazon’s SimpleDB, one of the Amazon Web Services that run in the cloud. SimpleDB provides a simple Web services interface to create and store ­multiple data sets, query data easily, and return the results. There is no need to ­pre-define a formal database structure or change that definition if new data are added later. For example, MetLife decided to employ the MongoDB open source NoSQL database to quickly integrate disparate data and deliver a ­consolidated view of the customer. MetLife’s database brings together data from more than 70 separate administrative systems, claims systems and other data sources, including semi-structured and unstructured data, such as images of health records and death certificates. The NoSQLdatabase is able to ingest FIGURE 6.5 The Three Basic Operations of a Relational DBMS Chapter 6 Foundations of Business Intelligence: Databases and Information Management The select, join, and project operations enable data from two different tables to be combined and only selected attributes to be displayed. 225 226 Part Two Information Technology Infrastructure structured, semi-structured and unstructured information without requiring tedious, expensive and time-consuming database-mapping (Henschen, 2013). Amazon and other cloud computing vendors provide relational database ­services as well. Amazon Relational Database Service (Amazon RDS) offers MySQL, SQL Server, or Oracle Database as database engines. Pricing is based on usage. Oracle has its own database cloud service using its relational Oracle Database and Microsoft SQL Azure Database is a cloud-based relational database service based on Microsoft’s SQL Server DBMS. Cloud-based data management services have special appeal for Web-focused start-ups or small to medium-sized businesses seeking database capabilities at a lower price than in-house database products. In addition to public cloud-based data management services, ­companies now have the option of using databases in private clouds. For example, Sabre Holdings, the world’s largest software as a service (SaaS) provider for the aviation industry, has a ­private database cloud that supports more than 100 projects and 700 users. A consolidated database spanning a pool of ­standardized servers ­running Oracle Database provides database ­services for multiple applications. Capabilities of Database Management Systems A DBMS includes capabilities and tools for organizing, managing, and accessing the data in the database. The most important are its data definition language, data dictionary, and data manipulation language. DBMS have a data definition capability to specify the structure of the ­content of the database. It would be used to create database tables and to define the ­characteristics of the fields in each table. This information about the database would be documented in a data dictionary. A data dictionary is an automated or manual file that stores definitions of data elements and their characteristics. Microsoft Access has a rudimentary data dictionary capability that displays information about the name, description, size, type, format, and other ­properties of each field in a table (see Figure 6.6). Data dictionaries for large corporate databases may capture additional information, such as usage, ownership (who in the organization is responsible for maintaining the data), authorization, ­security, and the individuals, business functions, programs, and reports that use each data element. Querying and Reporting DBMS includes tools for accessing and manipulating information in databases. Most DBMS have a specialized language called a data manipulation ­language that is used to add, change, delete, and retrieve the data in the database. This language contains commands that permit end users and programming ­specialists to extract data from the database to satisfy information requests and develop applications. The most prominent data manipulation language today is Structured Query Language, or SQL. Figure 6.7 illustrates the SQL query that would produce the new resultant table in Figure 6.5. You can find out more about how to perform SQL queries in our Learning Tracks for this chapter. Users of DBMS for large and midrange computers, such as DB2, Oracle, or SQL Server, would employ SQL to retrieve information they needed from the database. Microsoft Access also uses SQL, but it provides its own set of userfriendly tools for querying databases and for organizing data from databases into more polished reports. Chapter 6 Foundations of Business Intelligence: Databases and Information Management FIGURE 6.6 Access Data Dictionary Features Microsoft Access has a rudimentary data dictionary capability that displays information about the size, format, and other characteristics of each field in a database. Displayed here is the information maintained in the SUPPLIER table. The small key icon to the left of Supplier_Number indicates that it is a key field. In Microsoft Access, you will find features that enable users to create q ­ ueries by identifying the tables and fields they want and the results, and then selecting the rows from the database that meet particular criteria. These actions in turn are translated into SQL commands. Figure 6.8 illustrates how the same query as the SQL query to select parts and suppliers would be ­constructed using the Microsoft query-building tools. Microsoft Access and other DBMS include capabilities for report generation so that the data of interest can be displayed in a more structured and polished format than would be possible just by querying. Crystal Reports is a popular report generator for large corporate DBMS, although it can also be used with Access. Access also has capabilities for developing desktop system applications. These include tools for creating data entry screens, reports, and developing the logic for processing transactions. Designing Databases To create a database, you must understand the relationships among the data, the type of data that will be maintained in the database, how the data will be FIGURE 6.7 Example of an SQL Query Illustrated here are the SQL statements for a query to select suppliers for parts 137 or 150. They produce a list with the same results as Figure 6.5. 227 228 Part Two Information Technology Infrastructure FIGURE 6.8 An Access Query Illustrated here is how the query in Figure 6.7 would be constructed using Microsoft Access ­query-building tools. It shows the tables, fields, and selection criteria used for the query. used, and how the organization will need to change to manage data from a company-wide perspective. The database requires both a conceptual design and a physical design. The conceptual, or logical, design of a database is an abstract model of the database from a business perspective, whereas the ­physical design shows how the database is actually arranged on direct-access storage devices. Normalization and Entity-Relationship Diagrams The conceptual database design describes how the data elements in the ­database are to be grouped. The design process identifies relationships among data elements and the most efficient way of grouping data elements together to meet business information requirements. The process also i­dentifies ­redundant data elements and the groupings of data elements required for ­specific application programs. Groups of data are organized, refined, and streamlined until an overall logical view of the relationships among all the data in the database emerges. To use a relational database model effectively, complex groupings of data must be streamlined to minimize redundant data elements and ­awkward m any-to-many relationships. The process of creating small, stable, yet ­ ­flexible and adaptive data structures from complex groups of data is called ­normalization. Figures 6.9 and 6.10 illustrate this process. In the particular business modeled here, an order can have more than one part but each part is provided by only one supplier. If we build a relation called ORDER with all the fields included here, we would have to repeat the name FIGURE 6.9 An unnormalized relation for ORDER An unnormalized relation contains repeating groups. For example, there can be many parts and suppliers for each order. There is only a one-to-one correspondence between Order_Number and Order_Date. Chapter 6 Foundations of Business Intelligence: Databases and Information Management 229 FIGURE 6.10 Normalized tables created from ORDER After normalization, the original relation ORDER has been broken down into four smaller relations. The relation ORDER is left with only two attributes and the relation LINE_ITEM has a combined, or concatenated, key consisting of Order_Number and Part_Number. and address of the supplier for every part on the order, even though the order is for parts from a single supplier. This relationship contains what are called repeating data groups because there can be many parts on a single order to a given supplier. A more efficient way to arrange the data is to break down ORDER into smaller relations, each of which describes a single entity. If we go step by step and normalize the relation ORDER, we emerge with the relations illustrated in Figure 6.10. You can find out more about normalization, ­entity-relationship ­diagramming, and database design in the Learning Tracks for this chapter. Relational database systems try to enforce referential integrity rules to ensure that relationships between coupled tables remain consistent. When one table has a foreign key that points to another table, you may not add a record to the table with the foreign key unless there is a corresponding record in the linked table. In the database we examined earlier in this chapter, the foreign key Supplier_Number links the PART table to the SUPPLIER table. We may not add a new record to the PART table for a part with Supplier_ Number 8266 unless there is a corresponding record in the SUPPLIER table for Supplier_Number 8266. We must also delete the corresponding record in the PART table if we delete the record in the SUPPLIER table for Supplier_ Number 8266. In other words, we shouldn’t have parts from nonexistent suppliers! Database designers document their data model with an entity-relationship diagram, illustrated in Figure 6.11. This diagram illustrates the relationship between the entities SUPPLIER, PART, LINE_ITEM, and ORDER. The boxes FIGURE 6.11 An entity-relationship diagram This diagram shows the relationships between the entities SUPPLIER, PART, LINE_ITEM, and ORDER that might be used to model the database in Figure 6.10. 230 Part Two Information Technology Infrastructure r­ epresent entities. The lines connecting the boxes represent relationships. A line connecting two entities that ends in two short marks designates a one-toone r­ elationship. A line connecting two entities that ends with a crow’s foot topped by a short mark indicates a one-to-many relationship. Figure 6.11 shows that one ORDER can contain many LINE_ITEMs. (A PART can be ordered many times and appear many times as a line item in a single order.) Each PART can have only one SUPPLIER, but many PARTs can be provided by the same SUPPLIER. It can’t be emphasized enough: If the business doesn’t get its data model right, the system won’t be able to serve the business well. The company’s s­ ystems will not be as effective as they could be because they’ll have to work with data that may be inaccurate, incomplete, or difficult to retrieve. Understanding the organization’s data and how they should be represented in a database is ­perhaps the most important lesson you can learn from this course. For example, Famous Footwear, a shoe store chain with more than 800 ­locations in 49 states, could not achieve its goal of having “the right style of shoe in the right store for sale at the right price” because its database was not p ­ roperly designed for rapidly adjusting store inventory. The company had an Oracle relational database running on a midrange computer, but the d ­ atabase was designed primarily for producing standard reports for m ­ anagement rather than for reacting to marketplace changes. Management could not obtain ­precise data on specific items in inventory in each of its stores. The ­company had to work around this problem by building a new database where the sales and ­inventory data could be better organized for analysis and inventory management. 6.3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? Businesses use their databases to keep track of basic transactions, such as paying suppliers, processing orders, keeping track of customers, and paying employees. But they also need databases to provide information that will help the company run the business more efficiently, and help managers and employees make better decisions. If a company wants to know which product is the most popular or who is its most profitable customer, the answer lies in the data. The Challenge of Big Data Most data collected by organizations used to be transaction data that could easily fit into rows and columns of relational ­database management systems. We are now witnessing an explosion of data from Web traffic, e-mail m ­ essages, and social media content (tweets, status m ­ essages), as well as machine-­ generated data from sensors (used in smart meters, manufacturing sensors, and electrical meters) or from e ­ lectronic trading systems. These data may be unstructured or semi-structured and thus not ­suitable for relational database products that organize data in the form of c­ olumns and rows. We now use the term big data to describe these ­datasets with volumes so huge that they are beyond the ability of typical DBMS to ­capture, store, and analyze. Big data doesn’t refer to any specific quantity, but usually refers to data in the petabyte and exabyte range—in other words, billions to trillions of records, Chapter 6 Foundations of Business Intelligence: Databases and Information Management all from different sources. Big data are produced in much larger quantities and much more rapidly than traditional data. For example, a single jet engine is capable of generating 10 terabytes of data in just 30 minutes, and there are more than 25,000 airline flights each day. Even though “tweets” are limited to 140 characters each, Twitter generates over 8 terabytes of data daily. According to the International Data Center (IDC) technology research firm, data are more than doubling every two years, so the amount of data available to organizations is skyrocketing. Businesses are interested in big data because they can reveal more patterns and interesting anomalies than smaller data sets, with the potential to ­provide new insights into customer behavior, weather patterns, financial market ­activity, or other phenomena. However, to derive business value from these data, ­organizations need new technologies and tools capable of managing and ­analyzing ­non-traditional data along with their traditional enterprise data. Business Intelligence Infrastructure Suppose you wanted concise, reliable information about current operations, trends, and changes across the entire company. If you worked in a large ­company, the data you need might have to be pieced together from separate systems, such as sales, manufacturing, and accounting, and even from external sources, such as demographic or competitor data. Increasingly, you might need to use big data. A contemporary infrastructure for business intelligence has an array of tools for obtaining useful information from all the different types of data used by businesses today, including semi-structured and unstructured big data in vast quantities. These capabilities include data warehouses and data marts, Hadoop, in-memory computing, and analytical platforms. Some of these capabilities are available as cloud services. Data Warehouses and Data Marts The traditional tool for analyzing corporate data for the past two decades has been the data warehouse. A data warehouse is a database that stores ­current and historical data of potential interest to decision makers throughout the ­company. The data originate in many core operational transaction systems, such as s­ ystems for sales, customer accounts, and manufacturing, and may include data from Web site transactions. The data warehouse extracts c­ urrent and ­historical data from multiple operational systems inside the organization. These data are combined with data from external sources and t­ransformed by correcting ­inaccurate and incomplete data and restructuring the data for ­management reporting and analysis before being loaded into the data warehouse. The data warehouse makes the data available for anyone to access as needed, but it cannot be altered. A data warehouse system also provides a range of ad hoc and standardized query tools, analytical tools, and graphical reporting facilities . Companies often build enterprise-wide data warehouses, where a central data warehouse serves the entire organization, or they create smaller, decentralized warehouses called data marts. A data mart is a subset of a data warehouse in which a summarized or highly focused portion of the organization’s data is placed in a separate database for a specific population of users. For example, a company might develop marketing and sales data marts to deal with ­customer information. Bookseller Barnes & Noble used to maintain a series of data ­marts—one for point-of-sale data in retail stores, another for college bookstore sales, and a third for online sales. 231 232 Part Two Information Technology Infrastructure Hadoop Relational DBMS and data warehouse products are not well-suited for organizing and analyzing big data or data that do not easily fit into columns and rows used in their data models. For handling unstructured and semi-structured data in vast quantities, as well as structured data, organizations are using Hadoop. Hadoop is an open source software framework managed by the Apache Software Foundation that enables distributed parallel processing of huge amounts of data across inexpensive computers. It breaks a big data problem down into ­sub-problems, distributes them among up to thousands of inexpensive ­computer processing nodes, and then combines the result into a smaller data set that is easier to analyze. You’ve probably used Hadoop to find the best airfare on the Internet, get directions to a restaurant, do a search on Google, or connect with a friend on Facebook. Hadoop consists of several key services: the Hadoop Distributed File System (HDFS) for data storage and MapReduce for high-performance parallel data processing. HDFS links together the file systems on the numerous nodes in a Hadoop cluster to turn them into one big file system. Hadoop’s MapReduce was inspired by Google’s MapReduce system for breaking down processing of huge datasets and assigning work to the various nodes in a cluster. HBase, Hadoop’s non-relational database, provides rapid access to the data stored on HDFS and a transactional platform for running high-scale real-time applications. Hadoop can process large quantities of any kind of data, including structured transactional data, loosely structured data such as Facebook and Twitter feeds, complex data such as Web server log files, and unstructured audio and video data. Hadoop runs on a cluster of inexpensive servers, and processors can be added or removed as needed. Companies use Hadoop for analyzing very large volumes of data as well as for a staging area for unstructured and semi-structured data before they are loaded into a data warehouse. Facebook stores much of its data on its massive Hadoop cluster, which holds an estimated 100 petabytes, about 10,000 times more information than the Library of Congress. Yahoo uses Hadoop to track user behavior so it can modify its home page to fit their i­ nterests. Life sciences research firm NextBio uses Hadoop and HBase to process data for ­pharmaceutical companies conducting genomic research. Top database vendors such as IBM, Hewlett-Packard, Oracle, and Microsoft have their own Hadoop software distributions. Other vendors offer tools for moving data into and out of Hadoop or for analyzing data within Hadoop. In-Memory Computing Another way of facilitating big data analysis is to use in-memory ­computing, which relies primarily on a computer’s main memory (RAM) for data storage. (Conventional DBMS use disk storage systems.) Users access data stored in system primary memory, thereby eliminating bottlenecks from retrieving and reading data in a traditional, disk-based database and dramatically shortening query response times. In-memory processing makes it ­possible for very large sets of data, amounting to the size of a data mart or small data warehouse, to reside entirely in memory. Complex business calculations that used to take hours or days are able to be completed within seconds, and this can even be accomplished on handheld devices. (See the Interactive Session on Technology.) The previous chapter describes some of the advances in contemporary ­computer hardware technology that make in-memory processing possible, such as powerful high-speed processors, multicore processing, and falling computer memory prices. These technologies help companies optimize the use of memory and accelerate processing performance while lowering costs. Chapter 6 Foundations of Business Intelligence: Databases and Information Management 233 Interactive Session: Technology Driving ARI Fleet Management with Real-Time Analytics Automotive Resources International®, better known as simply ARI®, is the world’s largest privately-held company for vehicle fleet management services. ARI is headquartered in Mt. Laurel, New Jersey and has 2,500 employees and offices throughout North America, Europe, the UK, and Hong Kong. The company manages more than 1,000,000 vehicles in the U.S., Canada, Mexico, Puerto Rico and Europe. Businesses that need vehicles for shipments (trucks, vans, cars, ships, and rail cars) may choose to manage their own fleet of vehicles or they may outsource fleet management to companies such as ARI which specialize in these services. ARI manages the entire life cycle and operation of a fleet of vehicles for its customers, from up-front specification and acquisition to resale, including financing, maintenance, fuel management, and risk management services such as driver safety training and accident management. ARI also maintains six call centers in North America that operate 24/7, 365 days a year to support customers’ fleet operations by providing assistance regarding repairs, breakdowns, accident response, preventive maintenance, and other driver needs. These call centers handle about 3.5 million calls per year from customers, drivers, and suppliers who expect access to real-time actionable information. Providing this information has become increasingly challenging. Operating a single large commercial vehicle fleet generates high volumes of complex data, such as data on fuel consumption, maintenance, licensing, and compliance. A fuel transaction, for example, requires data on state taxes paid, fuel grade, total sale, amount sold, and time and place of purchase. A simple brake job and preventive maintenance checkup generates dozens of records for each component that is serviced. Each part and service performed on a vehicle is tracked using American Trucking Association codes. ARI collects and analyzes over 14,000 pieces of data per vehicle. Then multiply the data by hundreds of fleets, some with up to 10,000 vehicles, all operating simultaneously throughout the globe, and you’ll have an idea of the enormous volume of data ARI needs to manage, both for itself and for its customers. ARI provided its customers with detailed information about their fleet operations, but the type of information it could deliver was very limited. For example, ARI could generate detailed reports on line-item expenditures, vehicle purchases, maintenance records, and other operational information presented as simple spreadsheets, charts, or graphs, but it was not possible to analyze all the data to spot trends and make recommendations. ARI was able to analyze data customer by customer, but it was not able to aggregate data across its entire customer base. For instance, if ARI was managing a pharmaceutical company’s vehicle fleet, its information ­systems could not benchmark that fleet’s performance against others in the industry. That type of ­problem required too much manual work and time, and still didn’t deliver the level of insight management thought was possible. What’s more, in order to create reports, ARI had to go through internal subject matter experts in various aspects of fleet operations, who were called “reporting power users.” Every request for information was passed to these power users. A request for a report would take 5 days to fill. If the report was unsatisfactory, it would go back to the report writer to make changes. ARI’s process for analyzing its data was extremely drawn out. In mid-2011, ARI implemented SAP BusinessObjects Explorer to give customers the enhanced ability to access data and run their own reports. SAP BusinessObjects Explorer is a business intelligence tool that enables business users to view, sort and analyze business intelligence data. Users search through data sources using an iTuneslike interface. They do not have to create queries to search the data and results are shown with a chart that indicates the best information match. The graphical representation of results changes as the user asks further questions of the data. In early 2012, ARI integrated SAP BusinessObjects Explorer with HANA, SAP’s in-memory computing platform that is deployable as an on-premise appliance (hardware and software) or in the cloud. HANA is optimized for performing real-time analytics and handling very high volumes of operational and transactional data in real time. HANA’s in-memory analytics queries data stored in random access memory (RAM) instead of on a hard disk or flash storage. Things started happening quickly after that. When ARI’s controller wanted an impact analysis of the company’s top 10 customers, SAP HANA produced the result in 3 to 3 ½ seconds. In ARI’s old systems 234 Part Two Information Technology Infrastructure environment, this task would have been assigned to a power user versed in using reporting tools, specifications would have to be drawn up and a program designed for that specific query, a process that would have taken about 36 hours. Using HANA, ARI is now able to quickly mine its vast data resources and generate predictions based on the results. For example, the company can produce precise figures on what it costs to operate a fleet of a certain size over a particular route across specific industries during a certain type of weather and predict what the impact of changes in any of these variables. And it can do so nearly as easily as providing customers with a simple history of their expenditures on fuel. With such helpful information ARI provides more value to its customers. HANA has also reduced the time required for each transaction handled by ARI’s call centers—from the time a call center staffer takes a call to retrieving and delivering the requested information—by 5 percent. Since call center staff account for 40 percent of ARI’s direct overhead, that time reduction translates into major cost savings. ARI plans to make some of these real-time reporting and analytic capabilities available on mobile devices, which will enable customers to instantly approve a variety of operational procedures, such as authorizing maintenance repairs. Customers will also be able to use the mobile tools for instant insight into their fleet operations, down to a level of detail such as a specific vehicle’s tire history. Sources: “Driving 2 Million Vehicles with SAP Data,”, accessed February 1, 2014;, accessed February 1, 2014; and “ARI Fleet Management Drives Real-Time Analytics to Customers,” SAP InsiderPROFILES, April 1, 2013. c a s e s t u dy q u e s t i o n s 1. Why was data management so problematic at ARI? 2. Describe ARI’s earlier capabilities for data analysis and reporting and their impact on the business. 