Associate Level Material
Appendix E
Hardware/Software Components
In your own words, describe the following hardware/software components
Legacy systems
Mainframe computers
Microprocessors
PCs
Network computers
World Wide Web and Internet
Wired and wireless broadband
technology
PC software
Networking software
Computer security software
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BUS 210
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
C H A P T E R
9
Information Technology
and E-Commerce:
Managing Information, Knowledge,
and Business Relationships
Learning Objectives
After studying this chapter you should be able to:
1. Distinguish between data, information, and
knowledge and identify the characteristics
of useful information.
2. Explain the relationship between IT,
competitive advantage, and profitability.
3. Discuss five major IT applications used
by companies today to build competitive
advantage.
4. Identify the major hardware and software
components of IT and e-commerce and
describe how they have evolved over time.
WHY IS THIS IMPORTANT ?
Think back to the last time you bought a new cell
phone or computer. With all of the choices on the
market, how did you decide which model was best for
you? You probably did some consumer research to
learn about the brands and features available, checked
for the best price, and made a selection based on the
information you had.
Managers do the same thing when making decisions. They need the best information available to
support the value chain that creates a competitive
advantage for their organizations. This chapter explains how companies can use information technology to increase their profitability.
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
A Question of Business
IBM’s “E-Business on Demand” IT
In what ways can IBM’s IT help improve a company’s efficiency and effectiveness?
In the poor economic conditions of the early
are the “reservoirs,” or “lakes,” of a large com-
2000s, the stock prices of most companies
pany’s IT system. This water flows between PCs
that make and sell information technology (IT)
in a company’s computer network via the fiber-
plunged as their main customers—other business companies—slashed their IT budgets.
With their lower IT budgets, companies worked
hard to find the types of computer hardware
and software that would have the biggest
impact on their profitability. Convincing a company to spend millions or billions of dollars to
buy new kinds of software and hardware is a
daunting task facing the salesforce of any IT
company today.
One IT company that faces this challenge is
IBM, which makes, sells, and services a vast
optic cables that connect them. Thus, computing
array of computer hardware and software. To
power, like water, can be moved between com-
maintain its leading position in the competitive IT
puters both inside and between companies—
industry IBM’s CEO, Sam Palmisano, announced
providing that computers are linked seamlessly
a bold new business model for IBM based on new
together. Seamless means that the computer
IT called “e-business on demand.” Palmisano
hardware and software do not create information
announced that companies that adopt IBM’s new
“logjams” that disrupt the flow of information and
IT will obtain millions or billions of dollars in sav-
computing power.
ings in operating costs—something very appeal-
IBM’s software engineers developed new
ing to companies trying to make the most of their
e-business software to allow computers both
IT budgets.
inside and between companies to work seam-
To promote the new business model, IBM told
lessly together. Among other things, this soft-
its customers to think of information and comput-
ware allows computer operators to monitor hun-
ing power as a “fluid” like water that is contained
dreds of different computers at the same time
in the hundreds or thousands of computers that
and shift work from one machine to another
Jones: Introduction To
Business: How Companies
Create Value for People
274
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
Chapter Nine
to distribute a company’s computing power to
wherever it is most needed. This has several
cost saving advantages. First, it allows companies to run their computers close to capacity,
which greatly improves IT productivity and reduces operating costs. Second, to ensure that
there was never any possibility its customers
would experience a “drought,” IBM proposed to
use its own vast computer capacity as a kind of
bank, or reservoir, that customers could tap into
whenever their own systems might become
overloaded. For example, IBM’s e-business
software allows companies to shift any excess
workload from their network to IBM’s computers, which means they do not have to invest
tens-of-millions of dollars in extra computers—a
huge cost saving. Third, when a company’s
computers are seamlessly networked, they can
function as a “supercomputer,” a computer with
immense information processing power that
can easily cost upwards of $50 million to purchase as a standalone computer, and tens-ofmillions more dollars to maintain.
To show customers the cost-saving potential
of its new e-business products, IBM decided it
would be the first company to use it. Previously,
IBM allowed its hundreds of different divisions
to choose whatever software they liked to manage their own purchasing and supply chain
activities. In 2003, Palmisano appointed star
manager Linda Stanford to overhaul IBM’s companywide supply chain—which purchases
inputs worth $44 billion a year! Stanford was
made responsible for developing software to
seamlessly link all IBM’s divisions into a single,
Overview
integrated computer network. When implemented, the new software resulted in a 5% gain
in productivity, which IBM expects to repeat for
the next 5 to 10 years. This will result in cost
savings of over $2 billion annually. IBM was
quick to tell its customers that they can expect
to see similar savings if they purchase its ebusiness software.
IBM’s new e-business system also has many
other performance-enhancing benefits. Its thousands of IT consultants are experts in particular
industries such as the car, financial services, or
retail industries. They have a deep understanding of the particular problems facing companies
in those industries and how to improve their
business models. Palmisano told IBM’s consultants to work closely with its software engineers
to find ways to incorporate their knowledge into
software that can be implanted into a customer’s
IT system to better manage its business model.
IBM is now developing 17 “expert systems,”
which are industry-specific, problem-solving software packages managers can use to make better business decisions as well as reduce operating costs. One of these expert systems is being
developed for the pharmaceutical industry. Using
IBM’s new pharmaceutical expert system, a
company’s computer network will function as a
supercomputer able to simulate and model the
potential success of the many new drugs a company has under development. Currently, only 5 to
10% of new drugs make it to the market. IBM
believes its new expert system could raise that
rate to over 50%, which would result in billions of
dollars in cost savings for drug companies.1 •
We live in exciting times. Just decades ago, science-fiction writers
like Robert Heinlein and Isaac Asimov imagined devices such as
wrist-held videophones, virtual reality machines, and speech-programmed, handheld computers. Today, companies like Palm, Hewlett-Packard, Nokia, Sony, and
Microsoft are producing the computer hardware and software that makes these
devices possible. Even science-fiction writers did not imagine the creation of the
Internet or how that would dramatically change people’s lives. We live in a different
world than just a decade ago; advances in IT have changed the way people think
and the very nature of business commerce, occupations, and organizations.
In this chapter, we examine how these dramatic advances in IT have affected
business activity and the way companies compete in today’s wired and wireless
global world. First, we discuss the relationship between information, knowledge,
competitive advantage, and profitability. Second, we discuss the five principal IT
applications responsible for much of the increase in business efficiency and effectiveness today. Third, we describe the different hardware and software components of
IT and e-commerce used to network computers both inside and between companies.
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
© The McGraw−Hill
Companies, 2007
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
275
Information Technology and E-Commerce
We then examine the battles currently raging in the IT industry between major companies. By the end of this chapter, you will understand the many ways in which IT
allows companies to make better use of their resources to increase their efficiency,
effectiveness, and profitability.
Information
Technology and
Profitability
information A set of
data, facts, numbers, and
words that has been
organized in such a way
that it provides its users
with knowledge.
knowledge What a
person perceives,
recognizes, identifies, or
discovers from analyzing
data and information.
learning An increase
in the store or stock of
people’s expertise or
knowledge.
In a historical sense, the IT revolution is the most recent cause
of the global change in industrial business practices. To understand how IT has changed business and the way companies
operate today, it is necessary to understand what information is
and why it’s become a crucial facilitator of business commerce.
Suppose you add up the value of the coins in your pocket
and find you have $1.36 in change. You have been manipulating data, the numerical value of each individual coin, to obtain information, the total
value of your change. You did so because you needed to know, for example, if you
have enough money to buy a coke and a candy bar. Information is a set of data,
facts, numbers, and words organized in such a way that it provides its users with
knowledge. Knowledge is what a person perceives, recognizes, identifies, or discovers from analyzing data and information. Over time, the result of acquiring more and
better information and knowledge is learning. Learning is an increase in the store of
expertise or knowledge people have. Knowledge and learning give people the ability
to better understand and respond to the economic environment in which they operate. As such, they are better able satisfy their wants and needs. Figure 9.1 illustrates
the relationship between information, knowledge, and learning. In a business context, managers try to acquire more and better data and information that leads to
increased knowledge. The more knowledge they possess, the better able they are to
respond to the competitive business environment.
Information technology (IT) refers to the many different kinds of computer and
communications hardware and software, and the skills of the designers, programmers, managers, and technicians who create and manage this technology. IT is used
to acquire, define, input, arrange, organize, manipulate, store, and transmit facts,
Figure 9.1
Information,
Knowledge,
and Learning
Learning
Knowledge
Information
Data
Data
Data
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
276
Chapter Nine
information
technology The many
different kinds of computer
and communications
hardware and software
and the skills of their
designers, programmers,
managers, and technicians
who create and manage it.
data, and information to create business knowledge and promote organizational
learning. Organizational learning occurs when managers and employees are able
to use information and knowledge to achieve a better fit between a company’s business model and the forces in its environment. The result of organizational learning is
increased profitability.
organizational
learning Managing
information and knowledge
to achieve a better fit
between a company’s
business model and the
forces in its environment.
