Successful collaboration requires an appropriate organizational structure and culture, along with appropriate collaboration technology.

BUILDING A COLLABORATIVE CULTURE AND BUSINESS PROCESSES Collaboration won’t take place spontaneously in a business firm, especially if there is no supportive culture or business processes. Business firms, especially large firms, had in the past a reputation for being “command and control”

Chapter 2 Global E-business and Collaboration 59

organizations where the top leaders thought up all the really important matters, and then ordered lower-level employees to execute senior management plans. The job of middle management supposedly was to pass messages back and forth, up and down the hierarchy.

Command and control firms required lower-level employees to carry out orders without asking too many questions, with no responsibility to improve processes, and with no rewards for teamwork or team performance. If your workgroup needed help from another work group, that was something for the bosses to figure out. You never communicated horizontally, always vertically, so management could control the process. As long as employees showed up for work, and performed the job satisfactorily, that’s all that was required. Together, the expectations of management and employees formed a culture, a set of assumptions about common goals and how people should behave. Many busi- ness firms still operate this way.

A collaborative business culture and business processes are very different. Senior managers are responsible for achieving results but rely on teams of employees to achieve and implement the results. Policies, products, designs, processes, and systems are much more dependent on teams at all levels of the organization to devise, to create, and to build products and services. Teams are rewarded for their performance, and individuals are rewarded for their performance in a team. The function of middle managers is to build the teams, coordinate their work, and monitor their performance. In a collabora- tive culture, senior management establishes collaboration and teamwork as vital to the organization, and it actually implements collaboration for the senior ranks of the business as well.

TOOLS AND TECHNOLOGIES FOR COLLABORATION AND TEAMWORK A collaborative, team-oriented culture won’t produce benefits if there are no information systems in place to enable collaboration. Currently there are hun- dreds of tools designed to deal with the fact that, in order to succeed in our jobs, we are all dependent on one another, our fellow employees, customers, suppli- ers, and managers. Table 2-3 lists the most important types of collaboration soft- ware tools. Some high-end tools like IBM Lotus Notes are expensive, but power- ful enough for global firms. Others are available online for free (or with premium versions for a modest fee) and are suitable for small businesses. Let’s look more closely at some of these tools.


E-mail and instant messaging White boarding

Collaborative writing Web presenting

Collaborative reviewing/editing Work scheduling

Event scheduling Document sharing (including wikis)

File sharing Mind mapping

Screen sharing Large audience Webinars

Audio conferencing Co-browsing

Video conferencing

Source:, 2009.

60 Part One Organizations, Management, and the Networked Enterprise

E-mai l and Instant Messag ing ( IM) E-mail and instant messaging have been embraced by corporations as a major communication and collaboration tool supporting interaction jobs. Their soft- ware operates on computers, cell phones, and other wireless handheld devices and includes features for sharing files as well as transmitting messages. Many instant messaging systems allow users to engage in real-time conversations with multiple participants simultaneously. Gartner technology consultants predict that within a few years, instant messaging will be the “de facto tool” for voice, video, and text chat for 95 percent of employees in big companies.

Soc ia l Network ing We’ve all visited social networking sites such as MySpace and Facebook, which feature tools to help people share their interests and interact. Social networking tools are quickly becoming a corporate tool for sharing ideas and collaborating among interaction-based jobs in the firm. Social networking sites such as provide networking services to business professionals, while other niche sites have sprung up to serve lawyers, doctors, engineers, and even dentists. IBM built a Community Tools component into its Lotus Notes collabo- ration software to add social networking features. Users are able to submit ques- tions to others in the company and receive answers via instant messaging.

Wikis Wikis are a type of Web site that makes it easy for users to contribute and edit text content and graphics without any knowledge of Web page development or programming techniques. The most well-known wiki is Wikipedia, the largest collaboratively edited reference project in the world. It relies on volunteers, makes no money, and accepts no advertising. Wikis are ideal tools for storing and sharing company knowledge and insights. Enterprise software vendor SAP AG has a wiki that acts as a base of information for people outside the company, such as customers and software developers who build programs that interact with SAP software. In the past, those people asked and sometimes answered questions in an informal way on SAP online forums, but that was an inefficient system, with people asking and answering the same questions over and over.

At Intel Corporation, employees built their own internal wiki, and it has been edited over 100,000 times and viewed more than 27 million times by Intel employees. The most common search is for the meaning of Intel acronyms such as EASE for “employee access support environment” and POR for “plan of record.” Other popular resources include a page about software engineering processes at the company. Wikis are destined to become the major repository for unstructured corporate knowledge in the next five years in part because they are so much less costly than formal knowledge management systems and they can be much more dynamic and current.

Vir tua l Wor lds Virtual worlds, such as Second Life, are online 3-D environments populated by “residents” who have built graphical representations of themselves known as avatars. Organizations such as IBM and INSEAD, an international business school with campuses in France and Singapore, are using this virtual world to house online meetings, training sessions, and “lounges.” Real-world people rep- resented by avatars meet, interact, and exchange ideas at these virtual loca- tions. Communication takes place in the form of text messages similar to instant messages.

Chapter 2 Global E-business and Collaboration 61

Internet -Based Co l laborat ion Env i ronments There are now suites of software products providing multi-function platforms for workgroup collaboration among teams of employees who work together from many different locations. Numerous collaboration tools are available, but the most widely used are Internet-based audio conferencing and video conferencing systems, online software services such as Google Apps/Google Sites, and corpo- rate collaboration systems such as Lotus Notes and Microsoft SharePoint.

Virtual Meeting Systems For many businesses, including investment bank- ing, accounting, law, technology services, and management consulting, exten- sive travel is a fact of life. The expenses incurred by business travel have been steadily rising in recent years, primarily due to increasing energy costs. In an effort to reduce travel expenses, many companies, both large and small, are adopting videoconferencing and Web conferencing technologies.

Companies such as Heinz, General Electric, Pepsico, and Wachovia are using virtual meeting systems for product briefings, training courses, strategy ses- sions, and even inspirational chats.

An important feature of leading-edge high-end videoconferencing systems is telepresence technology, an integrated audio and visual environment that allows a person to give the appearance of being present at a location other than his or her true physical location. The Interactive Session on Management describes telepresence and other technologies for hosting these “virtual” meet- ings. You can also find video cases on this topic.

Google Apps/Google Sites One of the most widely used “free” online ser- vices for collaboration is Google Apps/Google Sites. Google Sites allows users to quickly create online, group-editable Web sites. Google Sites is one part of the larger Google Apps suite of tools. Google Sites users can design and populate Web sites in minutes and, without any advanced technical skills, post a variety of files including calendars, text, spreadsheets, and videos for private, group, or public viewing and editing.

Google Apps works with Google Sites and includes the typical desktop pro- ductivity office software tools (word processing, spreadsheets, presentation, contact management, messaging, and mail). A Premier edition charging busi- nesses $50 per year for each user offers 25 gigabytes of mail storage, a 99.9-per- cent uptime guarantee for e-mail, tools to integrate with the firm’s existing infrastructure, and 24/7 phone support. Table 2-4 describes some of the capa- bilities of Google Apps/Google Sites.



Google Calendar Private and shared calendars; multiple calendars

Google Gmail Google’s free online e-mail service, with mobile access capabilities

Google Talk Instant messaging, text and voice chat

Google Docs Online word processing, presentation, spreadsheet, and drawing software; online editing and sharing

Google Sites Team collaboration sites for sharing documents, schedules, calendars; searching documents and creating group wikis

Google Video Private hosted video sharing

Google Groups User-created groups with mailing lists, shared calendars, documents, sites, and video; searchable archives

62 Part One Organizations, Management, and the Networked Enterprise

Instead of taking that 6:30 A.M. plane to make a round of meetings in Dallas, wouldn’t it be great if you could attend these events without leaving your desktop? Today you can, thanks to technologies for videoconferencing and for hosting online meetings over the Web. A June 2008 report issued by the Global e-Sustainability Initiative and the Climate Group estimated that up to 20 percent of business travel could be replaced by virtual meeting technology.

A videoconference allows individuals at two or more locations to communicate simultaneously through two-way video and audio transmissions. The critical feature of videoconferencing is the digital compression of audio and video streams by a device called a codec. Those streams are then divided into packets and transmitted over a network or the Internet. Until recently, the technology was plagued by poor audio and video performance, and its cost was prohibitively high for all but the largest and most powerful corporations. Most companies deemed videoconferencing a poor substitute for face-to-face meetings.

However, vast improvements in videoconferenc- ing and associated technologies have renewed inter- est in this way of working. Videoconferencing is now growing at an annual rate of 30 percent. Proponents of the technology claim that it does more than sim- ply reduce costs. It allows for “better” meetings as well: it’s easier to meet with partners, suppliers, sub- sidiaries, and colleagues from within the office or around the world on a more frequent basis, which in most cases simply cannot be reasonably accom- plished through travel. You can also meet with con- tacts that you wouldn’t be able to meet at all without videoconferencing technology.

For example, Rip Curl, a Costa Mesa, California, producer of surfing equipment, uses videoconferenc- ing to help its designers, marketers, and manufactur- ers collaborate on new products. Executive recruit- ing firm Korn/Ferry International uses video interviews to screen potential candidates before presenting them to clients.

Today’s state-of-the-art videoconferencing systems display sharp high-definition TV images. The top-of- the-line videoconferencing technology is known as telepresence. Telepresence strives to make users feel as if they are actually present in a location different

VIRTUAL MEETINGS: SMART MANAGEMENT from their own. You can sit across a table from a large screen showing someone who looks quite real and life-size, but may be in Brussels or Hong Kong. Only the handshake and exchange of business cards are missing. Telepresence products provide the high- est-quality videoconferencing available on the mar- ket to date. Cisco Systems has installed telepresence systems in more than 500 organizations around the world. Prices for fully equipped telepresence rooms can run to $500,000.

Companies able to afford this technology report large savings. For example, technology consulting firm Accenture reports that it eliminated expendi- tures for 240 international trips and 120 domestic flights in a single month. The ability to reach cus- tomers and partners is also dramatically increased. Other business travelers report tenfold increases in the number of customers and partners they are able to reach for a fraction of the previous price per person. MetLife, which installed Cisco Telepresence in three dedicated conference rooms in Chicago, New York, and New Jersey, claims that the technol- ogy not only saved time and expense but also helped the company meet its “green” environmental goals of reducing carbon emissions by 20 percent in 2010.

Videoconferencing products have not traditionally been feasible for small businesses, but another com- pany, LifeSize, has introduced an affordable line of products as low as $5,000. Overall, the product is easy to use and will allow many smaller companies to use a high-quality videoconferencing product.

There are even some free Internet-based options like Skype videoconferencing and ooVoo. These products are of lower quality than traditional video- conferencing products, and they are proprietary, meaning they can only talk to others using that very same system. Most videoconferencing and telepres- ence products are able to interact with a variety of other devices. Higher-end systems include features like multi-party conferencing, video mail with unlimited storage, no long-distance fees, and a detailed call history.

Companies of all sizes are finding Web-based online meeting tools such as WebEx, Microsoft Office Live Meeting, and Adobe Acrobat Connect especially helpful for training and sales presenta- tions. These products enable participants to share

I N T E R A C T I V E S E S S I O N : M A N A G E M E N T

Chapter 2 Global E-business and Collaboration 63

1. One consulting firm has predicted that video and Web conferencing will make business travel extinct. Do you agree? Why or why not?

2. What is the distinction between videoconferencing and telepresence?

3. What are the ways in which videoconferencing provides value to a business? Would you consider it smart management? Explain your answer.

4. If you were in charge of a small business, would you choose to implement videoconferencing? What factors would you consider in your decision?

documents and presentations in conjunction with audioconferencing and live video via Webcam. Cornerstone Information Systems, a Bloomington, Indiana, business software company with 60 employ- ees, cut its travel costs by 60 percent and the average time to close a new sale by 30 percent by performing many product demonstrations online.

Before setting up videoconferencing or telepres- ence, it’s important for a company to make sure it really needs the technology to ensure that it will be a profitable venture. Companies should determine how their employees conduct meetings, how they com- municate and with what technologies, how much travel they do, and their network’s capabilities. There are still plenty of times when face-to-face interaction is more desirable, and often traveling to meet a client is essential for cultivating clients and closing sales.

Explore the WebEx Web site ( and answer the following questions:

1. List and describe its capabilities for small-medium and large businesses. How useful is WebEx? How can it help companies save time and money?

2. Compare WebEx video capabilities with the video- conferencing capabilities described in this case.

3. Describe the steps you would take to prepare for a Web conference as opposed to a face-to-face conference.

Videoconferencing figures to have an impact on the business world in other ways, as well. More employees may be able to work closer to home and balance their work and personal lives more effi- ciently; traditional office environments and corpo- rate headquarters may shrink or disappear; and freelancers, contractors, and workers from other countries will become a larger portion of the global economy.

Sources: Joe Sharkey, “Setbacks in the Air Add to Lure of Virtual Meetings, The New York Times, April 26, 2010; Bob Evans, “Pepsi Picks Cisco for Huge TelePresence Deal,” February 2, 2010; Esther Schein, “Telepresence Catching On, But Hold On to Your Wallet,” Computerworld, January 22, 2010; Christopher Musico, “Web Conferencing: Calling Your Conference to Order,” Customer Relationship Management, February 2009; and Brian Nadel, “3 Videoconferencing Services Pick Up Where Your Travel Budget Leaves Off,” Computerworld, January 6, 2009; Johna Till Johnson, “Videoconferencing Hits the Big Times…. For Real,” Computerworld, May 28, 2009.


Google has developed an additional Web-based platform for real-time collab- oration and communication called Google Wave. “Waves” are “equal parts con- versation and document,” in which any participant of a wave can reply any- where in the message, edit the content, and add or remove participants at any point in the process. Users are able to see responses from other participants on their “wave” while typing occurs, accelerating the pace of discussion.

For example, Clear Channel Radio in Greensboro, North Carolina, used Google Wave for an on air and online promotion that required input from sales people, the sales manager, the station program director, the station promotions director, the online content coordinator, and the Web manager. Without Google Wave, these people would have used numerous back and forth e-mails, sent graphics files to each other for approval, and spent large amounts of time track- ing people down by phone. Wave helped them complete the entire project in just a fraction of time it would normally have taken (Boulton, 2010).

64 Part One Organizations, Management, and the Networked Enterprise

Microsoft SharePoint Microsoft SharePoint is the most widely adopted col- laboration system for small and medium-sized firms that use Microsoft server and networking products. Some larger firms have adopted it as well. SharePoint is a browser-based collaboration and document management platform, com- bined with a powerful search engine that is installed on corporate servers.

SharePoint has a Web-based interface and close integration with everyday tools such as Microsoft Office desktop software products. Microsoft’s strategy is to take advantage of its “ownership” of the desktop through its Microsoft Office and Windows products. For Microsoft, the path towards enterprise-wide collab- oration starts with the Office desktop and Microsoft network servers. SharePoint software makes it possible for employees to share their Office docu- ments and collaborate on projects using Office documents as the foundation.

SharePoint products and technologies provide a platform for Web-based collaboration at the enterprise level. SharePoint can be used to host Web sites that organize and store information in one central location to enable teams to coordinate work activities, collaborate on and publish documents, maintain task lists, implement workflows, and share information via wikis, blogs, and Twitter-style status updates. Because SharePoint stores and organizes informa- tion in one place, users can find relevant information quickly and efficiently while working together closely on tasks, projects, and documents.

Here is a list of SharePoint’s major capabilities:

• Provides a single workspace for teams to coordinate schedules, organize documents, and participate in discussions, within the organization or over an extranet.

• Facilitates creation and management of documents with the ability to control versions, view past revisions, enforce document-specific security, and main- tain document libraries.

• Provides announcements, alerts, and discussion boards to inform users when actions are required or changes are made to existing documentation or information.

• Supports personalized content and both personal and public views of documents and applications.

• Provides templates for blogs and wikis to help teams share information and brainstorm.

• Provides tools to manage document libraries, lists, calendars, tasks, and discussion boards offline, and to synchronize changes when reconnected to the network.

• Provides enterprise search tools for locating people, expertise, and content.

Sony Electronics, a leading provider of consumer and professional electron- ics products with more 170,000 employees around the world, uses Microsoft Office SharePoint Server 2010 to improve information access, enhance collabo- ration, and make better use of experts inside the company. Sony uses SharePoint’s wiki tools to capture and organize employees’ insights and com- ments into a company-wide body of knowledge, and its people search feature to identify employees with expertise about specific projects and research areas. The company also used SharePoint to create a central file-sharing repository. This helps employees collaboratively write, edit, and exchange documents and eliminates the need to e-mail documents back and forth. All of these improve- ments have cut development time on key projects from three to six months to three to six weeks. (Microsoft, 2010).

Chapter 2 Global E-business and Collaboration 65

Lotus Notes For very large firms (Fortune 1000 and Russell 2000 firms), the most widely used collaboration tool is IBM’s Lotus Notes. Lotus Notes was an early example of groupware, a collaborative software system with capabilities for sharing calendars, collective writing and editing, shared database access, and electronic meetings, with each participant able to see and display informa- tion from others and other activities. Notes is now Web-enabled with enhance- ments for social networking (Lotus Connections) and a scripting and applica- tion development environment so that users can build custom applications to suit their unique needs.

IBM Software Group defines Lotus Notes as an “integrated desktop client option for accessing business e-mail, calendars, and applications on an IBM Lotus Domino server.” The Notes software installed on the user’s client com- puter allows the machine to be used as a platform for e-mail, instant messaging (working with Lotus Sametime), Web browsing, and calendar/resource reserva- tion work, as well as for interacting with collaborative applications. Today, Notes also provides blogs, wikis, RSS aggregators, CRM, and help desk systems.

Thousands of employees at hundreds of large firms such as Toshiba, Air France, and Global Hyatt Corporation use IBM Lotus Notes as their primary col- laboration and teamwork tools. Firmwide installations of Lotus Notes at a large Fortune 1000 firm may cost millions of dollars a year and require extensive sup- port from the corporate information systems department. Although online tools like the Google collaboration services described earlier do not require installation on corporate servers or much support from the corporate IS staff, they are not as powerful as those found in Lotus Notes. It is unclear whether they could scale to the size of a global firm (at least for now). Very large firms adopt IBM Lotus Notes because Notes promises higher levels of security and reliability, and the ability to retain control over sensitive corporate information.

For example, EuroChem, the largest agrochemical company in Russia and one of Europe’s top three fertilizer producers, used Lotus Notes to create a sin- gle standard platform for collaboration and document management. The soft- ware facilitates cooperation and collaboration among geographically dispersed regional production centers and provides a secure automated platform for doc- ument exchange. With Lotus Notes, EuroChem is able to register and control all documents, to establish routing paths for document approval, and to maintain a full history of all movements and changes. Security features allow the company to create a personalized work environment for each user and to prevent unau- thorized users from accessing sensitive information (IBM, 2009).

Large firms in general do not feel secure using popular online software services for “strategic” applications because of the implicit security concerns. However, most experts believe that these concerns will diminish as experience with online tools grows, and the sophistication of online software service suppliers increases to protect security and reduce vulnerability. Table 2-5 describes additional online collaboration tools.

Check l i s t fo r Managers : Eva luat ing and Se lect ing Co l laborat ion Software Too l s With so many collaboration tools and services available, how do you choose the right collaboration technology for your firm? To answer this question, you need a framework for understanding just what problems these tools are designed to solve. One framework that has been helpful for us to talk about collaboration tools is the time/space collaboration matrix developed in the early 1990s by a number of collaborative work scholars (Figure 2-8).