3. Was SAP HANA a good solution for ARI? Why or why not? 4. Describe the changes in the business as a result of adopting HANA. Leading commercial products for in-memory computing include SAP’s High Performance Analytics Appliance (HANA) and Oracle Exalytics. Each provides a set of integrated software components, including in-memory database software and specialized analytics software, that run on hardware optimized for ­in-memory computing work. A n a l y t i c P l a t fo r m s Commercial database vendors have developed specialized high-speed ­analytic platforms using both relational and non-relational technology that are ­optimized for analyzing large datasets. Analytic platforms such as IBM Netezza and Oracle Exadata feature preconfigured hardware-software systems that are specifically designed for query processing and analytics. For example, IBM Netezza features tightly integrated database, server, and storage components that handle complex analytic queries 10 to 100 times faster than traditional systems. Analytic platforms also include in-memory systems and NoSQL nonrelational database management systems. Analytic platforms are now available as cloud services. Figure 6.12 illustrates a contemporary business intelligence infrastructure using the technologies we have just described. Current and historical data are extracted from multiple operational systems along with Web data, machine-­ generated data, unstructured audio/visual data, and data from external sources that’s been restructured and reorganized for reporting and analysis. Hadoop ­clusters pre-process big data for use in the data warehouse, data marts, or an Chapter 6 Foundations of Business Intelligence: Databases and Information Management FIGURE 6.12 Contemporary Business Intelligence Infrastructure A contemporary business intelligence infrastructure features capabilities and tools to manage and analyze large quantities and different types of data from multiple sources. Easy-to-use query and reporting tools for casual business users and more sophisticated analytical toolsets for power users are included. a­ nalytic p ­ latform, or for direct querying by power users. Outputs include reports and dashboards as well as query results. Chapter 12 discusses the various types of BI users and BI reporting in greater detail. Analytical Tools: Relationships, Patterns, Trends Once data have been captured and organized using the business intelligence technologies we have just described, they are available for further analysis using software for database querying and reporting, multidimensional data analysis (OLAP), and data mining. This section will introduce you to these tools, with more detail about business intelligence analytics and applications in Chapter 12. O n l i n e A n a l y t i c a l P r o c e s s i n g ( OLAP ) Suppose your company sells four different products—nuts, bolts, washers, and screws—in the East, West, and Central regions. If you wanted to ask a fairly straightforward question, such as how many washers sold during the past ­quarter, you could easily find the answer by querying your sales database. But what if you wanted to know how many washers sold in each of your sales regions and compare actual results with projected sales? To obtain the answer, you would need online analytical processing (OLAP). OLAP supports multidimensional data analysis, enabling users to view the same data in different ways using multiple dimensions. Each aspect 235 236 Part Two Information Technology Infrastructure of ­information—product, pricing, cost, region, or time period—represents a different dimension. So, a product manager could use a multidimensional data analysis tool to learn how many washers were sold in the East in June, how that compares with the previous month and the previous June, and how it compares with the sales f­ orecast. OLAP enables users to obtain online answers to ad hoc questions such as these in a fairly rapid amount of time, even when the data are stored in very large databases, such as sales figures for multiple years. Figure 6.13 shows a multidimensional model that could be created to ­represent products, regions, actual sales, and projected sales. A matrix of actual sales can be stacked on top of a matrix of projected sales to form a cube with six faces. If you rotate the cube 90 degrees one way, the face showing will be product versus actual and projected sales. If you rotate the cube 90 degrees again, you will see region versus actual and projected sales. If you rotate 180 degrees from the ­original view, you will see projected sales and product versus region. Cubes can be nested within cubes to build complex views of data. A company would use either a specialized multidimensional database or a tool that creates multidimensional views of data in relational databases. Data Mining Traditional database queries answer such questions as, “How many units of product number 403 were shipped in February 2013?” OLAP, or multidimensional analysis, supports much more complex requests for information, such as, “Compare sales of product 403 relative to plan by quarter and sales region for the past two years.” With OLAP and query-oriented data analysis, users need to have a good idea about the information for which they are looking. Data mining is more discovery-driven. Data mining provides insights into corporate data that cannot be obtained with OLAP by finding hidden patterns and relationships in large databases and inferring rules from them to predict future behavior. The patterns and rules are used to guide decision making and ­forecast the effect of those decisions. The types of information obtainable FIGURE 6.13 Multidimensional Data Model This view shows product versus region. If you rotate the cube 90 degrees, the face that will show is product versus actual and projected sales. If you rotate the cube 90 degrees again, you will see region versus actual and projected sales. Other views are possible. Chapter 6 Foundations of Business Intelligence: Databases and Information Management from data mining include associations, sequences, classifications, clusters, and forecasts. • Associations are occurrences linked to a single event. For instance, a study of supermarket purchasing patterns might reveal that, when corn chips are ­purchased, a cola drink is purchased 65 percent of the time, but when there is a promotion, cola is purchased 85 percent of the time. This information helps managers make better decisions because they have learned the ­profitability of a promotion. • In sequences, events are linked over time. We might find, for example, that if a house is purchased, a new refrigerator will be purchased within two weeks 65 percent of the time, and an oven will be bought within one month of the home purchase 45 percent of the time. • Classification recognizes patterns that describe the group to which an item belongs by examining existing items that have been classified and by ­inferring a set of rules. For example, businesses such as credit card or ­telephone companies worry about the loss of steady customers. Classification helps discover the characteristics of customers who are likely to leave and can provide a model to help managers predict who those customers are so that the managers can devise special campaigns to retain such customers. • Clustering works in a manner similar to classification when no groups have yet been defined. A data mining tool can discover different groupings within data, such as finding affinity groups for bank cards or partitioning a database into groups of customers based on demographics and types of personal investments. • Although these applications involve predictions, forecasting uses predictions in a different way. It uses a series of existing values to forecast what other values will be. For example, forecasting might find patterns in data to help managers estimate the future value of continuous variables, such as sales figures. These systems perform high-level analyses of patterns or trends, but they can also drill down to provide more detail when needed. There are data mining ­applications for all the functional areas of business, and for government and ­scientific work. One popular use for data mining is to provide detailed ­analyses of patterns in customer data for one-to-one marketing campaigns or for ­identifying profitable customers. Entertainment, formerly known as Harrah’s Entertainment, is the ­largest gaming company in the world. It continually analyzes data about its c­ ustomers gathered when people play its slot machines or use its casinos and hotels. The corporate marketing department uses this information to build a detailed gambling profile, based on a particular customer’s ongoing value to the company. For instance, data mining lets Caesars know the favorite gaming e ­ xperience of a regular customer at one of its riverboat casinos, along with that person’s preferences for room accommodations, restaurants, and ­entertainment. This information guides management decisions about how to cultivate the most profitable customers, encourage those customers to spend more, and attract more customers with high revenue-generating potential. Business i­ntelligence improved Caesars’s profits so much that it became the centerpiece of the firm’s business strategy. Tex t M i n i n g a n d We b M i n i n g Unstructured data, most in the form of text files, is believed to account for over 80 percent of useful organizational information and is one of the major sources of 237 238 Part Two Information Technology Infrastructure big data that firms want to analyze. E-mail, memos, call center t­ ranscripts, survey responses, legal cases, patent descriptions, and service reports are all valuable for finding patterns and trends that will help employees make better business decisions. Text mining tools are now ­available to help businesses analyze these data. These tools are able to extract key ­elements from unstructured big data sets, discover patterns and relationships, and ­summarize the information. Businesses might turn to text mining to analyze transcripts of calls to ­customer service centers to identify major service and repair issues or to ­measure c­ ustomer sentiment about their company. Sentiment analysis ­software is able to mine text comments in an e-mail message, blog, social media conversation, or survey form to detect favorable and unfavorable opinions about specific subjects. For example, the discount broker Charles Schwab uses Attensity Analyze ­software to analyze hundreds of thousands of its customer interactions each month. The software analyzes Schwab’s customer service notes, e-mails, survey responses, and online discussions to discover signs of dissatisfaction that might cause a customer to stop using the company’s services. Attensity is able to ­automatically identify the various “voices” customers use to express their ­feedback (such as a positive, negative, or conditional voice) to pinpoint a ­person’s intent to buy, intent to leave, or reaction to a specific product or marketing ­message. Schwab uses this information to take corrective actions such as stepping up direct broker communication with the customer and trying to quickly resolve the ­problems that are making the customer unhappy. The Web is another rich source of unstructured big data for revealing ­patterns, trends, and insights into customer behavior. The discovery and analysis of useful patterns and information from the World Wide Web is called Web mining. Businesses might turn to Web mining to help them understand customer b ­ ehavior, evaluate the effectiveness of a particular Web site, or quantify the success of a marketing campaign. For instance, marketers use the Google Trends and Google Insights for Search services, which track the popularity of various words and phrases used in Google search queries, to learn what people are interested in and what they are interested in buying. Web mining looks for patterns in data through content mining, structure mining, and usage mining. Web content mining is the process of extracting knowledge from the content of Web pages, which may include text, image, audio, and video data. Web structure mining examines data related to the structure of a particular Web site. For example, links pointing to a document indicate the popularity of the document, while links coming out of a document indicate the richness or perhaps the variety of topics covered in the document. Web usage mining examines user interaction data recorded by a Web server whenever requests for a Web site’s resources are received. The usage data records the user’s behavior when the user browses or makes transactions on the Web site and collects the data in a server log. Analyzing such data can help companies determine the value of particular customers, cross marketing strategies across products, and the effectiveness of promotional campaigns. The chapter-ending case describes organizations’ experiences as they use the analytical tools and business intelligence technologies we have described to grapple with “big data” challenges. Databases and the Web Have you ever tried to use the Web to place an order or view a product ­c atalog? If so, you were probably using a Web site linked to an internal Chapter 6 Foundations of Business Intelligence: Databases and Information Management c­ orporate ­database. Many companies now use the Web to make some of the information in their internal databases available to customers and business partners. Suppose, for example, a customer with a Web browser wants to search an online retailer’s database for pricing information. Figure 6.14 illustrates how that ­customer might access the retailer’s internal database over the Web. The user accesses the retailer’s Web site over the Internet using Web browser ­software on his or her client PC. The user’s Web browser software requests data from the ­organization’s database, using HTML commands to communicate with the Web server. Because many back-end databases cannot interpret commands written in HTML, the Web server passes these requests for data to software that ­translates HTML commands into SQL so the commands can be processed by the DBMS ­working with the database. In a client/server environment, the DBMS resides on a ­dedicated computer called a database server. The DBMS receives the SQL requests and provides the required data. Middleware transfers i­ nformation from the organization’s internal database back to the Web server for delivery in the form of a Web page to the user. Figure 6.14 shows that the middleware working between the Web server and the DBMS is an application server running on its own dedicated ­computer (see Chapter 5). The application server software handles all application operations, including transaction processing and data access, between browser-based computers and a company’s back-end business applications or databases. The application server takes requests from the Web server, runs the business logic to process transactions based on those requests, and provides connectivity to the organization’s back-end systems or databases. Alternatively, the software for handling these operations could be a custom program or a CGI script. A CGI script is a compact program using the Common Gateway Interface (CGI) specification for processing data on a Web server. There are a number of advantages to using the Web to access an organization’s internal databases. First, Web browser software is much easier to use than proprietary query tools. Second, the Web interface requires few or no changes to the internal database. It costs much less to add a Web interface in front of a legacy system than to redesign and rebuild the system to improve user access. Accessing corporate databases through the Web is creating new e ­ fficiencies, opportunities, and business models. provides an up-to-date online directory of more than 700,000 suppliers of industrial products, such as chemicals, metals, plastics, rubber, and automotive equipment. Formerly called FIGURE 6.14 Linking Internal Databases to the Web Users access an organization’s internal database through the Web using their desktop PCs and Web browser software. 239 240 Part Two Information Technology Infrastructure Thomas Register, the company used to send out huge paper catalogs with this information. Now it provides this information to users online via its Web site and has become a smaller, leaner company. Other companies have created entirely new businesses based on access to large databases through the Web. One is the social networking service Facebook, which helps users stay connected with each other and meet new people. Facebook features “profiles” with information on more than 1.3 billion active users with information about themselves, including interests, friends, photos, and groups with which they are affiliated. Facebook ­maintains a massive database to house and manage all of this content. There are also many Web-enabled databases in the public sector to help ­consumers and citizens access helpful information. 6.4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources? Setting up a database is only a start. In order to make sure that the data for your business remain accurate, reliable, and readily available to those who need it, your business will need special policies and procedures for data management. Establishing an Information Policy Every business, large and small, needs an information policy. Your firm’s data are an important resource, and you don’t want people doing whatever they want with them. You need to have rules on how the data are to be organized and maintained, and who is allowed to view the data or change them. An information policy specifies the organization’s rules for sharing, d isseminating, acquiring, standardizing, classifying, and inventorying ­ ­information. Information policy lays out specific procedures and accountabilities, identifying which users and organizational units can share ­information, where information can be distributed, and who is responsible for updating and maintaining the information. For example, a typical information policy would specify that only selected members of the payroll and human resources department would have the right to change and view sensitive employee data, such as an employee’s salary or social security number, and that these departments are responsible for making sure that such employee data are accurate. If you are in a small business, the information policy would be e ­ stablished and implemented by the owners or managers. In a large organization, ­managing and planning for information as a corporate resource often requires a formal data administration function. Data administration is responsible for the ­specific policies and procedures through which data can be managed as an organizational resource. These responsibilities include developing i­nformation policy, planning for data, overseeing logical database design and data ­dictionary ­development, and monitoring how information systems specialists and ­end-user groups use data. You may hear the term data governance used to describe many of these activities. Promoted by IBM, data governance deals with the policies and Chapter 6 Foundations of Business Intelligence: Databases and Information Management ­ rocesses for managing the availability, usability, integrity, and security of the p data employed in an enterprise, with special emphasis on promoting p ­ rivacy, security, data quality, and compliance with government regulations. A large organization will also have a database design and management group within the corporate information systems division that is responsible for defining and organizing the structure and content of the database, and maintaining the database. In close cooperation with users, the design group establishes the physical database, the logical relations among elements, and the access rules and security procedures. The functions it performs are called database administration. Ensuring Data Quality A well-designed database and information policy will go a long way toward ensuring that the business has the information it needs. However, additional steps must be taken to ensure that the data in organizational databases are ­accurate and remain reliable. What would happen if a customer’s telephone number or account balance were incorrect? What would be the impact if the database had the wrong price for the product you sold or your sales system and inventory system showed ­different prices for the same product? Data that are inaccurate, untimely, or inconsistent with other sources of information lead to incorrect decisions, ­product recalls, and financial losses. Gartner Inc. reported that more than 25 ­percent of the critical data in large Fortune 1000 companies’ databases is ­inaccurate or incomplete, including bad product codes and product descriptions, faulty inventory descriptions, erroneous financial data, incorrect s­upplier i­nformation, and incorrect employee data. A Sirius Decisions study on “The Impact of Bad Data on Demand Creation” found that 10 to 25 percent of ­customer and ­prospect records contain critical data errors. Correcting these errors at their source a­ nd following best practices for promoting data ­quality increased the productivity of the sales process and generated a 66 percent increase in ­revenue. Some of these data quality problems are caused by redundant and i­ nconsistent data produced by multiple systems feeding a data warehouse. For example, the sales ordering system and the inventory management system might both ­maintain data on the organization’s products. However, the sales ordering system might use the term Item Number and the inventory system might call the same attribute Product Number. The sales, inventory, or manufacturing systems of a clothing retailer might use different codes to represent values for an attribute. One system might represent clothing size as “extra large,” whereas the other system might use the code “XL” for the same purpose. During the design process for the warehouse database, data describing entities, such as a customer, product, or order, should be named and defined consistently for all business areas using the database. Think of all the times you’ve received several pieces of the same direct mail advertising on the same day. This is very likely the result of having your name maintained multiple times in a database. Your name may have been misspelled or you used your middle initial on one occasion and not on another or the information was initially entered onto a paper form and not scanned properly into the system. Because of these inconsistencies, the database would treat you as different people! We often receive redundant mail addressed to Laudon, Lavdon, Lauden, or Landon. If a database is properly designed and enterprise-wide data standards ­established, duplicate or inconsistent data elements should be minimal. 241 242 Part Two Information Technology Infrastructure Most data quality problems, however, such as misspelled names, transposed ­numbers, or incorrect or missing codes, stem from errors during data input. The incidence of such errors is rising as companies move their businesses to the Web and allow customers and suppliers to enter data into their Web sites that directly update internal systems. Before a new database is in place, organizations need to identify and ­correct their faulty data and establish better routines for editing data once their ­database is in operation. Analysis of data quality often begins with a data quality audit, which is a structured survey of the accuracy and level of completeness of the data in an information system. Data quality audits can be performed by surveying entire data files, surveying samples from data files, or surveying end users for their perceptions of data quality. Data cleansing, also known as data scrubbing, consists of activities for detecting and correcting data in a database that are incorrect, incomplete, improperly formatted, or redundant. Data cleansing not only corrects errors but also enforces consistency among different sets of data that originated in separate information systems. Specialized data-cleansing software is available to automatically survey data files, correct errors in the data, and integrate the data in a consistent company-wide format. Data quality problems are not just business problems. They also pose ­serious problems for individuals, affecting their financial condition and even their jobs. For example, inaccurate or outdated data about consumers’ credit ­histories maintained by credit bureaus can prevent creditworthy individuals from ­obtaining loans or lower their chances of finding or keeping a job. The Interactive Session on Management illustrates American Water’s experience with managing data as a resource. As you read this case, try to identify the policies, procedures, and technologies that were required to improve data management at this company. Chapter 6 Foundations of Business Intelligence: Databases and Information Management 243 I n t e r a c t i v e S e ssi o n : m a n a g e m e n t American Water Keeps Data Flowing American Water, founded in 1886, is the largest public water utility in the United States. Headquartered in Voorhees, N.J., the company employs more than 7,000 dedicated professionals who provide drinking water, wastewater and other related services to approximately 16 million people in 35 states, as well as Ontario and Manitoba, Canada. Most of American Water’s services support locally-managed utility subsidiaries that are regulated by the U.S. state in which each operates as well as the federal government. American Water also owns subsidiaries that manage municipal drinking water and wastewater systems under contract and others that supply businesses and residential communities with water management products and services. Until recently, American water’s systems and business processes were very localized, and many of these processes were manual. Over time, this ­information environment became ­increasingly ­difficult to manage. Many systems were not ­integrated, so that running any type of report that had to provide information about more than one region was a ­heavily manual process. Data had to be extracted from the systems supporting each region and then combined manually to create the desired output. When the company was preparing to hold an initial public offering of its stock in 2006, its software systems could not handle the required regulatory controls, so roughly 80 percent of this work had to be performed manually. It was close to a nightmare. Management wanted to change the company from a decentralized group of independent regional businesses into a more centralized organization with standard company-wide business processes and enterprise-wide reporting. The first step toward achieving this goal was to implement an enterprise resource planning (ERP) system designed to replace disparate systems with a single integrated software platform. The company selected SAP as its ERP ­system vendor. An important step of this project was to migrate the data from American Water’s old systems to the new platform. The company’s data resided in many different systems in various formats. Each regional business maintained some of its own data in its own systems, and a portion of these data were redundant and inconsistent. For example, there were duplicate pieces of materials master data because a material might be called one thing in the company’s Missouri operation and another in its New Jersey business. These names had to be standardized so that the same name for a piece of data was used by every business unit. American Water’s business users had to buy into this new company-wide view of data. Data migration entails much more than just ­transferring data between old and new systems. Business users need to know that data are not just a responsibility of the information systems department: the business “owns” the data. It is business needs that determine the rules and standards for managing the data. Therefore, it is up to business users to inventory and review all the pieces of data in their systems to determine precisely which pieces of data from the old system will be used in the new system and which data do not need to be brought over. The data also need to be reviewed to make sure they are accurate and consistent and that redundant data are eliminated. Most likely some type of data cleansing will be required. For example, American Water had data on more than 70,000 vendors in its vendor master data file. Andrew Clarkson, American Water’s Business Intelligence Lead, asked business users to define an active vendor and to use that definition to identify which data to migrate. He also worked with ­various functional groups to standardize how to present address data. One of the objectives of American Water’s data management work was to support an enterprisewide business intelligence program based on a single view of the business. An analytical system and data ­warehouse would be able to combine data from the SAP ERP System with data from other sources, including new customer information and enterprise asset management systems. That meant that American Water’s business users had to do a lot of thinking about the kinds of reports they wanted. The company had originally planned to have the system ­provide 200 reports, but later reduced that number by half. Business users were trained to ­generate these reports and customize them. Most financial users initially tried to create their reports using Microsoft Excel spreadsheet software. Over time, however, they learned to do the same thing using SAP Business Objects Web Intelligence tools that came with the system. SAP Business Objects Web 244 Part Two Information Technology Infrastructure Intelligence is a set of tools that enables business users to view, sort, and analyze business intelligence data. It includes tools for generating queries, reports and interactive dashboards. At present, American Water is focusing on promoting the idea that data must be “clean” to be effective and has poured an incredible amount of effort into its data cleansing work—identifying incomplete, incorrect, inaccurate, and irrelevant pieces of data and then replacing, modifying, or deleting the “dirty” data. According to Clarkson, just as water treatment plants have measurements and meters to check water quality as its being treated, data management needs to ensure the quality of data at every step to make sure the final product will be genuinely useful for the company. Sources: “SAP to Deliver Software Solution to American Water,”, accessed January 31, 2014; David Hannon, “Clean Smooth-Flowing Data at American Water,” SAP Insider Profiles, January–March 2013 and, accessed February 2, 2014. case study questions 1. Discuss the role of information policy, data administration, and efforts to ensure data quality in improving data management at American Water. 