Useful Information and Knowledge
When managers and employees have information that gives them a greater understanding of the competitive threats and opportunities a company faces, they are in a
better position. The usefulness of information depends, however, on whether it is
complete, accurate and reliable, relevant, and timely. Figure 9.2 illustrates these characteristics, and each is discussed next.
COMPLETE For information to be useful, it needs to provide a complete picture of
a situation; salient facts or data that would alter a manager’s assessment of a situation
cannot be omitted. For example, a manager who fails to collect information about the
cost of holding parts in inventory or the actual cost related to hiring, training, or paying employees lacks a complete picture of his or her company’s true profitability.
Similarly, a research team that fails to examine the research results of other scientists
around the world is at a competitive disadvantage.
ACCURATE AND RELIABLE The usefulness of information is a function of its
accuracy and reliability. The greater its precision and freedom from error, the more
likely the information is to be truly insightful, and the more confident managers can
be basing their decisions on it. Basing important decisions on poor-quality information can obviously be disastrous. For example, if managers in different functions measure the cost of the same resources in different ways, the company’s top managers
will have a much harder time gauging the real profitability of the business.
RELEVANT Before IT, information was very expensive to collect and process.
Today, however, managers are awash with information. In fact, in many cases, they
have too much information. What’s relevant and what can be safely ignored is time
consuming and costly for them to sort out. Moreover, information that is too detailed
or complex can actually obscure rather than provide insight about a business situation.
Figure 9.2
Characteristics of
Useful Information
Complete
Accurate
and
reliable
Useful
Information is:
Timely
Relevant
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
© The McGraw−Hill
Companies, 2007
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
277
Information Technology and E-Commerce
information overload
A situation in which
managers have to process
so much information it
actually reduces their
understanding of a
situation.
real-time information
Information that is
constantly updated.
Information overload is a term used to describe a situation in which managers have
to process so much information that it actually lessens their understanding of a situation.
Suppose, for example, to find a way to increase profitability managers decide to
collect information on every kind of product being made by their company’s competitors. Then, they collect detailed information on all these products’ features and
their market share (to see which are the most popular). The managers now possess
detailed information about which products were successful in the past. However, this
does not provide them with much knowledge about what kind of products might be
successful in the future. Moreover, while they are doing this research their competitors
are developing newer products. The point here is that not all information is good
information: To avoid collecting irrelevant information that can actually slow down a
company’s progress, managers need to think carefully about which information they
truly need and what is relevant in a particular problem-solving situation.
TIMELY In today’s rapidly changing business environment, it is essential that the
information managers use to make decisions be as up-to-date as possible. Real-time
information is information that is constantly updated. Most companies today purchase IT systems that give them real-time information. For example, when a company introduces a new product or reduces the price of an existing product, managers
need real-time information about how well customers are responding to these moves
and if the company’s profitability is rising or falling as a result. If managers have to
wait months to find this out, the company’s market share might fall significantly in the
meantime (because customers don’t like the new product) or its profitability might
drop precipitously (because the price cut isn’t leading to more units sold).
Gaining a Competitive Advantage with IT
Recall from Chapter 4 that the four sources of a global competitive advantage are
superior productivity, quality, innovation, and responsiveness to customers. The purpose of a company’s IT is to provide managers at all levels and in all functions and
divisions with the knowledge they need to achieve these goals. Figure 9.3 outlines
these goals, which we discuss in depth next.
SUPERIOR PRODUCTIVITY IT gives middle managers the ability to collect
and process more data and information about each individual task or operation
involved in a functional activity. With the knowledge they gain, they can improve the
Figure 9.3
IT and Competitive
Advantage
Superior
productivity
Superior
quality
IT builds
competitive
advantage when
it results in
Superior
responsiveness
to customers
Superior
innovation
Jones: Introduction To
Business: How Companies
Create Value for People
278
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
Chapter Nine
productivity of a particular function. Today, for example, manufacturing managers
are able to collect data on hundreds and thousands of specific manufacturing operations. This gives them a much better understanding of how efficiently they are using
the company’s resources to make and sell goods and services. Even 10 years ago the
costs of doing this would have been exorbitant. Now it is much cheaper. Moreover, as
we learned earlier in the chapter, IBM now goes so far as to promise its customers that
its systems will improve their productivity. In a sense, the productivity gains companies can achieve by acquiring good information makes the cost of getting that information even cheaper yet. In other words, good information pays off.
SUPERIOR QUALITY IT gives managers the ability to accurately analyze the
individual operations needed to make a product to understand where problems might
lie. When they know where these errors lie, they can then work to eliminate them and
improve product quality. Take a car engine, for example: A one-thousandth-of-an-inch
difference between a piston in an engine and the combustion chamber it enters can
have a dramatic impact on a car’s performance. If the managers in charge of engine
assembly can discover why such a gap is being created, they can redesign the components or manufacturing process to fix the problem and improve quality.
In service organizations, such as retail stores, IT makes it possible to collect information on many dimensions of quality. For example, managers in companies such as
Amazon.com and LandsEnd.com use IT to track the percentage of customer orders
that are correctly filled as a way of judging quality. Analyzing this information allows
managers to pinpoint reasons why mistakes happen so corrective action can be taken.
SUPERIOR INNOVATION IT can speed up product innovation in many ways.
We learned, for example, how software created by IBM is helping pharmaceutical
firms identify products most likely to succeed. By focusing on just those products,
the firms are able to develop and market them more quickly. IT systems also allow a
company’s technical knowledge to be stored and constantly updated in the ongoing
search for new products and ways to improve existing products. Similarly, electronic
bulletin boards, chatrooms, and teleconferencing systems that allow scientists and
engineers from all parts of a company to access constantly updated information
speed up innovation.
SUPERIOR CUSTOMER RESPONSIVENESS IT can facilitate a company’s
responsiveness to its customers in a number of different ways. Many companies use
software systems to create a profile of each of their customers—a record of their likes
and dislikes, buying habits over time, and so on. IT systems can also be used to track
how customers are responding to a firm’s advertising campaigns. For example, using
sophisticated software, Amazon.com was able to discover that its advertising dollars
were much more effectively spent when used to reach the company’s present customers versus attract new customers. As a result, Amazon.com now advertises primarily on Web sites popular among its repeat customers.
Starbucks is another example. When
Starbucks first began operating in the
United States, finding places to put its
Did You Know?
stores was not a problem. Now, however,
the company is already located in many
In 1974, a pack of Wrigley chewing gum was scanned at a New
of the prime real-estate spots. Instead of
Jersey grocery store. Today there are about five billion scans
basing store location decisions on gut
every day. The bar code traces its origins back to 1949 and a 27instinct (which is what Starbucks’ manyear-old graduate student, Norman Joseph Woodland who drew
agers used to do) the company now uses
dots and dashes in the sand to simulate Morse Code (he was on
“location” software. The software anathe beach, taking a break from school) and then extended them
lyzes consumers in a particular area (their
downward with his fingers. What appeared were thin lines
demographics, income, and so forth) as
resulting from the dots and thick lines from the dashes.2
well as the surrounding competition.
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
© The McGraw−Hill
Companies, 2007
9. Information Technology
and E−Commerce:
Managing Information,
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Relationships
279
Information Technology and E-Commerce
Major
Information
Technology
Applications
In this section, we focus on the five IT applications that have
had the biggest impact on business: (1) transaction processing
systems, (2) knowledge management systems, (3) expert systems and artificial intelligence, (4) enterprise resource planning, and (5) e-commerce. These applications are outlined in
Figure 9.4. A company’s chief information officer (CIO), the
top manager of its IT function, is responsible for choosing and
implementing a system in which these applications operate
seamlessly and at the least cost.
Transaction Processing Systems
chief information
officer The top manager
of a company’s IT function.
transaction
processing system
An IT system designed
to collect, record, and
manipulate the data
related to a company’s
day-to-day business
operations.
knowledge
management system
An IT system that analyzes
the information collected
from the TP system but
filters and analyzes it to
make it more useful to
managers.
Transaction processing systems (TP systems) are designed to collect, record, and
manipulate the data related to a company’s routine, day-to-day operations. VF Jeans
uses a TP system to connect with its sales outlets, such as department stores, where it
collects data on the type and size of jeans selling the fastest. Its managers then take
this information and, within hours, decide what to instruct the company’s overseas
manufacturers to make.
In the human resource management (HRM) function, a TP system is used to enter
employee records like their personal data, employment history, and performance
evaluations as well as process their pay and benefits. Accounting uses a TP system to
enter and record data on each of the millions of transactions involved in making and
selling goods and services. This basic information is then used to prepare a company’s financial statements.
TP systems are the “backbone” of a company’s IT. They perform all of the donkey
work necessary to record the basic information a company needs to operate. Managers then manipulate and use this information to better understand how individual
functions and the company as a whole are performing.
Knowledge Management Systems
Knowledge management systems (KM systems) take the information in a company’s
TP systems and filter and analyze it to make it more useful to managers. The problem
facing IT managers when they design a KM system is to identify the most important
information in the database needed to solve a particular problem. In other words, they need
to be able to extract that information from the mass of data the company’s TP system
collects every day.