66 Part One Organizations, Management, and the Networked Enterprise

Socialtext’s enterprise social networking products-includ- ing microblogging, blogs, wikis, profiles and social spreadsheets-enable employ- ees to share vital informa- tion and work together in real-time. Built on a flexi- ble, Web-oriented architec- ture, Socialtext integrates with virtually any traditional system of record, such as CRM and ERP, enabling companies to discuss, collab- orate, and take action on key business processes.



Socialtext An enterprise server-based collaboration environment which provides social networking, Twitter-like micro-blogging , wiki workspaces, with integrated weblogs, distributed spreadsheets, and a personal home page for every user. Delivered in a variety of hosted cloud services, as well as on-site appliances to provide enterprise customers with flexible deployment options that meet their security requirements.

Zoho Collecting and collaborating on text, line drawings, images, Web pages, video, RSS feeds. Project management (includes task management, work flow, reports, time tracking, forums, and file sharing). Free or monthly charge for premium service.

BlueTie Online collaboration with e-mail, scheduling, to-do lists, contact management, file sharing. $4.99 per user per month.

Basecamp Sharing to-do lists, files, message boards, milestone tracking. Free for a single project, $24/month for 15 projects with 5 gigabytes of storage.

Onehub Sharing documents, calendars, Web bookmarks; e-mail integration and IM. Manage hub resources; bulletin board.

WorkZone Collaboration with file sharing; project management; customization; security.

Chapter 2 Global E-business and Collaboration 67

The time/space matrix focuses on two dimensions of the collaboration prob- lem: time and space. For instance, you need to collaborate with people in dif- ferent time zones and you cannot all meet at the same time. Midnight in New York is noon in Bombay, so this makes it difficult to have a video-conference (the people in New York are too tired). Time is clearly an obstacle to collabora- tion on a global scale.

Place (location) also inhibits collaboration in large global or even national and regional firms. Assembling people for a physical meeting is made difficult by the physical dispersion of distributed firms (firms with more than one loca- tion), the cost of travel, and the time limitations of managers.

The collaboration technologies we have just described are ways of overcom- ing the limitations of time and space. Using this time/space framework will help you to choose the most appropriate collaboration and teamwork tools for your firm. Note that some tools are applicable in more than one time/place sce- nario. For example, Internet collaboration suites such as Lotus Notes have capa- bilities for both synchronous (instant messaging, electronic meeting tools) and asynchronous (e-mail, wikis, document editing) interactions.

Here’s a “to-do” list to get started. If you follow these six steps, you should be led to investing in the correct collaboration software for your firm at a price you can afford, and within your risk tolerance.

1. What are the collaboration challenges facing the firm in terms of time and space? Locate your firm in the time/space matrix. Your firm can occupy more than one cell in the matrix. Different collaboration tools will be needed for each situation.

2. Within each cell of the matrix where your firm faces challenges, exactly what kinds of solutions are available? Make a list of vendor products.

3. Analyze each of the products in terms of their cost and benefits to your firm. Be sure to include the costs of training in your cost estimates, and the costs of involving the information systems department if needed.


Collaboration technologies can be classified in terms of whether they support interactions at the same or different time or place, and whether these interactions are remote or co-located.

68 Part One Organizations, Management, and the Networked Enterprise

4. Identify the risks to security and vulnerability involved with each of the prod- ucts. Is your firm willing to put proprietary information into the hands of exter- nal service providers over the Internet? Is your firm willing to risk its important operations to systems controlled by other firms? What are the financial risks facing your vendors? Will they be here in three to five years? What would be the cost of making a switch to another vendor in the event the vendor firm fails?

5. Seek the help of potential users to identify implementation and training issues. Some of these tools are easier to use than others.

6. Make your selection of candidate tools, and invite the vendors to make presen- tations.


We’ve seen that businesses need information systems to operate today and that they use many different kinds of systems. But who is responsible for running these systems? Who is responsible for making sure the hardware, software, and other technologies used by these systems are running properly and are up to date? End users manage their systems from a business standpoint, but manag- ing the technology requires a special information systems function.

In all but the smallest of firms, the information systems department is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm’s IT infrastructure. We describe IT infrastructure in detail in Chapter 5.

THE INFORMATION SYSTEMS DEPARTMENT The information systems department consists of specialists, such as program- mers, systems analysts, project leaders, and information systems managers. Programmers are highly trained technical specialists who write the software instructions for computers. Systems analysts constitute the principal liaisons between the information systems groups and the rest of the organization. It is the systems analyst’s job to translate business problems and requirements into information requirements and systems. Information systems managers are leaders of teams of programmers and analysts, project managers, physical facil- ity managers, telecommunications managers, or database specialists. They are also managers of computer operations and data entry staff. Also, external specialists, such as hardware vendors and manufacturers, software firms, and consultants, frequently participate in the day-to-day operations and long-term planning of information systems.

In many companies, the information systems department is headed by a chief information officer (CIO). The CIO is a senior manager who oversees the use of information technology in the firm. Today’s CIOs are expected to have a strong business background as well as information systems expertise and to play a leadership role in integrating technology into the firm’s business strategy. Large firms today also have positions for a chief security officer, chief knowledge officer, and chief privacy officer, all of whom work closely with the CIO.

The chief security officer (CSO) is in charge of information systems secu- rity for the firm and is responsible for enforcing the firm’s information security

Chapter 2 Global E-business and Collaboration 69

policy (see Chapter 8). (Sometimes this position is called the chief information security officer [CISO] where information systems security is separated from physical security.) The CSO is responsible for educating and training users and information systems specialists about security, keeping management aware of security threats and breakdowns, and maintaining the tools and policies chosen to implement security.

Information systems security and the need to safeguard personal data have become so important that corporations collecting vast quantities of personal data have established positions for a chief privacy officer (CPO). The CPO is responsible for ensuring that the company complies with existing data privacy laws.

The chief knowledge officer (CKO) is responsible for the firm’s knowl- edge management program. The CKO helps design programs and systems to find new sources of knowledge or to make better use of existing knowledge in organizational and management processes.

End users are representatives of departments outside of the information systems group for whom applications are developed. These users are playing an increasingly large role in the design and development of information sys- tems.

In the early years of computing, the information systems group was com- posed mostly of programmers who performed highly specialized but limited technical functions. Today, a growing proportion of staff members are systems analysts and network specialists, with the information systems department act- ing as a powerful change agent in the organization. The information systems department suggests new business strategies and new information-based prod- ucts and services, and coordinates both the development of the technology and the planned changes in the organization.

ORGANIZING THE INFORMATION SYSTEMS FUNCTION There are many types of business firms, and there are many ways in which the IT function is organized within the firm. A very small company will not have a formal information systems group. It might have one employee who is respon- sible for keeping its networks and applications running, or it might use consul- tants for these services. Larger companies will have a separate information sys- tems department, which may be organized along several different lines, depending on the nature and interests of the firm. Our Learning Track describes alternative ways of organizing the information systems function within the business.

The question of how the information systems department should be orga- nized is part of the larger issue of IT governance. IT governance includes the strategy and policies for using information technology within an organization. It specifies the decision rights and framework for accountability to ensure that the use of information technology supports the organization’s strategies and objectives. How much should the information systems function be centralized? What decisions must be made to ensure effective management and use of infor- mation technology, including the return on IT investments? Who should make these decisions? How will these decisions be made and monitored? Firms with superior IT governance will have clearly thought out the answers (Weill and Ross, 2004).

70 Part One Organizations, Management, and the Networked Enterprise

2.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience analyzing opportuni- ties to improve business processes with new information system applications, using a spreadsheet to improve decision making about suppliers, and using Internet software to plan efficient transportation routes.

Management Dec i s ion Prob lems

1. Don’s Lumber Company on the Hudson River is one of the oldest retail lum- beryards in New York State. It features a large selection of materials for floor- ing, decks, moldings, windows, siding, and roofing. The prices of lumber and other building materials are constantly changing. When a customer inquires about the price on pre-finished wood flooring, sales representatives consult a manual price sheet and then call the supplier for the most recent price. The supplier in turn uses a manual price sheet, which has been updated each day. Often the supplier must call back Don’s sales reps because the company does not have the newest pricing information immediately on hand. Assess the business impact of this situation, describe how this process could be improved with information technology, and identify the decisions that would have to be made to implement a solution. Who would make those decisions?

2. Henry’s Hardware is a small family business in Sacramento, California. The owners must use every square foot of store space as profitably as possi- ble. They have never kept detailed inventory or sales records. As soon as a shipment of goods arrives, the items are immediately placed on store shelves. Invoices from suppliers are only kept for tax purposes. When an item is sold, the item number and price are rung up at the cash register. The owners use their own judgment in identifying items that need to be reordered. What is the business impact of this situation? How could information systems help the owners run their business? What data should these systems capture? What decisions could the systems improve?

Improv ing Dec i s ion Making: Us ing a Spreadsheet to Se lect Supp l ie r s

Software skills: Spreadsheet date functions, data filtering, DAVERAGE function Business skills: Analyzing supplier performance and pricing

In this exercise, you will learn how to use spreadsheet software to improve management decisions about selecting suppliers. You will start with raw trans- actional data about suppliers organized as a large spreadsheet list. You will use the spreadsheet software to filter the data based on several different criteria to select the best suppliers for your company.

You run a company that manufactures aircraft components. You have many competitors who are trying to offer lower prices and better service to customers, and you are trying to determine whether you can benefit from better supply chain management. In myMISlab, you will find a spreadsheet file that contains a list of all of the items that your firm has ordered from its suppliers during the past three months. A sample is shown below, but the Web site may have a more recent version of this spreadsheet for this exercise. The fields in the spreadsheet file include vendor name, vendor identification number, purchaser’s order number, item identification number and item description (for each item ordered from the vendor), cost per item, number of units of the item ordered (quantity), total cost of each

Chapter 2 Global E-business and Collaboration 71

order, vendor’s accounts payable terms, order date, and actual arrival date for each order.

Prepare a recommendation of how you can use the data in this spreadsheet database to improve your decisions about selecting suppliers. Some criteria to consider for identifying preferred suppliers include the supplier’s track record for on-time deliveries, suppliers offering the best accounts payable terms, and suppliers offering lower pricing when the same item can be provided by multi- ple suppliers. Use your spreadsheet software to prepare reports to support your recommendations.

Achiev ing Operat iona l Exce l lence : Us ing Internet Software to P lan Eff ic ient Transportat ion Routes

In this exercise, you will use the same online software tool that businesses use to map out their transportation routes and select the most efficient route. The MapQuest ( Web site includes interactive capabili- ties for planning a trip. The software on this Web site can calculate the distance between two points and provide itemized driving directions to any location.

You have just started working as a dispatcher for Cross-Country Transport, a new trucking and delivery service based in Cleveland, Ohio. Your first assign- ment is to plan a delivery of office equipment and furniture from Elkhart, Indiana (at the corner of E. Indiana Ave. and Prairie Street) to Hagerstown, Maryland (corner of Eastern Blvd. N. and Potomac Ave.). To guide your trucker, you need to know the most efficient route between the two cities. Use MapQuest to find the route that is the shortest distance between the two cities. Use MapQuest again to find the route that takes the least time. Compare the results. Which route should Cross-Country use?

72 Part One Organizations, Management, and the Networked Enterprise

LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter:

1. Systems from a Functional Perspective

2. IT Enables Collaboration and Teamwork

3. Challenges of Using Business Information Systems

4. Organizing the Information Systems Function

Review Summary 1. What are business processes? How are they related to information systems?

A business process is a logically related set of activities that defines how specific business tasks are performed, and it represents a unique way in which an organization coordinates work, information, and knowledge. Managers need to pay attention to business processes because they determine how well the organization can execute its business, and they may be a source of strategic advantage. There are business processes specific to each of the major business functions, but many business processes are cross-functional. Information systems automate parts of business processes, and they can help organizations redesign and streamline these processes.

2. How do systems serve the different management groups in a business? Systems serving operational management are transaction processing systems (TPS), such as pay-

roll or order processing, that track the flow of the daily routine transactions necessary to conduct business. Management information systems (MIS) produce reports serving middle management by condensing information from TPS, and these are not highly analytical. Decision-support systems (DSS) support management decisions that are unique and rapidly changing using advanced analyti- cal models. All of these types of systems provide business intelligence that helps managers and enterprise employees make more informed decisions. These systems for business intelligence serve multiple levels of management, and include executive support systems (ESS) for senior management that provide data in the form of graphs, charts, and dashboards delivered via portals using many sources of internal and external information.

3. How do systems that link the enterprise improve organizational performance? Enterprise applications are designed to coordinate multiple functions and business processes.

Enterprise systems integrate the key internal business processes of a firm into a single software sys- tem to improve coordination and decision making. Supply chain management systems help the firm manage its relationship with suppliers to optimize the planning, sourcing, manufacturing, and deliv- ery of products and services. Customer relationship management (CRM) systems coordinate the business processes surrounding the firm’s customers. Knowledge management systems enable firms to optimize the creation, sharing, and distribution of knowledge. Intranets and extranets are private corporate networks based on Internet technology that assemble information from disparate systems. Extranets make portions of private corporate intranets available to outsiders.

4. Why are systems for collaboration and teamwork so important and what technologies do they use? Collaboration is working with others to achieve shared and explicit goals. Collaboration and team-

work have become increasingly important in business because of globalization, the decentralization of decision making, and growth in jobs where interaction is the primary value-adding activity. Collaboration is believed to enhance innovation, productivity, quality, and customer service. Effective collaboration today requires a supportive organizational culture as well as information

systems and tools for collaborative work. Collaboration tools include e-mail and instant messaging, wikis, videoconferencing systems, virtual worlds, social networking systems, cell phones, and Internet collaboration platforms such as Google Apps/Sites, Microsoft SharePoint, and Lotus Notes.

5. What is the role of the information systems function in a business? The information systems department is the formal organizational unit responsible for information

technology services. It is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm’s IT infrastructure. The department consists of specialists, such as programmers, systems analysts, project leaders, and information systems managers, and is often headed by a CIO.

Key Terms Business intelligence, 49 Chief information officer (CIO), 68 Chief knowledge officer (CKO), 69 Chief privacy officer (CPO), 69 Chief security officer (CSO), 68 Collaboration, 56 Customer relationship management (CRM)

systems, 53 Decision-support systems (DSS), 48 Digital dashboard, 50 Electronic business (e-business), 55 Electronic commerce (e-commerce), 55 E-government, 55 End users, 69 Enterprise applications, 51

Enterprise systems, 51 Executive support systems (ESS), 50 Information systems department, 68 Information systems managers, 68 Interorganizational system, 53 IT governance, 69 Knowledge management systems (KMS), 54 Management information systems (MIS), 47 Portal, 50 Programmers, 68 Supply chain management (SCM) systems, 53 Systems analysts, 68 Teams, 56 Telepresence, 61 Transaction processing systems (TPS), 45

Review Questions 1. What are business processes? How are they related

to information systems?

• Define business processes and describe the role they play in organizations.

• Describe the relationship between informa- tion systems and business processes.

2. How do systems serve the various levels of man- agement in a business?

• Describe the characteristics of transaction processing systems (TPS) and the roles they play in a business.

• Describe the characteristics of management information systems (MIS) and explain how MIS differ from TPS and from DSS.

• Describe the characteristics of decision-sup- port systems (DSS) and how they benefit businesses.

• Describe the characteristics of executive sup- port systems (ESS) and explain how these sys- tems differ from DSS.

3. How do systems that link the enterprise improve organizational performance? • Explain how enterprise applications improve

organizational performance. • Define enterprise systems, supply chain

management systems, customer relationship management systems, and knowledge man- agement systems and describe their business benefits.

• Explain how intranets and extranets help firms integrate information and business processes.

4. Why are systems for collaboration and teamwork so important and what technologies do they use?

Chapter 2 Global E-business and Collaboration 73

74 Part One Organizations, Management, and the Networked Enterprise

Collaboration and Teamwork: Describing Management Decisions and Systems

Discussion Questions 1. How could information systems be used to sup-

port the order fulfillment process illustrated in Figure 2-1? What are the most important pieces of information these systems should capture? Explain your answer.

2. Identify the steps that are performed in the process of selecting and checking out a book from your college library and the information that flows among these activities. Diagram the

Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos.

With a team of three or four other students, find a description of a manager in a corporation in BusinessWeek, Fortune, The Wall Street Journal, or another business publication or do your research on the Web. Gather information about what the man- ager’s company does and the role he or she plays in the company. Identify the organizational level and business function where this manager works. Make a list of the kinds of decisions this manager has to make

and the kind of information the manager would need for those decisions. Suggest how information systems could supply this information. If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments. Try to use Google Docs to develop a presentation of your find- ings for the class.

process. Are there any ways this process could be improved to improve the performance of your library or your school? Diagram the improved process.

3. How might the BMW Oracle team have used col- laboration systems to improve the design and per- formance of the America’s Cup sailboat USA? Which system features would be the most impor- tant for these tasks?

• Define collaboration and teamwork and explain why they have become so important in business today.

• List and describe the business benefits of collaboration.

• Describe a supportive organizational culture and business processes for collaboration.

• List and describe the various types of collab- oration and communication systems.

5. What is the role of the information systems function in a business?

• Describe how the information systems func- tion supports a business.

• Compare the roles played by programmers, systems analysts, information systems man- agers, the chief information officer (CIO), chief security officer (CSO), and chief knowl- edge officer (CKO).

Chapter 2 Global E-Business and Collaboration 75

Collaboration and Innovation at Procter & Gamble CASE STUDY

ook in your medicine cabinet. No matter where you live in the world, odds are that you’ll find many Procter & Gamble products that you use every day. P&G is the largest

manufacturer of consumer products in the world, and one of the top 10 largest companies in the world by market capitalization. The company is known for its successful brands, as well as its ability to develop new brands and maintain its brands’ popularity with unique business innovations. Popular P&G brands include Pampers, Tide, Bounty, Folgers, Pringles, Charmin, Swiffer, Crest, and many more. The com- pany has approximately 140,000 employees in more than 80 countries, and its leading competitor is Britain-based Unilever. Founded in 1837 and head- quartered in Cincinnati, Ohio, P&G has been a main- stay in the American business landscape for well over 150 years. In 2009, it had $79 billion in revenue and earned a $13.2 billion profit.

P&G’s business operations are divided into three main units: Beauty Care, Household Care, and Health and Well-Being, each of which are further subdivided into more specific units. In each of these divisions, P&G has three main focuses as a business. It needs to maintain the popularity of its existing brands, via advertising and marketing; it must extend its brands to related products by developing new products under those brands; and it must innovate and create new brands entirely from scratch. Because so much of P&G’s business is built around brand creation and management, it’s critical that the company facilitate collaboration between researchers, marketers, and managers. And because P&G is such a big company, and makes such a wide array of products, achieving these goals is a daunting task.

P&G spends 3.4 percent of revenue on innovation, which is more than twice the industry average of 1.6 percent. Its research and development teams consist of 8,000 scientists spread across 30 sites globally. Though the company has an 80 percent “hit” rate on ideas that lead to products, making truly innovative and groundbreaking new products is very difficult in an extremely competitive field like consumer prod- ucts. What’s more, the creativity of bigger companies like P&G has been on the decline, with the top con- sumer goods companies accounting for only 5 per-

cent of patents filed on home care products in the early 2000s.

Finding better ways to innovate and develop new ideas is critical in a marketplace like consumer goods, and for any company as large as P&G, finding methods of collaboration that are effective across the enterprise can be difficult. That’s why P&G has been active in implementing information systems that fos- ter effective collaboration and innovation. The social networking and collaborative tools popularized by Web 2.0 have been especially attractive to P&G man- agement, starting at the top with former CEO A.G. Lafley. Lafley was succeeded by Robert McDonald in 2010, but has been a major force in revitalizing the company.