2. Describe roles played by information systems specialists and end users in American Water’s systems transformation project. 3. Why was the participation of business users so important? If they didn’t play this role, what would have happened? 4. How did implementing a data warehouse help American Water move toward a more centralized organization? 5. Give some examples of problems that would have occurred at American Water if its data were not “clean”? 6. How did American Water’s data warehouse improve operations and management decision making? Review Summary 1. What are the problems of managing data resources in a traditional file environment? Traditional file management techniques make it difficult for organizations to keep track of all of the pieces of data they use in a systematic way and to organize these data so that they can be easily accessed. Different functional areas and groups were allowed to develop their own files independently. Over time, this traditional file management environment creates problems such as data redundancy and inconsistency, program-data dependence, inflexibility, poor security, and lack of data sharing and availability. A database management system (DBMS) solves these problems with software that permits centralization of data and data management so that businesses have a single consistent source for all their data needs. Using a DBMS minimizes redundant and inconsistent files. 2. What are the major capabilities of DBMS and why is a relational DBMS so powerful? The principal capabilities of a DBMS includes a data definition capability, a data dictionary capability, and a data manipulation language. The data definition capability specifies the structure and ­content of the database. The data dictionary is an automated or manual file that stores information about the data in the database, including names, definitions, formats, and descriptions of data e ­ lements. The data manipulation language, such as SQL, is a specialized language for accessing and manipulating the data in the database. The relational database has been the primary method for organizing and maintaining data in ­information systems because it is so flexible and accessible. It organizes data in two-dimensional tables called relations with rows and columns. Each table contains data about an entity and its attributes. Each row represents a record and each column represents an attribute or field. Each table also ­contains a key field to uniquely identify each record for retrieval or manipulation. Relational database tables can be combined easily to deliver data required by users, provided that any two tables share a common Chapter 6 Foundations of Business Intelligence: Databases and Information Management 245 data element. Non-relational databases are becoming popular for managing types of data that can't be h ­ andled easily by the relational data model. Both relational and non-relational database products are available as cloud computing services. Designing a database requires both a logical design and a physical design. The logical design ­models the database from a business perspective. The organization’s data model should reflect its key business ­processes and decision-making requirements. The process of creating small, stable, flexible, and adaptive data structures from complex groups of data when designing a relational ­database is termed normalization. A well-designed relational database will not have many-to-many relationships, and all attributes for a ­specific entity will only apply to that entity. It will try to enforce referential integrity rules to ensure that relationships between coupled tables remain ­consistent. An entity-relationship diagram graphically depicts the relationship between entities (tables) in a relational database. 3. What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? Contemporary data management technology has an array of tools for obtaining useful information from all the different types of data used by businesses today, including semi-structured and unstructured big data in vast quantities. These capabilities include data warehouses and data marts, Hadoop, ­in-memory computing, and analytical platforms. OLAP represents relationships among data as a ­multidimensional structure, which can be visualized as cubes of data and cubes within cubes of data, enabling more sophisticated data analysis. Data mining analyzes large pools of data, including the c­ ontents of data warehouses, to find patterns and rules that can be used to predict future behavior and guide decision making. Text mining tools help ­businesses analyze large unstructured data sets consisting of text. Web mining tools focus on analysis of useful patterns and information from the World Wide Web, examining the structure of Web sites and activities of Web site users as well as the contents of Web pages. Conventional databases can be linked via middleware to the Web or a Web interface to facilitate user access to an organization’s internal data. 4. Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources? Developing a database environment requires policies and procedures for managing organizational data as well as a good data model and database technology. A formal information policy governs the maintenance, distribution, and use of information in the organization. In large corporations, a formal data administration function is responsible for information policy, as well as for data planning, data dictionary development, and monitoring data usage in the firm. Data that are inaccurate, incomplete, or inconsistent create serious operational and financial p ­ roblems for businesses because they may create inaccuracies in product pricing, customer accounts, and inventory data, and lead to inaccurate decisions about the actions that should be taken by the firm. Firms must take special steps to make sure they have a high level of data quality. These include using enterprise-wide data standards, databases designed to minimize inconsistent and redundant data, data quality audits, and data cleansing ­software. Key Terms Analytic platform, 234 Attribute, 218 Big data, 230 Bit, 218 Byte, 218 Data administration, 240 Data cleansing, 242 Data definition, 226 Data dictionary, 226 Data governance, 240 Data inconsistency, 219 Data manipulation language, 226 Data mart, 231 Data mining, 236 Data quality audit, 242 Data redundancy, 219 Data warehouse, 231 Database, 221 Database administration, 241 Database management system (DBMS), 221 Database server, 239 Entity, 218 Entity-relationship diagram, 229 Field, 218 File, 218 Foreign key, 224 246 Part Two Information Technology Infrastructure Hadoop, 232 In-memory computing, 232 Information policy, 240 Key field, 223 Non-relational database management systems, 224 Normalization, 228 Online analytical processing (OLAP), 235 Primary key, 223 Program-data dependence, 220 Record, 218 Referential integrity, 229 Relational DBMS, 222 Sentiment analysis, 238 Structured Query Language (SQL), 226 Text mining, 238 Tuple, 223 Web mining, 238 MyMISLab Go to to complete the problems marked with this icon . Review Questions 6-1  W hat are the problems of managing data resources in a traditional file environment? • List and describe each of the components in the data hierarchy. • Define and explain the significance of ­entities, attributes, and key fields. • List and describe the problems of the ­traditional file environment. 6-2 What are the major capabilities of database management systems (DBMS) and why is a relational DBMS so powerful? • Define a database and a database ­management system. • Name and briefly describe the capabilities of a DBMS. • Define a relational DBMS and explain how it organizes data. • List and describe the three operations of a relational DBMS. • Explain why non-relational databases are ­useful. • Define and describe normalization and ­referential integrity and explain how they contribute to a well-designed relational database. • Define and describe an entity-relationship diagram and explain its role in database design. 6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? • Define big data and describe the technologies for managing and analyzing it. • List and describe the components of a c ontemporary business intelligence ­ ­infrastructure. • Describe the capabilities of online analytical processing (OLAP). • Define data mining, describing how it ­differs from OLAP and the types of information it provides. • Explain how text mining and Web mining ­differ from conventional data mining. • Describe how users can access information from a company’s internal databases through the Web. 6-4 Why are information policy, data administration, and data quality assurance essential for ­managing the firm’s data resources? • Describe the roles of information policy and data administration in information ­management. • Explain why data quality audits and data cleansing are essential. Chapter 6 Foundations of Business Intelligence: Databases and Information Management 247 Discussion Questions 6-5 I t has been said there is no bad data, just bad management. Discuss the implications of this statement. 6-6  To what extent should end users be involved in the selection of a database management system and database design? 6-7  What are the consequences of an organization not having an information policy? Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing data quality problems, e ­ stablishing company-wide data standards, creating a database for inventory management, and using the Web to search online databases for overseas business resources. Management Decision Problems 6-8 Emerson Process Management, a global supplier of measurement, ­analytical, and monitoring instruments and services based in Austin, Texas, had a new data warehouse designed for analyzing customer activity to improve service and marketing. However, the data warehouse was full of inaccurate and redundant data. The data in the warehouse came from numerous transaction processing systems in Europe, Asia, and other ­locations around the world. The team that designed the warehouse had assumed that sales groups in all these areas would enter customer names and addresses the same way. In fact, companies in different countries were using multiple ways of entering quote, billing, shipping, and other data. Assess the potential business impact of these data quality problems. What decisions have to be made and steps taken to reach a solution? 6-9 Your industrial supply company wants to create a data warehouse where management can obtain a single corporate-wide view of critical sales ­information to identify bestselling products, key customers, and sales trends. Your sales and product information are stored in several different systems: a divisional sales system running on a Unix server and a corporate sales system running on an IBM mainframe. You would like to create a single standard format that consolidates these data from both systems. In MyMISLab, you can review the proposed format, along with sample files from the two systems that would supply the data for the data warehouse. Then answer the following questions: • What business problems are created by not having these data in a single ­standard format? • How easy would it be to create a database with a single standard format that could store the data from both systems? Identify the problems that would have to be addressed. • Should the problems be solved by database specialists or general business managers? Explain. • Who should have the authority to finalize a single company-wide format for this information in the data warehouse? Achieving Operational Excellence: Building a Relational Database for Inventory Management Software skills: Database design, querying, and reporting Business skills: Inventory management 6-10 In this exercise, you will use database software to design a database for ­managing inventory for a small business. Sylvester’s Bike Shop, located in San Francisco, California, sells road, mountain, hybrid, leisure, and children’s ­bicycles. Currently, Sylvester’s purchases bikes from three suppliers, but plans to add new suppliers in the near future. Using the information found in the tables in MyMISLab, build a simple ­relational database to manage information about Sylvester’s suppliers and products. Once you have built the database, perform the following activities. 248 Part Two Information Technology Infrastructure • Prepare a report that identifies the five most expensive bicycles. The report should list the bicycles in descending order from most expensive to least expensive, the quantity on hand for each, and the markup percentage for each. • Prepare a report that lists each supplier, its products, the quantities on hand, and associated reorder levels. The report should be sorted alphabetically by supplier. For each supplier, the products should be sorted alphabetically. • Prepare a report listing only the bicycles that are low in stock and need to be reordered. The report should provide supplier information for the items identified. • Write a brief description of how the database could be enhanced to further improve management of the business. What tables or fields should be added? What additional reports would be useful? I m p r ov i n g D e c i s i o n M a k i n g : S e a r c h i n g O n l i n e D a t a b a s e s fo r O v e r s e a s Business Resources Software skills: Online databases Business skills: Researching services for overseas operations 6-11 This project develops skills in searching Web-enabled databases with information about products and ­services in faraway locations. Your company is located in Greensboro, North Carolina, and manufactures office furniture of various types. You are considering opening a facility to manufacture and sell your products in Australia. You would like to contact organizations that offer many services necessary for you to open your Australian office and manufacturing facility, including lawyers, accountants, import-export experts, and telecommunications equipment and support firm. Access the following online databases to locate companies that you would like to meet with during your upcoming trip: Australian Business Register (, AustraliaTrade Now (, and the Nationwide Business Directory of Australia ( If necessary, use search engines such as Yahoo and Google. • List the companies you would contact on your trip to determine whether they can help you with these and any other functions you think are vital to establishing your office. • Rate the databases you used for accuracy of name, completeness, ease of use, and general helpfulness. Collaboration and Teamwork Project 6-12  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this chapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open source collaboration tools to complete the assignment. Chapter 6 Foundations of Business Intelligence: Databases and Information Management 249 Does Big Data Bring Big R ewards? case study T oday’s companies are dealing with an ­avalanche of data from social media, search, and sensors as well as from t­raditional sources. According to one estimate, 2.5 quintillion bytes of data per day are generated around the world. Making sense of “big data” has become one of the primary challenges for corporations of all shapes and sizes, but it also represents new opportunities. How are companies currently taking advantage of “big data?” Green Mountain Coffee in Waterbury, Vermont, is analyzing both structured and unstructured audio and text data to learn more about customer behavior and buying patterns. The firm has 20 different brands and more than 200 different beverages, and uses Calabrio Speech Analytics to glean insights from multiple interaction channels and data streams. In the past, Green Mountain was unable to fully utilize all the data gathered when customers called into its contact center. The company wanted to know more about how many people were asking for a specific product, which products generated the most questions, and which products and categories created the most confusion. By analyzing its big data, Green Mountain was able to gather much more precise information and use it to produce materials, Web pages, and database entries to help representatives do their jobs more effectively. Management is now able to identify issues more rapidly before they ­create ­problems for customers. AutoZone uses big data to help it adjust inventory and product prices at some of its 5,000 stores. For example, a customer walking into an AutoZone store in Waco, Texas, might find a deal on Gabriel shocks which that person would not find in most other AutoZone stores. The Mulberry, Florida AutoZone store might feature a special on a bug deflector. To target these deals at the local level, the auto parts retailer analyzes information gleaned from a ­variety of databases, such as the types of cars driven by people living around its retail outlets. Software from NuoDB, which uses a cloud services model, makes it possible to quickly increase the amount of data ­analyzed without bringing down the system, or changing a line of code. Benefits from analyzing big data are not ­limited to businesses. A number of services have emerged to analyze big data to help consumers. For example, personal devices such as the NikeFuelBand, SonySmartBand, and Jawbone UP24 enable people analyze their routines, diets, and sleeping patterns to see how they compare with others. This can lead to more-effective workouts and help people meet fitness goals. A number of online services enable consumers to check thousands of different flight and hotel options and book their own reservations, tasks previously handled by travel agents. New mobilebased services make it even easier to compare prices and pick the best travel options. For instance, a mobile app from Skyscanner Ltd. shows deals from all over the Web in one list—sorted by price, ­duration or airline—so travelers don’t have to scour multiple sites to book within their budget. Skyscanner uses information from more than 300 airlines, travel agents and timetables and shapes the data into ata-glance formats, with algorithms to keep pricing ­current and make predictions about who will have the best deal for a given market. There are limits to using big data. A number of companies have rushed to start big data projects without first establishing a business goal for this new information. Swimming in numbers doesn’t necessarily mean that the right information is being collected or that people will make smarter decisions. Although big data is very good at detecting correlations, especially subtle correlations that an analysis of smaller data sets might miss, big data analysis doesn’t necessarily indicate which correlations are meaningful. For example, examining big data might show that from 2006 to 2011 the United States murder rate was highly correlated with the market share of Internet Explorer, since both declined sharply. But that doesn’t necessarily mean there is any meaningful connection between the two phenomena. Several years ago, Google developed what it thought was a leading-edge algorithm using data it collected from Web searches to determine exactly how many people had influenza. It tried to calculate the number of people with flu in the United States by relating people’s location to flu-related search queries on Google. The service has consistently overestimated flu rates, when compared to conventional data collected afterward by the US Centers for Disease Control (CDC). According to Google Flu Trends, nearly 11 percent of the U.S. population was 250 Part Two Information Technology Infrastructure supposed to have had influenza at the flu season’s peak in mid-January 2013. However, an article in the science journal Nature stated that Google’s results were twice the actual amount estimated by the U.S. Centers for Disease Control and Prevention, which had 6 percent of the population coming down with the disease. Why did this happen? Several scientists suggested that Google was “tricked” by widespread media coverage of the year’s severe flu season in the U.S, which was further amplified by social media coverage. Google’s algorithm only looked at ­numbers, not the context of the search results. Sears Holdings, the parent company of Sears and Kmart, has been trying to use big data to get closer to its customers. Sears used to be the largest retailer in the United States, but for many years has steadily lost ground to discounters such as Walmart and Target and to competitively-priced specialty retailers such as Home Depot and Lowe’s. The company has been slow to reduce operating costs, keep pace with current merchandising trends, and remodel its 2,429 stores, many of which are run-down and in undesirable locations. Over the years, Sears had invested heavily in information technology. At one time it spent more on information technology and networking than all other non-computer firms in the United States except the Boeing Corporation. Sears used its huge customer databases of 60 million past and present Sears credit card holders to target groups such as tool buyers, appliance buyers, and gardening enthusiasts with special promotions. These efforts did not translate into competitive advantage because Sears’ cost structure remained one of the highest in its industry. The Sears company has continued to embrace new technology to revive flagging sales: online ­shopping, mobile apps, and an marketplace with other vendors for 18 million products, along with heavy in-store promotions. So far, these efforts have not paid off, and sales have declined since the 2005 merger with Kmart. The ­company posted a loss of nearly $1.4 billion for 2013. Sears Holdings CEO Lou D’Ambrosio believes even more intensive use of technology and mining of customer data is the answer. The expectation is that deeper knowledge of customer preferences and ­buying patterns will make promotions, merchandising, and selling much more effective. Customers should flock to Sears stores because they will be ­carrying exactly what they want. A customer loyalty program called Shop Your Way Rewards promises customers generous free deals for repeat purchases if they agree to share their personal shopping data with the company. Sears would not disclose how many customers have signed up for Shop Your Way Rewards, but loyalty-marketing firm Colloquy estimates around 50 million people are members. Sears wanted to personalize marketing campaigns, coupons, and offers down to the individual customer, but its legacy systems were incapable of supporting that level of activity. In order to use big models on large data sets, Sears turned to Apache Hadoop and big data technology. It used to take Sears six weeks to analyze marketing campaigns for loyalty club members using a mainframe, Teradata data warehouse software, and SAS servers. Using Hadoop, the processing can be completed weekly. Certain online and mobile commerce analyses can be performed daily and targeting is much more precise, in some cases down to the individual customer. Sears’s old models were able to use 10 percent of available data, but the new models are able to work with 100 percent. In the past, Sears was only able to retain data from 90 days to two years, but with Hadoop, it can keep everything, increasing its chances of finding more meaningful patterns in the data. What’s more, Hadoop processing is much less costly than conventional relational databases. A Hadoop system handling 200 terabytes of data runs about one-third the cost of a 200-terabyte relational platform. With Hadoop’s massively parallel processing power, processing 2 billion records takes Sears little more than one minute longer than processing 100 million records. Hadoop is still an immature platform, and Hadoop expertise is scarce. Sears had to learn Hadoop largely by trial and error. But it now runs critical reports on the platform, including analyses of customers, financial data, products, and supply chains. Capitalizing on its experience as a big-data innovator, Sears set up a subsidiary called MetaScale to sell big data cloud and consulting services to other companies. Sears can point to many conceptual uses of Hadoop, but the question still lingers about whether the company is effectively using Hadoop to solve its enormous business problems. Is it truly able to offer customers personalized promotions and are they working? What is the business impact? Where are the numbers to show that big data is helping Sears become more profitable? Sears may be able to ­generate revenue by selling big data expertise to MetaScale customers, but will Hadoop really help turn Sears around? Chapter 6 Foundations of Business Intelligence: Databases and Information Management Jim Sullivan, a partner at loyalty marketing firm Colloquy, notes that a good loyalty program that gives a company better intelligence about what its customers really want can be a strategic advantage, but even the best loyalty programs can’t fix a fundamentally broken brand. Sources: Laura Kolodny, “How Consumers Can Use Big Data,” Wall Street Journal, March 23, 2014; Joseph Stromberg,“Why Google Flu Trends Can’t Track the Flu (Yet), ”smithsonianmag. com, March 13, 2014; Gary Marcus and Ernest Davis, “Eight (No, Nine!) Problems With Big Data,” New York Times, April 6, 2014; Thomas H. Davenport, Big Data at Work, Harvard Business School Publishing, 2014; Samuel Greengard, “Companies Grapple With Big Data Challenges,” Baseline, October 29, 2013; Rachael King and Steven Rosenbush. “Big Data Broadens Its Range.” The Wall Street Journal (March 13, 2013; Nick Bilton, “Disruptions: Data Without a Context Tells a Misleading Story,” The New York Times, February 24, 2013; ShiraOvide, “Big Data, Big Blunders,” The Wall Street Journal, March 11, 2013; Mark A. Smith, “Big Data Pointless without Integration,” Information Management, February 25, 2013; Frank Konkel, “Fast Failure Could Lead to Big-Data Success,” Federal Computer Week, January 30, 2013; and Doug Henschen, 251 “Why Sears Is Going All-in on Hadoop,” Information Week, October 3, 2012. Case Study Questions 6-13 Describe the kinds of “big data” collected by the organizations described in this case. 6-14 List and describe the business intelligence technologies described in this case. 6-15 Why did the companies and services described in this case need to maintain and analyze big data? What business benefits did they obtain? How much were they helped by analyzing big data? 6-16 Identify three decisions that were improved by using big data. 6-17 Should all organizations try to analyze big data? Why or why not? What management, organization, and technology issues should be addressed before a company decides to work with big data? MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions: 6-18 6-19 Identify the five problems of a traditional file environment and explain how a database management system solves them. Discuss how the following facilitate the management of big data: Hadoop, in-memory computing, analytic ­platforms. 252 Part Two Information Technology Infrastructure Chapter 6 References Aiken, Peter, Mark Gillenson, Xihui Zhang, and David Rafner. “Data Management and Data Administration. Assessing 25 Years of Practice.” Journal of Database Management (July-September 2011). Barth, Paul S. “Managing Big Data: What Every CIO Needs to Know.” CIO Insight (January 12, 2012). Barton, Dominic and David Court. “Making Advanced Analytics Work for You.” Harvard Business Review (October 2012). Baum, David. “Flying High with a Private Database Cloud.” Oracle Magazine (November/December 2011). 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Boston: Harvard Business Press (2008). Redman, Thomas C. “Data’s Credibility Problem” Harvard Business Review (December 2013). Rosenbush, Steven and Michael Totty. “How Big Data Is Transforming Business.” Wall Street Journal (March 10, 2013). Ross, Jeanne W., Cynthia M. Beath, and Anne Quaadgras. “You May Not Need Big Data After All.” Harvard Business Review (December 2013). Wallace, David J. “How Caesar’s Entertainment Sustains a ­ ­Data-Driven Culture.” DataInformed (December 14, 2012). This page intentionally left blank Telecommunications, the Internet, and Wireless Technology 7 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. What are the principal components of telecommunications networks and key networking technologies? 2. What are the different types of n ­ etworks? 3. How do the Internet and Internet technology work and how do they support communication and ­e-business? 4. What are the principal technologies and standards for wireless ­networking, communication, and Internet access? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 254 Chapter Cases Video Cases Wireless Technology Makes Dundee Precious Metals Good as Gold The Battle Over Net Neutrality Monitoring Employees on Networks: Unethical or Good Business? Google, Apple, and Facebook Struggle for Your Internet Experience Telepresence Moves Out of the Boardroom and Into the Field Virtual Collaboration with Lotus Sametime Wireless Technology Makes Dundee Precious Metals Good as Gold D undee Precious Metals (DPM) is a Canadian-based, international mining company engaged in the acquisition, exploration, development and mining and processing of precious metal properties. One of the company’s principal assets is the Chelopech copper and gold mine east of Sofia, Bulgaria, and the company also has a gold mine in s­ outhern Armenia and a smelter in Namibia. The price of gold and other metals has fluctuated wildly, and Dundee was looking for a way to offset lower gold prices by making its mining operations more efficient. However, mines are very complex operations, and there are ­special challenges with communicating and coordinating work underground. Management decided to implement an underground wireless Wi-Fi network that allows electronic devices to exchange data wirelessly at the Chelopech mine to monitor the location of equipment, people, and ore throughout the mine’s tunnels and facilities. The company deployed several hundred Cisco Systems Inc. high-speed wireless access points (in waterproof, dustproof, and crush-resistant enclosures), extended range antennas, communications boxes with industrial switches connected to 90 kilometers of fiber optic lines that snake through the mine, emergency boxes on walls for Linksys VoIP phones, protected vehicle antennas that can withstand being knocked against a mine ceiling, and custom “walkie-talkie” software. Dundee was able to get access points that normally have a range of 200 meters to work at a range of 600 to 800 meters in a straight line, or 400 to 600 meters around a curve. Another part of the solution was to use AeroScout Wi-Fi radio frequency ­identification (RFID) technology to track workers, equipment, and vehicles. © TTstudio/Shutterstock 255 256 Part Two Information Technology Infrastructure About 1,000 AeroScout Wi-Fi RFID tags are worn by miners or mounted on ­vehicles and equipment, transmitting data about vehicle rock loads and mechanical status, miner locations, and the status of doors and ventilation fans over the mine’s Wi-Fi network. AeroScout’s Mobile View software is able to display a ­real-time visual representation of the location of people and items. The software can determine where loads came from, where rock should be sent, and where empty vehicles should go next. Data about any mishap or slowdown, such as a truck that made an unscheduled stop, or a miner who is behind schedule, are transmitted to Dundee’s surface crew so that appropriate action can be taken. The Mobile View interface is easy to use and provides a variety of reports and rules-based alerts. By using this wireless technology to track the location of equipment and workers underground, Dundee has been able to decrease equipment downtime and utilize resources more efficiently. Dundee also uses the data from the underground wireless network for its Dassault Systemes’ Geovia mine management software and IBM mobile planning software. Before implementing AeroScout, Dundee kept track of workers by noting who had turned in their cap lamps at the end of their shift. AeroScout has ­automated this process, enabling staff in the control room to quickly determine the location of miners. It is also essential that workers driving equipment underground be able to communicate closely with the mine’s control room. In the past, workers used a radio checkpoint system to relay their location. The new wireless system enables control room staff to actually see the location of machinery, so they can direct traffic more effectively, quickly identify problems, and respond more rapidly to emergencies. Thanks to wireless technology, Dundee has been able to reduce costs and increase productivity while improving the safety of its workers. Communication costs have dropped 20 percent. According to Dundee CEO Rick Howes, the ­ability to use real-time data will increase the company’s profit per miner by 10 to 15 percent. Sources:, accessed April 29, 2014; Eric Reguly, “Dundee’s Real-Time Data Innovations Are as Good as Gold,” The Globe and Mail, December 1, 2013; Howard Solomon, “How a Canadian Mining Company Put a Wi-Fi Network Underground,” IT World Canada, December 3, 2013; and AeroScout, “Dundee Precious Metals Improves Safety and Operational Efficiency with AeroScout Real-time Location System, September 15, 2011. T he experience of Dundee Precious Metals illustrates some of the ­powerful capabilities and opportunities provided by contemporary n etworking technology. The company uses wireless networking, radio ­ ­frequency identification (RFID) technology, and AeroScout MobileView ­software to automate tracking of workers, equipment, and ore as they move through its Chelopech underground mine. The chapter-opening diagram calls attention to important points raised by his case and this chapter. The Dundee Precious Metals production environment in its Chelopech mine is difficult to monitor because it is underground, yet requires intensive oversight and coordination to make sure that people, materials, and equipment are available when and where they are needed underground and that work is flowing smoothly. Tracking components manually or using older radio identification methods was slow, cumbersome, and errorprone. Dundee was also under pressure to cut costs because the price of gold had dropped and precious metals typically have wild price fluctuations. Management decided that wireless Wi-Fi technology and RFID tagging ­provided a solution and arranged for the deployment of a wireless Wi-Fi ­network throughout the entire underground Chelopech production facility. Chapter 7 Telecommunications, the Internet, and Wireless Technology The network made it much easier to track and supervise mining activities from above ground. Dundee Precious Metals had to redesign some aspects of its production and other work processes and to train employees in the new system to take advantage of the new technology. Here are some questions to think about: Why did wireless technology play such a key role in this solution? Describe how the new system changed the production process at the Chelopech mine. 7.1 I What are the principal components of telecommunications networks and key networking technologies? f you run or work in a business, you can’t do without networks. You need to communicate rapidly with your customers, suppliers, and employees. Until about 1990, businesses used the postal system or ­telephone ­system with voice or fax for communication. Today, however, you and your employees use computers, e-mail, text messaging, the Internet, mobile phones, and mobile computers connected to wireless networks for this ­purpose. Networking and the Internet are now nearly synonymous with doing business. Networking and Communication Trends Firms in the past used two fundamentally different types of networks: ­telephone ­networks and computer networks. Telephone networks historically handled voice ­communication, and computer networks handled data traffic. Telephone networks were built by t­ elephone ­companies throughout the twentieth ­century using voice transmission technologies ­(hardware and software), and these ­companies almost always operated as regulated ­monopolies throughout 257 258 Part Two Information Technology Infrastructure the world. Computer networks were originally built by computer ­companies ­seeking to transmit data between computers in different locations. Thanks to continuing telecommunications deregulation and information t­echnology innovation, telephone and computer networks are converging into a single digital ­network using shared Internet-based standards and equipment. Telecommunications ­providers today, such as AT&T and Verizon, offer data transmission, Internet access, mobile phone service, and television ­programming as well as voice service. Cable companies, such as Cablevision and Comcast, offer voice s­ ervice and Internet access. Computer networks have expanded to include Internet ­telephone and video services. Increasingly, all of these voice, video, and data communications are based on Internet technology. Both voice and data communication networks have also become more ­powerful (faster), more portable (smaller and mobile), and less expensive. For instance, the typical Internet connection speed in 2000 was 56 kilobits per second, but today more than 74 percent of U.S. households have high-speed ­broadband connections provided by telephone and cable TV companies ­running at 1 to 15 million bits per second. The cost for this service has fallen exponentially, from 25 cents per kilobit in 2000 to a tiny fraction of a cent today. Increasingly, voice and data communication, as well as Internet access, are ­taking place over broadband wireless platforms, such as mobile phones, mobile handheld devices, and PCs in wireless networks. More than half the Internet users in the United States use smartphones and tablets to access the Internet. What Is a Computer Network? If you had to connect the computers for two or more employees together in the same office, you would need a computer network. Exactly what is a ­network? In its simplest form, a ­network consists of two or more connected computers. Figure 7.1 illustrates the major ­hardware, software, and transmission ­components used in a simple network: a c­ lient ­computer and a dedicated server computer, network interfaces, a connection medium, ­network operating system software, and either a hub or a switch. Each computer on the network contains a network interface device to link the computer to the network. The connection medium for linking network ­components can be a telephone wire, coaxial cable, or radio signal in the case of cell phone and wireless local area networks (Wi-Fi networks). The network operating system (NOS) routes and manages communications on the network and coordinates network resources. It can reside on every computer in the n ­ etwork, or it can reside primarily on a dedicated server c­ omputer for all the applications on the network. A server computer is a ­computer on a network that performs important network functions for client computers, such as serving up Web pages, storing data, and storing the network operating system (and hence controlling the network). Microsoft Windows Server, Linux, and Novell Open Enterprise Server are the most widely used network operating systems. Most networks also contain a switch or a hub acting as a connection point between the computers. Hubs are very simple devices that connect network components, sending a packet of data to all other connected devices. A switch has more intelligence than a hub and can filter and forward data to a specified destination on the network. What if you want to communicate with another network, such as the Internet? You would need a router. A router is a communications processor used to route packets of data through different networks, ensuring that the data sent gets to the correct address. Chapter 7 Telecommunications, the Internet, and Wireless Technology FIGURE 7.1 Components of a Simple Computer Network Illustrated here is a very simple computer network, consisting of computers, a network operating system (NOS) residing on a dedicated server computer, cable (wiring) connecting the devices, switches, and a router. Network switches and routers have proprietary software built into their ­hardware for directing the movement of data on the network. This can create network bottlenecks and makes the process of configuring a network more ­complicated and time-consuming. Software-defined networking (SDN) is a new networking approach in which many of these control functions are ­managed by one central program, which can run on inexpensive commodity servers that are separate from the network devices themselves. This is ­especially helpful in a cloud computing environment with many different pieces of hardware because it allows a network administrator to manage traffic loads in a flexible and more efficient manner. Networks in Large Companies The network we’ve just described might be suitable for a small business. But what about large companies with many different locations and thousands of employees? As a firm grows, and collects hundreds of small local area ­networks, these networks can be tied together into a corporate-wide networking infrastructure. The network infrastructure for a large c­ orporation consists of a large number of these small local area networks linked to other local area networks and to ­firmwide corporate networks. A number of powerful ­servers support a corporate Web site, a corporate intranet, and perhaps an extranet. Some of these servers link to other large computers supporting ­back-end systems. Figure 7.2 provides an illustration of these more complex, larger scale ­corporate-wide networks. Here you can see that the corporate network i nfrastructure supports a mobile sales force using mobile phones and ­ ­smartphones, mobile employees linking to the company Web site, internal 259 260 Part Two Information Technology Infrastructure FIGURE 7.2 Corporate Network Infrastructure Today’s corporate network infrastructure is a collection of many different networks from the public switched ­telephone network, to the Internet, to ­corporate local area networks linking workgroups, departments, or office floors. company networks using mobile wireless local area networks (Wi-Fi ­networks), and a videoconferencing system to support managers across the world. In ­addition to these computer ­networks, the firm’s infrastructure may include a separate telephone ­network that handles most voice data. Many firms are ­dispensing with their ­traditional telephone networks and using Internet ­telephones that run on their existing data networks (described later). As you can see from this figure, a large corporate network infrastructure uses a wide variety of technologies—everything from ordinary telephone ­service and corporate data networks to Internet service, wireless Internet, and mobile phones. One of the major problems facing corporations today is how to i­ ntegrate all the different communication networks and channels into a coherent system that enables information to flow from one part of the ­corporation to another, and from one system to another. As more and more ­communication networks become ­digital, and based on Internet technologies, it will become easier to ­integrate them. Key Digital Networking Technologies Contemporary digital networks and the Internet are based on three key ­technologies: c­ lient/server computing, the use of packet switching, and the development of widely used c­ ommunications standards (the most important Chapter 7 Telecommunications, the Internet, and Wireless Technology of which is Transmission Control Protocol/Internet Protocol, or TCP/IP) for ­linking disparate networks and computers. Client/Server Computing Client/server computing, introduced in Chapter 5, is a ­distributed computing model in which some of the processing power is located within small, ­inexpensive client computers, and resides literally on desktops, laptops, or in handheld devices. These powerful clients are linked to one another through a network that is controlled by a network server computer. The server sets the rules of communication for the network and provides every client with an address so others can find it on the network. Client/server computing has largely replaced centralized mainframe ­computing in which nearly all of the processing takes place on a central large mainframe computer. Client/server computing has extended computing to departments, workgroups, factory floors, and other parts of the business that could not be served by a centralized architecture. It also makes it possible for personal computing devices such as PCs, laptops, and mobile phones, to be ­connected to networks such as the Internet. The Internet is the largest ­implementation of client/server computing. Pa c k e t S w i t c h i n g Packet switching is a method of slicing digital messages into parcels called packets, s­ ending the packets along different communication paths as they become available, and then ­reassembling the packets once they arrive at their destinations (see Figure 7.3). Prior to the development of packet switching, computer networks used leased, dedicated ­telephone circuits to communicate with other computers in remote locations. In circuit-switched ­networks, such as the telephone system, a complete point-to-point circuit is assembled, and then communication can proceed. These dedicated circuit-switching techniques FIGURE 7.3 Packet-Switched Networks and Packet Communications Data are grouped into small packets, which are transmitted independently over various communications channels and reassembled at their final destination. 261 262 Part Two Information Technology Infrastructure were ­expensive and wasted available communications capacity—the circuit was maintained regardless of whether any data were being sent. Packet switching makes much more efficient use of the communications capacity of a network. In packet-switched networks, messages are first broken down into small fixed bundles of data called packets. The ­packets include ­information for directing the packet to the right address and for ­checking ­transmission errors along with the data. The packets are transmitted over ­various communications channels using routers, each packet traveling ­independently. Packets of data originating at one source will be routed through many different paths and networks before being reassembled into the original message when they reach their destinations. TCP/IP and Connectivity In a typical telecommunications network, diverse hardware and ­software c omponents need to work together to transmit information. Different ­ ­components in a network communicate with each other only by adhering to a common set of rules called protocols. A protocol is a set of rules and procedures governing transmission of information between two points in a ­network. In the past, many diverse proprietary and incompatible protocols often forced ­business firms to purchase computing and communications equipment from a single vendor. But today, corporate networks are increasingly using a single, common, worldwide standard called Transmission Control Protocol/ Internet Protocol (TCP/IP). TCP/IP was d ­ eveloped during the early 1970s to support U.S. Department of Defense Advanced Research Projects Agency (DARPA) efforts to help scientists transmit data among different types of ­computers over long distances. TCP/IP uses a suite of protocols, the main ones being TCP and IP. TCP refers to the Transmission Control Protocol, which handles the movement of data between c­ omputers. TCP establishes a connection between the computers, sequences the transfer of packets, and acknowledges the packets sent. IP refers to the Internet Protocol (IP), which is responsible for the delivery of packets and includes the disassembling and reassembling of packets during transmission. Figure 7.4 illustrates the four-layered Department of Defense reference model for TCP/IP, and the layers are described as follows: FIGURE 7.4 The Transmission Control Protocol/Internet Protocol (TCP/IP) Reference Model This figure illustrates the four layers of the TCP/IP reference model for communications. Chapter 7 Telecommunications, the Internet, and Wireless Technology 1. Application layer. The Application layer enables client application programs to access the other layers and defines the protocols that applications use to exchange data. One of these application protocols is the Hypertext Transfer Protocol (HTTP), which is used to transfer Web page files. 2. Transport layer. The Transport layer is responsible for providing the Application layer with communication and packet services. This layer includes TCP and other protocols. 3. Internet layer. The Internet layer is responsible for addressing, routing, and packaging data packets called IP datagrams. The Internet Protocol is one of the protocols used in this layer. 4. Network Interface layer. At the bottom of the reference model, the Network Interface layer is responsible for placing packets on and receiving them from the network medium, which could be any networking technology. Two computers using TCP/IP are able to communicate even if they are based on different hardware and software platforms. Data sent from one computer to the other passes downward through all four layers, starting with the sending computer’s Application layer and passing through the Network Interface layer. After the data reach the recipient host computer, they travel up the layers and are reassembled into a format the receiving computer can use. If the receiving computer finds a damaged packet, it asks the ­sending computer to retransmit it. This process is reversed when the receiving ­computer responds. 7.2 What are the different types of networks? Let’s look more closely at alternative networking technologies available to ­businesses. Signals: Digital vs. Analog There are two ways to communicate a message in a network: an analog signal or a digital signal. An analog signal is represented by a continuous waveform that passes through a communications medium and has been used for voice ­communication. The most common analog devices are the telephone ­handset, the speaker on your computer, or your iPod earphone, all of which c­ reate analog waveforms that your ear can hear. A digital signal is a discrete, binary waveform, rather than a continuous ­waveform. Digital signals communicate information as strings of two d ­ iscrete states: one bit and zero bits, which are represented as on-off electrical pulses. Computers use digital signals and require a modem to convert these digital ­signals into analog ­signals that can be sent over (or received from) telephone lines, cable lines, or wireless media that use analog signals (see Figure 7.5). Modem stands for m ­ odulator-demodulator. Cable modems connect your ­computer to the Internet using a cable network. DSL modems connect your computer to the Internet using a telephone c­ ompany’s landline network. Wireless modems perform the same function as traditional modems, connecting your computer to a wireless network that could be a cell phone network, or a Wi-Fi network. Without modems, ­computers could not communicate with one another using analog networks (which include the telephone system and cable networks). 263 264 Part Two Information Technology Infrastructure FIGURE 7.5 Functions of the Modem A modem is a device that translates digital signals into analog form (and vice versa) so that computers can transmit data over analog networks such as telephone and cable networks. Types of Networks There are many different kinds of networks and ways of classifying them. One way of l­ooking at networks is in terms of their geographic scope (see Table 7.1). Local Area Networks If you work in a business that uses networking, you are probably connecting to other employees and groups via a local area network. A local area network (LAN) is designed to connect personal computers and other digital devices within a half-mile or 500-meter radius. LANs typically connect a few computers in a small office, all the computers in one building, or all the computers in ­several buildings in close proximity. LANs also are used to link to long-distance wide area networks (WANs, described later in this section) and other networks around the world using the Internet. Review Figure 7.1, which could serve as a model for a small LAN that might be used in an office. One computer is a dedicated network file server, p ­ roviding users with access to shared computing resources in the network, including ­software programs and data files. The server determines who gets access to what and in which sequence. The router ­connects the LAN to other networks, which could be the Internet or another corporate ­network, so that the LAN can exchange information with ­networks external to it. The most common LAN operating systems are Windows, Linux, and Novell. Each of these network operating systems ­supports TCP/IP as its default networking protocol. Ethernet is the dominant LAN standard at the physical network level, ­specifying the physical medium to carry signals between computers, access control rules, and a s­ tandardized set of bits used to carry data over the system. TABLE 7.1 Types of Networks Type area Local area network (LAN) Up to 500 meters (half a mile); an office or floor of a building Campus area network (CAN) Up to 1,000 meters (a mile); a college campus or corporate facility Metropolitan area network (MAN) A city or metropolitan area Wide area network (WAN) A transcontinental or global area Chapter 7 Telecommunications, the Internet, and Wireless Technology Originally, Ethernet supported a data transfer rate of 10 megabits per second (Mbps). Newer versions, such as Gigabit Ethernet, support a data transfer rate of 1 gigabit per second (Gbps). The LAN illustrated in Figure 7.1 uses a client/server architecture where the network operating system resides primarily on a single file server, and the server provides much of the control and resources for the network. Alternatively, LANs may use a peer-to-peer architecture. A peer-to-peer ­network treats all processors equally and is used primarily in small networks with 10 or fewer users. The various computers on the network can exchange data by direct access and can share peripheral devices without going through a separate server. In LANs using the Windows Server family of operating systems, the ­peer-to-peer ­architecture is called the workgroup network model, in which a small group of computers can share resources, such as files, folders, and printers, over the network without a dedicated server. The Windows domain ­network model, in contrast, uses a dedicated server to manage the computers in the network. Larger LANs have many clients and multiple servers, with separate s­ ervers for ­specific services, such as storing and managing files and databases (file servers or ­database ­servers), managing printers (print servers), storing and managing e-mail (mail servers), or storing and managing Web pages (Web servers). Metropolitan and Wide Area Networks Wide area networks (WANs) span broad geographical distances—entire regions, states, continents, or the entire globe. The most universal and ­powerful WAN is the Internet. Computers connect to a WAN through public networks, such as the telephone system or private cable systems, or through leased lines or satellites. A metropolitan area network (MAN) is a network that spans a metropolitan area, usually a city and its major suburbs. Its geographic scope falls between a WAN and a LAN. TRANSMISSION MEDIA AND TRANSMISSION SPEED Networks use different kinds of physical transmission media, including twisted pair wire, coaxial cable, fiber-optic cable, and media for wireless transmission. Each has advantages and limitations. A wide range of speeds is possible for any given medium depending on the software and hardware configuration. Table 7.2 ­compares these media. B a n d w i d t h : Tr a n s m i s s i o n S p e e d The total amount of digital information that can be transmitted through any ­telecommunications medium is measured in bits per second (bps). One signal change, or cycle, is required to ­transmit one or several bits; therefore, the transmission capacity of each type of telecommunications medium is a function of its frequency. The number of cycles per second that can be sent through that medium is measured in hertz—one hertz is equal to one cycle of the medium. The range of frequencies that can be accommodated on a particular telecommunications channel is called its bandwidth. The bandwidth is the difference between the highest and lowest frequencies that can be accommodated on a single channel. The greater the range of frequencies, the greater the bandwidth and the greater the channel’s transmission capacity. 265 266 Part Two Information Technology Infrastructure TABLE 7.2 Physical Transmission Media Transmission Medium Description Speed Twisted pair wire Strands of copper wire twisted in pairs for voice and data communications. CAT 5 is the most common 10 Mbps LAN cable. Maximum recommended run of 100 meters. 10–100+ Mbps Coaxial cable Thickly insulated copper wire, which is capable of high-speed data transmission and less subject to interference than twisted wire. Currently used for cable TV and for networks with longer runs (more than 100 meters). Up to 1 Gbps Fiber-optic cable Strands of clear glass fiber, transmitting data as pulses of light generated by lasers. Useful for high-speed transmission of large quantities of data. More expensive than other physical transmission media and harder to install; often used for network backbone. 