Figure 9.4
Five Major IT
Applications
Transaction
Processing
Knowledge Management
Expert Systems
Enterprise Resource Planning
E-Commerce
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Business: How Companies
Create Value for People
280
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
Chapter Nine
To extract this information, a company first instructs its functional managers to develop a set of criteria about the information that needs to be collected.
These managers then work with the company’s IT
personnel to develop a set of best practices, the set
of skill-based competencies that allow a particular
function to perform at a high level. A function’s best
practices are the optimal procedures by which it does
its job, such as marketing finding new ways to attract
new, online customers, product development using
new software to innovate new products, and manufacturing developing novel ways to assemble a product.
Once these best practices are discovered, they are
converted into computer code that works like a set of
rules to scan the information in a company’s transacManagers in charge of VF Jeans, the company that produces Leebrand clothing, use data from the company’s TP system to alert
tion processing databases and recognize patterns that
them when the demand for a specific product is dropping or if a
spell “trouble”—departures from the rules. When the
large number of people are returning a particular product.
KM system recognizes problems that are arising, it
alerts the functional managers, who then must find
best practices The set
the best way to respond to the problem. In VF Jeans, for example, hundreds of thouof skill-based competencies
sands of pieces of sales data are archived each day in its TP system. VF’s sales manthat allow a particular
agers then use this information to develop rules alerting them if the demand for a spefunction to perform at its
cific product drops or if a large number of customers are returning a particular product
optimal level.
(which perhaps indicates there is a quality problem). These rules are then programmed into the KM system so managers can take quick corrective action as needed.
IT consultants Expert
KM systems are especially important in service organizations that use IT consulemployees who use their
tants: employees charged with solving customers’ IT problems. At IT consulting comknowledge and learning to
panies like Accenture, for example, each consultant is responsible for capturing the
solve their customers’ IT
knowledge he or she gains while working with a client and giving it to Accenture’s KM
problems.
system managers. These people then sift through all of this input and determine the
best practices consultants should use to provide state-of-the-art IT solutions for the
company’s clients. The information is then programmed into Accenture’s companywide KM system so the firm’s consultants anywhere in the world can access it at any
time. Accenture spent over $2 billion developing its companywide KM system, and it
employs 300 knowledge experts to manage it.
Expert Systems and Artificial Intelligence
expert system An
advanced IT system that
can reason through a
company’s information,
diagnose problems, and
suggest solutions.
artificial intelligence
An IT system that reasons
and learns like a human
being.
IT has dramatically improved business decision making. Expert systems and artificial
intelligence are now taking this decision making to a higher level. An expert system
is an advanced IT system that can (1) reason through the information captured by a
company’s TP and KM systems; (2) recognize and diagnose patterns, problems, or
issues related to that information; and (3) suggest solutions for those problems and
issues. It is this third component of expert systems—the ability to suggest solutions to
problems—that distinguishes them from ordinary KM systems. This ability is called
“artificial intelligence.”
Artificial intelligence allows computers to learn, and refine, their reasoning over
time, much like a human being does. Let’s look at VF Jeans again. An expert system
might have the ability to use information about customers’ current buying preferences to predict future changes in customer demand. By analyzing detailed information on operating costs, the expert system might be able to suggest ways to change the
company’s purchasing or manufacturing operations to reduce costs 12 or 18 months
in the future.
Expert systems can be designed to perform similar kinds of high-level information
processing for all of a company’s functions. They can also provide top managers with
a set of sophisticated analytic procedures that explain the fit, or misfit, between a
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Business: How Companies
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III. A Functional Approach
to Business
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Companies, 2007
9. Information Technology
and E−Commerce:
Managing Information,
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Information Technology and E-Commerce
company’s business model and its environment. Recall that in addition to the pharmaceutical industry, IBM consultants are working to develop expert systems for 16
other industries. Hewlett-Packard, Oracle, and Honda are some of the other companies developing systems using artificial intelligence. Honda has even developed a
child-sized robot called “Asimo.” Asimo taught itself to climb stairs and jog using artificial intelligence software. Honda is hoping the robot will be running errands and
delivering interoffice mail to Honda’s employees perhaps by 2010.
Enterprise Resource Planning Systems
enterprise resource
planning (ERP)
systems Multimodule
applications software
packages that coordinate
all of a company’s
functional activities.
It is not sufficient just to give managers inside of a function better information and
knowledge. They also need to be able to access information about the activities going
on in the company’s other functions. The greater the flow of information and knowledge among functions, the more organizational learning takes place, which allows
managers to improve a company’s business model. Enterprise resource planning
(ERP) systems are multimodule applications software packages that coordinate all of
a company’s functional activities. ERP systems (1) help individual functions improve
their operations and (2) improve the integration between functions.
Choosing and designing an ERP system to improve the way a company operates is
one of the biggest challenge’s facing today’s CIOs. To appreciate why almost every
large global company installs an ERP system, it is necessary to understand the concept of the value-chain. We discuss this next.
ERP AND THE VALUE-CHAIN Recall from Chapter 1 that a company’s value
chain consists of the functional activities needed to make and sell goods and services
profitably. Figure 9.5 lists these functions again (which are discussed in the remaining
chapters in the book).
Recall from Chapter 1 that a value chain has two different types of functions: primary and support functions. Primary functions are those that are directly involved in
making and selling goods and services: Marketing, product development, operations,
materials management, and sales are successive steps in the value-creation process.
These activities are primary because they produce the value customers find in a company’s products. When the primary functions combined activities lower the costs of
making a product, or create well-designed innovative products customers are willing
to pay a premium price for, they add value to the firm and increase its profitability.
Figure 9.5
Primary and
Secondary ValueChain Functions
Information
Technology and
E-Commerce
Chapter 9
Resources
Marketing and
Product
Development
Chapter 10
Accounting
Chapter 14
Human Resource
Management
Chapter 13
Operations
and Materials
Management
Chapter 11
Sales, Distribution,
and Customer
Relationship
Management
Chapter 12
Finance
Chapter 15
Customers
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© The McGraw−Hill
Companies, 2007
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By contrast, a firm’s secondary functions are those that measure, control, facilitate, and
improve the way a company’s primary functions perform. IT, human resource management (HRM), accounting, and finance are, in many cases, secondary functions.
In the value chain, each primary function, in sequence, contributes value to a
product and then hands it off to the next function, which makes its contribution, and
so on, down the line. The primary function of marketing, for example, is to uncover
new or changing customer needs and to decide how to modify or create new products
to respond to them. Marketing then shares this knowledge with the firm’s product
development groups, whose engineers and scientists work to develop and design
these products. In turn, materials management and manufacturing work to find ways
to obtain cheaper, better inputs and make the new products as efficiently as possible.
Marketing and sales must then convince customers to buy these products.
The value chain provides a useful way to think about the sequence of functional
activities necessary to create and sell products successfully. In an IT context, however, it also suggests that there is an enormous amount of information that must be
coordinated. This is where the IT function can have the most impact on a company’s profitability. Business in Action discusses an ERP system designed to do this,
which is sold by SAP.
SAP’s ERP Systems
SAP is the world’s leading supplier of ERP software; it introduced the world’s first
ERP system in 1973. So great was the demand for its software that SAP had to train
thousands of IT consultants from companies like IBM, Hewlett-Packard, Accenture, and Cap Gemini to install and customize its software to meet the needs of
companies around the globe.
SAP’s ERP system is popular because it manages a company’s functional activities at all the stages in the value chain. Within the industry, the software has become
known as the “expert system of expert systems.” It contains the set of best practices
SAP’s engineers have found increase a business’s efficiency, quality, innovation,
and responsiveness. SAP claims that when a company reconfigures its IT platform
and installs its software, it can achieve productivity gains of 30 to 50%—which can
amount to billions of dollars in savings for a large multinational firm.
For each value-chain function, SAP installs a
software module on its network. Each function
then inputs its data into the module in a way specified by SAP. For example, the sales department
inputs all of the information it gathers about customers; the materials-management department
does likewise, as does marketing, accounting, and
so on. The modules then reason through the
information that has been input, and managers
get real-time feedback about the firm’s current
state of operations and how to improve them.
The managers also have access to the other function’s systems and are alerted when their operations might be affected by those functions. All of
this information is then relayed to the company’s
top managers, who consider the solutions offered
SAP’s ERP system is popular because it manages a firm’s
functional activities at all stages in the value chain.
by system and take action.3
Business
in Action
Suppose, for example, marketing personnel discover some unmet customer need
and suggest a type of product that can meet this need. They estimate that the company could sell 400,000 units of the product annually, if it were produced. Using
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III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
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Relationships
Information Technology and E-Commerce
© The McGraw−Hill
Companies, 2007
283
SAP’s software, the company’s engineers then
develop a new, high-quality, low-cost product
based on marketing’s recommendations. While
this is occurring, the firm’s manufacturing managers monitor the development of the product
via the system and make suggestions to the
engineers about how to design the product in
such a way that it will cost less to produce.