When Lafley became P&G’s CEO in 2000, he immediately asserted that by the end of the decade, the company would generate half of its new product ideas using sources from outside the company, both as a way to develop groundbreaking innovations more quickly and to reduce research and develop- ment costs. At the time, Lafley’s proclamation was considered to be visionary, but in the past 10 years, P&G has made good on his promise.

The first order of business for P&G was to develop alternatives to business practices that were not suffi- ciently collaborative. The biggest culprit, says Joe Schueller, Innovation Manager for P&G’s Global Business Services division, was perhaps an unlikely one: e-mail. Though it’s ostensibly a tool for commu- nication, e-mail is not a sufficiently collaborative way to share information; senders control the flow of information, but may fail to send mail to colleagues who most need to see it, and colleagues that don’t need to see certain e-mails will receive mailings long after they’ve lost interest. Blogs and other collabora- tive tools, on the other hand, are open to anyone interested in their content, and attract comments from interested users.

However, getting P&G employees to actually use these newer products in place of e-mail has been a struggle for Schueller. Employees have resisted the changes, insisting that newer collaborative tools represent more work on top of e-mail, as opposed to a better alternative. People are accustomed to e-mail, and there’s significant organizational inertia against switching to a new way of doing things. Some P&G


76 Part One Organizations, Management, and the Networked Enterprise

processes for sharing knowledge were notoriously inefficient. For instance, some researchers used to write up their experiments using Microsoft Office applications, then print them out and glue them page by page into notebooks. P&G was determined to implement more efficient and collaborative methods of communication to supplant some of these out- dated processes.

To that end, P&G launched a total overhaul of its collaboration systems, led by a suite of Microsoft products. The services provided include unified com- munications (which integrates services for voice transmission, data transmission, instant messaging, e-mail, and electronic conferencing), Microsoft Live Communications Server functionality, Web confer- encing with Live Meeting, and content management with SharePoint. According to P&G, over 80,000 employees use instant messaging, and 20,000 use Microsoft Outlook, which provides tools for e-mail, calendaring, task management, contact manage- ment, note taking, and Web browsing. Outlook works with Microsoft Office SharePoint Server to support multiple users with shared mailboxes and calendars, SharePoint lists, and meeting schedules.

The presence of these tools suggests more collabo- rative approaches are taking hold. Researchers use the tools to share the data they’ve collected on vari- ous brands; marketers can more effectively access the data they need to create more highly targeted ad campaigns; and managers are more easily able to find the people and data they need to make critical business decisions.

Companies like P&G are finding that one vendor simply isn’t enough to satisfy their diverse needs. That introduces a new challenges: managing infor- mation and applications across multiple platforms. For example, P&G found that Google search was inadequate because it doesn’t always link informa- tion from within the company, and its reliance on keywords for its searches isn’t ideal for all of the top- ics for which employees might search. P&G decided to implement a new search product from start-up Connectbeam, which allows employees to share bookmarks and tag content with descriptive words that appear in future searches, and facilitates social networks of coworkers to help them find and share information more effectively.

The results of the initiative have been immediate. For example, when P&G executives traveled to meet with regional managers, there was no way to inte- grate all the reports and discussions into a single doc- ument. One executive glued the results of experi- ments into Word documents and passed them out at

a conference. Another executive manually entered his data and speech into PowerPoint slides, and then e-mailed the file to his colleagues. One result was that the same file ended up in countless individual mailboxes. Now, P&G’s IT department can create a Microsoft SharePoint page where that executive can post all of his presentations. Using SharePoint, the presentations are stored in a single location, but are still accessible to employees and colleagues in other parts of the company. Another collaborative tool, InnovationNet, contains over 5 million research- related documents in digital format accessible via a browser-based portal. That’s a far cry from experi- ments glued in notebooks.

One concern P&G had when implementing these collaborative tools was that if enough employees did- n’t use them, the tools would be much less useful for those that did use them. Collaboration tools are like business and social networks–the more people con- nect to the network, the greater the value to all par- ticipants. Collaborative tools grow in usefulness as more and more workers contribute their information and insights. They also allow employees quicker access to the experts within the company that have needed information and knowledge. But these bene- fits are contingent on the lion’s share of company employees using the tools.

Another major innovation for P&G was its large- scale adoption of Cisco TelePresence conference rooms at many locations across the globe. For a com- pany as large as P&G, telepresence is an excellent way to foster collaboration between employees across not just countries, but continents. In the past, telepresence technologies were prohibitively expen- sive and overly prone to malfunction. Today, the technology makes it possible to hold high-definition meetings over long distances. P&G boasts the world’s largest rollout of Cisco TelePresence technology.

P&G’s biggest challenge in adopting the technol- ogy was to ensure that the studios were built to par- ticular specifications in each of the geographically diverse locations where they were installed. Cisco accomplished this, and now P&G’s estimates that 35 percent of its employees use telepresence regularly. In some locations, usage is as high as 70 percent. Benefits of telepresence include significant travel savings, more efficient flow of ideas, and quicker decision making. Decisions that once took days now take minutes.

Laurie Heltsley, P&G’s director of global business services, noted that the company has saved $4 for every $1 invested in the 70 high-end telepresence systems it has installed over the past few years.

Chapter 2 Global E-Business and Collaboration 77

These high-definition systems are used four times as often as the company’s earlier versions of videocon- ferencing systems.

Sources: Joe Sharkey, “Setbacks in the Air Add to Lure of Virtual Meetings,” The New York Times, April 26, 2010; Matt Hamblen, “Firms Use Collaboration Tools to Tap the Ultimate IP-Worker Ideas,” Computerworld, September 2, 2009; “Computerworld Honors Program: P&G”, 2008;, accessed May 18, 2010; “Procter & Gamble Revolutionizes Collaboration with Cisco TelePresence,”, accessed May 18, 2010; “IT’s Role in Collaboration at Procter &Gamble,” Information Week, February 1, 2007.

CASE STUDY QUESTIONS 1. What is Procter & Gamble’s business strategy?

What is the relationship of collaboration and innovation to that business strategy?

2. How is P&G using collaboration systems to exe- cute its business model and business strategy? List and describe the collaboration systems and technologies it is using and the benefits of each.

3. Why were some collaborative technologies slow to catch on at P&G?

4. Compare P&G’s old and new processes for writing up and distributing the results of a research experiment.

5. Why is telepresence such a useful collaborative tool for a company like P&G?

6. Can you think of other ways P&G could use collaboration to foster innovation?

LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. Which features of organizations do

managers need to know about to build and use information systems successfully? What is the impact of information systems on organiza- tions?

2. How does Porter’s competitive forces model help companies develop competitive strategies using information systems?

3. How do the value chain and value web models help businesses iden- tify opportunities for strategic information system applications?

4. How do information systems help businesses use synergies, core competencies, and network-based strategies to achieve competitive advantage?

5. What are the challenges posed by strategic information systems and how should they be addressed?


SYSTEMS What Is an Organization? Features of Organizations

3.2 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Economic Impacts Organizational and Behavioral Impacts The Internet and Organizations Implications for the Design and Understanding of


COMPETITIVE ADVANTAGE Porter’s Competitive Forces Model Information System Strategies for Dealing with

Competitive Forces The Internet’s Impact on Competitive Advantage The Business Value Chain Model Synergies, Core Competencies, and Network-Based


ADVANTAGE: MANAGEMENT ISSUES Sustaining Competitive Advantage Aligning IT with Business Objectives Managing Strategic Transitions

3.5 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using a Database to

Clarify Business Strategy Improving Decision Making: Using Web Tools to

Configure and Price an Automobile

LEARNING TRACK MODULE The Changing Business Environment for

Information Technology

Chapter 3

Information Systems, Organizations, and Strategy

Interactive Sessions:

How Much Do Credit Card Companies Know About You?

Is the iPad a Disruptive Technology?


erizon and AT&T are the two largest telecommunications companies in the United States. In addition to voice communication, their customers use their networks to surf the Internet; send e-mail, text, and video messages; share photos; watch videos and high-definition TV; and conduct videoconferences around the globe. All of these

products and services are digital. Competition in this industry is exceptionally intense and fast-changing. Both companies are

trying to outflank one another by refining their wireless, landline, and high-speed Internet networks and expanding the range of products, applications, and services available to customers. Wireless services are the most profitable. AT&T is staking its growth on the wireless market by aggressively marketing leading-edge high-end devices such as the iPhone. Verizon has bet on the reliability, power, and range of its wireless and landline networks and its renowned customer service.

For a number of years, Verizon has tried to blunt competition by making heavy technol- ogy investments in both its landline and wireless networks. Its wireless network is consid- ered the most far-reaching and reliable in the United States. Verizon is now pouring billions of dollars into a rollout of fourth-generation (4G) cellular technology capable of supporting highly data-intensive applications such as downloading large streams of video and music through smart phones and other network appliances. Returns from Verizon’s 4G investment are still uncertain.

Verizon’s moves appear more risky financially than AT&T’s, because its up-front costs are so high. AT&T’s strategy is more conservative. Why not partner with other companies to capitalize on their technology innovations? That was the rationale for AT&T contracting with Apple Computer to be the exclusive network for its iPhone. Even though AT&T subsidizes some of the iPhone’s cost to consumers, the iPhone’s streamlined design, touch screen, exclusive access to the iTunes music service, and over 250,000 downloadable applications have made it an instant hit. AT&T has also sought to provide cellular services for other network appliances such as Amazon’s Kindle e-book reader and netbooks.

The iPhone has been AT&T’s primary growth engine, and the Apple relationship made the carrier the U.S. leader in the smartphone carrier marketspace. AT&T has over 43 percent of U.S. smartphone customers, compared with 23 percent for Verizon. Smart-phone customers are



highly desirable because they typically pay higher monthly rates for wireless data service plans.

The iPhone became so wildly popular that users overstrained AT&T’s networks, leaving many in dense urban areas such as New York and San Francisco with sluggish service or dropped calls. To handle the surging demand, AT&T could upgrade its wire- less network, but that would cripple profits. Experts con- tend that AT&T would have to spend $5 billion to $7 billion to bring its network up to

80 Part One Organizations, Management, and the Networked Enterprise

Verizon’s quality. To curb excessive use, AT&T moved to a tiered pricing model for new iPhone users, with data charges based on how much data customers actually use.

Adding to AT&T’s woes, its monopoly on the iPhone may be ending. Apple reached an agreement with Verizon in 2010 to make an iPhone that is com- patible with Verizon’s network. Allowing Verizon to offer iPhone service will more than double Apple’s market for this device, but will undoubtedly drive some AT&T iPhone customers to Verizon in the hope of finding better net- work service. Verizon is further hedging its bets by offering leading-edge smartphones based on Google’s Android operating system that compete well against the iPhone. With or without the iPhone, if Verizon’s Android phone sales continue to accelerate, the competitive balance will shift again. Sources: Roger Cheng, “For Telecom Firms, Smartphones Rule,” The Wall Street Journal, July 19, 2010; Brad Stone and Jenna Wortham, “Even Without iPhone, Verizon Is Gaining,” The New York Times, July 15, 2010; Roben Farzad, “AT&T’s iPhone Mess,” Bloomberg Businessweek, April 25, 2010; Niraj Sheth, “AT&T Prepares Network for Battle,” The Wall Street Journal, March 31, 2010; and Amol Sharma, “AT&T, Verizon Make Different Calls,” The Wall Street Journal, January 28, 2009.

The story of Verizon and AT&T illustrates some of the ways that informa-tion systems help businesses compete—and also the challenges of sustaining a competitive advantage. The telecommunications industry in which both companies operate is extremely crowded and competitive, with telecom- munications companies vying with cable companies, new upstarts, and each other to provide a wide array of digital services as well as voice transmission. To meet the challenges of surviving and prospering in this environment, each of these companies focused on a different competitive strategy using informa- tion technology.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Both companies identified opportunities to use information technology to offer new products and services. AT&T offered enhanced wireless services for the iPhone, while Verizon initially focused on high-capacity, high-quality network services. AT&T’s strategy emphasized keeping costs low while capitalizing on innovations from other technology vendors. Verizon’s strategy involved high up-front costs to build a high-capacity network infrastructure, and it also focused on providing a high level of network reliability and customer service.

This case study clearly shows how difficult it is to sustain a competitive advantage. Exclusive rights to use the highly popular iPhone on its network brought AT&T millions of new customers and enhanced its competitive position. But its competitive advantage is likely to erode if it is forced to invest heavily to upgrade its networks, if Apple allows Verizon to offer a version of the iPhone, or if Verizon smartphones are competitive with the iPhone. Changes in service pricing plans may also affect the competitive balance among the various wireless carriers.

Chapter 3 Information Systems, Organizations, and Strategy 81

3.1 ORGANIZATIONS AND INFORMATION SYSTEMS nformation systems and organizations influence one another. Information systems are built by managers to serve the interests of the business firm. At the same time, the organization must be aware of and open to the influences of information systems to benefit from new technologies.

The interaction between information technology and organizations is complex and is influenced by many mediating factors, including the organiza- tion’s structure, business processes, politics, culture, surrounding environment, and management decisions (see Figure 3-1). You will need to understand how information systems can change social and work life in your firm. You will not be able to design new systems successfully or understand existing systems without understanding your own business organization.



This complex two-way relationship is mediated by many factors, not the least of which are the decisions made—or not made—by managers. Other factors mediating the relationship include the organizational culture, structure, politics, business processes, and environment.

82 Part One Organizations, Management, and the Networked Enterprise

As a manager, you will be the one to decide which systems will be built, what they will do, and how they will be implemented. You may not be able to anticipate all of the consequences of these decisions. Some of the changes that occur in business firms because of new information technology (IT) investments cannot be foreseen and have results that may or may not meet your expectations. Who would have imagined fifteen years ago, for instance, that e-mail and instant messaging would become a dominant form of business communication and that many managers would be inundated with more than 200 e-mail messages each day?

WHAT IS AN ORGANIZATION? An organization is a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This technical definition focuses on three elements of an organization. Capital and labor are primary production factors provided by the environment. The organization (the firm) transforms these inputs into products and services in a production function. The products and services are consumed by environments in return for supply inputs (see Figure 3-2).

An organization is more stable than an informal group (such as a group of friends that meets every Friday for lunch) in terms of longevity and routineness. Organizations are formal legal entities with internal rules and procedures that must abide by laws. Organizations are also social structures because they are a collection of social elements, much as a machine has a structure—a particular arrangement of valves, cams, shafts, and other parts.

This definition of organizations is powerful and simple, but it is not very descriptive or even predictive of real-world organizations. A more realistic behavioral definition of an organization is that it is a collection of rights, privileges, obligations, and responsibilities that is delicately balanced over a period of time through conflict and conflict resolution (see Figure 3-3).

In this behavioral view of the firm, people who work in organizations develop customary ways of working; they gain attachments to existing relationships; and they make arrangements with subordinates and superiors about how work will be done, the amount of work that will be done, and under


In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop.

what conditions work will be done. Most of these arrangements and feelings are not discussed in any formal rulebook.

How do these definitions of organizations relate to information systems technology? A technical view of organizations encourages us to focus on how inputs are combined to create outputs when technology changes are introduced into the company. The firm is seen as infinitely malleable, with capital and labor substituting for each other quite easily. But the more realistic behavioral definition of an organization suggests that building new information systems, or rebuilding old ones, involves much more than a technical rearrangement of machines or workers—that some information systems change the organizational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of time.

Changing these elements can take a long time, be very disruptive, and requires more resources to support training and learning. For instance, the length of time required to implement effectively a new information system is much longer than usually anticipated simply because there is a lag between implementing a technical system and teaching employees and managers how to use the system.

Technological change requires changes in who owns and controls informa- tion, who has the right to access and update that information, and who makes decisions about whom, when, and how. This more complex view forces us to look at the way work is designed and the procedures used to achieve outputs.

The technical and behavioral definitions of organizations are not contradic- tory. Indeed, they complement each other: The technical definition tells us how thousands of firms in competitive markets combine capital, labor, and information technology, whereas the behavioral model takes us inside the individual firm to see how that technology affects the organization’s inner workings. Section 3.2 describes how each of these definitions of organizations can help explain the relationships between information systems and organiza- tions.

Chapter 3 Information Systems, Organizations, and Strategy 83


The behavioral view of organizations emphasizes group relationships, values, and structures.

84 Part One Organizations, Management, and the Networked Enterprise

FEATURES OF ORGANIZATIONS All modern organizations have certain characteristics. They are bureaucra- cies with clear-cut divisions of labor and specialization. Organizations arrange specialists in a hierarchy of authority in which everyone is account- able to someone and authority is limited to specific actions governed by abstract rules or procedures. These rules create a system of impartial and universal decision making. Organizations try to hire and promote employees on the basis of technical qualifications and professionalism (not personal connections). The organization is devoted to the principle of efficiency: maximizing output using limited inputs. Other features of organizations include their business processes, organizational culture, organizational poli- tics, surrounding environments, structure, goals, constituencies, and leader- ship styles. All of these features affect the kinds of information systems used by organizations.

Rout ines and Bus iness Processes All organizations, including business firms, become very efficient over time because individuals in the firm develop routines for producing goods and services. Routines—sometimes called standard operating procedures—are precise rules, procedures, and practices that have been developed to cope with virtually all expected situations. As employees learn these routines, they become highly productive and efficient, and the firm is able to reduce its costs over time as efficiency increases. For instance, when you visit a doctor’s office, receptionists have a well-developed set of routines for gathering basic information from you; nurses have a different set of routines for preparing you for an interview with a doctor; and the doctor has a well-developed set of routines for diagnosing you. Business processes, which we introduced in Chapters 1 and 2, are collections of such routines. A business firm in turn is a collection of business processes (Figure 3-4).

Organ izat iona l Po l i t i cs People in organizations occupy different positions with different specialties, concerns, and perspectives. As a result, they naturally have divergent viewpoints about how resources, rewards, and punishments should be distributed. These differences matter to both managers and employees, and they result in political struggle for resources, competition, and conflict within every organization. Political resistance is one of the great difficulties of bringing about organizational change—especially the development of new information systems. Virtually all large information systems investments by a firm that bring about significant changes in strategy, business objectives, business processes, and procedures become politically charged events. Managers that know how to work with the politics of an organization will be more successful than less-skilled managers in implementing new information systems. Throughout this book, you will find many examples of where internal politics defeated the best-laid plans for an information system.

Organ izat iona l Cu l ture All organizations have bedrock, unassailable, unquestioned (by the mem- bers) assumptions that define their goals and products. Organizational culture encompasses this set of assumptions about what products the organization should produce, how it should produce them, where, and for whom. Generally, these cultural assumptions are taken totally for granted

Chapter 3 Information Systems, Organizations, and Strategy 85

and are rarely publicly announced or spoken about. Business processes—the actual way business firms produce value—are usually ensconced in the organization’s culture.

You can see organizational culture at work by looking around your univer- sity or college. Some bedrock assumptions of university life are that professors know more than students, the reason students attend college is to learn, and classes follow a regular schedule. Organizational culture is a powerful unifying force that restrains political conflict and promotes common understanding, agreement on procedures, and common practices. If we all share the same basic cultural assumptions, agreement on other matters is more likely.

At the same time, organizational culture is a powerful restraint on change, especially technological change. Most organizations will do almost anything to avoid making changes in basic assumptions. Any technological change that threatens commonly held cultural assumptions usually meets a great deal of resistance. However, there are times when the only sensible way for a firm to move forward is to employ a new technology that directly opposes an existing organizational culture. When this occurs, the technology is often stalled while the culture slowly adjusts.


All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance.