15 Mbps to 6+ Tbps Wireless transmission media Based on radio signals of various frequencies and includes both terrestrial and satellite microwave systems and cellular networks. Used for long-distance, wireless communication and Internet access. Up to 600+ Mbps (CAT 5) 7.3 How do the Internet and Internet technology work and how do they support communication and e-business? We all use the Internet, and many of us can’t do without it. It’s become an ­indispensable personal and business tool. But what exactly is the Internet? How does it work, and what does Internet technology have to offer for business? Let’s look at the most important Internet features. What Is the Internet? The Internet has become the world’s most extensive, public communication system. It’s also the world’s largest ­implementation of client/server computing and internetworking, linking millions of individual n ­ etworks all over the world. This global network of networks began in the early 1970s as a U.S. Department of Defense network to link scientists and university professors around the world. Most homes and small businesses connect to the Internet by subscribing to an Internet service provider. An Internet service provider (ISP) is a commercial organization with a permanent connection to the Internet that sells temporary connections to retail subscribers. EarthLink, NetZero, AT&T, and Time Warner are ISPs. Individuals also connect to the Internet through their business firms, universities, or research centers that have designated Internet domains. There are a variety of services for ISP Internet connections. Connecting via a ­traditional ­telephone line and modem, at a speed of 56.6 kilobits per second (Kbps), used to be the most common form of connection worldwide, but it has been largely replaced by broadband ­connections. Digital subscriber line, cable, satellite Internet connections, and T lines provide these broadband ­services. Digital subscriber line (DSL) technologies operate over existing telephone lines to carry voice, data, and video at transmission rates ranging from 385 Kbps Chapter 7 Telecommunications, the Internet, and Wireless Technology all the way up to 40 Mbps, depending on usage patterns and distance. Cable Internet connections provided by cable ­television vendors use digital cable coaxial lines to deliver high-speed Internet access to homes and businesses. They can provide high-speed access to the Internet of up to 50 Mbps, although most providers offer service ranging from 1 Mbps to 6 Mbps. In areas where DSL and cable services are unavailable, it is possible to access the Internet via ­satellite, although some satellite Internet connections have slower upload speeds than other broadband services. T1 and T3 are international telephone standards for digital communication. They are leased, dedicated lines suitable for businesses or government ­a gencies requiring high-speed guaranteed service levels. T1 lines offer ­guaranteed ­delivery at 1.54 Mbps, and T3 lines offer delivery at 45 Mbps. The Internet does not provide similar guaranteed service levels, but simply “best effort.” Internet Addressing and Architecture The Internet is based on the TCP/IP networking protocol suite described e ­ arlier in this chapter. Every computer on the Internet is assigned a unique Internet Protocol (IP) address, which currently is a 32-bit number represented by four strings of numbers ranging from 0 to 255 separated by periods. For instance, the IP address of is When a user sends a message to another user on the Internet, the message is first decomposed into packets using the TCP protocol. Each packet contains its destination address. The packets are then sent from the client to the ­network server and from there on to as many other servers as necessary to arrive at a specific computer with a known address. At the destination address, the ­packets are reassembled into the original message. The Domain Name System Because it would be incredibly difficult for Internet users to remember strings of 12 n ­ umbers, the Domain Name System (DNS) converts domain names to IP addresses. The domain name is the English-like name that corresponds to the unique 32-bit numeric IP address for each computer connected to the Internet. DNS servers maintain a database containing IP addresses mapped to their ­corresponding domain names. To access a computer on the Internet, users need only specify its domain name. DNS has a hierarchical structure (see Figure 7.6). At the top of the DNS ­hierarchy is the root domain. The child domain of the root is called a ­top-level domain, and the child domain of a top-level domain is called a second-level domain. Top-level domains are two- and three-character names you are ­familiar with from surfing the Web, for ­example, .com, .edu, .gov, and the ­various country codes such as .ca for Canada or .it for Italy. S­ econd-level domains have two parts, designating a top-level name and a second-level name—such as,, or A host name at the bottom of the hierarchy designates a specific computer on either the Internet or a ­private ­network. The most common domain extensions currently available and officially approved are shown in the following list. Countries also have domain names such as .uk, .au, and .fr (United Kingdom, Australia, and France, respectively), and there is a new class of “internationalized” top-level domains that use nonEnglish characters. In the future, this list will expand to include many more types of organizations and industries. 267 268 Part Two Information Technology Infrastructure FIGURE 7.6 The Domain Name System Domain Name System is a hierarchical system with a root domain, top-level domains, second-level domains, and host computers at the third level. .com .edu .gov .mil .net .org .biz .info Commercial organizations/businesses Educational institutions U.S. government agencies U.S. military Network computers Nonprofit organizations and foundations Business firms Information providers Internet Architecture and Governance Internet data traffic is carried over transcontinental high-speed backbone ­networks that g­ enerally operate in the range of 45 Mbps to 2.5 Gbps (see Figure 7.7). These trunk lines are typically owned by long-distance telephone companies (called network service p ­ roviders) or by national governments. Local connection lines are owned by regional t­ elephone and cable television ­companies in the United States that connect retail users in homes and businesses to the Internet. The regional networks lease access to ISPs, private companies, and government institutions. Each organization pays for its own networks and its own local Internet ­connection services, a part of which is paid to the long-distance trunk line ­owners. Individual Internet users pay ISPs for using their service, and they ­generally pay a flat subscription fee, no matter how much or how little they use the Internet. A debate is now raging on whether this arrangement should ­continue or whether heavy Internet users who download large video and music files should pay more for the bandwidth they consume. The Interactive Session on Organizations explores this topic, by examining the pros and cons of net ­neutrality. Chapter 7 Telecommunications, the Internet, and Wireless Technology FIGURE 7.7 Internet Network Architecture The Internet backbone connects to regional networks, which in turn provide access to Internet service providers, large firms, and government ­institutions. Network access points (NAPs) and metropolitan area exchanges (MAEs) are hubs where the ­backbone intersects regional and local networks and where backbone owners connect with one another. No one “owns” the Internet, and it has no formal management. However, worldwide Internet policies are established by a number of professional ­organizations and government bodies, including the Internet Architecture Board (IAB), which helps define the overall structure of the Internet; the Internet Corporation for Assigned Names and Numbers (ICANN), which assigns IP addresses; and the World Wide Web Consortium (W3C), which sets Hypertext Markup Language and other programming standards for the Web. These organizations influence government agencies, network owners, ISPs, and software developers with the goal of keeping the Internet operating as efficiently as possible. The Internet must also conform to the laws of the s­ overeign nation-states in which it operates, as well as the technical ­infrastructures that exist within the nation-states. Although in the early years of the Internet and the Web there was very little legislative or executive ­interference, this situation is changing as the Internet plays a growing role in the ­distribution of information and knowledge, including content that some find objectionable. ICANN was created by the Department of Commerce in 1986 to manage the domain name system, and the central core servers of the Internet domains located in the United States. Emerging nations and others have long called for the U.S. dominance of the Internet to end, and instead s­ upport a ­multi-national controlling agency. After the terrorist attacks on the United States on September 11, 2001, the U.S. refused to consider such a change. This opinion changed again in March 2014 when the Commerce Department announced its intention to transfer the domain name functions of the Internet 269 270 Part Two Information Technology Infrastructure I n t e r a c t i v e S e s s i o n : ORGANI Z A T IONS The Battle Over Net Neutrality What kind of Internet user are you? Do you ­primarily use the Net to do a little e-mail and online banking? Or are you online all day, ­watching YouTube videos, downloading music files, or ­playing online games? Do you use your iPhone to stream TV shows and movies on a regular basis? If you’re a power Internet or smartphone user, you are ­consuming a great deal of bandwidth. Could hundreds of millions of people like you start to slow the Internet down? Video streaming on Netflix accounts for 32 ­percent of all bandwidth use in the United States, and Google’s YouTube for 19 percent of Web traffic at peak hours. If user demand overwhelms ­network capacity, the Internet might not come to a screeching halt, but users could face sluggish ­download speeds and video transmission. Heavy use of iPhones in urban areas such as New York and San Francisco has already degraded service on the AT&T ­wireless network. AT&T reported that 3 percent of its ­subscriber base accounted for 40 percent of its data traffic. Internet service providers (ISPs) assert that network congestion is a serious problem and that expanding their networks would require passing on burdensome costs to consumers. These companies believe differential pricing methods, which include data caps and metered use—charging based on the amount of bandwidth consumed—are the fairest way to finance necessary investments in their network infrastructures. But metering Internet use is not widely accepted, because of an ongoing debate about net neutrality. Net neutrality is the idea that Internet service ­providers must allow customers equal access to content and applications, regardless of the source or nature of the content. Presently, the Internet is neutral: all Internet traffic is treated equally on a first-come, first-served basis by Internet ­backbone owners. However, this arrangement prevents ­telecommunications and cable companies from charging differentiated prices based on the amount of bandwidth consumed by the content being ­delivered over the Internet. The strange alliance of net neutrality advocates includes; the Christian Coalition; the American Library Association; data-intensive Web businesses such as Netflix, Amazon, and Google; major consumer groups; and a host of bloggers and small businesses. Net neutrality advocates argue that differentiated pricing would impose heavy costs on heavy bandwidth users such as YouTube, Skype, and other innovative services, preventing high-bandwidth startup companies from gaining traction. Net neutrality supporters also argue that without net neutrality, ISPs that are also cable companies, such as Comcast, might block online streaming video from Netflix or Hulu in order to force customers to use the cable company’s on-demand movie rental services. Network owners believe regulation to enforce net neutrality will impede U.S. competitiveness by discouraging capital expenditure for new networks and curbing their networks’ ability to cope with the exploding demand for Internet and wireless traffic. U.S. Internet service lags behind many other nations in overall speed, cost, and quality of service, adding credibility to this argument. And with enough options for Internet access, dissatisfied consumers could simply switch to providers who enforce net neutrality and allow unlimited Internet use. The wireless industry had been largely exempted from net neutrality rules, because the government determined it was a less mature network and companies should be allowed more freedom to manage traffic. Wireless providers already have tiered plans that charge heavy bandwidth users larger service fees. A December 2012 report by the non-profit, nonpartisan, public policy institute, New America Foundation (NAF), disputes these claims. Like personal computers, the processing capacity of the routers and switches in wired broadband networks has vastly expanded while the price has declined. Although total U.S. Internet data consumption rose 120% in 2012, the cost to transport the data decreased at a faster pace. The net cost to carriers was at worst flat and for the most part, down. The NAF report further asserts that lack of competition has enabled wired broadband carriers to charge higher rates, institute data caps, and spend less on the capital expenditures needed to upgrade and maintain their networks than they have in the past. The courts have maintained that the Federal Communications Commission (FCC) has no authority to dictate how the Internet operates. The Communications Act of 1996 forbids the agency from managing the Internet as a “common carrier,” the Chapter 7 Telecommunications, the Internet, and Wireless Technology regulatory approach the commission took toward telephones, and the FCC itself decided not to classify broadband as a telecommunications service. On January 14, 2014, the U.S. Court of Appeals for the District of Columbia struck down the FCC’s “Open Internet” rules that required equal treatment of Internet traffic and prevented broadband providers from blocking traffic favoring certain sites or charging special fees to companies that account for the most traffic. The court said the FCC saddled broadband ­providers with the same sorts of obligations as traditional “common carrier” telecommunications services, such as landline phone systems, even though the commission had explicitly decided not to classify broadband as a telecommunications service. On April 24, 2014, the FCC announced that it would propose new rules that allow companies like Disney, Google or Netflix to pay Internet service providers like Comcast and Verizon for special, faster lanes to send video and other content to their ­customers. Broadband providers would have to disclose how they treat all Internet traffic and on what terms they offer more rapid lanes, and would be required to act in a “commercially reasonable man- 271 ner.” Providers would not be allowed to block Web sites. The proposed rules would also require Internet service providers to disclose whether, in assigning faster lanes, they had favored their affiliated ­companies that provide content. Nevertheless, the FCC continues to push for an open Internet. On April 30, 2014, FCC chairman Tom Wheeler announced that lack of competition has hurt consumers, and that the FCC planned to write tough new rules to enforce net neutrality. Sources: “Should the U.S. Regulate Broadband Internet Access as a Utility?” Wall Street Journal, May 11, 2014; Edward Wyatt, “Stern Talk From Chief of F.C.C. on Open Net,” New York Times, April 30, 2014 and “F.C.C., in a Shift, Backs Fast Lane for Web Traffic,” New York Times, April 24, 2014; Amol Sharma, “Netflix, YouTube Could Feel Effects of ‘Open Internet’ Ruling,” Wall Street Journal, January 14, 2014; Gautham Nagesh, “FCC to Propose New ‘Net Neutrality’ Rules,” Wall Street Journal, April 23, 2014; Shira Ovide, “Moving Beyond the Net Neutrality Debate,” Wall Street Journal, January 14, 2014; Gautham Nagesh and Amol Sharma, “Court Tosses Rules of Road for Internet,” Wall Street Journal, January 4, 2014; UpdAlina Selyukh,” S. Court to Hear Oral Arguments in Net Neutrality Case on September 9,” Reuters, June 25, 2013; and Hibah Hussain, Danielle Kehl, Benjamin Lennett, and Patrick Lucey, “Capping the Nation’s Broadband Future? Dwindling Competition Is Fueling the Rise of Increasingly Costly and Restrictive Internet Usage Caps,” New America Foundation, December 17, 2012. c a s e s t u dy q u e s t i o n s 1. What is net neutrality? Why has the Internet operated under net neutrality up to this point in time? 2. Who’s in favor of net neutrality? Who’s opposed? Why? 3. What would be the impact on individual users, businesses, and government if Internet providers switched to a tiered service model for transmission over land lines as well as wireless? 4. It has been said that net neutrality is the most important issue facing the Internet since the advent of the Internet. Discuss the implications of this statement. 5. Are you in favor of legislation enforcing network neutrality? Why or why not? over to a global, multi-stakeholder community which will be d ­ etermined in 2015. Multi-stakeholder means that the leadership of the global Internet would follow the pattern of ICANN and would be composed of representatives from academia, business, governments, and public interest groups rather than a government led or an inter-governmental body. Until this body is formed, the Internet domain name system will remain under the control of the Department of Commerce. The announcement came in part as a response to widespread global hostility to U.S. control over the DNS amidst the revelations of Edward Snowden, describing how U.S. intelligence agencies used the Internet to conduct surveillance over individuals and groups around the world even though such surveillance had nothing to do with the operations of ICANN or the Department of Commerce, but instead were enabled by other 272 Part Two Information Technology Infrastructure technical means (NTIA, 2014; Wyatt, 2014). The hope is that the transition to a multinational body will not disrupt the orderly operation of the Internet. The Future Internet: IPv6 and Internet2 The Internet was not originally designed to handle the transmission of ­massive quantities of data and billions of users. Because of sheer Internet population growth, the world is about to run out of available IP addresses using the old addressing convention. The old addressing system is being replaced by a new version of the IP addressing schema called IPv6 (Internet Protocol ­version 6), which ­contains 128-bit addresses (2 to the power of 128), or more than a quadrillion possible unique addresses. IPv6 is not compatible with the ­existing Internet addressing system, so the transition to the new standard will take years. Internet2 is an advanced networking consortium representing over 350 U.S. ­universities, private businesses, and government agencies working with 66,000 institutions across the United States and international networking partners from more than 100 countries. To connect these communities, Internet2 developed a high-capacity 100 Gbps network that serves as a testbed for leadingedge technologies that may eventually migrate to the ­public Internet, including telemedicine, distance learning, and other advanced applications not p ­ ossible with consumer-grade Internet services. The fourth generation of this network is being rolled out to provide 8.8 ­terabits of capacity. Internet Services and Communication Tools The Internet is based on client/server technology. Individuals using the Internet ­control what they do through client applications on their ­computers, such as Web browser ­software. The data, including e-mail messages and Web pages, are stored on servers. A client uses the Internet to request information from a particular Web server on a d ­ istant computer, and the server sends the requested information back to the client over the Internet. Chapters 5 and 6 describe how Web servers work with application servers and database s­ ervers to access information from an organization’s internal information s­ystems ­applications and their associated databases. Client platforms today include not only PCs and other ­computers but also smartphones and tablets. Internet Services A client computer connecting to the Internet has access to a variety of ­services. These ­services include e-mail, chatting and instant messaging, electronic ­discussion groups, Telnet, File Transfer Protocol (FTP), and the Web. Table 7.3 provides a brief description of these services. Each Internet service is implemented by one or more software programs. All of the services may run on a single server computer, or different services may be allocated to d ­ ifferent machines. Figure 7.8 illustrates one way that these ­services can be arranged in a multitiered client/server architecture. E-mail enables messages to be exchanged from computer to computer, with ­capabilities for routing messages to multiple recipients, forwarding ­messages, and attaching text ­documents or multimedia files to messages. Most e-mail today is sent through the Internet. The cost of e-mail is far lower than ­equivalent voice, postal, or overnight delivery costs, and e-mail messages arrive ­anywhere in the world in a matter of seconds. Nearly 90 percent of U.S. workplaces have employees communicating ­interactively using chat or instant messaging tools. Chatting enables two or more people who are ­simultaneously connected to the Internet to hold live, Chapter 7 Telecommunications, the Internet, and Wireless Technology 273 TABLE 7.3 Major Internet Services Capability Functions Supported E-mail Person-to-person messaging; document sharing Chatting and instant messaging Interactive conversations Newsgroups Discussion groups on electronic bulletin boards Telnet Logging on to one computer system and doing work on another File Transfer Protocol (FTP) Transferring files from computer to computer World Wide Web Retrieving, formatting, and displaying information (including text, audio, graphics, and video) using hypertext links interactive conversations. Chat systems now support voice and video chat as well as written conversations. Many online retail businesses offer chat services on their Web sites to attract visitors, to encourage repeat purchases, and to improve customer service. Instant messaging is a type of chat service that enables participants to ­create their own private chat channels. The instant messaging system alerts the user whenever s­ omeone on his or her private list is online so that the user can initiate a chat session with other ­individuals. Instant messaging systems for consumers include Yahoo! Messenger, Google Talk, AOL Instant Messenger, and Facebook Chat. Companies concerned with security use proprietary ­communications and ­messaging systems such as IBM Sametime. Newsgroups are worldwide discussion groups posted on Internet electronic bulletin boards on which people share information and ideas on a defined topic, such as radiology or rock bands. Anyone can post messages on these bulletin boards for others to read. Many thousands of groups exist that discuss almost all conceivable topics. FIGURE 7.8 Client/Server Computing on the Internet Client computers running Web browsers and other software can access an array of services on servers over the Internet. These services may all run on a single server or on multiple specialized servers. 274 Part Two Information Technology Infrastructure Employee use of e-mail, instant messaging, and the Internet is supposed to increase worker productivity, but the accompanying Interactive Session on Management shows that this may not always be the case. Many company ­managers now believe they need to monitor and even regulate their employees’ online activity. But is this ethical? Although there are some strong business reasons why companies may need to monitor their employees’ e-mail and Web activities, what does this mean for employee privacy? Vo i c e o v e r I P The Internet has also become a popular platform for voice transmission and corporate n ­ etworking. Voice over IP (VoIP) technology delivers voice ­information in digital form using packet switching, avoiding the tolls charged by local and long-distance telephone ­networks (see Figure 7.9). Calls that would ordinarily be transmitted over public telephone networks travel over the ­corporate network based on the Internet Protocol, or the public Internet. Voice calls can be made and received with a computer equipped with a microphone and speakers or with a VoIP-enabled telephone. Cable firms such as Time Warner and Cablevision provide VoIP service ­bundled with their high-speed Internet and cable offerings. Skype offers free VoIP worldwide using a peer-to-peer network, and Google has its own free VoIP service. Although there are up-front investments required for an IP phone system, VoIP can reduce communication and network management costs by 20 to 30 percent. For ­example, VoIP saves Virgin Entertainment Group $700,000 per year in long-distance bills. In a­ ddition to lowering long-distance costs and ­eliminating monthly fees for private lines, an IP n ­ etwork provides a single voice-data infrastructure for both telecommunications and computing ­services. Companies no longer have to maintain separate networks or provide support ­services and personnel for each different type of network. Unified Communications In the past, each of the firm’s networks for wired and wireless data, voice ­communications, and videoconferencing operated independently of each FIGURE 7.9 How Voice over IP Works A VoIP phone call digitizes and breaks up a voice message into data packets that may travel along different routes before being reassembled at the final destination. A processor nearest the call’s destination, called a gateway, arranges the packets in the proper order and directs them to the telephone number of the receiver or the IP address of the receiving computer. Chapter 7 Telecommunications, the Internet, and Wireless Technology 275 Int e r a ct i v e S e s s i o n : m a n a g e m e nt Monitoring Employees on Networks: Unethical or Good Business? The Internet has become an extremely valuable ­business tool, but it’s also a huge distraction for workers on the job. Employees are wasting ­valuable company time by surfing inappropriate Web sites (Facebook, shopping, sports, etc.), sending and receiving personal email, talking to friends via online chat, and downloading videos and music. According to IT research firm Gartner Inc., ­non-work-related Internet surfing results in an ­estimated 40% ­productivity loss each year for American ­businesses. A recent Gallup Poll found that the average employee spends over 75 minutes per day using office computers for non-business related activity. That translates into an annual loss of $6,250 per year, per employee. An average mid-size company of 500 employees could be expected to lose $3.25 million in lost productivity due to Internet misuse. Many companies have begun monitoring employee use of e-mail and the Internet, sometimes without their knowledge. Many tools are now available for this purpose, including SONAR, Spector CNE Investigator, iSafe, OsMonitor, IMonitor, Work Examiner, Net Spy, Activity Monitor, Mobistealth, and Spytech. These products enable companies to record online searches, monitor file downloads and uploads, record keystrokes, keep tabs on emails, create transcripts of chats, or take certain screenshots of images displayed on computer screens. Instant messaging, text messaging, and social media monitoring are also increasing. Although U.S. companies have the legal right to monitor employee Internet and e-mail activity while they are at work, is such monitoring unethical, or is it simply good business? Managers worry about the loss of time and employee productivity when employees are ­focusing on personal rather than company business. Too much time on personal business translates into lost revenue. Some employees may even be billing time they spend pursuing personal interests online to ­clients, thus ­overcharging them. If personal traffic on company networks is too high, it can also clog the company’s network so that legitimate business work cannot be performed. Procter & Gamble (P&G) found that on an average day, employees were listening to 4,000 hours of music on Pandora and viewing 50,000 five-minute YouTube videos. These activities involved streaming huge quantities of data, which slowed down P&G’s Internet connection. When employees use e-mail or the Web ­(including social networks) at employer facilities or with employer equipment, anything they do, ­including anything illegal, carries the company’s name. Therefore, the employer can be traced and held liable. Management in many firms fear that racist, ­sexually explicit, or other potentially ­offensive material accessed or traded by their employees could result in adverse publicity and even lawsuits for the firm. An estimated 27 percent of Fortune 500 organizations have had to defend themselves against claims of sexual harassment stemming from inappropriate email. Even if the company is found not to be liable, responding to lawsuits could run up huge legal bills. Symantec’s 2011 Social Media Protection Flash Poll found that the average litigation cost for companies with social media incidents ran over $650,000. Companies also fear leakage of confidential ­information and trade secrets through e-mail or social networks. Another survey conducted by the American Management Association and the ePolicy Institute found that 14 percent of the employees polled admitted they had sent confidential or potentially embarrassing company e-mails to outsiders. U.S. companies have the legal right to ­monitor what employees are doing with company ­equipment during business hours. The question is whether ­electronic surveillance is an appropriate tool for maintaining an efficient and positive workplace. Some companies try to ban all personal activities on corporate networks—zero tolerance. Others block employee access to specific Web sites or social sites, closely monitor e-mail messages, or limit personal time on the Web. For example, P&G blocks Netflix and has asked employees to limit their use of Pandora. It still allows some YouTube viewing, and is not blocking access to social networking sites because staff use them for digital marketing campaigns. Ajax Boiler in Santa Ana, California, uses software from SpectorSoft Corporation that records all the Web sites employees visit, time spent at each site, and all e-mails sent. Financial services and investment firm Wedbush Securities monitors the daily e-mails, instant messag- 276 Part Two Information Technology Infrastructure ing, and social networking activity of its 1,000-plus employees. The firm’s e-mail monitoring software flags certain types of messages and keywords within messages for further investigation. A number of firms have fired employees who have stepped out of bounds. A Proofpoint survey found that one in five large U.S. companies fired an employee for violating e-mail policies in the past year. Among managers who fired employees for Internet misuse, the majority did so because the employees’ e-mail ­contained sensitive, confidential, or embarrassing information. No solution is problem-free, but many consultants believe companies should write corporate policies on employee e-mail, social media, and Web use. The policies should include explicit ground rules that state, by position or level, under what ­circumstances employees can use company facilities for e-mail, blogging, or Web surfing. The policies should also inform employees whether these activities are ­monitored and explain why. IBM now has “social computing guidelines” that cover employee activity on sites such as Facebook and Twitter. The guidelines urge employees not to conceal their identities, to remember that they are personally responsible for what they publish, and to refrain from discussing controversial topics that are not related to their IBM role. The rules should be tailored to specific business needs and organizational cultures. For example, investment firms will need to allow many of their employees access to other investment sites. A ­company dependent on widespread information sharing, innovation, and independence could very well find that monitoring creates more problems than it solves. Sources: “Should Companies Monitor Their Employees’ Social Media?” Wall Street Journal, May 11, 2014; Rhodri Marsden, “Workplace monitoring mania may be risky business,” Brisbane Times, March 30, 2014; Donna Iadipaolo, “Invading Your Privacy Is Now the Norm in the Workplace,”, April 28, 2014; “Office Slacker Stats,”, accessed May 1, 2014; “Office Productivity Loss,”, accessed May 1, 2014; “Workplace Privacy and Employee Monitoring,” Privacy Rights Clearinghouse, June 2013; Samuel Greengard, “How Smartphone Addiction Hurts Productivity,” CIO Insight, March 11, 2013; Emily Glazer, “P&G Curbs Employees’ Internet Use,” The Wall Street Journal, April 4, 2012; and David L. Barron, “Social Media: Frontier for Employee Disputes,” Baseline, January 19, 2012. case study questions 1. Should managers monitor employee e-mail and Internet usage? Why or why not? 2. Describe an effective e-mail and Web use policy for a company. 