Materials managers observe how the product is
being developed and make suggestions to the
engineers about the global suppliers that should
be used or how the product should be altered so
that certain suppliers or parts can be utilized. At
the same time, the firm’s human resource man- SAP’s software is multifunctional.
agers use the system to forecast the number of For example, engineers in product
employees needed to make and sell the product development can use the system to
design a new, high-quality, low-cost
and what this will cost.
product, whereas manufacturing
How does SAP’s ERP software build com- managers can use the system to keep
petitive advantage and profitability? First, it operating costs to a minimum.
speeds up product development so companies
that can bring products to market more quickly generate higher sales revenue. Second, SAP’s system focuses on how to drive down operating costs while maintaining
high product quality. Third, SAP’s system is focused on satisfying the final customer;
its customer relationship management (CRM) module watches how customers
respond to a new product and feeds back this information quickly to sales and the
company’s other functions.
To see what this means in practice let’s jump ahead three months and suppose that
the CRM component of SAP’s ERP software reports that actual sales are 20% below
target. It has further reasoned that the problem is due to the fact that the product
lacks one crucial feature that customers want. The product is a smart phone, for
example, and customers want a built-in, digital camera.
The sales function decides that this, indeed, must be done and alerts the managers
of the firm’s other functions. Now, they can also begin to make decisions about how
to manage this development: The engineers in product development, for example,
can figure out how much it will cost to develop the built-in camera and how long it
will take. Managers in the other functions can monitor the engineers’ progress and
make suggestions for improvement. In the meantime, the firm’s manufacturing managers are aware that sales of the older camera are slow and have already cut back on
their production of that camera. Similarly, materials managers will have contacted
digital camera makers to find out how much such a camera will cost and when it can
be supplied. In the meantime, marketing will develop new sales forecasts to estimate
demand for the modified product. It announces a revised sales forecast of 75,000
units of the modified product.
It takes the firm’s engineers one month to modify the product, but because the
managers in manufacturing and materials management already have information
about it via SAP’s software, the product hits the market only two months later. Within
weeks, the company’s sales department reports that actual sales are greatly exceeding
marketing’s new forecast. The company knows it has a winning product, and top
managers give the go ahead for manufacturing to build a second production line to
double production of the product. The firm’s functions are expecting this decision
because they have access to this information, too. In fact, they have already been
experimenting with their SAP modules to try to determine how long it will take them
to respond to such a move. In turn, they provide the other functions with this information so they can adjust their functional activities accordingly, much like a symphony orchestra works together.
Remember, all this quick and responsive action has been made possible because of
the ERP system. Compare this to a paper-based system. In such a company, it would
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9. Information Technology
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Relationships
Chapter Nine
take much longer to find out about the slow sales and that the firm’s projections were
wrong. In the meantime manufacturing, producing according to plan, will have generated a huge stock of unsold products, which is a major source of operating costs. Also,
because the product will be out of date, the company will have to sell it at a discount
just to get rid of it. This will hurt the firm’s profitability. In the meantime, managers
from the different functions will have been making frantic phone calls and holding
face-to-face meetings to decide what to do. It might take another six months for the
modified product to be put into production. Perhaps as much as an entire year of huge
potential profits will have been lost.
E-Commerce Systems
E-commerce is trade that takes place between companies, and between companies
and individual customers, using IT and the Internet. Business-to-business (B2B) commerce is trade that takes place between companies. (See Figure 9.6.) A main B2B software application is the B2B marketplace, an industry-specific trading platform set
up to connect buyers and sellers using the Internet. To participate in a B2B marketplace, companies agree to use the same software standard. This allows them to search
for and share information with each other. Together, they can work to
find ways to reduce costs or improve quality. This is what the grocery
industry is trying to do. Because profits are small in the industry, it is trying to adopt common software standards to make transactions between
businesses less complicated and more cost effective. We discuss these
B2B and B2C marketplaces in more detail in later chapters.
Business-to-customer (B2C) commerce is trade that takes place between
a company and consumers. When a company uses IT to connect directly
to consumers they do not need to use intermediaries like wholesalers and
retailers. Like Dell computer, they make higher profits by selling directly to
customers. The wine industry is an example. Many wineries now sell their
wine straight to consumers via the Internet. Online storefronts are helping
companies access customers directly and cheaply with a much wider range
of products and information about them. Amazon has developed one of
the most customer-friendly storefronts on the Web. Amazon’s site offers a
plethora of products from multiple stores, along with detailed information
about the reliability of both the products and retailers that sell them—in
many instances from current users of the products. Amazon.com is consisOnce again, here is Chip Wass’ cartoon
tently rated top in online customer satisfaction.
depiction of an electronic auction.
e-commerce Trade that
takes place between
companies, and between
companies and individual
customers via the Internet
(or other IT systems).
Figure 9.6
Types of
E-Commerce
Company
B
B2
e
erc
mm
o
C
B2
C
Company
Co
mm
erc
e
Individual Customer
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Business: How Companies
Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
Information Technology and E-Commerce
B2B marketplace An
industry-specific trading
platform set up to connect
buyers and sellers using
the Internet.
intranet A company’s
internal system of
computers and Web sites
accessible only by its
employees.
© The McGraw−Hill
Companies, 2007
285
Software developers like Microsoft, Oracle, SAP, and IBM are rushing to help
Amazon and other companies put IT application to work on the Internet. Previously,
the developers’ software had been configured only to work on a particular company’s
system of interlinked internal computers or intranet. Now, they are developing software that links a company’s network to its suppliers and customers around the world
via the World Wide Web. SAP, for example, rushed to update its ERP modules to
allow for transactions over the Internet. It calls its new B2B commerce software
“mySAP.” Today every one of SAP’s modules is Internet compatible. Microsoft and
IBM are doing likewise with their software. We discuss Internet applications and storefronts in greater depth in the chapters on marketing and sales, which appear later in
the book.
Hardware
Components
of IT and
E-Commerce
Total global spending on IT is over $1 trillion a year. The
United States, with just 4.6% of the world’s population, purchases about 50% of the world’s computing and information
processing power. In the view of many experts, the strength of
the U.S. economy today is due to it being the world’s leader in
making and using IT. Some experts call the computer industry the “industry of industries” because its products have an
immense effect on the performance and profitability of companies in most other industries.
Let’s examine the way the IT industry has developed over the last 50 years and
how it has affected businesses. In this section, we examine the hardware components
of IT, and in the next section, software components. Throughout this discussion we
also examine the way companies in the IT industry, such as IBM and Microsoft, are
competing to be the leading IT suppliers.
Legacy Systems
legacy system The
hardware and software
components of a
company’s IT system at
any one point in time.
The hardware and software components of a company’s existing IT system are called
its legacy system. A company makes a huge investment in its legacy system, one that
can cost a multinational company billions of dollars to purchase and develop. Moreover, its IT managers, and managers and employees across the company, have spent
an enormous amount of time to learn how to input data and use the system. Advances
in IT frequently require a company to upgrade its systems, just as we as individual
computer users have to upgrade our own systems from time to time.
To make the process of upgrading its legacy system smoother and easier, companies
and their CIOs are increasingly choosing to buy most of their computer hardware,
software, and services from one or a few leading IT companies like IBM or HewlettPackard. Large IT companies offer a complete suite of computer hardware and software from mainframes to laptops that work seamlessly together when installed. The IT
consultants of these companies also know how to customize their systems to suit a
company’s particular needs and develop comprehensive training programs on the system for the company’s staff. But what are the specific hardware components of a
legacy system and how have they changed over time? We discuss this next.
Mainframe Computers
The first modern computer, the UNIVAC, was developed in 1951 using vacuum-tube
technology. The result was a computer as big as a two-story house. Seven years later,
Texas Instruments invented the integrated circuit. The integrated circuit allowed
much smaller mainframes to be built. Instead of the size of a two-story house, each
was about the size of a large living room. The computing power of the new mainframes was also many times greater. IBM ultimately became the leading developer
of mainframe computers, and mainframes still serve as the center, or hub, of most
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Chapter Nine
companies’ information processing and storage systems. IBM also became the leading developer of the
software that runs mainframes.
Transaction processing systems for large companies were the principal kind of IT applications being
developed at this time. Because it dominated mainframe computing, IBM became one, if not the, most
profitable company in the world. The company then
pumped those profits back into IT research and pioneered many of the advances in computer hardware
that made computers thousands of times more powerful during the 1960s and 1970s.
In the age of mainframes, however, computers were
in the “backroom.” A firm’s functional managers could
The first modern computer, the UNIVAC, which was developed in
only access them through the company’s computer
1951, used vacuum-tube technology. The result was a computer
engineers. These people were responsible for mainas big as a two-story house.
taining the systems and inputting data. Upon request
they would manipulate the data and provide the results to managers who requested it.
Although a functional manager could request a spreadsheet to analyze sales figures,
examine changes in production costs, or prepare the company’s accounts, the way computers operated remained a mystery to most non-IT managers. Nonetheless, computers
were used, among other things, for scientific research, to design cars, and to manage
complex global financial accounts and transactions. Even though they were crude by
today’s standards, they helped companies to increase their efficiency and effectiveness
in countless ways. By the 1970s, for example, General Motors possessed more computing power than any other company. The company’s superior IT was one reason why it
was then the largest, and most profitable, global carmaker.