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Organ izat iona l Env i ronments Organizations reside in environments from which they draw resources and to which they supply goods and services. Organizations and environments have a reciprocal relationship. On the one hand, organizations are open to, and dependent on, the social and physical environment that surrounds them. Without financial and human resources—people willing to work reliably and consistently for a set wage or revenue from customers—organizations could not exist. Organizations must respond to legislative and other requirements imposed by government, as well as the actions of customers and competitors. On the other hand, organizations can influence their environments. For example, business firms form alliances with other businesses to influence the political process; they advertise to influence customer acceptance of their products.

Figure 3-5 illustrates the role of information systems in helping organizations perceive changes in their environments and also in helping organizations act on their environments. Information systems are key instruments for environ- mental scanning, helping managers identify external changes that might require an organizational response.

Environments generally change much faster than organizations. New technologies, new products, and changing public tastes and values (many of which result in new government regulations) put strains on any organization’s culture, politics, and people. Most organizations are unable to adapt to a rapidly changing environment. Inertia built into an organization’s standard operating procedures, the political conflict raised by changes to the existing order, and the threat to closely held cultural values inhibit organizations from making significant changes. Young firms typically lack resources to sustain even short periods of troubled times. It is not surprising that only 10 percent of the Fortune 500 companies in 1919 still exist today.


Environments shape what organizations can do, but organizations can influence their environments and decide to change environments altogether. Information technology plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment.

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Disruptive Technologies: Riding the Wave. Sometimes a technology and resulting business innovation comes along to radically change the business landscape and environment. These innovations are loosely called “disruptive.” (Christensen, 2003). What makes a technology disruptive? In some cases, dis- ruptive technologies are substitute products that perform as well or better (often much better) than anything currently produced. The car substituted for the horse-drawn carriage; the word processor for typewriters; the Apple iPod for portable CD players; digital photography for process film photography.

In these cases, entire industries are put out of business. In other cases, disruptive technologies simply extend the market, usually with less functional- ity and much less cost, than existing products. Eventually they turn into low-cost competitors for whatever was sold before. Disk drives are an example: small hard disk drives used in PCs extended the market for disk drives by offer- ing cheap digital storage for small files. Eventually, small PC hard disk drives became the largest segment of the disk drive marketplace.

Some firms are able to create these technologies and ride the wave to profits; others learn quickly and adapt their business; still others are obliterated because their products, services, and business models become obsolete. They may be very efficient at doing what no longer needs to be done! There are also cases where no firms benefit, and all the gains go to consumers (firms fail to capture any profits). Table 3-1 describes just a few disruptive technologies from the past.

Disruptive technologies are tricky. Firms that invent disruptive technologies as “first movers” do not always benefit if they lack the resources to exploit the



Microprocessor chips Thousands and eventually millions of Microprocessor firms win (Intel, Texas Instruments) (1971) transistors on a silicon chip while transistor firms (GE) decline.

Personal computers Small, inexpensive, but fully functional desktop PC manufacturers (HP, Apple, IBM), and chip (1975) computers manufacturers prosper (Intel), while mainframe (IBM) and

minicomputer (DEC) firms lose.

PC word processing Inexpensive, limited but functional text editing PC and software manufacturers (Microsoft, HP, Apple) software (1979) and formatting for personal computers prosper, while the typewriter industry disappears.

World Wide Web A global database of digital files and “pages” Owners of online content and news benefit, while traditional (1989) instantly available publishers (newspapers, magazines, broadcast television)


Internet music services Repositories of downloadable music on the Owners of online music collections (, iTunes), (1998) Web with acceptable fidelity telecommunications providers who own Internet backbone

(AT&T, Verizon), local Internet service providers win, while record label firms and music retailers lose (Tower Records).

PageRank algorithm A method for ranking Web pages in terms of Google is the winner (they own the patent), while their popularity to supplement Web search traditional key word search engines (Alta Vista) lose. by key terms

Software as Web service Using the Internet to provide remote access Online software services companies ( to online software win, while traditional “boxed” software companies

(Microsoft, SAP, Oracle) lose.

technology or fail to see the opportunity. The MITS Altair 8800 is widely regarded as the first PC, but its inventors did not take advantage of their first- mover status. Second movers, so-called “fast followers” such as IBM and Microsoft, reaped the rewards. Citibank’s ATMs revolutionized retail banking, but they were copied by other banks. Now all banks use ATMs, with the benefits going mostly to the consumers. Google was not a first mover in search, but an innovative follower that was able to maintain rights to a powerful new search algorithm called PageRank. So far it has been able to hold onto its lead while most other search engines have faded down to small market shares.

Organ izat iona l St ructure Organizations all have a structure or shape. Mintzberg’s classification, described in Table 3-2, identifies five basic kinds of organizational structure (Mintzberg, 1979).

The kind of information systems you find in a business firm—and the nature of problems with these systems—often reflects the type of organizational structure. For instance, in a professional bureaucracy such as a hospital it is not unusual to find parallel patient record systems operated by the administration, another by doctors, and another by other professional staff such as nurses and social workers. In small entrepreneurial firms you will often find poorly designed systems developed in a rush that often outgrow their usefulness quickly. In huge multidivisional firms operating in hundreds of locations you will often find there is not a single integrating information system, but instead each locale or each division has its set of information systems.

Other Organ izat iona l Features Organizations have goals and use different means to achieve them. Some organizations have coercive goals (e.g., prisons); others have utilitarian goals (e.g., businesses). Still others have normative goals (universities, religious

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Entrepreneurial structure Young, small firm in a fast-changing environment. It has a Small start-up business simple structure and is managed by an entrepreneur serving as its single chief executive officer.

Machine bureaucracy Large bureaucracy existing in a slowly changing environment, Midsize manufacturing firm producing standard products. It is dominated by a centralized management team and centralized decision making.

Divisionalized bureaucracy Combination of multiple machine bureaucracies, each Fortune 500 firms, such as General producing a different product or service, all topped by one Motors central headquarters.

Professional bureaucracy Knowledge-based organization where goods and services Law firms, school systems, hospitals depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority.

Adhocracy Task force organization that must respond to rapidly changing Consulting firms, such as the Rand environments. Consists of large groups of specialists organized Corporation into short-lived multidisciplinary teams and has weak central management.

Chapter 3 Information Systems, Organizations, and Strategy 89

groups). Organizations also serve different groups or have different constituen- cies, some primarily benefiting their members, others benefiting clients, stockholders, or the public. The nature of leadership differs greatly from one organization to another—some organizations may be more democratic or authoritarian than others. Another way organizations differ is by the tasks they perform and the technology they use. Some organizations perform primarily routine tasks that can be reduced to formal rules that require little judgment (such as manufacturing auto parts), whereas others (such as consulting firms) work primarily with nonroutine tasks.


Information systems have become integral, online, interactive tools deeply involved in the minute-to-minute operations and decision making of large organizations. Over the last decade, information systems have fundamentally altered the economics of organizations and greatly increased the possibilities for organizing work. Theories and concepts from economics and sociology help us understand the changes brought about by IT.

ECONOMIC IMPACTS From the point of view of economics, IT changes both the relative costs of capital and the costs of information. Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. Hence, information technology should result in a decline in the number of middle managers and clerical workers as information technology substitutes for their labor (Laudon, 1990).

As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain relatively expensive. Hence, over time we should expect managers to increase their invest- ments in IT because of its declining cost relative to other capital investments.

IT also obviously affects the cost and quality of information and changes the economics of information. Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the marketplace what it cannot make itself. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production costs. Using markets is expensive because of costs such as locating and communicating with distant suppliers, monitoring contract compliance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985). Traditionally, firms have tried to reduce trans- action costs through vertical integration, by getting bigger, hiring more employ- ees, and buying their own suppliers and distributors, as both General Motors and Ford used to do.

Information technology, especially the use of networks, can help firms lower the cost of market participation (transaction costs), making it worthwhile for firms to contract with external suppliers instead of using internal sources. As a result, firms can shrink in size (numbers of employees) because it is far less expensive to outsource work to a competitive marketplace rather than hire employees.

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For instance, by using computer links to external suppliers, the Chrysler Corporation can achieve economies by obtaining more than 70 percent of its parts from the outside. Information systems make it possible for companies such as Cisco Systems and Dell Inc. to outsource their production to contract manufacturers such as Flextronics instead of making their products themselves.

Figure 3-6 shows that as transaction costs decrease, firm size (the number of employees) should shrink because it becomes easier and cheaper for the firm to contract for the purchase of goods and services in the marketplace rather than to make the product or offer the service itself. Firm size can stay constant or contract even as the company increases its revenues. For example, when Eastman Chemical Company split off from Kodak in 1994, it had $3.3 billion in revenue and 24,000 full-time employees. In 2009, it generated over $5 billion in revenue with only 10,000 employees.

Information technology also can reduce internal management costs. According to agency theory, the firm is viewed as a “nexus of contracts” among self-interested individuals rather than as a unified, profit-maximizing entity (Jensen and Meckling, 1976). A principal (owner) employs “agents” (employ- ees) to perform work on his or her behalf. However, agents need constant supervision and management; otherwise, they will tend to pursue their own interests rather than those of the owners. As firms grow in size and scope, agency costs or coordination costs rise because owners must expend more and more effort supervising and managing employees.

Information technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce agency costs because it becomes easier for managers to oversee a greater number of employees. Figure 3-7 shows that by reducing overall management costs, information technology enables firms to increase revenues while shrinking the number of middle managers and clerical workers. We have seen examples in earlier chapters where information technology expanded the power and scope of small organi- zations by enabling them to perform coordinating activities such as processing orders or keeping track of inventory with very few clerks and managers.


When the costs of participating in markets (transaction costs) were high, it made sense to build large firms and do everything inside the firm. But IT reduces the firm’s market transaction costs. This means firms can outsource work using the market, reduce their employee head count, and still grow revenues, relying more on outsourcing firms and external contractors.

Chapter 3 Information Systems, Organizations, and Strategy 91

Because IT reduces both agency and transaction costs for firms, we should expect firm size to shrink over time as more capital is invested in IT. Firms should have fewer managers, and we expect to see revenue per employee increase over time.

ORGANIZATIONAL AND BEHAVIORAL IMPACTS Theories based in the sociology of complex organizations also provide some understanding about how and why firms change with the implementation of new IT applications.

IT F la t tens Organ izat ions Large, bureaucratic organizations, which primarily developed before the computer age, are often inefficient, slow to change, and less competitive than newly created organizations. Some of these large organizations have downsized, reducing the number of employees and the number of levels in their organiza- tional hierarchies.

Behavioral researchers have theorized that information technology facilitates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency (see Figure 3-8). IT pushes decision-making rights lower in the organization because lower-level employees receive the information they need to make decisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees the capabilities to make intelligent decisions.) Because managers now receive so much more accurate information on time, they become much faster at making decisions, so fewer managers are required. Management costs decline as a percentage of revenues, and the hierarchy becomes much more efficient.

These changes mean that the management span of control has also been broadened, enabling high-level managers to manage and control more workers


Agency costs are the costs of managing a firm’s employees. IT reduces agency costs making manage- ment more efficient. Fewer managers are needed to manage employees. IT makes it possible to build very large global firms and to run them efficiently without greatly expanding management. Without IT, very large global firms would be difficult to operate because they would be very expensive to manage.

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spread over greater distances. Many companies have eliminated thousands of middle managers as a result of these changes.

Post indust r ia l Organ izat ions Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In postindustrial societies, authority increasingly relies on knowledge and competence, and not merely on formal positions. Hence, the shape of organizations flattens because professional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more widespread throughout the firm (Drucker, 1988).

Information technology may encourage task force-networked organizations in which groups of professionals come together—face to face or electronically— for short periods of time to accomplish a specific task (e.g., designing a new automobile); once the task is accomplished, the individuals join other task forces. The global consulting service Accenture is an example. It has no opera- tional headquarters and no formal branches. Many of its 190,000 employees move from location to location to work on projects at client locations in 49 different countries.

Who makes sure that self-managed teams do not head off in the wrong direction? Who decides which person works on which team and for how long? How can managers evaluate the performance of someone who is constantly rotating from team to team? How do people know where their careers are headed? New approaches for evaluating, organizing, and informing workers are required, and not all companies can make virtual work effective.


Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower-level employees more decision-making authority.

Chapter 3 Information Systems, Organizations, and Strategy 93

Unders tand ing Organ izat iona l Res i s tance to Change Information systems inevitably become bound up in organizational politics because they influence access to a key resource—namely, information. Information systems can affect who does what to whom, when, where, and how in an organization. Many new information systems require changes in personal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because information systems potentially change an organization’s structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced.

There are several ways to visualize organizational resistance. Leavitt (1965) used a diamond shape to illustrate the interrelated and mutually adjusting character of technology and organization (see Figure 3-9). Here, changes in technology are absorbed, deflected, and defeated by organizational task arrangements, structures, and people. In this model, the only way to bring about change is to change the technology, tasks, structure, and people simulta- neously. Other authors have spoken about the need to “unfreeze” organizations before introducing an innovation, quickly implementing it, and “refreezing” or institutionalizing the change (Alter and Ginzberg, 1978; Kolb, 1970).

Because organizational resistance to change is so powerful, many informa- tion technology investments flounder and do not increase productivity. Indeed, research on project implementation failures demonstrates that the most common reason for failure of large projects to reach their objectives is not the failure of the technology, but organizational and political resistance to change. Chapter 14 treats this issue in detail. Therefore, as a manger involved in future IT investments, your ability to work with people and organizations is just as important as your technical awareness and knowledge.

THE INTERNET AND ORGANIZATIONS The Internet, especially the World Wide Web, has an important impact on the relationships between many firms and external entities, and even on the


Implementing information systems has consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously. Source: Leavitt (1965).

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organization of business processes inside a firm. The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations. In essence, the Internet is capable of dramatically lowering the transaction and agency costs facing most organizations. For instance, broker- age firms and banks in New York can now deliver their internal operating pro- cedures manuals to their employees at distant locations by posting them on the corporate Web site, saving millions of dollars in distribution costs. A global sales force can receive nearly instant product price information updates using the Web or instructions from management sent by e-mail. Vendors of some large retailers can access retailers’ internal Web sites directly to find up-to-the-minute sales information and to initiate replenishment orders instantly.

Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a key component of their IT infrastructures. If prior networking is any guide, one result will be simpler business processes, fewer employees, and much flatter organizations than in the past.

IMPLICATIONS FOR THE DESIGN AND UNDERSTANDING OF INFORMATION SYSTEMS To deliver genuine benefits, information systems must be built with a clear understanding of the organization in which they will be used. In our experi- ence, the central organizational factors to consider when planning a new system are the following:

• The environment in which the organization must function

• The structure of the organization: hierarchy, specialization, routines, and business processes

• The organization’s culture and politics

• The type of organization and its style of leadership

• The principal interest groups affected by the system and the attitudes of workers who will be using the system

• The kinds of tasks, decisions, and business processes that the information system is designed to assist


In almost every industry you examine, you will find that some firms do better than most others. There’s almost always a stand-out firm. In the automotive industry, Toyota is considered a superior performer. In pure online retail, Amazon is the leader, in off-line retail Walmart, the largest retailer on earth, is the leader. In online music, Apple’s iTunes is considered the leader with more than 75 percent of the downloaded music market, and in the related industry of digital music players, the iPod is the leader. In Web search, Google is considered the leader.

Firms that “do better” than others are said to have a competitive advantage over others: They either have access to special resources that others do not, or they are able to use commonly available resources more efficiently—usually

Chapter 3 Information Systems, Organizations, and Strategy 95

because of superior knowledge and information assets. In any event, they do better in terms of revenue growth, profitability, or productivity growth (efficiency), all of which ultimately in the long run translate into higher stock market valuations than their competitors.

But why do some firms do better than others and how do they achieve competitive advantage? How can you analyze a business and identify its strategic advantages? How can you develop a strategic advantage for your own business? And how do information systems contribute to strategic advantages? One answer to that question is Michael Porter’s competitive forces model.

PORTER’S COMPETITIVE FORCES MODEL Arguably, the most widely used model for understanding competitive advantage is Michael Porter’s competitive forces model (see Figure 3-10). This model provides a general view of the firm, its competitors, and the firm’s environment. Earlier in this chapter, we described the importance of a firm’s environment and the dependence of firms on environments. Porter’s model is all about the firm’s general business environment. In this model, five competi- tive forces shape the fate of the firm.

Trad i t iona l Compet i tors All firms share market space with other competitors who are continuously devising new, more efficient ways to produce by introducing new products and services, and attempting to attract customers by developing their brands and imposing switching costs on their customers.

New Market Entrants In a free economy with mobile labor and financial resources, new companies are always entering the marketplace. In some industries, there are very low barriers to entry, whereas in other industries, entry is very difficult. For instance, it is fairly easy to start a pizza business or just about any small retail business, but it is much more expensive and difficult to enter the computer chip business, which has very high capital costs and requires significant exper- tise and knowledge that is hard to obtain. New companies have several possible


In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

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advantages: They are not locked into old plants and equipment, they often hire younger workers who are less expensive and perhaps more innovative, they are not encumbered by old worn-out brand names, and they are “more hungry” (more highly motivated) than traditional occupants of an industry. These advantages are also their weakness: They depend on outside financing for new plants and equipment, which can be expensive; they have a less-experienced workforce; and they have little brand recognition.

Subst i tute Products and Ser v ices In just about every industry, there are substitutes that your customers might use if your prices become too high. New technologies create new substitutes all the time. Even oil has substitutes: Ethanol can substitute for gasoline in cars; vegetable oil for diesel fuel in trucks; and wind, solar, coal, and hydro power for industrial electricity generation. Likewise, the Internet telephone service can substitute for traditional telephone service, and fiber-optic telephone lines to the home can substitute for cable TV lines. And, of course, an Internet music service that allows you to download music tracks to an iPod is a substitute for CD-based music stores. The more substitute products and services in your industry, the less you can control pricing and the lower your profit margins.

Customers A profitable company depends in large measure on its ability to attract and retain customers (while denying them to competitors), and charge high prices. The power of customers grows if they can easily switch to a competitor’s products and services, or if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is little product differentiation, and all prices are known instantly (such as on the Internet). For instance, in the used college textbook market on the Internet, students (customers) can find multiple suppliers of just about any current college textbook. In this case, online customers have extraordinary power over used-book firms.

Suppl ie rs The market power of suppliers can have a significant impact on firm profits, especially when the firm cannot raise prices as fast as can suppliers. The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality, and delivery schedules. For instance, manufacturers of laptop PCs almost always have multiple competing suppliers of key compo- nents, such as keyboards, hard drives, and display screens.

INFORMATION SYSTEM STRATEGIES FOR DEALING WITH COMPETITIVE FORCES What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technol- ogy and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy.

Low- Cost Leadersh ip Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Walmart. By keeping prices low and shelves well

Chapter 3 Information Systems, Organizations, and Strategy 97

stocked using a legendary inventory replenishment system, Walmart became the leading retail business in the United States. Walmart’s continuous replen- ishment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale termi- nals record the bar code of each item passing the checkout counter and send a purchase transaction directly to a central computer at Walmart headquarters. The computer collects the orders from all Walmart stores and transmits them to suppliers. Suppliers can also access Walmart’s sales and inventory data using Web technology.

Because the system replenishes inventory with lightning speed, Walmart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Walmart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep oper- ating costs low, Walmart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)

Walmart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response.

Product D i f ferent ia t ion Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services. For instance, Google continuously introduces new and unique search services on its Web site, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created the iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for $.69 to $1.29 each. Apple has continued to

Supermarkets and large retail stores such as Walmart use sales data captured at the checkout counter to determine which items have sold and need to be reordered. Walmart’s continuous replenishment system transmits orders to restock directly to its suppliers. The system enables Walmart to keep costs low while fine-tuning its merchandise to meet customer demands.

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innovate with its multimedia iPhone, iPad tablet computer, and iPod video player. The chapter-opening case describes how AT&T’s business strategy is trying to piggyback off such digital innovations.