3. Should managers inform employees that their Web behavior is being monitored? Or should managers monitor secretly? Why or why not? other and had to be managed s­ eparately by the information systems department. Now, however, firms are able to merge disparate communications modes into a single universally accessible service using unified communications technology. Unified communications integrates disparate channels for voice c­ ommunications, data communications, instant messaging, e-mail, and ­electronic ­conferencing into a single experience where users can seamlessly switch back and forth between different communication modes. Presence ­technology shows whether a person is available to receive a call. Companies will need to examine how work flows and business processes will be altered by this technology in order to gauge its value. CenterPoint Properties, a major Chicago area industrial real estate ­company, used ­unified communications technology to create collaborative Web sites for each of its real estate deals. Each Web site provides a single point for accessing structured and unstructured data. Integrated presence technology lets team members e-mail, instant message, call, or videoconference with one click. Chapter 7 Telecommunications, the Internet, and Wireless Technology Virtual Private Networks What if you had a marketing group charged with developing new products and services for your firm with members spread across the United States? You would want them to be able to e-mail each other and communicate with the home office without any chance that ­outsiders could intercept the communications. In the past, one answer to this problem was to work with large private networking firms who offered secure, private, dedicated networks to ­customers. But this was an expensive solution. A much less-expensive solution is to create a virtual private network within the public Internet. A virtual private network (VPN) is a secure, encrypted, private network that has been configured within a public network to take advantage of the economies of scale and ­management facilities of large networks, such as the Internet (see Figure 7.10). A VPN p ­ rovides your firm with secure, encrypted communications at a much lower cost than the same capabilities offered by ­traditional non-Internet providers who use their private n ­ etworks to secure communications. VPNs also provide a network infrastructure for c­ ombining voice and data networks. Several competing protocols are used to protect data transmitted over the public Internet, including Point-to-Point Tunneling Protocol (PPTP). In a process called tunneling, packets of data are encrypted and wrapped inside IP packets. By adding this wrapper around a network message to hide its content, business firms create a private connection that travels through the public Internet. The Web The Web is the most ­popular Internet service. It’s a ­system with universally accepted standards for ­storing, retrieving, formatting, and ­displaying ­information using a client/server ­architecture. Web pages are formatted using hypertext with embedded links that connect documents to one another and that also link pages to other objects, such as sound, video, or animation files. When you click a graphic and a video clip plays, you have clicked a hyperlink. A typical Web site is a ­collection of Web pages linked to a home page. FIGURE 7.10 A Virtual Private Network Using the Internet This VPN is a private network of computers linked using a secure “tunnel” connection over the Internet. It protects data transmitted over the public Internet by encoding the data and “wrapping” them within the Internet Protocol (IP). By adding a wrapper around a network message to hide its content, organizations can create a private connection that travels through the public Internet. 277 278 Part Two Information Technology Infrastructure Hypertext Web pages are based on a standard Hypertext Markup Language (HTML), which formats documents and incorporates dynamic links to other d ­ ocuments and pictures stored in the same or remote computers (see Chapter 5). Web pages are accessible through the Internet because Web browser software ­operating your computer can request Web pages stored on an Internet host server using the Hypertext Transfer Protocol (HTTP). HTTP is the ­communications standard used to transfer pages on the Web. For example, when you type a Web address in your browser, such as, your browser sends an HTTP request to the server requesting the home page of HTTP is the first set of letters at the start of every Web address, followed by the domain name, which specifies the organization’s server computer that is storing the ­document. Most companies have a domain name that is the same as or closely related to their official corporate name. The directory path and document name are two more pieces of information within the Web address that help the browser track down the requested page. Together, the address is called a uniform resource locator (URL). When typed into a browser, a URL tells the browser software exactly where to look for the information. For example, in the URL, http names the protocol used to display Web pages, is the domain name, content/features is the directory path that identifies where on the domain Web server the page is stored, and 082610.html is the document name and the name of the ­format it is in (it is an HTML page). We b S e r v e r s A Web server is software for locating and managing stored Web pages. It locates the Web pages requested by a user on the computer where they are stored and delivers the Web pages to the user’s computer. Server applications usually run on dedicated computers, although they can all reside on a single computer in small organizations. The most common Web server in use today is Apache HTTP Server, followed by Microsoft Internet Information Services (IIS). Apache is an open source product that is free of charge and can be downloaded from the Web. S e a r c h i n g f o r I n f o r m a t i o n o n t h e We b No one knows for sure how many Web pages there really are. The surface Web is the part of the Web that search engines visit and about which information is recorded. For instance, Google visited an estimated 600 billion pages in 2013, and this reflects a large portion of the ­publicly accessible Web page population. But there is a “deep Web” that contains an e ­ stimated 1 trillion additional pages, many of them proprietary (such as the pages of the Wall Street Journal Online, which cannot be visited without a subscription or access code) or that are stored in ­protected corporate databases. Searching for information on Facebook is another matter. With an estimated 1.3 billion members, each with pages of text, photos, and media, the population of Web pages is larger than many estimates. But Facebook is a “closed” Web, and its pages are not searchable by Google or other search engines. Search Engines Obviously, with so many Web pages, finding specific Web pages that can help you or your business, nearly instantly, is an important problem. The question is, how can you find the one or two pages you really want and need out of billions of indexed Web pages? Search engines attempt to solve the problem of finding useful information on the Web nearly instantly, Chapter 7 Telecommunications, the Internet, and Wireless Technology and, arguably, they are the “killer app” of the Internet era. Today’s search engines can sift through HTML files, files of Microsoft Office applications, PDF files, as well as audio, video, and image files. There are hundreds of different search engines in the world, but the vast majority of search results are supplied by Google, Yahoo!, and Microsoft’s Bing (see Figure 7.11). Web search engines started out in the early 1990s as relatively simple ­software programs that roamed the nascent Web, visiting pages and gathering information about the content of each page. The first search engines were simple ­keyword indexes of all the pages they ­visited, leaving the user with lists of pages that may not have been truly relevant to their search. In 1994, Stanford University computer science students David Filo and Jerry Yang ­created a hand-selected list of their favorite Web pages and called it “Yet Another Hierarchical Officious Oracle,” or Yahoo. Yahoo was not i­nitially a search engine but rather an edited selection of Web sites organized by c­ ategories the editors found useful. Currently Yahoo relies on Microsoft’s Bing for search results. In 1998, Larry Page and Sergey Brin, two other Stanford computer science ­students, released their first version of Google. This search engine was ­different: Not only did it index each Web page’s words but it also ranked search results based on the relevance of each page. Page patented the idea of a page ranking system (called PageRank System), which essentially measures the popularity of a Web page by calculating the number of sites that link to that page as well as the number of pages to which it links. The premise is that really popular Web pages are more “relevant” to users. Brin contributed a unique Web crawler program that indexed not only keywords on a page but also combinations of words (such as authors and the titles of their articles). These two ideas became the foundation for the Google search engine. Figure 7.12 illustrates how Google works. Mobile Search With the growth of mobile smartphones and tablet computers, and with about 167 million Americans accessing the Internet via mobile devices, the nature of ­e-commerce and search is changing. Mobile search from smartphones and tablets made up about 50 percent of all searches in 2014, and FIGURE 7.11 Top Web Search Engines in the United States Google is the most popular search engine, handling nearly 70 percent of Web searches in the United States and around 90% in Europe.. Sources: Based on data from comScore Inc., February 2014. 279 280 Part Two Information Technology Infrastructure FIGURE 7.12 How Google Works The Google search engine is continuously crawling the Web, indexing the content of each page, calculating its popularity, and storing the pages so that it can respond quickly to user requests to see a page. The entire process takes about one-half second. according to Google will expand rapidly in the next few years. Both Google and Yahoo have developed new search interfaces to make searching and shopping from smartphones more convenient. Amazon, for instance, sold over $1 billion in goods in 2013 through mobile searches of its store (­Search Agency, 2013). While smartphones are widely used to shop, actual purchases typically take place on laptops or desktops, followed by tablets. Search Engine Marketing Search engines have become major advertising platforms and shopping tools by offering what is now called search engine marketing. Searching for information is one of the Web’s most popular activities: 60% of American adult Internet users use a search engine at least once a day, generating about 90 billion queries a month. With this huge audience, search engines are the foundation for the most lucrative form of online marketing and advertising, search engine marketing. When users enter a search term at Google, Bing, Yahoo, or any of the other sites serviced by these search engines, they receive two types of l­istings: sponsored links, for which advertisers have paid to be listed (usually at the top of the search results page), and unsponsored “organic” search results. In addition, ­advertisers can purchase small text boxes on the side of search results pages. The paid, ­sponsored advertisements are the fastest growing form of Internet advertising and are p ­ owerful new marketing tools that precisely match consumer interests with advertising ­messages at the right moment. Search engine marketing monetizes the value of the search process. In 2014, search engine marketing is expected to generate $22.8 billion in revenue, nearly half of all online advertising ($51 billion). Chapter 7 Telecommunications, the Internet, and Wireless Technology Google will for over 38% of all online ­advertising in 2014. About 97% of Google’s revenue of $60 billion in 2013 came from online advertising, and 95% of the ad revenue came from search engine marketing (Google, 2014). Because search engine marketing is so effective (it has the highest ­click-through rate and the highest return on ad investment), companies seek to ­optimize their Web sites for search engine recognition. The better optimized the page is, the higher a ranking it will achieve in search engine result listings. Search engine optimization (SEO) is the process of improving the quality and volume of Web traffic to a Web site by employing a series of techniques that help a Web site achieve a higher ranking with the major search engines when certain keywords and phrases are put into the search field. One technique is to make sure that the keywords used in the Web site description match the ­keywords likely to be used as search terms by prospective customers. For example, your Web site is more likely to be among the first ranked by search engines if it uses the keyword “lighting” rather than “lamps” if most prospective ­customers are searching for “lighting.” It is also advantageous to link your Web site to as many other Web sites as possible because search engines evaluate such links to determine the popularity of a Web page and how it is linked to other content on the Web. Search engines can be gamed by scammers who create thousands of phony Web site pages and link them altogether, or link them to a single retailer’s site in an attempt to fool Google’s search engine. Firms can also pay so-called “link farms” to link to their site. Google changed its search algorithm in 2012. Codenamed “Penguin,” the new algorithm examines the quality of links more carefully with the intent of down ranking sites that have a suspicious pattern of sites linking to them. Penguin is updated annually and published. Google and other search engine firms are attempting to refine search engine algorithms to capture more of what the user intended, and more the “meaning” of a search. Google introduced Hummingbird, its new search algorithm in September 2013. Rather than evaluate each word separately in a search, Google’s semantically informed Hummingbird will try to evaluate an entire sentence. So, if your search is a long sentence like “Google annual report selected financial data 2013,” Hummingbird should be able to figure out that you really want the SEC Form 10k report filed with the Securities and Exchange Commission on March 31, 2014. How about “Italian restaurant Brooklyn Bridge”? This will return the name and location of a number of Italian restaurants in vicinity of the Brooklyn Bridge. Semantic search more closely follows conversational search, or search as you would ordinarily speak it to another human being. Google’s predictive search is now a part of most search results. In predictive search, this part of the search algorithm guesses what you are looking for, and suggests search terms as you enter your search. Google searches also take advantage of Knowledge Graph, an effort of the search algorithm to anticipate what you might want to know more about as you search on a topic. Results of the knowledge graph appear on the right of the screen and contain more information about the topic or person you are searching on. In general, search engines have been very helpful to small businesses that cannot afford large marketing campaigns. Because shoppers are looking for a specific product or ­service when they use search engines, they are what ­marketers call “hot prospects”—­people who are looking for information and often intending to buy. Moreover, search engines charge only for click-throughs to a site. Merchants do not have to pay for ads that don’t work, only for ads that receive a click. Consumers benefit from search engine marketing because ads for merchants appear only when consumers are looking for a specific product. There 281 282 Part Two Information Technology Infrastructure are no pop-ups, Flash animations, videos, interstitials, e-mails, or other irrelevant communications to deal with. Thus, search engine marketing saves consumers cognitive energy and reduces search costs (including the cost of transportation needed to physically search for products). One study estimated the global value of search to both merchants and consumers to be more than $800 billion, with about 65 percent of the benefit going to consumers in the form of lower search costs and lower prices (McKinsey, 2011). Google and Microsoft face challenges ahead as desktop PC search growth slows, and r­evenues decline because the price of search engine ads is declining slightly. The growth in mobile search does not make up for the loss of desktop search revenues because mobile ads sell for generally half as much as desktop search ads. Social Search One problem with Google and mechanical search engines is that they are so thorough: Enter a search for “ultra computers” and in .2 ­seconds you will receive over 300 million reponses! Search engines are not very ­discriminating. Social search is an effort to provide fewer, more relevant, and trustworthy search results based on a p ­ erson’s network of social contacts. In contrast to the top search engines that use a mathematical algorithm to find pages that satisfy your query, a social search Web site would review your friends’ recommendations (and their friends’), their past Web visits, and their use of “Like” buttons. In January 2013 Facebook launched Graph Search, a social network search engine that responds to user search queries with information from the user’s social network of friends and connections. Graph Search relies upon the huge amount of data on Facebook that is, or can be, linked to individuals and organizations. You might use Graph Search to search for Boston restaurants that your friends like, alumni from the University of South Carolina who like Lady Gaga, or pictures of your friends before 2010. Google has developed Google +1 as a social layer on top of its existing search engine. Users can place a +1 next to the Web sites they found helpful, and their friends will be notified automatically. Subsequent searches by their friends would list the +1 sites recommended by friends higher up on the page. One problem with social search is that your close friends may not have ­intimate knowledge of topics you are exploring, or they may have tastes you don’t appreciate. It’s also possible your close friends don’t have any knowledge about what you are searching for. Semantic Search Another way for search engines to become more discriminating and helpful is to make search engines that could understand what it is we are really looking for. Called “semantic search” the goal is to build a search engine that could really understand human language and behavior. For instance, in 2012 Google’s search engine began delivering more than millions of links. It started to give users more facts and direct answers, and to provide more r­ elevant links to sites based on the search engine’s estimation of what the user intended, and even on the user’s past search behavior. Google’s search engine is trying to understand what people are most likely thinking about when they search for something. Google hopes to use its massive database of objects (people, places, things), and smart software to provide users better results than just millions of hits. For instance, do a search on “Lake Tahoe” and the search engine will return basic facts about Tahoe (altitude, average temperature, and local fish), a map, and hotel accommodations (Efrati, 2012). Although search engines were originally designed to search text documents, the explosion of photos and videos on the Internet created a demand for ­searching and classifying these visual objects. Facial recognition software can create a digital version of a human face. In 2012 Facebook introduced Chapter 7 Telecommunications, the Internet, and Wireless Technology its facial recognition software and combined it with tagging, to create a new feature called Tag Suggest. The software creates a digital facial print, similar to a finger print. Users can put their own tagged photo on their timeline, and their friend’s timelines. Once a person’s photo is tagged, Facebook can pick that person out of a group photo, and identify for others who is in the photo. You can also search for people on Facebook using their digital image to find and identify them. Intelligent Agent Shopping Bots Chapter 11 describes the capabilities of software agents with built-in intelligence that can gather or filter information and perform other tasks to assist users. Shopping bots use intelligent agent software for searching the Internet for shopping information. Shopping bots such as MySimon or PriceGrabber can help people interested in ­making a ­purchase filter and retrieve information about products of interest, evaluate competing products according to criteria the users have established, and ­negotiate with vendors for price and delivery terms. Many of these ­shopping agents search the Web for pricing and availability of products specified by the user and return a list of sites that sell the item along with pricing information and a purchase link. We b 2 . 0 Today’s Web sites don’t just contain static content—they enable people to ­collaborate, share information, and create new services and content online. These second-generation ­interactive Internet-based services are referred to as Web 2.0. If you have shared photos over the Internet at Flickr or another photo site, pinned a photo on Pinterest, posted a video to YouTube, created a blog, or added an app to your Facebook page, you’ve used some of these Web 2.0 services. Web 2.0 has four defining features: interactivity, real-time user control, social ­participation (sharing), and user-generated content. The technologies and ­services behind these features include cloud computing, software ­mashups and apps, blogs, RSS, wikis, and social networks. Mashups, which we introduced in Chapter 5, are software ­services that enable users and system developers to mix and match content or software c­ omponents to create something entirely new. For example, Yahoo’s photo s­ torage and ­sharing site Flickr combines ­photos with other information about the images provided by users and tools to make it usable within other p ­ rogramming ­environments. Web 2.0 tools and services have fueled the ­creation of social networks and other online communities where people can interact with one another in the manner of their choosing. A blog, the popular term for a Weblog, is a personal Web site that typically contains a series of chronological entries (newest to oldest) by its author, and links to related Web pages. Blogging is a major activity for U.S. Internet users: 74 million read blogs, and 22 million write blogs or post to blogs. The blog may include a blogroll (a collection of links to other blogs) and trackbacks (a list of entries in other blogs that refer to a post on the first blog). Most blogs allow readers to post comments on the blog entries as well. The act of creating a blog is often referred to as “blogging.” Blogs can be hosted by a third-party service such as,, and, and blogging features have been incorporated into social networks such as Facebook and collaboration platforms such as Lotus Notes. WordPress is a leading open source blogging tool and content management system. Microblogging, used in Twitter, is a type of blogging that features short posts of 140 characters or less. 283 284 Part Two Information Technology Infrastructure Blog pages are usually variations on templates provided by the blogging s­ ervice or s­ oftware. Therefore, millions of people without HTML skills of any kind can post their own Web pages and share content with others. The totality of blog-related Web sites is often referred to as the blogosphere. Although blogs have become popular personal publishing tools, they also have business uses (see Chapters 2 and 10). If you’re an avid blog reader, you might use RSS to keep up with your ­favorite blogs w ­ ithout constantly checking them for updates. RSS, which stands for Really Simple Syndication or Rich Site Summary, pulls specified content from Web sites and feeds it a­ utomatically to users’ computers. RSS reader software gathers material from the Web sites or blogs that you tell it to scan and brings new information from those sites to you. RSS readers are available through Web sites such as Google and Yahoo, and they have been incorporated into the major Web browsers and e-mail programs. Blogs allow visitors to add comments to the original content, but they do not allow visitors to change the original posted material. Wikis, in contrast, are ­collaborative Web sites where visitors can add, delete, or modify content on the site, including the work of ­previous authors. Wiki comes from the Hawaiian word for “quick.” Wiki software typically provides a template that defines layout and elements common to all pages, displays user-editable software program code, and then renders the content into an HTML-based page for display in a Web browser. Some wiki software allows only basic text formatting, whereas other tools allow the use of tables, images, or even interactive elements, such as polls or games. Most wikis provide capabilities for monitoring the work of other users and ­correcting mistakes. Because wikis make information sharing so easy, they have many business uses. The U.S. Department of Homeland Security’s National Cyber Security Center (NCSC) deployed a wiki to facilitate collaboration among federal a­ gencies on cybersecurity. NCSC and other agencies use the wiki for real-time information sharing on threats, attacks, and responses and as a repository for technical and standards information. Pixar Wiki is a collaborative community wiki for publicizing the work of Pixar Animation Studios. The wiki format allows anyone to create or edit an article about a Pixar film. Social networking sites enable users to build communities of friends and professional colleagues. Members typically create a “profile,” a Web page for posting photos, v ­ ideos, MP3 files, and text, and then share these profiles with others on the service identified as their “friends” or contacts. Social ­networking sites are highly interactive, offer real-time user control, rely on user-generated content, and are broadly based on social participation and s­ haring of content and opinions. Leading social networking sites include Facebook, Twitter (with 1.3 billion and 270 million monthly active users respectively in 2014), and LinkedIn (for professional contacts). For many, social networking sites are the defining Web 2.0 application, and one that has radically changed how people spend their time online; how people communicate and with whom; how business people stay in touch with ­customers, suppliers, and employees; how providers of goods and ­services learn about their customers; and how advertisers reach potential customers. The large social networking sites are also morphing into a­ pplication ­development ­platforms where members can create and sell ­software applications to other members of the community. Facebook alone has over 1 million developers who created over 550,000 applications for g­ aming, video sharing, and c­ ommunicating with friends and ­family. We talk more about business Chapter 7 Telecommunications, the Internet, and Wireless Technology a­ pplications of social ­networking in Chapters 2 and 10, and you can find social networking discussions in many other chapters of this book. You can also find a more detailed discussion of Web 2.0 in our Learning Tracks. We b 3 . 