Also during the 1960 and 1970s, other companies like Digital Equipment Corporation (DEC) and Hewlett-Packard began to offer smaller, less-powerful mainframe
computers, called “minicomputers.” Minicomputers were developed to provide IT
applications for a particular function or product division. Thus, for example, each of
GM’s car divisions might possess several minicomputers dedicated to car design or
accounting while the mainframe worked separately at corporate headquarters.
In the 1970s, software engineers were focusing their efforts on ways to improve a
computer’s “word-processing” abilities. Not only were computers just crunching numbers, they were increasingly being used by managers to work on word documents and
then update, and store them. It was becoming clear that computers, rather than typewriters, could be used more efficiently to create all kinds documents. Companies
began to look for ways for their mainframe computers to perform word-processing
functions. One idea, then called the “office of the future,” was to connect secretaries
and clerks directly into mainframes through remote terminals located in a company’s
functions and departments. Note the focus on the mainframe computer. At this time it
was unimaginable that there could be a computer on every employee’s desk.
One significant departure from this approach was pioneered by DEC, which
developed standalone minicomputers, or “workstations,” dedicated to word processing. Often, each department in a company purchased one of these expensive
machines, and managers gave their handwritten documents to workstation operators
for inputting. DEC became a leader in this area and a very profitable company. It did
not remain so for very long, however, because IT kept advancing and DEC had
shown that word processing applications could be successfully performed by much
simpler means than mainframe computers.
Microprocessors and Personal Computers
The dominance of the mainframe was challenged by Intel’s 4004 microprocessor, or
“computer on a chip,” in 1970. The first chips were thousands of times less powerful
than the “brains” of a mainframe and were not regarded as a substitute for mainframe
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computing. However, they opened the door for
“standalone” computing. Intel had the idea that an
individual user could have a computer using its chip
on his or her desk and then program it to do whatever he or she wanted it to do.
Apple Computer ran with this idea. In 1976 it introduced a kit form of the personal computer (PC) that it
sold to computer enthusiasts worldwide. They could
assemble a PC and then program it using some kind
of computer language. This event turned the computing world upside down. The enthusiasts then began to
experiment with ways to develop more powerful
word-processing and spreadsheet applications for the
PC. Many of them were so successful they went on to
The buyers of the first Apple PCs were “early adopters” of computer
found companies such as WordPerfect, Novell, Wordproducts—people who enjoyed experimenting with new technology.
Star, and so on.
Nonetheless, it took several years for the “hidden” significance of standalone PCs to
register with leading computer makers. IBM and DEC, for example, were dominated
by “mainframe thinking.” Their company values and norms were based on the notion
that computing would always be a centralized, technical activity. In a famous quote,
Kenneth Olson, the founder and CEO of DEC (and a brilliant computer engineer in
his own right), commented publicly that personal computers were merely “toys.”
Olson’s view, and the view of leading IT makers, soon changed. In the IT world,
researchers are always striving to improve a particular technology, and so its capabilities improve over time—much as the power of a car’s internal combustion engine has
been increased dramatically over the last 100 years. Intel continued to plow back all
its profits to develop ever more powerful generations of microprocessors, or chips. Its
more powerful chips allowed software developers to continually write ever more
powerful software applications improving the capabilities of PCs.
IBM didn’t introduce its first PC until 1981. It was very late to respond to the
emerging threat PCs posed to its mainframes.
Finally, in the late 1970s, an IBM manager named Bill Lowe, acting on his own initiative, convinced his company’s top managers to put him in charge of developing a
PC to compete with Apple. Lowe couldn’t afford to wait for five years while IBM
developed the hardware and software needed for the new PC, so, he decided to make
the IBM PC by buying all of the components he needed from other companies. This
was a major departure for IBM. Previously, all the technology needed to run IBM’s
products had been internally developed and then patented by the company.
The new IBM PC incorporated Intel’s 8086 chip and had two floppy disk drives
(the PC hard disk had not yet been invented). But to make all the PC’s different
components—its microprocessor, memory board, keypad, screen, printer, and so
on—work together, the computer needed software. Developing the software in-house
would have also taken IBM two or three years, so the company instead bought the
right to use a software operating system owned by a small company in Redmond,
Washington: This was Microsoft’s MS-DOS system. Interestingly enough, Microsoft
did not create MS-DOS. Bill Gates, Microsoft’s founder, knew IBM was looking
around for an operating system. He, too, lacked the time to develop one. However,
he knew of a small company in Seattle that did have a viable operating system. Using
$50,000 borrowed from his father, a wealthy Seattle lawyer, he purchased it, continued developing it with his colleagues, and renamed it MS-DOS. The rest is history.
Network Computers: Servers and Clients
The use of PCs spread rapidly during the 1980s. It also became clear during this time
that linking an organization’s PCs into a network could facilitate communication
between PC users. IBM, DEC, Hewlett-Packard, and new companies like Sun
Microsystems began to make powerful midrange computers known as network
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servers or “servers.” These computers connect to individual PCs, or “clients,” in the
network. The relatively low cost and ease of programming and maintaining
server–client networks (compared to the mainframe) soon made them very popular.
Large, but particularly small companies that had limited IT budgets, increasingly
began to use them as substitutes for mainframes.
The collection of client PCs linked to a central server became known as a “local
area network” (LAN). Within any large company, there might be hundreds of LANs
across its divisions, functions, or project groups. Each division or group could configure its own LAN, and load it with the software that best met its functional needs. This
was a major turning point.
Companies like SAP realized that what companies needed was software that would
allow each function or division to use its LAN most effectively, and software that
could link all the different LANs to its mainframe computer so they could all work
together to perform the sophisticated kinds of analyses needed to improve a company’s business model, as we discussed earlier. The success of SAP’s ERP software
signaled to IT companies like Microsoft and Hewlett-Packard that they needed to
develop software that would seamlessly connect PCs, LANs, and mainframes, as
depicted in Figure 9.7, so that they could all share the same information and communicate with one another.
The World Wide Web and the Internet
Not surprisingly, software engineers realized that if computers could be networked at
all levels inside of a company they could be networked across companies and countries.
Scientists in universities and research centers around the world needed to find a way to
rapidly transmit and share information. This led them to develop software connecting
the databases of different institutions. A software scientist, Tim Berners-Lee, wrote the
first HTML software code making it possible to post that information on Web pages.
Hence, the Internet and World Wide Web were born. (Contrary to popular belief, the
Internet was not created by former U.S. Vice President Al Gore.) Berners-Lee won a
Nobel Prize in 2004 for his efforts.
The Internet is made up of all the computer hardware such as mainframes, servers,
PCs, and the electronic network switches or routers, fiber-optic cable, telephone lines,
Future Workforce
Video
Small
Business
in Action
Summary: The future workforce is the topic of this BusinessWeek TV segment as
shown in the video on your Student DVD. Innovation abounds if you know where
to look for it. For example, the Canadian company, Taking It Global, has developed
what it calls the “Technology Board of the Future.” The organization is designed as
a sounding board that provides insight into the views, perspectives, and needs of the
future workforce. Fourteen students from around the globe are selected to participate as active members of the Technology Board. These students play a key role in
identifying trends that will be invaluable to employers particularly in the area of
technology needs of the future workforce. Specifically, the Board members are
asked to provide input on how they will use technology in their jobs of the future.
The film features short interviews with several of the Board members. Each of these
students provides a variation on the same themes—the importance of empowerment, mobile technology, and education. They see these factors as essential for
members of their generation and the workforce of the future.
Discussion Questions:
1. What are the major applications of information technology? Are the comments of the Board Members consistent with these applications?
2. Is innovation possible without a commitment to technology?
3. What is the effect of IT on occupations and careers?
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Information Technology and E-Commerce
Figure 9.7
Four Levels of IT
and Computing
(4)
(3)
(2)
(4)
(3)
(2)
(1)
(4)
(3)
(2)
(4)
(3)
(2)
(1) Mainframe
(2) Server
(3) PC
(4) PDA
router Hardware and
software that electronically
transfers data between
networks to its intended
destination, such as a
specific Web page or
computer.
Ethernet A local area
communication technology
that transmits information
between computers at
speeds of between 10 and
100 million MBPs using
coaxial or fiber optic cable.
and wireless technology that connect them into a global network. Companies such as
Cisco Systems, which was started by two scientists at Stanford University, pioneered the
development of cost-effective network switches and routers that make it possible to link
the computer networks of organizations together to form the Internet. A router transfers data between networks over the Internet and to its intended destination, such as a
specific Web page or a computer anywhere in the world. In an effort to further improve
communication between them, researchers later created the first e-mail systems. In 40
years’ time IT has evolved from standalone mainframes confined to backrooms to the
Internet, a worldwide network of computers with vast amounts of information accessible by anyone with a PC who wants to take the time or trouble to find it.