Manufacturers and retailers are using information systems to create products and services that are customized and personalized to fit the precise specifications of individual customers. For example, Nike sells customized sneakers through its NIKEiD program on its Web site. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to 8 characters. Nike transmits the orders via computers to specially-equipped plants in China and Korea. The sneakers cost only $10 extra and take about three weeks to reach the customer. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.

Table 3-3 lists a number of companies that have developed IT-based products and services that other firms have found difficult to copy, or at least a long time to copy.

Focus on Market N iche Use information systems to enable a specific market focus, and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.

The data come from a range of sources—credit card transactions, demo- graphic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with Web sites. Sophisticated software tools find patterns in these large pools of data and infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. For example, Hilton Hotels’ OnQ system analyzes detailed data collected on active guests in all of its properties to determine the preferences of each guest and each guest’s profitability. Hilton uses this information to give its most profitable customers additional privileges, such as late check-outs. Contemporary customer relationship management (CRM) systems feature ana- lytical capabilities for this type of intensive data analysis (see Chapters 2 and 9).


Amazon: One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers.

Online music: Apple iPod The iPod is an integrated handheld player backed up with an online and iTunes library of over 13 million songs

Golf club customization: Ping Customers can select from more than 1 million different golf club options; a build-to-order system ships their customized clubs within 48 hours.

Online bill payment: Fifty-two million households pay bills online in 2010.

Online person-to-person PayPal enables the transfer of money between individual bank payment: accounts and between bank accounts and credit card accounts.

Chapter 3 Information Systems, Organizations, and Strategy 99

The Interactive Session on Organizations describes how skillfully credit card companies are able to use this strategy to predict their most profitable cardholders. The companies gather vast quantities of data about consumer purchases and other behaviors and mine these data to construct detailed profiles that identify cardholders who might be good or bad credit risks. These practices have enhanced credit card companies’ profitability, but are they in consumers’ best interests?

Strengthen Customer and Supp l ie r Int imacy Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access by suppliers to production schedules, and even permits suppliers to decide how and when to ship supplies to Chrysler factories. This allows suppliers more lead time in producing goods. On the customer side, keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product), and loyalty to your firm.

Table 3-4 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see companies pursuing several of them simultaneously. For example, Dell tries to emphasize low cost as well as the ability to customize its personal computers.

THE INTERNET’S IMPACT ON COMPETITIVE ADVANTAGE Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense (Porter, 2001). Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. Profits have been dampened. Table 3-5 summarizes some of the potentially negative impacts of the Internet on business firms identified by Porter.



Low-cost leadership Use information systems to produce products and services at a lower Walmart price than competitors while enhancing quality and level of service

Product differentiation Use information systems to differentiate products, and enable new Google, eBay, Apple, Lands’ End services and products

Focus on market niche Use information systems to enable a focused strategy on a single Hilton Hotels, Harrah’s market niche; specialize

Customer and supplier Use information systems to develop strong ties and loyalty with Chrysler Corporation intimacy customers and suppliers

When Kevin Johnson returned from his honeymoon, a letter from American Express was waiting for him. The letter informed Johnson that AmEx was slash- ing his credit limit by 60 percent. Why? Not because Johnson missed a payment or had bad credit. The letter stated: “Other customers who have used their card at establishments where you recently shopped, have a poor repayment history with American Express.” Johnson had started shopping at Walmart. Welcome to the new era of credit card profiling.

Every time you make a purchase with a credit card, a record of that sale is logged into a massive data repository maintained by the card issuer. Each purchase is assigned a four-digit category code that describes the type of purchase that was made. There are separate codes for grocery stores, fast food restaurants, doctors, bars, bail and bond payments, and dating and escort services. Taken together, these codes allow credit card companies to learn a great deal about each of its customers at a glance.

Credit card companies use these data for multiple purposes. First, they use them to target future promotions for additional products more accurately. Users that purchase airline tickets might receive promotions for frequent flyer miles, for example. The data help card issuers guard against credit card fraud by identifying purchases that appear unusual compared to a cardholder’s normal purchase history. The card companies also flag users who frequently charge more than their credit limit or demonstrate erratic spending habits. Lastly, these records are used by law enforcement agencies to track down criminals.

Credit card holders with debt, the ones who never fully pay off their balances entirely and thus have to pay monthly interest charges and other fees, have been a major source of profit for credit card issuers. However, the recent financial crisis and credit crunch have turned them into a mounting liability because so many people are defaulting on their payments and even filing for bankruptcy. So the credit card companies are now focusing on mining credit card data to predict cardholders posing the highest risk.

Using mathematical formulas and insights from behavioral science, these companies are developing more fine-grained profiles to help them get inside the heads of their customers. The data provide new

HOW MUCH DO CREDIT CARD COMPANIES KNOW ABOUT YOU? insights about the relationship of certain types of pur- chases to a customer’s ability or inability to pay off credit card balances and other debt. The card-issuing companies now use this information to deny credit card applications or shrink the amount of credit avail- able to high-risk customers.

These companies are generalizing based on certain types of purchases that may unfairly charac- terize responsible cardholders as risky. Purchases of secondhand clothing, bail bond services, massages, or gambling might cause card issuers to identify you as a risk, even if you maintain your balance respon- sibly from month to month. Other behaviors that raise suspicion: using your credit card to get your tires re-treaded, to pay for drinks at a bar, to pay for marriage counseling, or to obtain a cash advance. Charged speeding tickets raise suspicion because they may indicate an irrational or impulsive person- ality. In light of the sub-prime mortgage crisis, credit card companies have even begun to consider indi- viduals from Florida, Nevada, California, and other states hardest hit by foreclosures to be risks simply by virtue of their state of residence.

The same fine-grained profiling also identifies the most reliable credit-worthy cardholders. For exam- ple, the credit card companies found that people who buy high-quality bird seed and snow rakes to sweep snow off of their roofs are very likely to pay their debts and never miss payments. Credit card companies are even using their detailed knowledge of cardholder behavior to establish personal connec- tions with the clients that owe them money and convince them to pay off their balances.

One 49-year old woman from Missouri in the throes of a divorce owed $40,000 to various credit card companies at one point, including $28,000 to Bank of America. A Bank of America customer ser- vice representative studied the woman’s profile and spoke to her numerous times, even pointing out one instance where she was erroneously charged twice. The representative forged a bond with the card- holder, and as a result she paid back the entire $28,000 she owed, (even though she failed to repay much of the remainder that she owed to other credit card companies.)

This example illustrates something the credit card companies now know: when cardholders feel more comfortable with companies, as a result of a good

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1. What competitive strategy are the credit card companies pursuing? How do information systems support that strategy?

2. What are the business benefits of analyzing customer purchase data and constructing behavioral profiles?

3. Are these practices by credit card companies ethical? Are they an invasion of privacy? Why or why not?

relationship with a customer service rep or for any other reason, they’re more likely to pay their debts.

It’s common practice for credit card companies to use this information to get a better idea of consumer trends, but should they be able to use it to preemp- tively deny credit or adjust terms of agreements? Law enforcement is not permitted to profile individu- als, but it appears that credit card companies are doing just that.

In June 2008, the FTC filed a lawsuit against CompuCredit, a sub-prime credit card marketer. CompuCredit had been using a sophisticated behav- ioral scoring model to identify customers who they considered to have risky purchasing behaviors and lower these customers’ credit limits. CompuCredit settled the suit by crediting $114 million to the accounts of these supposedly risky customers and paid a $2.5 million penalty.

Congress is investigating the extent to which credit card companies use profiling to determine interest rates and policies for their cardholders. The new credit card reform law signed by President

1. If you have a credit card, make a detailed list of all of your purchases for the past six months. Then write a paragraph describing what credit card companies learned about your interests and behavior from these purchases.

2. How would this information benefit the credit card companies? What other companies would be interested?

Barack Obama in May 2009 requires federal regula- tors to investigate this. Regulators must also deter- mine whether minority cardholders were adversely profiled by these criteria. The new legislation also bars card companies from raising interest rates at any time and for any reason on their customers.

Going forward, you’re likely to receive far fewer credit card solicitations in the mail and fewer offers of interest-free cards with rates that skyrocket after an initial grace period. You’ll also see fewer policies intended to trick or deceive customers, like cash- back rewards for unpaid balances, which actually encourage cardholders not to pay what they owe. But the credit card companies say that to compen- sate for these changes, they’ll need to raise rates across the board, even for good customers.

Sources: Betty Schiffman, “Who Knows You Better? Your Credit Card Company or Your Spouse?” Daily Finance, April 13, 2010; Charles Duhigg, “What Does Your Credit-Card Company Know about You?” The New York Times, June 17, 2009; and, “Can Your Lifestyle Hurt Your Credit?” MSN Money, June 30, 2009.Boudette.


Chapter 3 Information Systems, Organizations, and Strategy 101



Substitute products or services Enables new substitutes to emerge with new approaches to meeting needs and performing functions

Customers’ bargaining power Availability of global price and product information shifts bargaining power to customers

Suppliers’ bargaining power Procurement over the Internet tends to raise bargaining power over suppliers; suppliers can also benefit from reduced barriers to entry and from the elimination of distributors and other intermediaries standing between them and their users

Threat of new entrants The Internet reduces barriers to entry, such as the need for a sales force, access to channels, and physical assets; it provides a technology for driving business processes that makes other things easier to do

Positioning and rivalry among Widens the geographic market, increasing the number of competitors, and reducing differences among existing competitors competitors; makes it more difficult to sustain operational advantages; puts pressure to compete on price

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The Internet has nearly destroyed some industries and has severely threat- ened more. For instance, the printed encyclopedia industry and the travel agency industry have been nearly decimated by the availability of substitutes over the Internet. Likewise, the Internet has had a significant impact on the retail, music, book, retail brokerage, software, telecommunications, and news- paper industries.

However, the Internet has also created entirely new markets, formed the basis for thousands of new products, services, and business models, and pro- vided new opportunities for building brands with very large and loyal customer bases. Amazon, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are examples. In this sense, the Internet is “transforming” entire industries, forcing firms to change how they do business.

The Interactive Session on Technology provides more detail on the transfor- mation of the content and media industries. For most forms of media, the Internet has posed a threat to business models and profitability. Growth in book sales other than textbooks and professional publications has been sluggish, as new forms of entertainment continue to compete for consumers’ time. Newspapers and magazines have been hit even harder, as their readerships diminish, their advertisers shrink, and more people get their news for free online. The television and film industries have been forced to deal with pirates who are robbing them of some of their profits.

When Apple announced the launch of its new iPad tablet computer, leaders in all of these media saw not only a threat but also a significant opportunity. In fact, the iPad and similar mobile devices may be the savior—if traditional media can strike the right deal with technology providers like Apple and Google. And the iPad may be a threat for companies that fail to adjust their business models to a new method of providing content to users.

THE BUSINESS VALUE CHAIN MODEL Although the Porter model is very helpful for identifying competitive forces and suggesting generic strategies, it is not very specific about what exactly to do, and it does not provide a methodology to follow for achieving competitive advantages. If your goal is to achieve operational excellence, where do you start? Here’s where the business value chain model is helpful.

The value chain model highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985) and where information systems are most likely to have a strategic impact. This model identifies specific, critical leverage points where a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm’s products or services. These activities can be categorized as either primary activities or support activities (see Figure 3-11 on p. 105).

Primary activities are most directly related to the production and distribu- tion of the firm’s products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes receiving and storing materials for distribution to production. Operations transforms inputs into finished products. Outbound logistics entails storing and distributing finished products. Sales and marketing includes promoting and selling the firm’s products. The service activity includes maintenance and repair of the firm’s goods and services.


Tablet computers have come and gone several times before, but the iPad looks like it will be different. It has a gorgeous 10-inch color display, a persistent Wi- Fi Internet connection, potential use of high-speed cellular networks, functionality from over 250,000 applications available on Apple’s App Store, and the ability to deliver video, music, text, social networking applications, and video games. Its entry-level price is just $499. The challenge for Apple is to convince potential users that they need a new, expensive gad- get with the functionality that the iPad provides. This is the same challenge faced by the iPhone when it was first announced. As it turned out, the iPhone was a smashing success that decimated the sales of traditional cell phones throughout the world. Will the iPad do likewise as a disruptive technology for the media and content industries? It looks like it is on its way.

The iPad has some appeal to mobile business users, but most experts believe it will not supplant laptops or netbooks. It is in the publishing and media industries where its disruptive impact will first be felt.

The iPad and similar devices (including the Kindle Reader) will force many existing media businesses to change their business models significantly. These companies may need to stop investing in their traditional delivery platforms (like newsprint) and increase their investments in the new digital platform. The iPad will spur people to watch TV on the go, rather than their television set at home, and to read their books, newspapers, and magazines online rather than in print.

Publishers are increasingly interested in e-books as a way to revitalize stagnant sales and attract new readers. The success of Amazon’s Kindle has spurred growth in e-book sales to over $91 million wholesale in the first quarter of 2010. Eventually, e-books could account for 25 to 50 percent of all books sold. Amazon, the technology platform provider and the largest distributor of books in the world, has exercised its new power by forcing publishers to sell e-books at $9.95, a price too low for publishers to profit. Publishers are now refusing to supply new books to Amazon unless it raises prices, and Amazon is starting to comply.

The iPad enters this marketplace ready to compete with Amazon over e-book pricing and

IS THE IPAD A DISRUPTIVE TECHNOLOGY? distribution. Amazon has committed itself to offering the lowest possible prices, but Apple has appealed to publishers by announcing its intention to offer a tiered pricing system, giving publishers the opportu- nity to participate more actively in the pricing of their books. Apple has agreed with publishers to charge $12 to $14 for e-books, and to act as an agent selling books (with a 30% fee on all e-book sales) rather than a book distributor. Publishers like this arrangement, but worry about long-term pricing expectations, hoping to avoid a scenario where readers come to expect $9.99 e-books as the standard.

Textbook publishers are also eager to establish themselves on the iPad. Many of the largest textbook publishers have struck deals with software firms like ScrollMotion, Inc. to adapt their books for e-book readers. In fact, Apple CEO Steve Jobs designed the iPad with use in schools in mind, and interest on the part of schools in technology like the iPad has been strong. ScrollMotion already has experience using the Apple application platform for the iPhone, so the company is uniquely qualified to convert existing files provided by publishers into a format readable by the iPad and to add additional features, like a dictio- nary, glossary, quizzes, page numbers, a search func- tion, and high-quality images.

Newspapers are also excited about the iPad, which represents a way for them to continue charging for all of the content that they have been forced to make available online. If the iPad becomes as popular as other hit products from Apple, consumers are more likely to pay for content using that device. The successes of the App Store on the iPhone and of the iTunes music store attest to this. But the experience of the music industry with iTunes also gives all print media reason to worry. The iTunes music store changed the consumer perception of albums and music bundles. Music labels used to make more money selling 12 songs on an album than they did selling popular singles. Now consumers have drastically reduced their consumption of albums, preferring to purchase and download one song at a time. A similar fate may await print newpapers, which are bundles of news articles, many of which are unread.

Apple has also approached TV networks and movie studios about offering access to some of their top shows and movies for a monthly fee, but as of yet the

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1. Evaluate the impact of the iPad using Porter’s competitive forces model.

2. What makes the iPad a disruptive technology? Who are likely to be the winners and losers if the iPad becomes a hit? Why?

3. Describe the effects that the iPad is likely to have on the business models of Apple, content creators, and distributors.

bigger media companies have not responded to Apple’s overture. Of course, if the iPad becomes sufficiently popular, that will change, but currently media networks would prefer not to endanger their strong and lucrative partnerships with cable and satel- lite TV providers. (See the chapter-ending case study.)

And what about Apple’s own business model? Apple previously believed content was less impor- tant than the popularity of its devices. Now, Apple understands that it needs high-quality content from all the types of media it offers on its devices to be truly successful. The company’s new goal is to make deals with each media industry to distribute the content that users want to watch at a price agreed to by the content owners and the platform owners (Apple). The old attitudes of Apple (“Rip, burn,

distribute”), which were designed to sell devices are a thing of the past. In this case of disruptive technol- ogy, even the disruptors have been forced to change their behaviors. Sources: Ken Auletta, “Publish or Perish,” The New Yorker, April 26, 2010; Yukari Iwatani Kane and Sam Schechner, “Apple Races to Strike Content Deals Ahead of IPad Release,” The Wall Street Journal, March 18, 2010; Motoko Rich, “Books on iPad Offer Publishers a Pricing Edge,” The New York Times, January 28, 2010; Jeffrey A. Trachtenberg and Yukari Iwatani Kane, “Textbook Firms Ink Deals for iPad,” The Wall Street Journal, February 2, 2010; Nick Bilton, “Three Reasons Why the IPad Will Kill Amazon’s Kindle,” The New York Times, January 27, 2010; Jeffrey A Trachtenberg, “Apple Tablet Portends Rewrite for Publishers,” The Wall Street Journal, January 26, 2010; Brad Stone and Stephanie Clifford, “With Apple Tablet, Print Media Hope for a Payday,” The New York Times, January 26, 2010; Yukari Iwatani Kane, “Apple Takes Big Gamble on New iPad,” The Wall Street Journal, January 25, 2010; and Anne Eisenberg, “Devices to Take Textbooks Beyond Text,” The New York Times, December 6, 2009.

Visit Apple’s site for the iPad and the site for the Kindle. Review the features and specifica- tions of each device. Then answer the following questions:

1. How powerful is the iPad? How useful is it for reading books, newspapers or magazines, for surfing the Web, and for watching video? Can you identify any shortcomings of the device?

2. Compare the capabilities of the Kindle to the iPad. Which is a better device for reading books? Explain your answer.

3. Would you like to use an iPad or Kindle for the books you use in your college courses or read for pleasure instead of traditional print publications? Why or why not?


Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchas- ing input).

Now you can ask at each stage of the value chain, “How can we use informa- tion systems to improve operational efficiency, and improve customer and supplier intimacy?” This will force you to critically examine how you perform value-adding activities at each stage and how the business processes might be improved. You can also begin to ask how information systems can be used to improve the relationship with customers and with suppliers who lie outside the firm’s value chain but belong to the firm’s extended value chain where they are absolutely critical to your success. Here, supply chain management systems

Chapter 3 Information Systems, Organizations, and Strategy 105

that coordinate the flow of resources into your firm, and customer relationship management systems that coordinate your sales and support employees with customers, are two of the most common system applications that result from a business value chain analysis. We discuss these enterprise applications in detail later in Chapter 9.

Using the business value chain model will also cause you to consider benchmarking your business processes against your competitors or others in related industries, and identifying industry best practices. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting compa- nies, research organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective.

Once you have analyzed the various stages in the value chain at your business, you can come up with candidate applications of information systems. Then, once you have a list of candidate applications, you can decide which to develop first. By making improvements in your own business value chain that your competitors might miss, you can achieve competitive advantage by attaining operational excellence, lowering costs, improving profit margins, and forging a closer relationship with customers and suppliers. If your competitors are making similar improvements, then at least you will not be at a competitive disadvantage—the worst of all cases!


This figure provides examples of systems for both primary and support activities of a firm and of its value partners that can add a margin of value to a firm’s products or services.

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Extend ing the Va lue Cha in : The Va lue Web Figure 3-11 shows that a firm’s value chain is linked to the value chains of its suppliers, distributors, and customers. After all, the performance of most firms depends not only on what goes on inside a firm but also on how well the firm coordinates with direct and indirect suppliers, delivery firms (logistics partners, such as FedEx or UPS), and, of course, customers.

How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use information technology to develop industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industry-wide, IT-supported consortia, symposia, and communications networks to coordinate activities concerning government agencies, foreign competition, and compet- ing industries.

