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Resources: Ch. 9 of Introduction to Business

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 Complete the table in Appendix E by describing the uses of following hardware and software components: ·  Legacy systems

·  Mainframe computers

·  Microprocessors

·  PCs

·  Network computers

·  World Wide Web and the Internet

·  Wired and wireless broadband technology

·  PC software

·  Networking software

·  Computer security software

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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 Copyright © 2013, 2010, 2009, 2007 by University of Phoenix. All rights reserved. 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, Knowledge, and Business 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 Jones: Introduction To 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 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 281 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 Jones: Introduction To Business: How Companies Create Value for People 282 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 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 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 © 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 Jones: Introduction To Business: How Companies Create Value for People 284 III. A Functional Approach to Business © The McGraw−Hill Companies, 2007 9. Information Technology and E−Commerce: Managing Information, Knowledge, and Business 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 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 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 Jones: Introduction To Business: How Companies Create Value for People 286 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 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 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 Information Technology and E-Commerce 287 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 Jones: Introduction To Business: How Companies Create Value for People 288 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 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? 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 289 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 Jones: Introduction To Business: How Companies Create Value for People 290 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 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 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 Wi-Fi A type of Ethernet technology that allows computer users to access the Internet wirelessly. © The McGraw−Hill Companies, 2007 291 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. Jones: Introduction To Business: How Companies Create Value for People 292 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 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 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 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 Jones: Introduction To Business: How Companies Create Value for People 294 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 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 295 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. Jones: Introduction To Business: How Companies Create Value for People 296 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 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 Companies, 2007 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. Jones: Introduction To Business: How Companies Create Value for People 298 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 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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