Wired and Wireless Broadband Technology
Inside most organizations today, Ethernet cable connections are used to link clients to
servers and servers to the mainframe. The Ethernet is a local area network (LAN)
communication technology that transmits information between computers at speeds
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Chapter Nine
broadband
technology A type of
communications hardware
that allows for the rapid
transmission of vast
amounts of information.
of between 10 and 100 million bits of information per second (MBPs) using coaxial or
fiber-optic cables. Ethernet connections are found in networked offices, laboratories,
residence hall rooms, and so on. Most people’s first connection to the Internet was
through a modem phone line connection. The problem with a phone line connection,
however, is the limited capacity of ordinary phone lines to carry snippets of data,
called “bytes.” An Ethernet connection is much faster than a dial-up modem connection. The Ethernet can handle up to 10 million bits of information a second using a
coaxial cable. By contrast, if you connect to the Internet through the modem in your
PC, (which is mostly likely a 56K modem) you can transmit only 56,000 bytes per
second. That’s almost ten times slower.
To rapidly access information on the WWW, communications hardware has been
developed that can handle many billions of bytes per second. Broadband technology
is a type of communication hardware that allows for the rapid transmission of vast
amounts of information like movies and music, for example. Without broadband technology, it might take many hours, or even days, to download a movie from a Web site.
To picture broadband transmission, recall IBM’s view of computing power as being like
a fluid flowing through a pipe. Imagine how much fluid can flow through a pipe one inch
in diameter; now imagine how much water can flow through a pipe ten feet in diameter.
This is the difference between the information carrying capacity of an advanced broadband technology versus a 28K dial-up modem connection!
By 2000 another major IT breakthrough came in the form of wireless broadband
technology service. 3G wireless technology—the technology found in Web-enabled
phones—is expected to become the dominant wireless technology; it offers a wireless
phone connection to the Internet that is as fast as fiber-optic broadband technology.
Other developments in wireless communication are described in the following Business in Action.
Wireless Broadband’s Fast Takeoff
Since its introduction in 2001, a wireless broadband technology called Wi-Fi, short
for “Wireless Fidelity,” has been growing rapidly in popularity. Wi-Fi is a wireless
Ethernet technology that operates in the 5Ghz band used for radio-based local area
networks. Wi-Fi requires no wires or cables to connect a laptop to the Internet. Laptops from every room of a house or business, or in any location, such as a coffee
shop or restaurant, can connect via an access point known as a “hotspot,” assuming
there’s one within frequency range. A Wi-Fi user can also establish a wireless home
network with say, six different PCs and laptops sharing access to files, a printer, the
Internet, and even stereos, DVD players, and televisions within range. The drawback of the technology is that Wi-Fi hotspots
broadcast no more than a few thousand square
feet. Some companies like fast-food restaurants
and hotel chains offer free Wi-Fi access as a
selling point to computer users on the go. In
2003, Intel began selling Centrino, wirelessenabled laptop chips. With Intel’s new chip
installed, a separate Wi-Fi device no longer
needed to be installed on a user’s computer. It
was already built into new machines.
Another wireless technology called Bluetooth has also become popular and is also
being built into PC chips. Bluetooth is a wireless technology that can connect all the different pieces of a computer such as its hard drive,
Hotels, restaurants, and airports are among the businesses trying to
keyboard, screen, printer, and mouse. (It is
attract mobile computer users by offering Wi-Fi, or access points known
not a broadband technology, however. It does
as “hot spots.”
Business
in Action
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III. A Functional Approach
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9. Information Technology
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Wi-Fi A type of
Ethernet technology
that allows computer
users to access the
Internet wirelessly.
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not link the user to the Internet.) Bluetooth makes computer cables a thing of the
past. It can also wirelessly link most devices such as PDAs, stereos, and televisions,
into a home IT system.
In 2004, a major advance in wireless broadband arrived when a “super Wi-Fi”
technology using a different radio wave frequency was announced. A hotspot
equipped with the new technology will have a transmission range of up to 50
miles, similar to cellular phone towers. If and when this super Wi-Fi arrives, it will
create serious competition for phone and cable companies.4
WIRELESS COMPUTERS AND PERSONAL DIGITAL ASSISTANTS It
was this need for people to “compute on the go” that initially led to the development of
laptop computers and personal digital assistants (PDAs) in the late 1990s. Using a laptop, with Wi-Fi, for example, a salesperson can perform on-the-spot number crunching,
word-processing, and spreadsheet applications to give their customers an immediate
response, such as a price quote. Hand-held PDAs were originally designed to perform
specific business functions such as work and appointment scheduling, address-book
keeping, note taking, and expense tracking. The first of these, introduced in 1996, was
the Palm Pilot, an easy-to-use device that sold over 1 million units in just 18 months.
Also in the 1990s, IT companies like Intel and Texas Instruments began
to develop more powerful microprocessors that allowed many functions of
hand-held devices to be merged. Today, companies like Samsung, Nokia,
Sony, and Motorola are making “smart phones.” A smart phone is a combination wireless phone, PDA, and laptop. Many of these phones contain
word-processing and spreadsheet applications, digital cameras and MP3
and video-game players. Smart phones can also connect to the Web. These
amazing devices are continually growing in power and sophistication.
They can increase business productivity in many ways. Employees dealing
with customers or suppliers can input real-time information into the
devices, which can then be transmitted wirelessly to a company’s LAN.
Because a company’s databases are constantly updated, managers can
make decisions using more accurate information. Employees negotiating
with customers and suppliers in the field can request and obtain immediate assistance using their smart phones, PDAs, and laptops to draw on the
information in their company’s databases or information their colleagues
or managers presently have. This is the ultimate IT goal of most companies: Linking wireless PDAs, smart phones, and laptops, together with the
Most new smart phones connect
rest of their computer systems. The goal is to have all four levels of comwirelessly to the Web. Smart-phone
puting power (mainframe, LAN, PC or laptop, and PDA or smart phone)
users can also connect directly to their
operate seamlessly together.
PCs or to their companies’ LANs.
Software
Components
of Information
Technology
The need to link the four different levels of computer hardware
has helped drive the development of new and improved software. Whenever computers can be integrated, productivity can
be increased. Of course, just as in the computer hardware
industry, there are many software companies that are competing with one another to do this—SAP, Oracle, Siebel Systems,
Microsoft, and IBM, are just a few of them. All the companies
that compete in a particular segment of the software market,
such as ERP, networking, or security software, try to attract the
CIOs of corporations by claiming that their software is the best-of-breed solution,
the highest-performing IT application currently available for a particular task. Next,
we examine competition in different segments of the software market.
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III. A Functional Approach
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© The McGraw−Hill
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Chapter Nine
PC Software
best-of-breed solution
The highest-performing IT
hardware or software
application currently
available for managing a
particular information
processing or multimedia
task.
industry standard
A predominant type
of technology used
in an industry. Other
technologies must be
compatible with the
industry standard in order
to be widely adopted.
Microsoft, the world’s largest software maker, is, of course, the maker of the Windows
operating system, which is installed on more than 90% of the world’s PCs. In the
1990s, Windows became the industry standard. Today, PC makers (with the exception of Apple) typically install the Windows operating system on new PCs. A software
maker’s ability to control an industry standard (like Microsoft has done with Windows) can alter the entire course of hardware and software development. Think of it
as a sort of “snowball” effect: The value of any particular kind of software (like Windows), is a function of how many people use the software to communicate, share files,
data, and so forth. The more people that can communicate with the software, the
more important the software becomes for other people to have.
When a particular software program, such as Windows, becomes the industry standard, more and more software developers will write applications that work with it. In
turn, this makes the software that has become the standard even more popular. This
is precisely what has happened with Windows. Windows may or may not be the best
operating system available; it is, however, the industry standard.
Networking Software
IBM, the originator of the mainframe is still the largest mainframe software maker.
However, most of the software sold today is networking software—-software that networks one company to another—including their mainframes, servers, PCs, laptops,
and PDAs. Networking software allows companies to define, manipulate, analyze,
update, store, and share data with one another. Oracle, the second largest software
maker after Microsoft, achieved its position because it controls the industry standard
for networked, database-management software. One reason for the success of Oracle’s software is that it works with Microsoft’s Windows software.
Another early leader in the networking software market was Sun Microsystems,
which recognized that a gap existed in the market between mainframe computing (controlled by IBM), and PC computing (controlled by Microsoft). Sun focused its efforts on
developing powerful servers capable of linking all of a company’s servers and PCs
together. Sun, in fact, hoped that its servers would one day replace most mainframes.
For several years Sun prospered, but it decided that to protect its competitive
advantage, it would not make its networking software compatible with the Windows
platform. This was a costly mistake because Microsoft later took aim at the server
market. Because most PCs use Windows software, it was much easier for companies
to use Microsoft’s networking software than it was to use Sun’s. Today, Microsoft controls over 70% of the server market, and SUN is not even a major player. In fact,
Microsoft’s biggest competitor in the server market is Linux, which controls a 20%
share. Linux, and the threat it poses to Microsoft, is discussed in Business in Action.