0 a n d t h e F u t u r e We b Americans conducted about 19 billion searches in January 2014 (comScore, 2014). How many of these produced a meaningful result (a useful answer in the first three listings)? Arguably, fewer than half. Google, Yahoo, Microsoft, and Amazon are all trying to increase the odds of people finding meaningful answers to search engine queries. But with over 500 billion Web pages indexed, the means available for finding the ­information you really want are quite primitive, based on the words used on the pages, and the relative popularity of the page among people who use those same search terms. In other words, it’s hit or miss. To a large extent, the future of the Web involves developing techniques to make searching the 500 billion public Web pages more productive and ­meaningful for ordinary people. Web 1.0 solved the problem of obtaining access to information. Web 2.0 solved the problem of sharing that information with others and building new Web experiences. Web 3.0 is the promise of a future Web where all this digital information, all these c­ ontacts, can be woven together into a single meaningful experience. Sometimes this is referred to as the Semantic Web. “Semantic” refers to ­meaning. Most of the Web’s content today is designed for humans to read and for computers to ­display, not for computer programs to analyze and manipulate. Semantic Search, described above, is a subset of a larger effort to make the Web more intelligent, more humanlike (W3C, 2012). Search engines can ­discover when a particular term or keyword appears in a Web document, but they do not really understand its meaning or how it relates to other information on the Web. You can check this out on Google by entering two searches. First, enter “Paris Hilton”. Next, enter “Hilton in Paris”. Because Google does not understand ordinary English, it has no idea that you are interested in the Hilton Hotel in Paris in the second search. Because it cannot understand the meaning of pages it has indexed, Google’s search engine returns the most popular pages for those queries where “Hilton” and “Paris” appear on the pages. First described in a 2001 Scientific American article, the Semantic Web is a ­collaborative effort led by the World Wide Web Consortium to add a layer of meaning atop the existing Web to reduce the amount of human involvement in searching for and processing Web information. For instance, the New York Times launched a semantic application called Longitude which provides a graphical interface to access the Times content. You can ask for stories about Germany in the last 24 hours, or a city in the United States, to retrieve all recent stories in the Times. Views on the future of the Web vary, but they generally focus on ways to make the Web more “intelligent,” with machine-facilitated understanding of information p ­ romoting a more intuitive and effective user experience. For instance, let’s say you want to set up a party with your tennis buddies at a local restaurant Friday night after work. One problem is that you are already ­scheduled to go to a movie with another friend. In a Semantic Web 3.0 ­environment, you would be able to coordinate this change in plans with the schedules of your tennis buddies and the schedule of your movie friend, and make a reservation at the restaurant all with a single set of commands issued as text or voice to your handheld smartphone. Right now, this capability is beyond our grasp. 285 286 Part Two Information Technology Infrastructure Work proceeds slowly on making the Web a more intelligent experience, in large part because it is difficult to make machines, including software p ­ rograms, that are truly intelligent like humans. But there are other views of the future Web. Some see a 3-D Web where you can walk through pages in a 3-D environment. Others point to the idea of a pervasive Web that controls everything from a city’s traffic lights and water usage, to the lights in your living room, to your car’s rear view mirror, not to mention managing your calendar and appointments. This is referred to as the “Internet of Things.” The Internet of Things includes the widespread use and distribution of ­sensors. Firms like IBM, HP, and Oracle are exploring how to build smart machines, factories, and cities through extensive use of remote sensors and fast cloud computing. We provide more detail on this topic in the following section. The “App Internet” is another element in the future Web. The growth of apps within the mobile platform is astounding: Over 80% of mobile minutes in the United States are generated through apps, only 20% using browsers. Apps give users direct access to content and are much faster than loading a browser and searching for content. The visual Web is another part of the future Web. The “visual Web” refers to Web sites like Pinterest where pictures replace text documents, where users search on ­pictures, and where pictures of products replace display ads for ­products. Pinterest is a social n ­ etworking site that provides users (as well as brands) with an online board to which they can “pin” i­nteresting pictures. Looking for a blue dress, or black dress shirt? Google will deliver ­thousands of links to sites that sell these items. Pinterest will deliver a much smaller ­collection of magazine quality photos linked subtly to vendor Web sites. Considered the fastest ­growing Web site in history, Pinterest has 70 million monthly users and was the 35th most popular Web destination in 2014. The Instagram app is another example of the visual Web. Instagram is a photo and video s­ haring site that allows users to take pictures, enhance them, and share them with friends on other social sites like Facebook, Twitter, Tumblr, and Google+. In 2014 Instagram had 220 million monthly active users. Other complementary trends leading toward a future Web 3.0 include more ­widespread use of cloud computing and software as a service (SaaS) business models, ubiquitous c­ onnectivity among mobile platforms and Internet access devices, and the transformation of the Web from a network of separate siloed applications and content into a more seamless and interoperable whole. These more ­modest visions of the future Web 3.0 are more likely to be ­realized in the near term. 7.4 What are the principal technologies and standards for wireless networking, communication, and Internet access? Welcome to the wireless revolution! Cell phones, smartphones, tablets, and wireless-enabled ­personal computers have morphed into portable media and computing platforms that let you perform many of the computing tasks you used to do at your desk, and a whole lot more. We introduced smartphones in our discussions of the mobile ­digital platform in Chapters 1 and 5. Smartphones such as the iPhone, Android phones, and BlackBerry combine the functionality of a cell phone with that of a mobile laptop computer with Wi-Fi capability. This makes it possible to combine music, video, Internet Chapter 7 Telecommunications, the Internet, and Wireless Technology access, and telephone service in one device. A large part of the Internet is becoming a mobile, access-anywhere, broadband service for the delivery of video, music, and Web search. Cellular Systems In 2013, over 1.8 billion cell phones were sold worldwide. In the United States, there are 365 million cell phone subscriptions, and 164 million people have smartphones. About 167 million people access the Web using their phone (eMarketer, 2014). In a few years, smartphones will be the predominant source of searches, not the desktop PC. Digital cellular service uses several competing standards. In Europe and much of the rest of the world outside the United Sates, the standard is Global System for Mobile Communications (GSM). GSM’s strength is its international roaming capability. There are GSM cell phone ­systems in the United States, including T-Mobile and AT&T. A competing standard in the United States is Code Division Multiple Access (CDMA), which is the system used by Verizon and Sprint. CDMA was ­developed by the military ­during World War II. It transmits over several frequencies, ­occupies the entire spectrum, and randomly assigns users to a range of ­frequencies over time, making it more efficient than GSM. Earlier generations of cellular systems were designed primarily for voice and limited data transmission in the form of short text messages. Today w ­ ireless ­carriers offer 3G and 4G networks. 3G networks, with transmission speeds ranging from 144 Kbps for mobile users in, say, a car, to more than 2 Mbps for stationary users, offer fair transmission speeds for e-mail, browsing the Web, and online shopping, but are too slow for videos. 4G networks have much higher speeds: 100 megabits/second download, and 50 megabits upload speed, with more than enough capacity for watching high definition video on your smartphone. Long Term Evolution (LTE) and mobile Worldwide Interoperability for Microwave Access (WiMax—see the following section) are the current 4G standards. Wireless Computer Networks and Internet Access An array of technologies provide high-speed wireless access to the Internet for PCs and mobile devices. These new high-speed services have extended Internet access to numerous locations that could not be covered by traditional wired Internet services, and have made ubiquitous computing, anywhere, anytime, a reality. Bluetooth Bluetooth is the popular name for the 802.15 wireless networking ­standard, which is u ­ seful for creating small personal area networks (PANs). It links up to eight devices within a 10-meter area using low-power, radio-based ­communication and can transmit up to 722 Kbps in the 2.4-GHz band. Wireless phones, pagers, computers, printers, and computing devices using Bluetooth communicate with each other and even operate each other without direct user intervention (see Figure 7.13). For example, a person could direct a notebook computer to send a ­document file wirelessly to a printer. Bluetooth ­connects wireless keyboards and mice to PCs or cell phones to earpieces ­without wires. Bluetooth has low power requirements, m ­ aking it appropriate for battery-powered handheld computers or cell phones. 287 288 Part Two Information Technology Infrastructure FIGURE 7.13 A Bluetooth Network (PAN) Bluetooth enables a variety of devices, including cell phones, smartphones, wireless keyboards and mice, PCs, and printers, to interact wirelessly with each other within a small 30-foot (10-meter) area. In addition to the links shown, Bluetooth can be used to network similar devices to send data from one PC to another, for example. Although Bluetooth lends itself to personal networking, it has uses in large ­ c orporations. For example, FedEx drivers use Bluetooth to transmit the delivery data captured by their handheld PowerPad computers to ­cellular transmitters, which forward the data to corporate computers. Drivers no longer need to spend time docking their handheld units physically in the transmitters, and Bluetooth has saved FedEx $20 million per year. Wi-Fi and Wireless Internet Access The 802.11 set of standards for wireless LANs and wireless Internet access is also known as Wi-Fi. The first of these standards to be widely adopted was 802.11b, which can transmit up to 11 Mbps in the unlicensed 2.4-GHz band and has an effective distance of 30 to 50 meters. The 802.11g standard can transmit up to 54 Mbps in the 2.4-GHz range. 802.11n is capable of transmitting over 100 Mbps. Today’s PCs and netbooks have built-in support for Wi-Fi, as do the iPhone, iPad, and other smartphones. In most Wi-Fi communication, wireless devices communicate with a wired LAN using access points. An access point is a box consisting of a radio receiver/ transmitter and ­antennas that links to a wired network, router, or hub. Mobile access points such as Verizon’s Mobile Hotspots use the existing cellular ­network to create Wi-Fi connections. Figure 7.14 illustrates an 802.11 wireless LAN that connects a small number of mobile devices to a larger wired LAN and to the Internet. Most wireless devices are client machines. The servers that the mobile client stations need to use are on the wired LAN. The access point controls the wireless stations and acts as a bridge between the main wired LAN and the wireless LAN. (A bridge connects two LANs based on different technologies.) The access point also ­controls the wireless stations. Chapter 7 Telecommunications, the Internet, and Wireless Technology FIGURE 7.14 An 802.11 Wireless LAN Mobile laptop computers equipped with network interface cards link to the wired LAN by ­communicating with the access point. The access point uses radio waves to transmit network signals from the wired network to the client adapters, which convert them into data that the mobile device can understand. The client adapter then transmits the data from the mobile device back to the access point, which forwards the data to the wired network. The most popular use for Wi-Fi today is for high-speed wireless Internet s­ ervice. In this instance, the access point plugs into an Internet connection, which could come from a cable service or DSL telephone service. Computers within range of the access point use it to link wirelessly to the Internet. Hotspots typically consist of one or more access points providing wireless Internet access in a public place. Some hotspots are free or do not require any additional software to use; others may require activation and the establishment of a user account by providing a credit card number over the Web. Businesses of all sizes are using Wi-Fi networks to provide low-cost w ­ ireless LANs and Internet access. Wi-Fi hotspots can be found in hotels, airport lounges, libraries, cafes, and college campuses to provide mobile access to the Internet. Dartmouth College is one of many campuses where students now use Wi-Fi for research, course work, and entertainment. Wi-Fi technology poses several challenges, however. One is Wi-Fi’s s­ ecurity features, which make these wireless networks vulnerable to intruders. We ­provide more detail about Wi-Fi security issues in Chapter 8. Another drawback of Wi-Fi networks is susceptibility to interference from nearby ­systems operating in the same spectrum, such as wireless phones, microwave ovens, or other wireless LANs. However, wireless networks based on the 802.11n standard are able to solve this problem by using multiple ­wireless antennas in tandem to transmit and receive data and technology called MIMO (multiple input multiple output) to coordinate multiple simultaneous radio ­signals. 289 290 Part Two Information Technology Infrastructure WiMax A surprisingly large number of areas in the United States and throughout the world do not have access to Wi-Fi or fixed broadband connectivity. The range of Wi-Fi systems is no more than 300 feet from the base station, making it difficult for rural groups that don’t have cable or DSL service to find wireless access to the Internet. The IEEE developed a new family of standards known as WiMax to deal with these problems. WiMax, which stands for Worldwide Interoperability for Microwave Access, is the popular term for IEEE Standard 802.16. It has a ­wireless access range of up to 31 miles and transmission speed of up to 75 Mbps. WiMax antennas are powerful enough to beam high-speed Internet connections to ­rooftop antennas of homes and businesses that are miles away. Cellular handsets and laptops with WiMax capabilities are appearing in the marketplace. Mobile WiMax is one of the ­4G network technologies we discussed earlier in this chapter. RFID and Wireless Sensor Networks Mobile technologies are creating new efficiencies and ways of working throughout the enterprise. In addition to the wireless systems we have just described, radio frequency i­ dentification systems and wireless sensor networks are having a major impact. R a d i o F r e q u e n c y I d e n t i f i c a t i o n ( RFID ) Radio frequency identification (RFID) systems provide a powerful technology for t­racking the movement of goods throughout the supply chain. RFID ­systems use tiny tags with embedded microchips containing data about an item and its location to transmit radio ­signals over a short distance to RFID readers. The RFID readers then pass the data over a network to a computer for processing. Unlike bar codes, RFID tags do not need line-of-sight contact to be read. The RFID tag is electronically programmed with information that can uniquely identify an item plus other information about the item, such as its ­location, where and when it was made, or its status during production. Embedded in the tag is a microchip for storing the data. The rest of the tag is an antenna that transmits data to the reader. The reader unit consists of an antenna and radio transmitter with a ­decoding capability attached to a stationary or handheld device. The reader emits radio waves in ranges ­anywhere from 1 inch to 100 feet, depending on its power ­output, the radio frequency employed, and surrounding environmental ­conditions. When a RFID tag comes within the range of the reader, the tag is ­activated and starts sending data. The reader captures these data, decodes them, and sends them back over a wired or wireless network to a host ­computer for further processing (see Figure 7.15). Both RFID tags and antennas come in a variety of shapes and sizes. In inventory control and supply chain management, RFID systems ­capture and ­manage more detailed information about items in warehouses or in ­production than bar coding ­systems. If a large number of items are shipped together, RFID systems track each pallet, lot, or even unit item in the ­shipment. This technology may help companies such as Walmart improve receiving and storage operations by improving their ability to “see” exactly what stock is stored in warehouses or on retail store shelves. Dundee Precious Metals, described in Chapter 7 Telecommunications, the Internet, and Wireless Technology FIGURE 7.15 How RFID Works RFID uses low-powered radio transmitters to read data stored in a tag at distances ranging from 1 inch to 100 feet. The reader captures the data from the tag and sends them over a network to a host computer for processing. the chapter-opening case, uses RFID technology to track workers, equipment, and vehicles in its underground mine. Walmart has installed RFID readers at store receiving docks to record the arrival of pallets and cases of goods shipped with RFID tags. The RFID reader reads the tags a second time just as the cases are brought onto the sales floor from backroom storage areas. Software combines sales data from Walmart’s point-of-sale systems and the RFID data regarding the number of cases brought out to the sales floor. The program determines which items will soon be depleted and automatically generates a list of items to pick in the ­warehouse to replenish store shelves before they run out. This information helps Walmart reduce o ­ ut-of-stock items, increase sales, and further shrink its costs. The cost of RFID tags used to be too high for widespread use, but now it starts at around 7 cents per tag in the United States. As the price decreases, RFID is starting to become ­cost-effective for many applications. In addition to installing RFID readers and tagging systems, companies may need to upgrade their hardware and software to process the massive amounts of data produced by RFID systems—transactions that could add up to tens or hundreds of terabytes. Software is used to filter, aggregate, and prevent RFID data from overloading business networks and system applications. Applications often need to be ­redesigned to accept large volumes of frequently generated RFID data and to share those data with other a­ pplications. Major enterprise software vendors, including SAP and Oracle PeopleSoft, now offer R ­ FID-ready versions of their supply chain management applications. Wireless Sensor Networks If your company wanted state-of-the art technology to monitor building ­security or detect hazardous substances in the air, it might deploy a wireless sensor network. Wireless sensor networks (WSNs) are networks of interconnected wireless devices that are embedded into the physical environment to provide 291 292 Part Two Information Technology Infrastructure FIGURE 7.16 A Wireless Sensor Network The small circles represent lower-level nodes and the larger circles represent high-end nodes. ­Lower-level nodes forward data to each other or to higher-level nodes, which transmit data more rapidly and speed up network performance. measurements of many points over large spaces. These devices have built-in processing, storage, and radio frequency sensors and antennas. They are linked into an interconnected network that routes the data they capture to a computer for analysis. These networks range from hundreds to thousands of nodes. Because ­wireless ­sensor devices are placed in the field for years at a time without any maintenance or human ­intervention, they must have very low power ­requirements and batteries capable of lasting for years. Figure 7.16 illustrates one type of wireless sensor network, with data from individual nodes flowing across the network to a server with greater processing power. The server acts as a gateway to a network based on Internet technology. Wireless sensor networks are valuable in areas such as monitoring environmental changes, monitoring traffic or military activity, protect­ ing ­property, ­efficiently operating and managing machinery and vehicles, ­establishing ­security perimeters, monitoring supply chain management, or detecting chemical, biological, or radiological material. RFID systems and wireless sensor networks are major sources of “Big Data” that organizations are starting to analyze to improve their operations and decision making. Output from these systems is fueling what is called the Industrial Internet, also known as the Internet of Things, in which machines such as jet engines, power plant turbines, or agricultural sensors constantly gather data and send the data over the Internet for analysis. The data might signal the need to take action, such as replacing a part that’s close to wearing out, restocking a product on a store shelf, starting the watering system for a soybean field, or slowing down a turbine. Over time, more and more everyday physical objects will be connected to the Internet and will be able to identify themselves to other devices, creating networks that can sense and respond as data changes. Another example is the “smart city,” described in the Chapter 12 Interactive Session on Organizations. You’ll see more examples of the Internet of Things in Chapter 12. Chapter 7 Telecommunications, the Internet, and Wireless Technology Review Summary 1. What are the principal components of telecommunications networks and key ­networking technologies? A simple network consists of two or more connected ­computers. Basic network components include computers, network interfaces, a connection medium, network operating system software, and either a hub or a switch. The networking infrastructure for a large company includes the ­traditional telephone system, mobile ­c ellular communication, wireless local area networks, ­videoconferencing systems, a corporate Web site, intranets, extranets, and an array of local and wide area ­networks, including the Internet. Contemporary networks have been shaped by the rise of client/server computing, the use of packet switching, and the adoption of Transmission Control Protocol/Internet Protocol (TCP/IP) as a ­universal communications standard for linking disparate networks and ­computers, including the Internet. Protocols provide a common set of rules that enable ­communication among diverse ­components in a telecommunications network. 2. What are the different types of ­networks? The principal physical transmission media are twisted copper telephone wire, coaxial copper cable, fiber-optic cable, and wireless transmission. Local area networks (LANs) connect PCs and other digital devices together within a 500-meter radius and are used today for many corporate computing tasks. Wide area n ­ etworks (WANs) span broad ­geographical distances, ranging from several miles to ­continents, and are often private networks that are independently managed. Metropolitan area networks (MANs) span a single urban area. Digital subscriber line (DSL) technologies, cable Internet connections, and T1 lines are often used for high-capacity Internet connections. 3. How do the Internet and Internet technology work, and how do they support c­ ommunication and e-business? The Internet is a worldwide network of networks that uses the client/server model of computing and the TCP/IP network reference model. Every computer on the Internet is assigned a unique numeric IP address. The Domain Name System (DNS) converts IP addresses to more user-friendly domain names. Worldwide Internet policies are established by organizations and government bodies, such as the Internet Architecture Board (IAB) and the World Wide Web Consortium (W3C). Major Internet services include e-mail, newsgroups, chatting, instant messaging, Telnet, FTP, and the Web. Web pages are based on Hypertext Markup Language (HTML) and can display text, graphics, video, and audio. Web site directories, search engines, and RSS ­technology help users locate the ­information they need on the Web. RSS, blogs, social ­networking, and wikis are features of Web 2.0. Firms are also starting to realize economies by using VoIP technology for voice ­transmission and by using virtual private networks (VPNs) as low-cost alternatives to ­private WANs. 4. What are the principal technologies and standards for wireless networking, c­ ommunication, and Internet access? Cellular networks are evolving toward ­high-speed, high-bandwidth, digital packet-switched ­transmission. Broadband 3G networks are capable of transmitting data at speeds ranging from 144 Kbps to more than 2 Mbps. 4G networks capable of transmission speeds of 100 Mbps are starting to be rolled out. Major cellular standards include Code Division Multiple Access (CDMA), which is used primarily in the United States, and Global System for Mobile Communications (GSM), which is the standard in Europe and much of the rest of the world. Standards for wireless computer networks include Bluetooth (802.15) for small personal area networks (PANs), Wi-Fi (802.11) for local area networks (LANs), and WiMax (802.16) for metropolitan area networks (MANs). Radio frequency identification (RFID) systems provide a p ­ owerful technology for tracking the ­movement of goods by using tiny tags with embedded data about an item and its location. RFID ­readers read the radio signals transmitted by these tags and pass the data over a network to a computer for ­processing. Wireless s­ ensor networks (WSNs) are networks of interconnected wireless sensing and transmitting devices that are embedded into the physical environment to provide measurements of many points over large spaces. 293 294 Part Two Information Technology Infrastructure Key Terms 3G Networks, 287 4G networks, 287 Bandwidth, 265 Blog, 283 Blogosphere, 284 Bluetooth, 287 Broadband, 258 Cable Internet connections, 267 Chat, 272 Digital subscriber line (DSL), 266 Domain name, 267 Domain Name System (DNS), 267 E-mail, 272 File Transfer Protocol (FTP), 272 Hertz, 265 Hotspots, 289 Hubs, 258 Hypertext Transfer Protocol (HTTP), 278 Instant messaging, 273 Internet of Things, 292 Internet Protocol (IP) address, 267 Internet service provider (ISP), 267 Internet2, 272 IPv6, 272 Local area network (LAN), 264 Metropolitan area network (MAN), 265 Microblogging, 283 Modem, 263 Network operating system (NOS), 258 Packet switching, 261 Peer-to-peer, 265 Personal area networks (PANs), 287 Predictive search, 281 Protocol, 262 Radio frequency identification (RFID), 290 Router, 258 RSS, 284 Search engines, 278 Search engine marketing, 280 Search engine optimization (SEO), 281 Semantic Web, 285 Shopping bots, 283 Smartphones, 286 Social networking, 284 Social search, 282 Software-defined networking (SDN), 259 Switch, 258 T1 lines, 267 Telnet, 272 Transmission Control Protocol/Internet Protocol (TCP/IP), 262 Unified communications, 276 Uniform resource locator (URL), 278 Virtual private network (VPN), 277 Visual Web, 286 Voice over IP (VoIP), 274 Web 2.0, 283 Web 3.0, 285 Web site, 277 Wide area networks (WANs), 265 Wi-Fi, 288 Wiki, 284 WiMax, 290 Wireless sensor networks (WSNs), 291 MyMISLab Go to to complete the problems marked with this icon . Review Questions 7-1 What are the principal components of telecommunications networks and key n ­ etworking ­technologies? • Describe the features of a simple network and the network infrastructure for a large ­company. • Name and describe the principal technologies and trends that have shaped contemporary telecommunications systems. 