Looking at the industry value chain encourages you to think about how to use information systems to link up more efficiently with your suppliers, strategic partners, and customers. Strategic advantage derives from your ability to relate your value chain to the value chains of other partners in the process. For instance, if you are, you want to build systems that:

• Make it easy for suppliers to display goods and open stores on the Amazon site

• Make it easy for customers to pay for goods

• Develop systems that coordinate the shipment of goods to customers

• Develop shipment tracking systems for customers

Internet technology has made it possible to create highly synchronized industry value chains called value webs. A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer driven and operates in a less linear fashion than the traditional value chain.

Figure 3-12 shows that this value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in response to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location.

SYNERGIES, CORE COMPETENCIES, AND NETWORK- BASED STRATEGIES A large corporation is typically a collection of businesses. Often, the firm is organized financially as a collection of strategic business units and the returns to the firm are directly tied to the performance of all the strategic business units. Information systems can improve the overall performance of these business units by promoting synergies and core competencies.

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Synerg ies The idea of synergies is that when the output of some units can be used as inputs to other units, or two organizations pool markets and expertise, these relationships lower costs and generate profits. Recent bank and financial firm mergers, such as the merger of JP Morgan Chase and Bank of New York as well as Bank of America and Countrywide Financial Corporation occurred precisely for this purpose.

One use of information technology in these synergy situations is to tie together the operations of disparate business units so that they can act as a whole. For example, acquiring Countrywide Financial enabled Bank of America to extend its mortgage lending business and to tap into a large pool of new cus- tomers who might be interested in its credit card, consumer banking, and other financial products. Information systems would help the merged companies consolidate operations, lower retailing costs, and increase cross-marketing of financial products.

Enhanc ing Core Competenc ies Yet another way to use information systems for competitive advantage is to think about ways that systems can enhance core competencies. The argument is that the performance of all business units will increase insofar as these business units develop, or create, a central core of competencies. A core com- petency is an activity for which a firm is a world-class leader. Core competen- cies may involve being the world’s best miniature parts designer, the best package delivery service, or the best thin-film manufacturer. In general, a core competency relies on knowledge that is gained over many years of practical


The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand.

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field experience with a technology. This practical knowledge is typically sup- plemented with a long-term research effort and committed employees.

Any information system that encourages the sharing of knowledge across business units enhances competency. Such systems might encourage or enhance existing competencies and help employees become aware of new external knowledge; such systems might also help a business leverage existing competencies to related markets.

For example, Procter & Gamble, a world leader in brand management and consumer product innovation, uses a series of systems to enhance its core competencies. Some of these systems for collaboration were introduced in the Chapter 2 ending case study. An intranet called InnovationNet helps people working on similar problems share ideas and expertise. InnovationNet connects those working in research and development (R&D), engineering, purchasing, marketing, legal affairs, and business information systems around the world, using a portal to provide browser-based access to documents, reports, charts, videos, and other data from various sources. It includes a directory of subject matter experts who can be tapped to give advice or collaborate on problem solv- ing and product development, and links to outside research scientists and entrepreneurs who are searching for new, innovative products worldwide.

Network-Based Strateg ies The availability of Internet and networking technology have inspired strategies that take advantage of firms’ abilities to create networks or network with each other. Network-based strategies include the use of network economics, a virtual company model, and business ecosystems.

Network Economics. Business models based on a network may help firms strategically by taking advantage of network economics. In traditional economics—the economics of factories and agriculture—production experiences diminishing returns. The more any given resource is applied to production, the lower the marginal gain in output, until a point is reached where the additional inputs produce no additional outputs. This is the law of diminishing returns, and it is the foundation for most of modern economics.

In some situations, the law of diminishing returns does not work. For instance, in a network, the marginal costs of adding another participant are about zero, whereas the marginal gain is much larger. The larger the number of subscribers in a telephone system or the Internet, the greater the value to all participants because each user can interact with more people. It is not much more expensive to operate a television station with 1,000 subscribers than with 10 million subscribers. The value of a community of people grows with size, whereas the cost of adding new members is inconsequential.

From this network economics perspective, information technology can be strategically useful. Internet sites can be used by firms to build communities of users—like-minded customers who want to share their experiences. This builds customer loyalty and enjoyment, and builds unique ties to customers. EBay, the giant online auction site, and iVillage, an online community for women, are examples. Both businesses are based on networks of millions of users, and both companies have used the Web and Internet communication tools to build communities. The more people offering products on eBay, the more valuable the eBay site is to everyone because more products are listed, and more competition among suppliers lowers prices. Network economics also provides strategic benefits to commercial software vendors. The value of their software and complementary software products increases as more people use them, and

Chapter 3 Information Systems, Organizations, and Strategy 109

there is a larger installed base to justify continued use of the product and vendor support.

Virtual Company Model. Another network-based strategy uses the model of a virtual company to create a competitive business. A virtual company, also known as a virtual organization, uses networks to link people, assets, and ideas, enabling it to ally with other companies to create and distribute products and services without being limited by traditional organizational boundaries or physical locations. One company can use the capabilities of another company without being physically tied to that company. The virtual company model is useful when a company finds it cheaper to acquire products, services, or capabilities from an external vendor or when it needs to move quickly to exploit new market opportunities and lacks the time and resources to respond on its own.

Fashion companies, such as GUESS, Ann Taylor, Levi Strauss, and Reebok, enlist Hong Kong-based Li & Fung to manage production and shipment of their garments. Li & Fung handles product development, raw material sourcing, pro- duction planning, quality assurance, and shipping. Li & Fung does not own any fabric, factories, or machines, outsourcing all of its work to a network of more than 7,500 suppliers in 37 countries all over the world. Customers place orders to Li & Fung over its private extranet. Li & Fung then sends instructions to appropriate raw material suppliers and factories where the clothing is produced. The Li & Fung extranet tracks the entire production process for each order.

Working as a virtual company keeps Li & Fung flexible and adaptable so that it can design and produce the products ordered by its clients in short order to keep pace with rapidly changing fashion trends.

Business Ecosystems: Keystone and Niche Firms. The Internet and the emergence of digital firms call for some modification of the industry competitive forces model. The traditional Porter model assumes a relatively static industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers, with the focus on industry players in a market environment. Instead of participating in a single industry, some of today’s firms are much more aware that they participate in industry sets—collections of industries that provide related services and products (see Figure 3-13). Business ecosystem is another term for these loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers (Iansiti and Levien, 2004).

The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference being that cooperation takes place across many industries rather than many firms. For instance, both Microsoft and Walmart provide platforms composed of information systems, technologies, and services that thousands of other firms in different industries use to enhance their own capabilities. Microsoft has estimated that more than 40,000 firms use its Windows platform to deliver their own products, support Microsoft products, and extend the value of Microsoft’s own firm. Walmart’s order entry and inven- tory management system is a platform used by thousands of suppliers to obtain real-time access to customer demand, track shipments, and control inventories.

Business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. Keystone firms in the Microsoft ecosystem include Microsoft and technol- ogy producers such as Intel and IBM. Niche firms include thousands of software

110 Part One Organizations, Management, and the Networked Enterprise

application firms, software developers, service firms, networking firms, and consulting firms that both support and rely on the Microsoft products.

Information technology plays a powerful role in establishing business ecosystems. Obviously, many firms use information systems to develop into keystone firms by building IT-based platforms that other firms can use. In the digital firm era, we can expect greater emphasis on the use of IT to build industry ecosystems because the costs of participating in such ecosys- tems will fall and the benefits to all firms will increase rapidly as the platform grows.

Individual firms should consider how their information systems will enable them to become profitable niche players in larger ecosystems created by keystone firms. For instance, in making decisions about which products to build or which services to offer, a firm should consider the existing business ecosys- tems related to these products and how it might use IT to enable participation in these larger ecosystems.

A powerful, current example of a rapidly expanding ecosystem is the mobile Internet platform. In this ecosystem there are four industries: device makers (Apple iPhone, RIM BlackBerry, Motorola, LG, and others), wireless telecom- munication firms (AT&T, Verizon, T-Mobile, Sprint, and others), independent software applications providers (generally small firms selling games, applica- tions, and ring tones), and Internet service providers (who participate as providers of Internet service to the mobile platform).

Each of these industries has its own history, interests, and driving forces. But these elements come together in a sometimes cooperative, and sometimes competitive, new industry we refer to as the mobile digital platform ecosystem. More than other firms, Apple has managed to combine these industries into a system. It is Apple’s mission to sell physical devices (iPhones) that are nearly as powerful as today’s personal computers. These devices work only with a high-speed broadband network supplied by the wireless phone carriers. In order to attract a large customer base, the iPhone had to be more than just a cell phone. Apple differentiated this product by making it a “smart phone,” one


The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays an important role in enabling a dense network of interactions among the participating firms.

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capable of running thousands of different, useful applications. Apple could not develop all these applications itself. Instead it relies on generally small, independent software developers to provide these applications, which can be purchased at the iTunes store. In the background is the Internet service provider industry, which makes money whenever iPhone users connect to the Internet.


Strategic information systems often change the organization as well as its products, services, and operating procedures, driving the organization into new behavioral patterns. Successfully using information systems to achieve a competitive advantage is challenging and requires precise coordination of technology, organizations, and management.

SUSTAINING COMPETITIVE ADVANTAGE The competitive advantages that strategic systems confer do not necessarily last long enough to ensure long-term profitability. Because competitors can retaliate and copy strategic systems, competitive advantage is not always sustainable. Markets, customer expectations, and technology change; global- ization has made these changes even more rapid and unpredictable. The Internet can make competitive advantage disappear very quickly because virtually all companies can use this technology. Classic strategic systems, such as American Airlines’s SABRE computerized reservation system, Citibank’s ATM system, and FedEx’s package tracking system, benefited by being the first in their industries. Then rival systems emerged. was an e-commerce leader but now faces competition from eBay, Yahoo, and Google. Information systems alone cannot provide an enduring business advantage. Systems originally intended to be strategic frequently become tools for survival, required by every firm to stay in business, or they may inhibit organizations from making the strategic changes essential for future success.

ALIGNING IT WITH BUSINESS OBJECTIVES The research on IT and business performance has found that (a) the more successfully a firm can align information technology with its business goals, the more profitable it will be, and (b) only one-quarter of firms achieve alignment of IT with the business. About half of a business firm’s profits can be explained by alignment of IT with business (Luftman, 2003).

Most businesses get it wrong: Information technology takes on a life of its own and does not serve management and shareholder interests very well. Instead of business people taking an active role in shaping IT to the enterprise, they ignore it, claim not to understand IT, and tolerate failure in the IT area as just a nuisance to work around. Such firms pay a hefty price in poor performance. Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on revenues and profits.

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Management Check l i s t :Per forming a St rateg ic Systems Ana lys i s To align IT with the business and use information systems effectively for competitive advantage, managers need to perform a strategic systems analysis. To identify the types of systems that provide a strategic advantage to their firms, managers should ask the following questions:

1. What is the structure of the industry in which the firm is located?

• What are some of the competitive forces at work in the industry? Are there new entrants to the industry? What is the relative power of suppliers, customers, and substitute products and services over prices?

• Is the basis of competition quality, price, or brand?

• What are the direction and nature of change within the industry? From where are the momentum and change coming?

• How is the industry currently using information technology? Is the organiza- tion behind or ahead of the industry in its application of information systems?

2. What are the business, firm, and industry value chains for this particular firm?

• How is the company creating value for the customer—through lower prices and transaction costs or higher quality? Are there any places in the value chain where the business could create more value for the customer and additional profit for the company?

• Does the firm understand and manage its business processes using the best practices available? Is it taking maximum advantage of supply chain manage- ment, customer relationship management, and enterprise systems?

• Does the firm leverage its core competencies?

• Is the industry supply chain and customer base changing in ways that benefit or harm the firm?

• Can the firm benefit from strategic partnerships and value webs?

• Where in the value chain will information systems provide the greatest value to the firm?

3. Have we aligned IT with our business strategy and goals?

• Have we correctly articulated our business strategy and goals?

• Is IT improving the right business processes and activities to promote this strategy?

• Are we using the right metrics to measure progress toward those goals?

MANAGING STRATEGIC TRANSITIONS Adopting the kinds of strategic systems described in this chapter generally requires changes in business goals, relationships with customers and suppliers, and business processes. These sociotechnical changes, affecting both social and technical elements of the organization, can be considered strategic transitions—a movement between levels of sociotechnical systems.

Such changes often entail blurring of organizational boundaries, both external and internal. Suppliers and customers must become intimately linked and may share each other’s responsibilities. Managers will need to devise new business processes for coordinating their firms’ activities with those of customers, suppli- ers, and other organizations. The organizational change requirements surround- ing new information systems are so important that they merit attention through- out this text. Chapter 14 examines organizational change issues in more detail.

Chapter 3 Information Systems, Organizations, and Strategy 113

3.5 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience identifying informa- tion systems to support a business strategy, analyzing organizational factors affecting the information systems of merging companies, using a database to improve decision making about business strategy, and using Web tools to configure and price an automobile.

Management Dec i s ion Prob lems

1. Macy’s, Inc., through its subsidiaries, operates approximately 800 department stores in the United States. Its retail stores sell a range of merchandise, including adult and children’s apparel, accessories, cosmetics, home furnishings, and housewares. Senior management has decided that Macy’s needs to tailor merchandise more to local tastes, that the colors, sizes, brands, and styles of clothing and other merchandise should be based on the sales patterns in each individual Macy’s store. For example, stores in Texas might stock clothing in larger sizes and brighter colors than those in New York, or the Macy’s on Chicago’s State Street might include a greater variety of makeup shades to attract trendier shoppers. How could information systems help Macy’s management implement this new strategy? What pieces of data should these systems collect to help management make merchandising decisions that support this strategy?

2. Today’s US Airways is the result of a merger between US Airways and America West Airlines. Before the merger, US Airways dated back to 1939 and had very traditional business processes, a lumbering bureaucracy, and a rigid information systems function that had been outsourced to Electronic Data Systems. America West was formed in 1981 and had a younger workforce, a more freewheeling entrepreneurial culture, and managed its own information systems. The merger was designed to create synergies from US Airways’ experience and strong network on the east coast of the United States with America West’s low-cost structure, information systems, and routes in the western United States. What features of organizations should management have considered as it merged the two companies and their information systems? What decisions need to be made to make sure the strategy works?

Improv ing Dec i s ion Making: Us ing a Database to Clar i fy Bus iness St rategy

Software skills: Database querying and reporting; database design Business skills: Reservation systems; customer analysis

In this exercise, you’ll use database software to analyze the reservation transac- tions for a hotel and use that information to fine-tune the hotel’s business strategy and marketing activities.

The Presidents’ Inn is a small three-story hotel on the Atlantic Ocean in Cape May, New Jersey, a popular northeastern U.S. resort. Ten rooms overlook side streets, 10 rooms have bay windows that offer limited views of the ocean, and the remaining 10 rooms in the front of the hotel face the ocean. Room rates are based on room choice, length of stay, and number of guests per room. Room rates are the same for one to four guests. Fifth and sixth guests must pay an additional $20 charge each per day. Guests staying for seven days or more receive a 10-percent discount on their daily room rates.

Business has grown steadily during the past 10 years. Now totally renovated, the inn uses a romantic weekend package to attract couples, a vacation package

114 Part One Organizations, Management, and the Networked Enterprise

to attract young families, and a weekday discount package to attract business travelers. The owners currently use a manual reservation and bookkeeping system, which has caused many problems. Sometimes two families have been booked in the same room at the same time. Management does not have immediate data about the hotel’s daily operations and income.

In MyMISLab, you will find a database for hotel reservation transactions developed in Microsoft Access. A sample is shown below, but the Web site may have a more recent version of this database for this exercise.

Develop some reports that provide information to help management make the business more competitive and profitable. Your reports should answer the following questions:

• What is the average length of stay per room type?

• What is the average number of visitors per room type?

• What is the base income per room (i.e., length of visit multiplied by the daily rate) during a specified period of time?

• What is the strongest customer base?

After answering these questions, write a brief report describing what the database information reveals about the current business situation. Which specific business strategies might be pursued to increase room occupancy and revenue? How could the database be improved to provide better information for strategic decisions?

Improv ing Dec i s ion Making: Us ing Web Too l s to Conf igure and Pr ice an Automobi le

Software skills: Internet-based software Business skills: Researching product information and pricing

In this exercise, you’ll use software at Web sites for selling cars to find product information about a car of your choice and use that information to make an important purchase decision. You’ll also evaluate two of these sites as selling tools.

You are interested in purchasing a new Ford Focus. (If you are personally interested in another car, domestic or foreign, investigate that one instead.) Go to the Web site of CarsDirect ( and begin your investigation. Locate the Ford Focus. Research the various specific automobiles available in that model and determine which you prefer. Explore the full details about the specific car, including pricing, standard features, and options. Locate and read at least two reviews if possible. Investigate the safety of that model

Chapter 3 Information Systems, Organizations, and Strategy 115

based on the U.S. government crash tests performed by the National Highway Traffic Safety Administration if those test results are available. Explore the features for locating a vehicle in inventory and purchasing directly. Finally, explore the other capabilities of the CarsDirect site for financing.

Having recorded or printed the information you need from CarsDirect for your purchase decision, surf the Web site of the manufacturer, in this case Ford ( Compare the information available on Ford’s Web site with that of CarsDirect for the Ford Focus. Be sure to check the price and any incentives being offered (which may not agree with what you found at CarsDirect). Next, find a local dealer on the Ford site so that you can view the car before making your purchase decision. Explore the other features of Ford’s Web site.

Try to locate the lowest price for the car you want in a local dealer’s inventory. Which site would you use to purchase your car? Why? Suggest improvements for the sites of CarsDirect and Ford.

LEARNING TRACK MODULE The following Learning Track provides content relevant to topics covered in this chapter.

1. The Changing Business Environment for Information Technology

Review Summary 1. Which features of organizations do managers need to know about to build and use information

systems successfully? What is the impact of information systems on organizations? All modern organizations are hierarchical, specialized, and impartial, using explicit routines to

maximize efficiency. All organizations have their own cultures and politics arising from differences in interest groups, and they are affected by their surrounding environment. Organizations differ in goals, groups served, social roles, leadership styles, incentives, types of tasks performed, and type of structure. These features help explain differences in organizations’ use of information systems.

Information systems and the organizations in which they are used interact with and influence each other. The introduction of a new information system will affect organizational structure, goals, work design, values, competition between interest groups, decision making, and day-to-day behavior. At the same time, information systems must be designed to serve the needs of important organizational groups and will be shaped by the organization’s structure, business processes, goals, culture, politics, and management. Information technology can reduce transaction and agency costs, and such changes have been accentuated in organizations using the Internet. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are introduced.

2. How does Porter’s competitive forces model help companies develop competitive strategies using information systems?

In Porter’s competitive forces model, the strategic position of the firm, and its strategies, are determined by competition with its traditional direct competitors, but they are also greatly affected by new market entrants, substitute products and services, suppliers, and customers. Information systems help companies compete by maintaining low costs, differentiating products or services, focusing on market niche, strengthening ties with customers and suppliers, and increasing barriers to market entry with high levels of operational excellence.

116 Part One Organizations, Management, and the Networked Enterprise

Key Terms Agency theory, 90 Benchmarking, 105 Best practices, 105 Business ecosystem, 109 Competitive forces model, 95 Core competency, 107 Disruptive technologies, 87 Efficient customer response system, 97 Mass customization, 98 Network economics, 108 Organization, 82

Review Questions 1. Which features of organizations do managers need

to know about to build and use information systems successfully? What is the impact of information systems on organizations? • Define an organization and compare the

technical definition of organizations with the behavioral definition.

• Identify and describe the features of organiza- tions that help explain differences in organizations’ use of information systems.