Linux Takes on Windows
Business
in Action
First developed for use at the mainframe level, Linux is a computer operating system that today works on servers and PCs. It is quickly becoming a very popular
choice for CIOs in the server software market because it is relatively inexpensive
compared to Microsoft’s software. This is because Linux is open source software,
that is, it is free to download and use. Any company can download the Linux operating software and then configure its computer hardware and software to use it.
However, companies often need expert help to customize Linux to their legacy
system. This is where the costs come in: Companies have to buy the application
software and the expert service needed to install and maintain Linux.
Other companies like IBM, Red Hat, and Hewlett-Packard provide Linuxbased software and services in addition to Linux. Indeed, one of IBM’s prime
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Business: How Companies
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Companies, 2007
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293
Information Technology and E-Commerce
e-business strategies is based on using Linux to keep a client company’s costs low.
In fact, in 2002, IBM announced it was spending $3 billion to make all of its software compatible with Linux. Hewlett-Packard has made a similar commitment,
and Red Hat is also becoming a major Linux provider.
However, even after paying for these company’s software and service, the
potential cost savings of using Linux, rather than Microsoft are often enormous. It
has been estimated, for example, that to license the Microsoft software necessary
to connect just 100 of a client’s PCS to a server would cost $40,000 per year. With
Linux, that figure falls to several thousand dollars, and most of the money goes
towards paying for Linux services, not for the software itself, which can quickly
become obsolete.
Not surprisingly, by 2004, over 20% of companies had shifted to Linux. This
has cut into Microsoft’s revenues in a big way, and the company now views the
Linux platform as a major threat. Indeed, one reason that companies like IBM,
Hewlett-Packard, Sun, Oracle, and SAP are championing Linux and making their
applications software compatible with it, is to reduce Microsoft’s power in the software industry. If they can replace Microsoft Windows as the industry standard,
they can sell more of their Linux-related software and services. Perhaps much of
the profit that Microsoft currently receives from sales of its Windows software
could then be captured.
Linux is also reaching down into the PC market. A Linux operating system for
PCs, and its accompanying applications package, is currently available free. If
users want support, they can buy it from a company like Red Hat at a price much
lower than Microsoft charges for Windows XP. For example, in 2003, Wal-Mart
sold a complete Linux-based PC for $485. By contrast, a PC loaded with Microsoft
XP cost $150 more. If more and more software developers start to write userfriendly applications for Linux, then the gains Linux has made at the server level
might trickle down to the PC level. Then, Microsoft will be in real trouble.5
Computer Security Software
firewall Software that
gives a company’s PCs
safe access to the Internet
but that blocks computers
from outside the firm from
gaining access to the
company’s intranet.
hackers People who
seek to invade a company’s
databases and steal the
information for malicious or
illegal reasons.
The creation of the Internet led to a new software problem for companies—as well as
opportunities for others: How to protect a company’s systems and data from Internet
intruders? Obviously, a company needs to protect the vital, proprietary knowledge
contained in its databases from Internet users, some of which might even be competitors. At the same time, a company needs to open up its computers and network to
enjoy the efficiency-enhancing benefits the Internet makes possible.
One way to achieve this protection is with a “firewall.” A firewall is software that
gives a company’s PCs safe access to the Internet but that blocks computers from outside the firm from gaining access to the company’s intranet.(See Figure 9.8.) A firewall
is designed to keep out hackers, people who seek to invade a company’s databases
and steal the information in them, often for malicious or illegal reasons.
Figure 9.8
Protecting the
Intranet from the
Internet by a
Firewall
F
I
R
E
W
A
L
L
Internet
Intranet
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Create Value for People
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computer virus
Software code deliberately
written to harm hardware
and software and corrupt
files and databases.
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
© The McGraw−Hill
Companies, 2007
Chapter Nine
The rapid growth of the Internet has also led to a rise in the number of computer
viruses. A computer virus is software code deliberately written to harm a company’s
operating system and software applications software or corrupt its files and databases.
Sometimes a virus can wipe out all the information on a computer’s hard drive. Differentiating useful information that should be allowed through a company’s firewall
versus viruses is hard to do. This has led to opportunities for companies like Network
Associates and Symantec. These companies work to identify new viruses and quickly
write software code to kill them. People and firms are willing to pay for this service
because they don’t want their computer systems tampered with.
Wireless Hand-Held Software
Whether Linux will make inroads into Windows may depend on which company, or
companies, gains control of the industry standard for wireless computing and PDA
applications. Here, another competitive battle is currently raging between Palm,
Microsoft, and Symbian, a division of Nokia. All have developed competing wireless
hand-held operating systems for PDAs, smart phones, new tablet computers that can
be networked to a company’s computer system.
In the late 1990s, Microsoft realized that PDAs, such as tablet computers, and even,
keyboard-equipped smart phones might become powerful enough to become substitutes for PCs and laptops. As sales of PDAs increased, sales of PCs would plunge—just
as demand for mainframes plunged when powerful PCs became available—and this
would threaten the dominant position of Microsoft’s Windows software. To avoid this,
Microsoft spent billions of dollars developing Windows PocketPC, a Windows operating system for wireless PDAs. Microsoft is striving to make PocketPC the industry
standard to protect its competitive advantage. Again, the stakes are high; billions of
dollars in future profits are up for grabs. Just as Microsoft hurt Sun when it moved into
the server market, Microsoft’s move into the PDA market has hurt Palm.
Nokia, the second largest IT company after Microsoft, is desperately trying to prevent Windows PocketPC from becoming the industry standard. Nokia is championing its own standard made by its Symbian division, which is also supported by
Sony, Samsung, and Motorola. These companies know if they adopt PocketPC
instead, it will inevitably become the industry standard.
IT and Business Occupations
Last, but not least, we should not forget the vital human component of IT. Today,
over five million U.S. employees are involved in computer hardware or software
development or IT management. More job growth in the last decade has occurred in
the IT industry than in any other. Thousands of new occupational jobs such as those
for LAN computer managers,
expert systems analysts, database managers, and Internet
Did You Know?
design and hosting specialists
According to Intel, computer processing capability is rapidly approaching
have emerged.
the “Age of Tera”6:
Not only has IT created
Byte = 8 bits (one character)
many new kinds of occupaKilobyte = 1000 bytes (very short story)
tional specializations, it has
Megabyte = 106 bytes (small novel)
also transformed many other
Gigabyte = 109 bytes (pickup filled with paper)
kinds of business occupations.
Terabyte = 1012 bytes (a moderate university library)
In many industrial settings, for
Petabyte = 1015 bytes (half of all US college libraries)
example, computer-controlled
Exabyte = 1018 bytes (all words ever spoken)
technology now runs the proZettabyte = 1021 bytes (180 million Libraries of Congress)
duction lines and employees
Yottabyte = 1024 bytes (180 billion Libraries of Congress)
at all levels in a company must
have the skills necessary to
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Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
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Relationships
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Companies, 2007
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Information Technology and E-Commerce
manage the new computerized systems. In law offices and consulting companies, a
major part of an employee’s job is to contribute to its knowledge management systems
and help improve its performance.
Finally, to understand how much IT impacts any kind of business occupation,
consider how it has changed a truck driver’s job. Only a few years ago it was common for a truck driver to receive a commission for delivering a load from one city to
a second. Very often, the driver would then drive the truck back to the first city
empty because it was difficult to get information about the kinds of loads that might
need to be shipped from the second city back to the first. Today, most truck drivers
have wireless laptops in their cabs linked to a national electronic delivery B2B marketplace. The database contains information about different loads that need to be
trucked from city to city. So, a driver can discover what loads are available and then
negotiate a price to haul it. Today, drivers rarely return with an empty truck and
both drivers and the companies they serve benefit. Shipping costs can be spread
over both outward and inward bound journeys. Goods get to consumers more
quickly and can be priced more cheaply.
Clearly, never before has it become so important for people, no matter what their
occupation is, to become computer literate and develop advanced computer skills.
Computers are not toys; they are vital tools people can use to develop their human
capital and make themselves more valuable in the marketplace.
Summary of
the Chapter
All companies are
feeling the effects
of changing IT and
e-commerce today.
Creating and managing a modern IT system is a major challenge for
managers at all levels and in all functions of a business
organization. Increasingly, gaining competitive advantage and remaining profitable are coming to depend
on the possession of a state-of-the-art IT system. This
chapter has made the following main points:
1.
2.
3.
Information is a set of data, facts, numbers, and
words that is organized in such a way that it provides
its users with knowledge. The more knowledge
managers possess, the better able they are to
respond effectively to the competitive business
environment in which they operate.
Information technology (IT) refers to the many
different kinds of computer and communications
hardware and software and the skills of the
designers, programmers, managers, and technicians
who create and manage this technology. IT is used to
acquire, define, input, arrange, organize, manipulate,
store, and transmit data and information.
Four factors determine the usefulness of information:
its completeness, quality, relevance, and timeliness.
Real-time information is information that is constantly
updated. Managers use real-time information to tell
how well customers are responding to their products
and if a company’s profitability is rising or falling as a
result.
4.