7-2 What are the different types of networks? • Define an analog and a digital signal. • Distinguish between a LAN, MAN, and WAN. 7-3 How do the Internet and Internet technology work, and how do they support c­ ommunication and e-business? • Define the Internet, describe how it works, and explain how it provides business value. • Explain how the Domain Name System (DNS) and IP addressing system work. • List and describe the principal Internet ­services. • Define and describe VoIP and virtual private networks, and explain how they provide value to businesses. Chapter 7 Telecommunications, the Internet, and Wireless Technology • • List and describe alternative ways of ­locating information on the Web. Describe how online search technologies are used for marketing. 7-4 What are the principal technologies and s ta n d a rd s fo r w i re l e s s n e t wo r k i n g , ­ ­communications, and Internet access? • Define Bluetooth, Wi-Fi, WiMax, and 3G and 4G ­networks. • • • 295 Describe the capabilities of each and for which types of applications each is best suited. Define RFID, explain how it works, and describe how it provides value to ­businesses. Define WSNs, explain how they work, and describe the kinds of applications that use them. Discussion Questions 7-5  It has been said that within the next few years, smartphones will become the single most ­ i mportant digital device we own. Discuss the implications of this statement. 7-6  Should all major retailing and manufacturing ­companies switch to RFID? Why or why not? 7-7  What are some of the issues to consider in d etermining whether the Internet would ­ ­provide your business with a competitive advantage? Hands-On MIS Projects The projects in this section give you hands-on experience evaluating and selecting c­ ommunications technology, using spreadsheet software to improve selection of t­ elecommunications services, and using Web search engines for business research. Management Decision Problems 7-8 Your company supplies ceramic floor tiles to Home Depot, Lowe’s, and other home improvement stores. You have been asked to start using radio frequency identification tags on each case of tiles you ship to help your customers improve the management of your products and those of other suppliers in their warehouses. Use the Web to identify the cost of hardware, software, and networking components for an RFID system for your company. What factors should be considered? What are the key decisions that have to be made in ­determining whether your firm should adopt this technology? 7-9 BestMed Medical Supplies Corporation sells medical and surgical products and ­equipment from over 700 ­different manufacturers to hospitals, health clinics, and ­medical offices. The company employs 500 people at seven different locations in ­western and ­midwestern states, including account managers, ­customer service and ­support ­representatives, and warehouse staff. Employees communicate via ­traditional telephone voice services, e-mail, instant messaging, and cell phones. Management is inquiring about whether the company should adopt a system for unified ­communications. What factors should be considered? What are the key decisions that have to be made in ­determining whether to adopt this ­technology? Use the Web, if necessary, to find out more about unified communications and its costs. Improving Decision Making: Using Spreadsheet Software to Evaluate Wireless Services Software skills: Spreadsheet formulas, formatting Business skills: Analyzing telecommunications services and costs 7-10 In this project, you’ll use the Web to research alternative wireless services and use ­spreadsheet software to calculate wireless service costs for a sales force. 296 Part Two Information Technology Infrastructure You would like to equip your sales force of 35, based in St. Louis, Missouri with mobile phones that have capabilities for voice transmission, text messaging, Internet access, and taking and sending photos. Use the Web to select two wireless providers that offer nationwide voice and data service as well as good ­service in your home area. Examine the features of the mobile handsets and wireless plans offered by each of these vendors. Assume that each of the 35 salespeople will need to spend three hours per weekday between 8 a.m. and 6 p.m. on mobile voice c­ ommunication, send 30 text messages per weekday, use 1 gigabyte of data per month, and send five photos per week. Use your spreadsheet software to determine the wireless service and handset that will offer the best pricing per user over a ­two-year period. For the purposes of this exercise, you do not need to consider corporate discounts. A c h i e v i n g O p e r a t i o n a l E x c e l l e n c e : U s i n g We b S e a r c h E n g i n e s f o r B u s i n e s s Research Software skills: Web search tools Business skills: Researching new technologies 7-11  This project will help develop your Internet skills in using Web search engines for business research. Use Google and Bing to obtain information about ethanol as an alternative fuel for motor vehicles. If you wish, try some other search engines as well. Compare the volume and ­quality of information you find with each search tool. Which tool is the easiest to use? Which produced the best results for your research? Why? Collaboration and Teamwork Project 7-12  In MyMISLab, you will find a Collaboration and Teamwork Project dealing with the concepts in this c­ hapter. You will be able to use Google Drive, Google Docs, Google Sites, Google+, or other open-source ­collaboration tools to complete the ­assignment. Chapter 7 Telecommunications, the Internet, and Wireless Technology 297 Google, Apple, and Facebook Struggle for Your Internet Experience case study T hree Internet titans—Google, Apple, and Facebook—are in an epic struggle to ­dominate your Internet experience, and caught in the crossfire are search, music, video, and other media, along with the devices you use for all of these things, cloud computing, and a host of other issues that are likely central to your life. The prize is a projected $400 billion retail e-commerce marketplace where the major access device will be a smartphone or tablet computer. Mobile devices with advanced functionality and ubiquitous Internet access are rapidly overtaking traditional desktop machines as the most popular form of computing. Today, people spend more than half their time online using mobile devices. These smartphones and tablets take advantage of a ­growing cloud of computing capacity available to anyone with a smartphone and Internet connectivity. It’s no surprise, then, that today’s tech titans are so aggressively battling for control of this brave new mobile world. Apple, which started as a personal computer ­company, quickly expanded into software and ­consumer electronics. Since upending the music industry with its MP3 player, the iPod, and the iTunes digital music service over a decade ago, Apple took mobile computing by storm with the iPhone, iPod Touch, and iPad. Apple wants to be the computing platform of choice for the Internet. Apple is the leader in mobile software applications, thanks to the popularity of the App Store, with over 1 million apps for mobile and tablet devices. Applications greatly enrich the experience of using a mobile device, and whoever creates the most appealing set of devices and applications will derive a significant competitive advantage over rival companies. Apps are the new equivalent of the traditional browser. Apple still leads in this area. Google, begun by Stanford computer science graduate students Larry Page and Sergey Brin as campus search engine BackRub in 1996, quickly attracted attention for its unrivaled ability to return relevant search results. It continues to be the world’s ­leading search engine. Advertising dollars follow page views, and Google’s search dominance quickly led to advertising ascendency. Between AdWords, its keyword-based search advertising product; AdSense, the most popular online advertising network; and DoubleClick, an intermediary between online publishers and ad networks that buys, sells, and ­conducts performance reporting on display advertising space, Google dominates online advertising. In 2005, Google had purchased the Android open source mobile operating system and founded the Open Handset Alliance in order to compete in mobile computing. Google provides Android at no cost to smartphone manufacturers and many ­different manufacturers have adopted Android as a standard. In contrast, Apple only allows its own devices to use its proprietary operating system and the hundreds of thousands of apps it sells can only run on Apple products. Since the first Android phone hit the market in October 2008, free, publicly ­available source code and permissive licensing have propelled Android to the top place in mobile operating systems. By early 2014, Android was deployed on nearly 58 percent of smartphones in the United States and over 80 percent worldwide. Android has also become the most common operating system on tablets worldwide. Aggressively following the eyeballs, Google ­purchased Motorola Mobility Holdings for $12.5 ­billion in August 2011. This move provided Google with 17,000 patents, with another 7,000 in the pipeline to help defend Android from the smartphone patent wars. Google is also innovating in mobile hardware platforms with its Nexus 7 tablet, Google Glass (a wearable computer with an optical head-mounted display described in the Chapter 5 Interactive Session on Technology), and plans for a modular smartphone that consumers can configure with different features, such as a camera or heart rate monitor. Whoever has the dominant smartphone operating system will have control over the apps where ­smartphone users spend most of their time and ­built-in channels for serving ads to mobile devices, for example, on Google-owned YouTube and the Google Maps app. Although Google search technology can’t easily navigate the mobile apps where users are spending most of their time, Google is starting to index the content inside mobile apps and provide links pointing to that content featured in Google’s search results on smartphones. The cost-per-click paid for mobile ads has trailed desktop ads. Google instituted a design change to merge PC ads and mobile ads and present a 298 Part Two Information Technology Infrastructure cleaner mobile search page. Users were increasingly ­consenting to click mobile ads and shop from their smartphones and tablets. Both changes began to strengthen overall ad prices. Furthermore, with its advertising networks still contributing 95% of its revenues, Google had to make sure that Facebook did not eclipse it as an advertising vehicle. It launched Google+ (Google Plus) in mid-2011, its fourth foray into social ­networking. With 300 million active users by March 2014, Google+ has surpassed Twitter. Rather than a single Web site, Google hopes to meld the social experience across all of its sites. Google+ has morphed from a social network into a gateway to Google’s package of services like Gmail, Google Docs, Google+ network, maps, hotel reservations, and more. With Google challenging Apple on every front, Apple’s profit growth has slowed in the past couple of years. Although Apple has a number of advantages in the battle for mobile supremacy, it faces strong competition in both the U.S. and developing ­markets like China from Samsung Android phones that have larger screens, and much lower prices. Sales of iPhones were ­slowing until it introduced the iPhone 6 iOS phone and Apple Watch in September 2014. Two million phones were sold in the first two weeks, twice the rate of previous iPhones. The iPhone 6 comes in a large screen version to compete directly with Samsung. Apple has on its side a ­history of ­market-moving innovations, and a loyal user base that has steadily grown and is very likely to buy future product and offerings. Apple has a legacy of innovation on its side. In 2011, it unveiled the potentially market-disrupting Siri (Speech Interpretation and Recognition Interface), a combination search/navigation tool and personal assistant. Siri uses Yelp for local business searches, tapping into its user recommendations and ratings. For factual and mathematical questions, it enlists Wolfram Alpha. Siri promises personalized recommendations that improve as it gains user familiarity—all from a verbal command. Customer response has been mixed. Google countered by quickly ­releasing its own AI tool, Google Now. Facebook, founded by Mark Zuckerberg and ­several Harvard friends in 2004, provided a way for local students to meet and share information online. Today it’s the world’s largest social networking ­service, with nearly 1.3 billion monthly active users. People use Facebook to stay connected with their friends and family and to express what matters most to them. Facebook Platform enables developers to build applications and Web sites that integrate with Facebook to reach its global network of users and to build personalized and social products. Facebook has persistently worked on ways to ­convert its popularity and trove of user data into advertising dollars, with the expectation that these dollars will increasingly come from mobile smartphones and tablets. Over 750 million people around the world used Facebook on an average day, and three-quarters of them log on using mobile devices. By the first quarter of 2014, mobile advertising accounted for 59 percent of Facebook’s revenue, with many of those ads highly targeted by age, gender, and other demographics. Facebook is now a serious competitor to Google in the mobile ad market and is even trying to compete with emerging mobile ­platforms, having purchased Oculus VR Inc., a maker of virtual-reality goggles, for $2 billion. In March 2013, Facebook overhauled its home page to increase the size of both photos and links and allow users to create topical streams. Job number one was to de-clutter smartphone screens. Marketers love larger pictures, both for their prominence and their greater persuasive impact. Job number two was to give advertisers more opportunities, and more interest information, with which to target market. A “personalized newspaper” with, for example, an op-ed feed featuring followed commentary pages, a sports section tailored to preferred events and teams, and a hometown news feed, will swell Facebook’s database with useful ­tidbits. Whether users oblige remains to be seen; a popular app, Flipboard, already serves users interested in ­creating topical and publication-based streams. Next, Facebook introduced a mobile application suite to replace the typical smartphone home screen. Facebook Home is an interface running on top of the Android operating system that essentially turns an Android mobile device into a Facebook phone. Home replaces the smartphone’s typical cover screen with Facebook content, such as photos, messages and status updates. Home still provides access to apps on the phone, but the experience is centered around Facebook. About the same time, Facebook also launched a new search tool to challenge Google’s dominance of search. Graph Search mines Facebook’s vast ­repository of user data and delivers results based on social signals, such as Facebook “likes,” and friend recommendations. It’s a more “social” way of ­searching than Google. If the desire for friend-based recommendations outweighs users’ reluctance to divulge more personal information, Graph Search may be a major revenue driver. While users may be Chapter 7 Telecommunications, the Internet, and Wireless Technology enticed to check-in, and then assign stars or review local restaurants and styling salons, they are unlikely to reveal sensitive data such as their doctors’ identities or where their children go to school. Moreover, entering “liked” movies, books, and music, etc. takes time. Will users disclose sufficient data for searches to accurately list and rank results? With time and responsiveness to user practices, Facebook may uncover niche areas at which it excels. Even if it cannot directly rival Google’s advertising muscle, it should be able to chip away at its dominance. Facebook claims that using Graph Search to ­target Facebook users for advertising is forbidden, but no policy for supervision and sanctions has been revealed. Facebook is already under Federal Trade Commission (FTC) scrutiny, with independent ­privacy audits mandated for the next twenty years. Trust is the linchpin upon which Facebook’s strategy depends. Eroding user trust means less data to generate relevant search results and less impetus to use Facebook to connect to third-party sites and services. Facebook must tread carefully. But if Facebook can succeed in making itself synonymous with mobile access, the company could very well compete for global advertising dominance, with much of the world’s population just coming on line—on inexpensive Android smartphones. Sources: EricBrian X. Chen, “Apple’s War on Samsung Has Google in Crossfire,” New York Times, March 30, 2014 and “For Hints at Apple’s Plans, Read Its Shopping List,” New York Times, February 23, 2014; Reed Albergotti, “Facebook Net Triples, Sales Up 72%,” Wall Street Journal, April 23, 2014; Sarah Frier, “Facebook Bets $2 Billion That Oculus Headset Will Anchor Social Life,” Bloomberg Business Week, March 26, 2014; Farhad Manjoo, “The Future of Facebook May Not Say ‘Facebook’,” New York Times, April 16, 2014; Jim Edwards, “Here Is The Little-Known Way Google Juices User Traffic On Google+,”Business Insider, March 31, 2014; “Android Grows to Almost 60% US Smartphone Marketshare in Q1 as iOS Drops,”, accessed May 6, 2014; Evelyn M. Rusli, “The Challenge of Facebook’s Graph Search,” Wall Street Journal, January 16, 2013; Matthew Lynley and Evelyn M. Rusli, “What Is Facebook ‘Home’?”, Wall Street Journal, April 4, 2013; Somini Sengupta, “Fortunes of Facebook May Hinge on Searches,” New York Times, January 14, 2013, “Facebook Shows Off New Home Page Design, Including Bigger Pictures,” New York Times, March 7, 2013, and “Facebook Software Puts It Front and Center on Android Phones,” New York Times, April 4, 2013; John Letzing and Amir Efrati,“Google’s New Role as Gadget Maker,” Wall Street Journal, June 28, 2012. Case Study Questions 7-13 Compare the business models and core ­competencies of Google, Apple, and Facebook. 7-14 Why is mobile computing so important to these three firms? Evaluate the mobile ­strategies of each firm. 7-15 What is the significance of search to the success or failure of mobile computing? How have Apple and Facebook attempted to compete with Google? Will their strategies succeed? 7-16 Which company and business model do you think is most likely to dominate the Internet and why? 7-17 What difference would it make to a business or to an individual consumer if Apple, Google, or Facebook dominated the Internet experience? Explain your answer. MyMISLab Go to for Auto-graded writing questions as well as the following Assisted-graded writing questions. 7-18 7-19 299 Compare Web 2.0 and Web 3.0. How do social search, semantic search, and mobile search differ from searching for information on the Web using conventional search engines? 300 Part Two Information Technology Infrastructure Chapter 7 References Boutin, Paul. “Search Tool on Facebook Puts Network to Work.” New York Times (March 20, 2013). comScore. “comScore Releases June 2014 U.S. Search Engine Rankings.” (July 21, 2014). Efrati, Amir. “Google’s Search Revamp: A Step Closer to AI.” Wall Street Journal (March 14, 2012). eMarketer. “US Mobile Users: 2014 Complete Forecast.” (Alison M McCarthy, eMarketer Report (April 2014). Google, Inc. “SEC Form 10k for the Fiscal Year Ending December 30, 2013” Google, Inc. March 31, 2014. Holmes, Sam and Jeffrey A. Trachtenberg. “Web Addresses Enter New Era.” Wall Street Journal (June 21, 2011). ICANN. “ICANN Policy Update.” 10, No. 9 (September 2010). Lahiri, Atanu, I. “The Disruptive Effect of Open Platforms on Markets for Wireless Services.” Journal of Management Information Systems 27, No. 3 (Winter 2011). Marin Software, Inc. “The State of Mobile Search Advertising in the US: How the Emergence of Smartphones and Tablets Changes Paid Search.” Marin Software Inc. (2012). McKinsey&Company. “The Impact of Internet Technologies: Search (July 2011). Miller, Claire Cain. “Google, a Giant in Mobile Search, Seeks New Ways to Make It Pay,” New York Times (April 24, 2011). Murphy, Chris. “The Internet of Things.” Information Week (August 13, 2012). National Telecommunications and Information Agency. “NTIA Announces Intent to Transition Key Internet Domain Name Functions.” Press Release. March 14, 2014; Panko, Raymond R. and Julia Panko. Business Data Networks and Telecommunications 8e. Upper Saddle River, NJ: Prentice-Hall (2011). “Mobile Drives Increased Spend and Clicks on Both Google and Bing .” (July 15, 2014). Shaw, Tony. “Innovation Web 3.0.” Baseline (March/April 2011). Simonite, Tom. “Social Indexing.” Technology Review (May/June 2011). “Software Defined Networking.” Global Knowledge (2014). SupplyChainBrain. “RFID’s Role in Today’s Supply Chain (November 4, 2013). “The Internet of Things.” McKinsey Quarterly (March 2010). Winkler, Rolfe. “As Google Builds Out Own Content, Some Advertisers Feel Pushed Aside.” Wall Street Journal (August 18, 2014). Winkler, Rolfe. “Getting More than Just Words in a Google Search Result.” Wall Street Journal (Aug. 18, 2014). Wittman, Art. “Here Comes the Internet of Things” Information Week (July 22, 2013). Worldwide Web Consortium, “ Semantic Web.” semanticweb (October 18, 2012). Worthen, Ben and Cari Tuna. “Web Running Out of Addresses.” Wall Street Journal (Feb 1, 2011). Wyatt, Edward. “U.S. to Cede Its Oversight of Addresses on Internet.” New York Times, March 14, 2014 This page intentionally left blank Securing Information Systems 8 C H A P T E R Learning Objectives After reading this chapter, you will be able to answer the following questions: 1. Why are information systems vulnerable to destruction, error, and abuse? 2. What is the business value of security and control? 3. What are the components of an organizational framework for security and control? 4. What are the most important tools and technologies for safeguarding information resources? MyMISLab™ Visit for simulations, tutorials, and end-of-chapter problems. 302 Chapter Cases Video Cases The 21st Century Bank Heist Target Becomes the Target for Massive Data Theft BYOD: It’s Not So Safe The Looming Threat of Cyberwarfare Stuxnet and Cyberwarfare Cyberespionage: The Chinese Threat IBM Zone Trusted Information Channel (ZTIC) Instructional Videos: Sony PlayStation Hacked; Data Stolen from 77 Million Users Zappos Working to Correct Online Security Breach Meet the Hackers: Anonymous Statement on Hacking SONY The 21st Century Bank Heist O ne of the top ten bank heists of all time occurred in December 2012 and February 2013 when a worldwide network of cybercriminals made away with $45 million from two digital hacking operations. The thieves targeted a company in India and a U.S.-based firm that process transactions from Visa and MasterCard prepaid debit cards. Payment processors are known to employ less stringent network security than financial institutions. Once they accessed account information, the hackers sought out prepaid debit cards issued by two Middle Eastern banks whose databases afforded another point of lax security: Rakbank (National Bank of Ras Al-Khaimah) in the United Arab Emirates and the Bank of Muscat in Oman. Rather than accumulating numerous account numbers, the hackers ­eliminated the withdrawal caps on just a handful of cards. Information from just five Rakbank-issued cards generated the initial $5 million, with just twelve Bank of Muscat cards garnering the lion’s share in the second strike. No ­individual or business bank accounts were depleted. Instead, funds were extracted from pooled reserve accounts from which prepaid debit card ­transactions are immediately deducted with the individual subaccounts, (the value associated with a card) reduced concurrently. Both tactics were designed to delay detection. Next, the hackers created new PIN (personal identification) numbers for the cards. Then, using commercially-available card encoders attached via USB ports to laptops and PCs, a network of underlings simply used the built-in ­software to enter the account data, clicked Write or Encode, and swiped any plastic card with a magnetic stripe they could get their hands on, including old © Creativa/Shutterstock 303 304 Part Two Information Technology Infrastructure expired credit cards and hotel key cards. With counterfeit cards in hand, crews in more than two dozen countries including Japan, Russia, Romania, Egypt, Colombia, Great Britain, Sri Lanka, Canada, and the United States began collecting the loot from ATM machines. The $45 million haul was accomplished through 36,000 bank transactions over ten hours’ time. In May 2013, seven members of the New York cell were arrested; the eighth, and purported ringleader, had been found murdered in the Dominican Republic the month before. The global mob leaders were not caught. Magnetic stripes are an over four-decade old technology that much of the developed world has abandoned because they are so vulnerable to counterfeit replication and theft via handheld card skimmers. Other major regions of the world have been using EMV (Europay, MasterCard, and Visa) technology for nearly 20 years. Often referred to as the chip and PIN system, EMV smartcards store account information in an embedded chip, and their data encryption is stronger than that for magstripe cards. Magnetic-stripe credit cards serve the same authentication data every time they are swiped, whereas chip and PIN system cards offer a different encrypted mathematical value each time, making it harder for criminals to use stolen data for future purchases. For added ­security, the user must enter a PIN to verify the identity of the cardholder. U.S. banks and merchants have balked at the expense involved in switching payment processing systems. It is not a trifling matter. Over 600 million credit cards and 520 million debit cards must be exchanged. Over 15 million POS card readers must be replaced. Over 350,000 ATM machines nationwide must all either be retrofitted or replaced. Every store, restaurant, hair salon, gas station, doctor’s office, kiosk, and vending machine will be affected, as will the p ­ ayment processing infrastructure at acquiring banks, where merchant accounts receive the deposits from credit card sales. Payment processors, which supply the ­software and tech systems to interface with the card associations (Visa, MasterCard, etc,) and process card transactions, will also be affected. Meanwhile, in the name of global interoperability, the rest of the world had to continue issuing EMV cards with a magnetic stripe and retain magstripe infrastructure. But the U.S. switchover may finally be coming. Beginning in October 2015, and continuing through the end of 2017, if a merchant is not ­EMV-capable by the specified date, it will assume liability for fraudulent and disputed transactions. Sources: Javelin Strategy & Research, “EMV IN USA: Assessment of Merchant and Card Issuer Readiness,” April, 2014; Colleen Long and Martha Mendoza, “Bloodless bank heist impressed cybercrime experts,” Associated Press, May 10, 2013; Marc Santora, “In Hours, Thieves Took $45 Million in A.T.M. Scheme, New York Times, May 9, 2013; Peter Svensson, Martha Mendoza, and Ezequiel Abiú López, “Global network of hackers steals $45M from ATMs,” Associated Press, May 10, 2013; and “EMV Chip Technology, Secure Electronic Payments,” Forbes, March, 7, 2013. T he problems created by the bank theft of $45 million using counterfeit ATM cards illustrate some of the reasons businesses need to pay special attention to information system security. Digital ATM and credit card systems are extremely useful tools for both individuals and businesses. But from a ­security standpoint, as this case illustrates, they are vulnerable to hackers who were able to access supposedly protected card account data and use the data to create counterfeit cards with which to raid numerous ATM machines. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Although debit (and credit) card payment ­processors have some information systems security in place, the security used by some Chapter 8 Securing Information Systems payment processors and banks was very weak. These vulnerabilities ­enabled criminals to break into the systems of several payment processing ­companies and steal debit card account information that could be used to ­fabricate bogus ATM cards with which to steal from two banks. The way that the banks in question ­processed card payments using pooled reserve accounts also helped the criminals. These banks also had weak security. Another weak link in the security chain are ATM