• Describe the major economic theories that help explain how information systems affect organizations.

• Describe the major behavioral theories that help explain how information systems affect organizations.

• Explain why there is considerable organiza- tional resistance to the introduction of information systems.

Primary activities, 102 Product differentiation, 96 Routines, 84 Strategic transitions, 112 Support activities, 104 Switching costs, 99 Transaction cost theory, 89 Value chain model, 102 Value web, 106 Virtual company, 109

3. How do the value chain and value web models help businesses identify opportunities for strategic information system applications?

The value chain model highlights specific activities in the business where competitive strategies and information systems will have the greatest impact. The model views the firm as a series of primary and support activities that add value to a firm’s products or services. Primary activities are directly related to production and distribution, whereas support activities make the delivery of primary activities possible. A firm’s value chain can be linked to the value chains of its suppliers, distributors, and customers. A value web consists of information systems that enhance competitiveness at the industry level by promoting the use of standards and industry-wide consortia, and by enabling businesses to work more efficiently with their value partners.

4. How do information systems help businesses use synergies, core competencies, and network-based strategies to achieve competitive advantage?

Because firms consist of multiple business units, information systems achieve additional efficiencies or enhance services by tying together the operations of disparate business units. Information systems help businesses leverage their core competencies by promoting the sharing of knowledge across business units. Information systems facilitate business models based on large networks of users or subscribers that take advantage of network economics. A virtual company strategy uses networks to link to other firms so that a company can use the capabilities of other companies to build, market, and distribute products and services. In business ecosystems, multiple industries work together to deliver value to the customer. Information systems support a dense network of interactions among the participating firms.

5. What are the challenges posed by strategic information systems and how should they be addressed? Implementing strategic systems often requires extensive organizational change and a transition from one

sociotechnical level to another. Such changes are called strategic transitions and are often difficult and painful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive to build. Many strategic information systems are easily copied by other firms so that strategic advantage is not always sustainable.

Chapter 3 Information Systems, Organizations, and Strategy 117

• Describe the impact of the Internet and disruptive technologies on organizations.

2. How does Porter’s competitive forces model help companies develop competitive strategies using information systems? • Define Porter’s competitive forces model and

explain how it works. • Describe what the competitive forces model

explains about competitive advantage. • List and describe four competitive strategies

enabled by information systems that firms can pursue.

• Describe how information systems can support each of these competitive strategies and give examples.

• Explain why aligning IT with business objectives is essential for strategic use of sys- tems.

3. How do the value chain and value web models help businesses identify opportunities for strate- gic information system applications?

• Define and describe the value chain model.

• Explain how the value chain model can be used to identify opportunities for information systems.

• Define the value web and show how it is related to the value chain.

• Explain how the value web helps businesses identify opportunities for strategic informa- tion systems.

• Describe how the Internet has changed competitive forces and competitive advantage.

4. How do information systems help businesses use synergies, core competences, and network- based strategies to achieve competitive advantage?

• Explain how information systems promote synergies and core competencies.

• Describe how promoting synergies and core competencies enhances competitive advantage.

• Explain how businesses benefit by using network economics.

• Define and describe a virtual company and the benefits of pursuing a virtual company strategy.

5. What are the challenges posed by strategic infor- mation systems and how should they be addressed?

• List and describe the management challenges posed by strategic information systems.

• Explain how to perform a strategic systems analysis.

Discussion Questions 1. It has been said that there is no such thing as a

sustainable strategic advantage. Do you agree? Why or why not?

2. It has been said that the advantage that leading- edge retailers such as Dell and Walmart have over their competition isn’t technology; it’s their man- agement. Do you agree? Why or why not?

3. What are some of the issues to consider in deter- mining whether the Internet would provide your business with a competitive advantage?

Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos.

Collaboration and Teamwork: Identifying Opportunities for Strategic Information Systems

business strategy. Suggest strategic information systems appropriate for that particular business, including those based on Internet technology, if appropriate. If possible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a presentation of your findings for the class.

With your team of three or four students, select a company described in The Wall Street Journal, Fortune, Forbes, or another business publication. Visit the company’s Web site to find additional information about that company and to see how the firm is using the Web. On the basis of this information, analyze the business. Include a description of the organization’s features, such as important business processes, culture, structure, and environment, as well as its

Will TV Succumb to the Internet? CASE STUDY

he Internet has transformed the music industry. Sales of CDs in retail music stores have been steadily declining while sales of songs downloaded through the Internet to

iPods and other portable music players are skyrocket- ing. Moreover, the music industry is still contending with millions of people illegally downloading songs for free. Will the television industry experience a similar fate?

Widespread use of high-speed Internet access, powerful PCs with high-resolution display screens, iPhones, iPads, other mobile handhelds, and leading- edge file-sharing services have made downloading of video content from movies and television shows faster and easier than ever. Free and often illegal downloads of some TV shows are abundant. But the Internet is also providing new ways for television studios to distribute and sell their content, and they are trying to take advantage of that opportunity.

YouTube, which started up in February 2005, quickly became the most popular video-sharing Web site in the world. Even though YouTube’s original mis- sion was to provide an outlet for amateur filmmakers, clips of copyrighted Hollywood movies and television shows soon proliferated on the YouTube Web site. It is difficult to gauge how much proprietary content from TV shows winds up on YouTube without the studios’ permission. Viacom claimed in a 2008 lawsuit that over 150,000 unauthorized clips of its copyrighted television programs had appeared on YouTube.

YouTube tries to discourage its users from posting illegal clips by limiting the length of videos to 10 minutes each and by removing videos when requested by their copyright owner. YouTube has also implemented Video ID filtering and digital finger- printing technology that allows copyright owners to compare the digital fingerprints of their videos with material on YouTube and then flag infringing mater- ial. Using this technology, it is able to filter many unauthorized videos before they appear on the YouTube Web site. If infringing videos do make it online, they can be tracked using Video ID.

The television industry is also striking back by embracing the Internet as another delivery system for its content. Television broadcast networks such as NBC Universal, Fox, and CNN have put television shows on their own Web sites. In March 2007, NBC Universal, News Corp (the owner of Fox

Broadcasting), and ABC Inc. formed, a Web site offering streaming video of television shows and movies from NBC, Fox, ABC, Comedy Central, PBS, USA Network, Bravo, FX, Speed, Sundance, Oxygen, Onion News Network, and other networks. Hulu also syndicates its hosting to other sites, includ- ing AOL, MSN, Facebook, MySpace, Yahoo!, and, and allows users to embed Hulu clips in their Web site. The site is supported by advertising commercials, and much of its content is free to view- ers. CBS’s and Joost are other popular Web television sites.

Content from all of these sites is viewable over iPhones. Hulu has blocked services such as Boxee that try to bring Hulu to TV screens, because that would draw subscribers away from cable and satellite companies, diminishing their revenue.

According to Hulu CEO Jason Kilar, Hulu has suc- cessfully brought online TV into the mainstream. It dominates the market for online full-episode TV viewing, with more than 44 million monthly visitors, according to the online measurement firm comScore. Monthly video streams more than tripled in 2009, reaching over 900 million by January 2010.

What if there are so many TV shows available for free on the Web that “Hulu households” cancel their cable subscriptions to watch free TV online? Cable service operators have begun worrying, especially when the cable networks posted some of their programming on the Web. By 2010, nearly 800,000 U.S. households had “cut the cord,” dumping their cable, satellite, or high-speed television services from telecom companies such as Verizon’s FiOS or AT&T’s U-verse. In their place, they turned to Web-based videos from services such as Hulu, down- loadable shows from iTunes, by-mail video subscrip- tion services such as Netflix, or even old-style over- the-air broadcast programming. Although the “cord cutters” represent less than 1 percent of the 100 million U.S. households subscribing to a cable/ satellite/telco television service, the number of cord-cutting U.S. households is predicted to double to about 1.6 million. What if this trend continues?

In July 2009, cable TV operator Comcast Corporation began a trial program to bring some of Time Warner’s network shows, including TBS’s My Boys and TNT’s The Closer, to the Web. Other cable networks, including A&E and the History Channel, participated in the Comcast test.


118 Part One Organizations, Management, and the Networked Enterprise

By making more television shows available online, but only for cable subscribers, the cable networks hope to preserve and possibly expand the cable TV subscription model in an increasingly digital world. “The vision is you can watch your favorite network’s programming on any screen,” noted Time Warner Chief Executive Jeff Bewkes. The system used in the Comcast-Time Warner trial is interoperable with cable service providers’ systems to authenticate subscribers.

The same technology might also allow cable firms to provide demographic data for more targeted ads and perhaps more sophisticated advertising down the road. Cable programmers stand to earn more adver- tising revenue from their online content because viewers can’t skip ads on TV programs streamed from the Web as they do with traditional TV. Web versions of some television shows in the Comcast–Time Warner trial program, including TNT’s The Closer, will carry the same number of ads as seen on traditional TV, which amounts to more than four times the ad load on many Internet sites, including Hulu. Many hour-long shows available online are able to accommodate five or six commer- cial breaks, each with a single 30-second ad. NBC Universal Digital Entertainment has even streamed episodes of series, including The Office, with two ads per break. According to research firm eMarketer, these Web-video ads will generate $1.5 billion in ad revenue in 2010 and $2.1 billion in 2011.

For all its early success, Hulu is experiencing growing pains. Although it had generated more than $100 million in advertising revenue within two years, it is still unprofitable. Hulu’s content suppliers receive 50 to 70 percent of the advertising revenue Hulu generates from their videos. Some of these media companies have complained that this revenue is very meager, even though use of Hulu has skyrocketed. One major supplier, Viacom, withdrew its programming from Hulu after failing to reach a satisfactory agreement on revenue-sharing, depriving Hulu viewers of such popular shows as The Daily Show with Jon Stewart and The Colbert Report.

Other companies supplying Hulu’s content have pressured the company to earn even more advertis- ing dollars and to set up a subscription service requiring consumers to pay a monthly fee to watch at least some of the shows on the site. On June 29, 2010, Hulu launched such a service, called HuluPlus. For $9.99 per month, paid subscribers get the entire current season of Glee, The Office, House and other shows from broadcasters ABC, Fox, and NBC, as well as all the past seasons of several series. Hulu will

continue to show a few recent episodes for free online. Paying subscribers will get the same number of ads as users of the free Web site in order to keep the subscription cost low. Paying subscribers are also able watch shows in high definition and on multiple devices, including mobile phones and videogame consoles as well as television screens.

Will all of this work out for the cable industry? It’s still too early to tell. Although the cable program- ming companies want an online presence to extend their brands, they don’t want to cannibalize TV subscriptions or viewership ratings that generate advertising revenue. Customers accustomed to YouTube and Hulu may rebel if too many ads are shown online. According to Oppenheimer analyst Tim Horan, cable companies will start feeling the impact of customers canceling subscriptions to view online video and TV by 2012. Edward Woo, an Internet and digital media analyst for Wedbush Morgan Securities in Los Angeles, predicts that in a few years, “it should get extremely interesting.” Hulu and other Web TV and video sites will have much deeper content, and the technology to deliver that content to home viewers will be more advanced.

Sources: Ryan Nakashima, “Hulu Launches $10 Video Subscription Service,” Associated Press, June 29, 2010; Ben Patterson, “Nearly 800,000 U.S. TV Households ‘Cut the Cord,’ Report Says,” Yahoo! News, April 13, 2010; Brian Stelter and Brad Stone, “Successes (and Some Growing Pains) at Hulu, “ The New York Times, March 31, 2010; Brian Stelter, “Viacom and Hulu Part Ways,” The New York Times, March 2, 2010; Reinhardt Krause, “Cable TV Leaders Plot Strategy Vs. Free Programs on the Web,” Investors Business Daily, August 18, 2009; Sam Schechner and Vishesh Kumar, “TV Shows Bring Ads Online,” The Wall Street Journal, July 16, 2009; and Kevin Hunt, “The Coming TV-Delivery War: Cable vs. Internet,” The Montana Standard, July 18, 2009.

CASE STUDY QUESTIONS 1. What competitive forces have challenged the

television industry? What problems have these forces created?

2. Describe the impact of disruptive technology on the companies discussed in this case.

3. How have the cable programming and delivery companies responded to the Internet?

4. What management, organization, and technology issues must be addressed to solve the cable industry’s problems?

5. Have the cable companies found a successful new business model to compete with the Internet? Why or why not?

6. If more television programs were available online, would you cancel your cable subscription? Why or why not?

Chapter 3 Information Systems, Organizations, and Strategy 119

LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions:

1. What ethical, social, and political issues are raised by information systems?

2. What specific principles for conduct can be used to guide ethical decisions?

3. Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

4. How have information systems affected everyday life?


ISSUES RELATED TO SYSTEMS A Model for Thinking About Ethical, Social, and

Political Issues Five Moral Dimensions of the Information Age Key Technology Trends that Raise Ethical Issues

4.2 ETHICS IN AN INFORMATION SOCIETY Basic Concepts: Responsibility, Accountability, and

Liability Ethical Analysis Candidate Ethical Principles Professional Codes of Conduct Some Real-World Ethical Dilemmas

4.3 THE MORAL DIMENSIONS OF INFORMATION SYSTEMS Information Rights: Privacy and Freedom in the

Internet Age Property Rights: Intellectual Property Accountability, Liability, and Control System Quality: Data Quality and System Errors Quality of Life: Equity, Access, and Boundaries

4.4 HANDS-ON MIS PROJECTS Management Decision Problems Achieving Operational Excellence: Creating a Simple

Blog Improving Decision Making: Using Internet

Newsgroups for Online Market Research

LEARNING TRACK MODULES Developing a Corporate Code of Ethics for

Information Systems Creating a Web Page

Chapter 4

Ethical and Social Issues in Information Systems

Interactive Sessions:

The Perils of Texting

Too Much Technology?


ver get the feeling somebody is trailing you on the Web, watching your every click? Wonder why you start seeing display ads and pop-ups just after you’ve been scouring the Web for a car, a dress, or cosmetic product? Well, you’re right: your behavior is being tracked, and you are being targeted on the Web so that you are exposed to

certain ads and not others. The Web sites you visit track the search engine queries you enter, pages visited, Web content viewed, ads clicked, videos watched, content shared, and the products you purchase. Google is the largest Web tracker, monitoring thousands of Web sites. As one wag noted, Google knows more about you than your mother does. In March 2009, Google began displaying ads on thousands of Google-related Web sites based on their previous online activities. To parry a growing public resentment of behavioral targeting, Google said it would give users the ability to see and edit the information that it has compiled about their interests for the purposes of behavioral targeting.

Behavioral targeting seeks to increase the efficiency of online ads by using information that Web visitors reveal about themselves online, and if possible, combine this with offline identity and consumption information gathered by companies such as Acxiom. One of the original promises of the Web was that it can deliver a marketing message tailored to each consumer based on this data, and then measure the results in terms of click-throughs and purchases. The technology used to implement online tracking is a combination of cookies, Flash cookies, and Web beacons (also called Web bugs). Web beacons are small programs placed on your computer when you visit any of thousands of Web sites. They report back to servers operated by the bea- con owners the domains and Web pages you visited, what ads you clicked on, and other online behaviors. A recent study of 20 million Web pages published by 2 million domains found Google, Yahoo, Amazon, YouTube, Photobucket, and Flickr among the top 10 Web-bugging sites. Google alone accounts for 20% of all Web bugs. The average home landing page at the top 100 Web domains has over 50 tracking cookies and bugs. And you thought you were surfing alone?

Firms are experimenting with more precise targeting methods. Snapple used behavioral targeting methods (with the help of an online ad firm Tacoda) to identify the types of people attracted to Snapple Green Tea. Answer: people who like the arts and literature, travel interna- tionally, and visit health sites. Microsoft offers MSN advertisers access to personal data derived from 270 million worldwide Windows Live users. The goal of Web beacons and bugs is even more granular: these tools can be used to identify your personal interests and behaviors so precisely tar- geted ads can be shown to you.



The growth in the power, reach, and scope of behavioral targeting has drawn the attention of privacy groups and the Federal Trade Commission (FTC). Currently, Web tracking is unregulated. In November 2007, the FTC opened hearings to consider proposals from privacy advo- cates to develop a “do not track list,” to develop visual online cues to alert people to tracking, and to allow people to opt out. In the Senate, hearings on behavioral tar- geting were held throughout 2009 and the first half of 2010 with attention shifting to the privacy of personal location informa- tion. While Google, Microsoft, and Yahoo pleaded for legislation to protect them

122 Part One Organizations, Management, and the Networked Enterprise

from consumer lawsuits, the FTC refused to consider new legislation to protect the privacy of Internet users. Instead, the FTC proposed industry self-regulation. In 2009, a consortium of advertising firms (the Network Advertising Initiative) responded positively to FTC-proposed principles to regulate online behavioral advertising. In 2010, Congressional committees pressed leading Internet firms to allow users more opportunities to turn off tracking tools, and to make users aware on entry to a page that they are being tracked. In June 2010, the FTC announced it is examining Facebook Inc.’s efforts to protect user privacy.

All of these regulatory efforts emphasize transparency, user control over their information, security, and the temporal stability of privacy promises (unan- nounced and sudden changes in information privacy may not be allowed).

Perhaps the central ethical and moral question is understanding what rights individuals have in their own personally identifiable Internet profiles. Are these “ownership” rights, or merely an “interest” in an underlying asset? How much privacy are we willing to give up in order to receive more relevant ads? Surveys suggest that over 70 percent of Americans do not want to receive targeted ads. Sources: “Web Bug Report,” SecuritySpace, July, 2010; Miguel Helft, “Technology Coalition Seeks Stronger Privacy Laws,” New York Times, March 30, 2010; “Study Finds Behaviorally- Targeted Ads More Than Twice As Valuable, Twice as Effective As Non-targerted Online Ads,” Network Advertising Initiative, March 24, 2010; Steve Lohr, “Redrawing the Route to Online Privacy,” New York Times, February 28, 2010; “The Collection and Use of Location Information for Commercial Purposes Hearings,” U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Commerce, Trade and Consumer Protection, February 24, 2010; Tom Krazit, “Groups Call for New Checks on Behavioral Ad Data,” CNET News, September 1, 2009; Robert Mitchell, “What Google Knows About You,” Computerworld, May 11, 2009; Stephanie Clifford, “Many See Privacy on Web as Big Issue, Survey Says,” The New York Times, March 16, 2009; Miguel Helft, “Google to Offer Ads Based on Interests,” The New York Times, March 11, 2009; and David Hallerman, “Behavioral Targeting: Marketing Trends,” eMarketer, June 2008.

The growing use of behavioral targeting techniques described in thechapter-opening case shows that technology can be a double-edged sword. It can be the source of many benefits (by showing you ads relevant to your interests) but it can also create new opportunities for invading your privacy, and enabling the reckless use of that information in a variety of decisions about you.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Online advertising titans like Google, Microsoft, and Yahoo are all looking for ways to monetize their huge collections of online behavioral data. While search engine marketing is arguably the most effective form of advertising in history, banner display ad marketing is highly inefficient because it displays ads to everyone regardless of their interests. Hence the search engine marketers cannot charge much for display ad space. However, by tracking the online movements of 200 million U.S. Internet users, they can develop a very clear picture of who you are, and use that information to show you ads that might be of interest to you. This would make the marketing process more efficient, and more profitable for all the parties involved.

But this solution also creates an ethical dilemma, pitting the monetary inter- ests of the online advertisers and search engines against the interests of indi- viduals to maintain a sense of control over their personal information and their privacy. Two closely held values are in conflict here. As a manager, you will need to be sensitive to both the negative and positive impacts of information systems for your firm, employees, and customers. You will need to learn how to resolve ethical dilemmas involving information systems.