By lowering the costs of information processing,
computers make it cost-effective for managers to
(1) acquire better data about their operations, and
(2) manipulate data to increase their insight about
how well a business is operating.
5.
The five principal IT applications used in businesses
are (a) transaction processing systems, (b) knowledge
management systems, (c) expert systems and
artificial intelligence, (d) enterprise resource planning
systems, and (e) e-commerce systems.
6.
The two main kinds of e-commerce are (1) businessto-business (B2B)commerce and (2) business-tocustomer (B2C) commerce.
7.
The main components of IT hardware are the legacy
system, mainframe computers, microprocessors and
personal computers; network computers, the Internet,
wireless computers and personal digital assistants
(PDAs); and wired, wireless, and broadband
communication.
8.
The main components of IT software are PC
software, networking and mainframe software,
computer security software, and PDA software.
9.
More U.S. job growth in the last decade has occurred
in the IT industry than any other. IT has created
many new kinds of occupations and transformed
other occupations.
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Chapter Nine
Developing Business Skills
QUESTIONS FOR DISCUSSION AND ACTION
If you were the manager of a
fast-food restaurant, what kinds of
data would you collect to measure
(a) productivity (b) quality, and (c)
responsiveness to customers?
2. What is real-time information and
why is it important in business today?
3. In what ways can IT be used to create a competitive advantage?
4. What are the main differences between a knowledge management system and an expert system?
5. Action. Find a manager of a company in your
city. Interview the manager and identify the main
1.
kinds of software applications the manager uses to
perform his or her job.
6. Why is the IT industry sometimes called the
“industry of industries?”
7. What are the four main levels of computing? If
you are the CIO of a large company, what are the
biggest IT issues you face?
8. What is an industry software standard and in
what ways does it affect the nature of competition
between IT companies?
9. What is a tablet computer and how is it different
from a laptop or a PDA?
ETHICS IN ACTION
Watching the Web Surfers
You are the IT managers of a company and have been asked by the
CEO to install software that will
allow you to track the Web sites
employees are visiting using their work
PCs. The CEO is concerned that some employees
are spending too much time playing games, shopping online, or entering chatrooms to amuse themselves. The CEO wants to cut down on these activities. You will be responsible for monitoring the
employees’ Web-surfing activities.
Using the ethical principles in Chapter 5, think
about the ethical issues related to installing Webmonitoring software. Then answer the following
questions:
•
•
•
•
Is it ethical for a company to monitor the Web
sites an employee visits at work?
Suppose an employee spends his or her lunch
hour surfing the Web. Is it ethical to monitor
the employee during that time?
Suppose you find out that an employee who is
one of your friends is spending a lot of time in
chatrooms trying to find dates. How will you
deal with this situation?
Should employees be told that Web-monitoring
software has been installed on the company’s
computers? Who will be allowed to see the
records of the employees’ activities?
SMALL GROUP EXERCISE
Laptops or PDAs for
Salespeople?
After reading the following scenario,
break up into groups of three or four
people and discuss the issues involved.
Be prepared to share your thinking with
the rest of the class.
Your company is a major office supply chain with
over 2,000 stores throughout the United States. It is
known for excellent customer service, and its salespeople are continually visiting customers to demonstrate new products and help them with the ordering
process. Currently, salespeople use laptops and plug
into dial-up modems to connect back to corporate
headquarters. Your CEO has asked you, a group of
Jones: Introduction To
Business: How Companies
Create Value for People
III. A Functional Approach
to Business
9. Information Technology
and E−Commerce:
Managing Information,
Knowledge, and Business
Relationships
Information Technology and E-Commerce
IT managers, to debate the pros and cons of moving
to a wireless computing system using PDAs and
some kind of broadband technology.
Buying thousands of PDA devices for salespeople
and paying for wireless broadband access will be
expensive, and the new technology will probably
cost a few million dollars or more a year to operate.
Your job is to debate the pros and cons of moving to
a wireless PDA system.
What are the pros and cons associated with
salespeople using laptops or PDAs?
1.
© The McGraw−Hill
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297
What are the main disadvantages or disadvantages associated with moving to the new IT system?
3. What features must the PDA have to make it a
substitute for a laptop?
4. Which PDA operating system and type of broadband service will be best for your company? Why?
5. What might be some major problems associated
with moving to the new IT system?
6. How would you measure if the use of PDAs has
increased the productivity of the salesforce?
2.
DEVELOPING GOOD BUSINESS SENSE
Buying Your Own IT
Personal and tablet computers,
PDAs, and smart phones are expensive. So is the cost of the broadband
service necessary to connect them to
the Internet. Like CIOs, most individual
consumers have budgets they have to stick to. The
purpose of this exercise is for you to investigate the
choices and costs of the new IT available on the market and which of it will do the most to increase your
“business productivity.”
Imagine you have $2,500 to spend on a new computing and communication system. You will be stuck
with it throughout college, and you will be responsible for paying for all the hardware and software
needed to run it—including broadband access. Search
the Internet for relevant information, and then answer
the following questions.
What are the pros and cons associated with buying a personal computer, a tablet computer, or a PDA
equipped with an external keyboard?
2. Given your personal needs, which of these, or
which combination of these, is best for you?
3. What would be the most economical, but functional, system given that technology is rapidly changing?
4. How will the nature of the operating systems
these devices use affect your decision? For example,
is Linux software an option for you? What must you
be careful about to avoid buying hardware or software that is already outdated technologically?
5. Which broadband service should you choose?
Why?
6. Calculate the cost of purchasing you ideal system. Did you meet or exceed your budget?
1.
EXPLORING THE WORLD WIDE WEB
Using mySAP ERP
Go to the Web site of SAP, the ERP
software company discussed in the
chapter. Then click on “Solutions,”
“mySAP ERP,” and read the business
case about Phenix Optics at http://www.
sap.com/solutions/business-suite/erp/pdf/CS_Phenix_
Optics.pdf (or any other case your instructor assigns).
For more Web activities, log on to www.mhhe.com/
jonesintro.
Why did Phenix Optics choose ERP software to
enhance its business performance?
2. What kinds of benefits did the company obtain
by using mySAP ERP?
1.
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Chapter Nine
CASE FOR DISCUSSION
Nailing the Design before You Build
Saturn Electronics & Engineering Inc.’s growth strategy hinges on software. The privately held maker of
electronic components in Auburn Hills, Michigan,
wants to play in the global leagues to better serve its
big manufacturing customers. For starters, Saturn has
set up shop in the Philippines. There, some 40 engineers pick up work that is still pending when their
U.S. counterparts head home at day’s end. Adding a
second day shift means Saturn can deliver products
faster and more cheaply.
To make this transpacific collaboration go smoothly,
engineering director Paul Fleck invested more than
$1 million in two programs—one coordinates the online design process, the other watches over productdevelopment costs. It was a gutsy move for a company with less than $400 million in revenues. But
Fleck expects the new software from Agile Software
Corp. to pay for itself within 18 months through a
combination of cost savings and new business.
Saturn is just one of a growing crowd of midsize
manufacturers spending big bucks on the industry’s
latest craze: product life-cycle management. PLM is
unleashing a revolution in product development, with
tools for improving everything from design and engineering to manufacturing and field service—even final
disposal of discarded products. Market researcher
CIMdata Inc. pegs PLM’s sales this year at nearly $15
billion, heading to more than $20 billion in 2008.
In the 1990s, PLM was used mainly by automotive and aerospace giants. Early versions of the software were pricey integrated suites, but PLM vendors
now offer separate modules, like the two that Saturn
bought. Moreover, to small companies, PLM’s
promises sounded too much like the hype surrounding previous enterprise-software programs, which
often didn’t live up to their hoopla.
So what’s different about PLM? That’s simple, says
Monica A. Schnitger, a senior vice president at market researcher Daratech Inc. PLM emphasizes newrevenue generation, or top-line growth, as opposed
to cutting costs. “Most companies have done about
as much cost-cutting as they can. The best way to
increase revenue is to get better products to market
more quickly.”
That potential has universal appeal across all manufacturing sectors, not just in high tech. “Top-line
growth is the key benefit,” concurs Stephen A. Segal,
chief information officer at Canada’s Loewen Windows, which makes wood-framed windows and doors
for luxury homes in a factory near Calgary. For its
first PLM module, Loewen last year plunked down
$150,000 for a Catia computer-aided design and engineering (CAD/CAE) system from IBM. “Since everything we build is made to order, our lead times are
typically four to six weeks,” says Segal. “If we can
knock off one week, the payback from faster revenues
will be in the millions of dollars every year.”
For large companies, PLM’s product-portfolio
management tools offer a different route to better
top-line numbers. “At companies with complex portfolios, like Nike Inc. or Stanley Works, the key thing
you want to understand is which products are worth
investing in,” says James E. Heppelman, executive
vice president at Parametric Technology Corp., a
PLM supplier in Needham, Mass. “PLM can tell you
that,” he says, by correlating the better-margin items
with market intelligence on what’s likely to sell.
TRICKLE-DOWN TECH
Some small and midsize companies that have been
slow to see the light are getting pulled into PLM by the
bigger m...
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