Chapter 4 Ethical and Social Issues in Information Systems 123


n the past 10 years, we have witnessed, arguably, one of the most ethically challenging periods for U.S. and global business. Table 4-1 provides a small sample of recent cases demonstrating failed ethical judgment by senior and middle managers. These lapses in management ethical and business

judgment occurred across a broad spectrum of industries. In today’s new legal environment, managers who violate the law and are

convicted will most likely spend time in prison. U.S. federal sentencing guidelines adopted in 1987 mandate that federal judges impose stiff sentences on business



Lehman Brothers One of the oldest American investment banks collapses in 2008. Lehman used information systems and (2008–2010) accounting sleight of hand to conceal its bad investments. Lehman also engaged in deceptive tactics to

shift investments off its books.

WG Trading Co. (2010) Paul Greenwood, hedge fund manager and general partner at WG Trading, pled guilty to defrauding investors of $554 million over 13 years; Greenwood has forfeited $331 million to the government and faces up to 85 years in prison.

Minerals Management Managers accused of accepting gifts and other favors from oil companies, letting oil company rig Service (U.S. Department employees write up inspection reports, and failing to enforce existing regulations on offshore Gulf drilling of the Interior) (2010) rigs. Employees systematically falsified information record systems.

Pfizer, Eli Lilly, and Major pharmaceutical firms paid billions of dollars to settle U.S. federal charges that executives fixed AstraZeneca (2009) clinical trials for antipsychotic and pain killer drugs, marketed them inappropriately to children, and

claimed unsubstantiated benefits while covering up negative outcomes. Firms falsified information in reports and systems.

Galleon Group (2009) Founder of the Galleon Group criminally charged with trading on insider information, paying $250 million to Wall Street banks, and in return received market information that other investors did not get.

Siemens (2009) The world’s largest engineering firm paid over $4 billion to German and U.S. authorities for a decades-long, world-wide bribery scheme approved by corporate executives to influence potential customers and governments. Payments concealed from normal reporting accounting systems.

124 Part One Organizations, Management, and the Networked Enterprise

executives based on the monetary value of the crime, the presence of a conspiracy to prevent discovery of the crime, the use of structured financial transactions to hide the crime, and failure to cooperate with prosecutors (U.S. Sentencing Commission, 2004).

Although in the past business firms would often pay for the legal defense of their employees enmeshed in civil charges and criminal investigations, now firms are encouraged to cooperate with prosecutors to reduce charges against the entire firm for obstructing investigations. These developments mean that, more than ever, as a manager or an employee, you will have to decide for yourself what constitutes proper legal and ethical conduct.

Although these major instances of failed ethical and legal judgment were not masterminded by information systems departments, information systems were instrumental in many of these frauds. In many cases, the perpetrators of these crimes artfully used financial reporting information systems to bury their decisions from public scrutiny in the vain hope they would never be caught. We deal with the issue of control in information systems in Chapter 8. In this chapter, we talk about the ethical dimensions of these and other actions based on the use of information systems.

Ethics refers to the principles of right and wrong that individuals, acting as free moral agents, use to make choices to guide their behaviors. Information systems raise new ethical questions for both individuals and societies because they create opportunities for intense social change, and thus threaten existing distributions of power, money, rights, and obligations. Like other technologies, such as steam engines, electricity, the telephone, and the radio, information technology can be used to achieve social progress, but it can also be used to commit crimes and threaten cherished social values. The development of information technology will produce benefits for many and costs for others.

Ethical issues in information systems have been given new urgency by the rise of the Internet and electronic commerce. Internet and digital firm technologies make it easier than ever to assemble, integrate, and distribute information, unleashing new concerns about the appropriate use of customer information, the protection of personal privacy, and the protection of intellectual property.

Other pressing ethical issues raised by information systems include establish- ing accountability for the consequences of information systems, setting stan- dards to safeguard system quality that protects the safety of the individual and society, and preserving values and institutions considered essential to the quality of life in an information society. When using information systems, it is essential to ask, “What is the ethical and socially responsible course of action?”

A MODEL FOR THINKING ABOUT ETHICAL, SOCIAL, AND POLITICAL ISSUES Ethical, social, and political issues are closely linked. The ethical dilemma you may face as a manager of information systems typically is reflected in social and political debate. One way to think about these relationships is given in Figure 4-1. Imagine society as a more or less calm pond on a summer day, a delicate ecosystem in partial equilibrium with individuals and with social and political institutions. Individuals know how to act in this pond because social institutions (family, education, organizations) have developed well-honed rules of behavior, and these are supported by laws developed in the political sector that prescribe behavior and promise sanctions for violations. Now toss a rock into the center of the pond. What happens? Ripples, of course.

Imagine instead that the disturbing force is a powerful shock of new informa- tion technology and systems hitting a society more or less at rest. Suddenly, indi- vidual actors are confronted with new situations often not covered by the old rules. Social institutions cannot respond overnight to these ripples—it may take years to develop etiquette, expectations, social responsibility, politically correct attitudes, or approved rules. Political institutions also require time before develop- ing new laws and often require the demonstration of real harm before they act. In the meantime, you may have to act. You may be forced to act in a legal gray area.

We can use this model to illustrate the dynamics that connect ethical, social, and political issues. This model is also useful for identifying the main moral dimensions of the information society, which cut across various levels of action—individual, social, and political.

FIVE MORAL DIMENSIONS OF THE INFORMATION AGE The major ethical, social, and political issues raised by information systems include the following moral dimensions:

Information rights and obligations. What information rights do individuals and organizations possess with respect to themselves? What can they protect?

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The introduction of new information technology has a ripple effect, raising new ethical, social, and political issues that must be dealt with on the individual, social, and political levels. These issues have five moral dimensions: information rights and obligations, property rights and obligations, system quality, quality of life, and accountability and control.

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Property rights and obligations. How will traditional intellectual property rights be protected in a digital society in which tracing and accounting for ownership are difficult and ignoring such property rights is so easy?

Accountability and control. Who can and will be held accountable and liable for the harm done to individual and collective information and property rights?

System quality. What standards of data and system quality should we demand to protect individual rights and the safety of society?

Quality of life. What values should be preserved in an information- and knowledge-based society? Which institutions should we protect from violation? Which cultural values and practices are supported by the new information technology?

We explore these moral dimensions in detail in Section 4.3.

KEY TECHNOLOGY TRENDS THAT RAISE ETHICAL ISSUES Ethical issues long preceded information technology. Nevertheless, informa- tion technology has heightened ethical concerns, taxed existing social arrange- ments, and made some laws obsolete or severely crippled. There are four key technological trends responsible for these ethical stresses and they are summa- rized in Table 4-2.

The doubling of computing power every 18 months has made it possible for most organizations to use information systems for their core production processes. As a result, our dependence on systems and our vulnerability to system errors and poor data quality have increased. Social rules and laws have not yet adjusted to this dependence. Standards for ensuring the accuracy and reliability of information systems (see Chapter 8) are not universally accepted or enforced.

Advances in data storage techniques and rapidly declining storage costs have been responsible for the multiplying databases on individuals—employ- ees, customers, and potential customers—maintained by private and public organizations. These advances in data storage have made the routine violation of individual privacy both cheap and effective. Massive data storage systems are inexpensive enough for regional and even local retailing firms to use in identifying customers.

Advances in data analysis techniques for large pools of data are another technological trend that heightens ethical concerns because companies and government agencies are able to find out highly detailed personal information



Computing power doubles every 18 months More organizations depend on computer systems for critical operations.

Data storage costs rapidly declining Organizations can easily maintain detailed databases on individuals.

Data analysis advances Companies can analyze vast quantities of data gathered on individuals to develop detailed profiles of individual behavior.

Networking advances Copying data from one location to another and accessing personal data from remote locations are much easier.

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about individuals. With contemporary data management tools (see Chapter 5), companies can assemble and combine the myriad pieces of information about you stored on computers much more easily than in the past.

Think of all the ways you generate computer information about yourself— credit card purchases, telephone calls, magazine subscriptions, video rentals, mail-order purchases, banking records, local, state, and federal government records (including court and police records), and visits to Web sites. Put together and mined properly, this information could reveal not only your credit information but also your driving habits, your tastes, your associations, and your political interests.

Companies with products to sell purchase relevant information from these sources to help them more finely target their marketing campaigns. Chapters 3 and 6 describe how companies can analyze large pools of data from multiple sources to rapidly identify buying patterns of customers and suggest individ- ual responses. The use of computers to combine data from multiple sources and create electronic dossiers of detailed information on individuals is called profiling.

For example, several thousand of the most popular Web sites allow DoubleClick (owned by Google), an Internet advertising broker, to track the activities of their visitors in exchange for revenue from advertisements based on visitor information DoubleClick gathers. DoubleClick uses this informa- tion to create a profile of each online visitor, adding more detail to the profile as the visitor accesses an associated DoubleClick site. Over time, DoubleClick can create a detailed dossier of a person’s spending and computing habits on the Web that is sold to companies to help them target their Web ads more precisely.

ChoicePoint gathers data from police, criminal, and motor vehicle records; credit and employment histories; current and previous addresses; professional licenses; and insurance claims to assemble and maintain electronic dossiers on almost every adult in the United States. The company sells this personal

Credit card purchases can make personal information available to market researchers, telemarketers, and direct-mail companies. Advances in information technology facilitate the invasion of privacy.

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NORA technology can take information about people from disparate sources and find obscure, nonobvious relationships. It might discover, for example, that an applicant for a job at a casino shares a telephone number with a known criminal and issue an alert to the hiring manager.

information to businesses and government agencies. Demand for personal data is so enormous that data broker businesses such as ChoicePoint are flourishing.

A new data analysis technology called nonobvious relationship aware- ness (NORA) has given both the government and the private sector even more powerful profiling capabilities. NORA can take information about people from many disparate sources, such as employment applications, telephone records, customer listings, and “wanted” lists, and correlate relationships to find obscure hidden connections that might help identify criminals or terrorists (see Figure 4-2).

NORA technology scans data and extracts information as the data are being generated so that it could, for example, instantly discover a man at an airline ticket counter who shares a phone number with a known terrorist before that person boards an airplane. The technology is considered a valuable tool for homeland security but does have privacy implications because it can provide such a detailed picture of the activities and associations of a single individual.

Finally, advances in networking, including the Internet, promise to greatly reduce the costs of moving and accessing large quantities of data and open the possibility of mining large pools of data remotely using small desktop machines, permitting an invasion of privacy on a scale and with a precision heretofore unimaginable.

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4.2 ETHICS IN AN INFORMATION SOCIETY Ethics is a concern of humans who have freedom of choice. Ethics is about individual choice: When faced with alternative courses of action, what is the correct moral choice? What are the main features of ethical choice?

BASIC CONCEPTS: RESPONSIBILITY, ACCOUNTABILITY, AND LIABILITY Ethical choices are decisions made by individuals who are responsible for the consequences of their actions. Responsibility is a key element of ethical action. Responsibility means that you accept the potential costs, duties, and obligations for the decisions you make. Accountability is a feature of systems and social institutions: It means that mechanisms are in place to determine who took responsible action, and who is responsible. Systems and institutions in which it is impossible to find out who took what action are inherently inca- pable of ethical analysis or ethical action. Liability extends the concept of responsibility further to the area of laws. Liability is a feature of political sys- tems in which a body of laws is in place that permits individuals to recover the damages done to them by other actors, systems, or organizations. Due process is a related feature of law-governed societies and is a process in which laws are known and understood, and there is an ability to appeal to higher authorities to ensure that the laws are applied correctly.

These basic concepts form the underpinning of an ethical analysis of infor- mation systems and those who manage them. First, information technologies are filtered through social institutions, organizations, and individuals. Systems do not have impacts by themselves. Whatever information system impacts exist are products of institutional, organizational, and individual actions and behav- iors. Second, responsibility for the consequences of technology falls clearly on the institutions, organizations, and individual managers who choose to use the technology. Using information technology in a socially responsible manner means that you can and will be held accountable for the consequences of your actions. Third, in an ethical, political society, individuals and others can recover damages done to them through a set of laws characterized by due process.

ETHICAL ANALYSIS When confronted with a situation that seems to present ethical issues, how should you analyze it? The following five-step process should help:

1. Identify and describe clearly the facts. Find out who did what to whom, and where, when, and how. In many instances, you will be surprised at the errors in the initially reported facts, and often you will find that simply getting the facts straight helps define the solution. It also helps to get the opposing parties involved in an ethical dilemma to agree on the facts.

2. Define the conflict or dilemma and identify the higher-order values involved. Ethical, social, and political issues always reference higher values. The parties to a dispute all claim to be pursuing higher values (e.g., freedom, privacy, protection of property, and the free enterprise system). Typically, an ethical issue involves a dilemma: two diametrically opposed courses of action that support worthwhile values. For example, the chapter-ending case study illustrates two competing values: the need to improve health care record keeping and the need to protect individual privacy.

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3. Identify the stakeholders. Every ethical, social, and political issue has stakehold- ers: players in the game who have an interest in the outcome, who have invested in the situation, and usually who have vocal opinions. Find out the identity of these groups and what they want. This will be useful later when designing a solution.

4. Identify the options that you can reasonably take. You may find that none of the options satisfy all the interests involved, but that some options do a better job than others. Sometimes arriving at a good or ethical solution may not always be a balancing of consequences to stakeholders.

5. Identify the potential consequences of your options. Some options may be ethically correct but disastrous from other points of view. Other options may work in one instance but not in other similar instances. Always ask yourself, “What if I choose this option consistently over time?”

CANDIDATE ETHICAL PRINCIPLES Once your analysis is complete, what ethical principles or rules should you use to make a decision? What higher-order values should inform your judgment? Although you are the only one who can decide which among many ethical prin- ciples you will follow, and how you will prioritize them, it is helpful to consider some ethical principles with deep roots in many cultures that have survived throughout recorded history:

1. Do unto others as you would have them do unto you (the Golden Rule). Putting yourself into the place of others, and thinking of yourself as the object of the decision, can help you think about fairness in decision making.

2. If an action is not right for everyone to take, it is not right for anyone (Immanuel Kant’s Categorical Imperative). Ask yourself, “If everyone did this, could the organization, or society, survive?”

3. If an action cannot be taken repeatedly, it is not right to take at all (Descartes’ rule of change). This is the slippery-slope rule: An action may bring about a small change now that is acceptable, but if it is repeated, it would bring unacceptable changes in the long run. In the vernacular, it might be stated as “once started down a slippery path, you may not be able to stop.”

4. Take the action that achieves the higher or greater value (Utilitarian Principle). This rule assumes you can prioritize values in a rank order and understand the consequences of various courses of action.

5. Take the action that produces the least harm or the least potential cost (Risk Aversion Principle). Some actions have extremely high failure costs of very low probability (e.g., building a nuclear generating facility in an urban area) or extremely high failure costs of moderate probability (speeding and automobile accidents). Avoid these high-failure-cost actions, paying greater attention to high-failure-cost potential of moderate to high probability.

6. Assume that virtually all tangible and intangible objects are owned by someone else unless there is a specific declaration otherwise. (This is the ethical “no free lunch” rule.) If something someone else has created is useful to you, it has value, and you should assume the creator wants compensation for this work.

Actions that do not easily pass these rules deserve close attention and a great deal of caution. The appearance of unethical behavior may do as much harm to you and your company as actual unethical behavior.

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PROFESSIONAL CODES OF CONDUCT When groups of people claim to be professionals, they take on special rights and obligations because of their special claims to knowledge, wisdom, and respect. Professional codes of conduct are promulgated by associations of professionals, such as the American Medical Association (AMA), the American Bar Association (ABA), the Association of Information Technology Professionals (AITP), and the Association for Computing Machinery (ACM). These professional groups take responsibility for the partial regulation of their professions by determining entrance qualifications and competence. Codes of ethics are promises by profes- sions to regulate themselves in the general interest of society. For example, avoiding harm to others, honoring property rights (including intellectual prop- erty), and respecting privacy are among the General Moral Imperatives of the ACM’s Code of Ethics and Professional Conduct.

SOME REAL-WORLD ETHICAL DILEMMAS Information systems have created new ethical dilemmas in which one set of interests is pitted against another. For example, many of the large telephone companies in the United States are using information technology to reduce the sizes of their workforces. Voice recognition software reduces the need for human operators by enabling computers to recognize a customer’s responses to a series of computerized questions. Many companies monitor what their employees are doing on the Internet to prevent them from wasting company resources on non-business activities.

In each instance, you can find competing values at work, with groups lined up on either side of a debate. A company may argue, for example, that it has a right to use information systems to increase productivity and reduce the size of its workforce to lower costs and stay in business. Employees displaced by infor- mation systems may argue that employers have some responsibility for their welfare. Business owners might feel obligated to monitor employee e-mail and Internet use to minimize drains on productivity. Employees might believe they should be able to use the Internet for short personal tasks in place of the telephone. A close analysis of the facts can sometimes produce compromised solutions that give each side “half a loaf.” Try to apply some of the principles of ethical analysis described to each of these cases. What is the right thing to do?


In this section, we take a closer look at the five moral dimensions of informa- tion systems first described in Figure 4-1. In each dimension, we identify the ethical, social, and political levels of analysis and use real-world examples to illustrate the values involved, the stakeholders, and the options chosen.

INFORMATION RIGHTS: PRIVACY AND FREEDOM IN THE INTERNET AGE Privacy is the claim of individuals to be left alone, free from surveillance or interference from other individuals or organizations, including the state. Claims to privacy are also involved at the workplace: Millions of employees are

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subject to electronic and other forms of high-tech surveillance (Ball, 2001). Information technology and systems threaten individual claims to privacy by making the invasion of privacy cheap, profitable, and effective.

The claim to privacy is protected in the U.S., Canadian, and German consti- tutions in a variety of different ways and in other countries through various statutes. In the United States, the claim to privacy is protected primarily by the First Amendment guarantees of freedom of speech and association, the Fourth Amendment protections against unreasonable search and seizure of one’s personal documents or home, and the guarantee of due process.

Table 4-3 describes the major U.S. federal statutes that set forth the condi- tions for handling information about individuals in such areas as credit reporting, education, financial records, newspaper records, and electronic communications. The Privacy Act of 1974 has been the most important of these laws, regulating the federal government’s collection, use, and disclosure of information. At present, most U.S. federal privacy laws apply only to the federal government and regulate very few areas of the private sector.

Most American and European privacy law is based on a regime called Fair Information Practices (FIP) first set forth in a report written in 1973 by a federal government advisory committee (U.S. Department of Health, Education, and Welfare, 1973). FIP is a set of principles governing the collec- tion and use of information about individuals. FIP principles are based on the notion of a mutuality of interest between the record holder and the individ- ual. The individual has an interest in engaging in a transaction, and the record keeper—usually a business or government agency-requires informa- tion about the individual to support the transaction. Once information is gathered, the individual maintains an interest in the record, and the record may not be used to support other activities without the individual’s consent. In 1998, the FTC restated and extended the original FIP to provide guidelines for protecting online privacy. Table 4-4 describes the FTC’s Fair Information Practice principles.

The FTC’s FIP principles are being used as guidelines to drive changes in pri- vacy legislation. In July 1998, the U.S. Congress passed the Children’s Online Privacy Protection Act (COPPA), requiring Web sites to obtain parental permis- sion before collecting information on children under the age of 13. (This law is



Freedom of Information Act of 1966 as Amended (5 USC 552) Fair Credit Reporting Act of 1970

Privacy Act of 1974 as Amended (5 USC 552a) Family Educational Rights and Privacy Act of 1974

Electronic Communications Privacy Act of 1986 Right to Financial Privacy Act of 1978

Computer Matching and Privacy Protection Act of 1988 Privacy Protection Act of 1980

Computer Security Act of 1987 Cable Communications Policy Act of 1984

Federal Managers Financial Integrity Act of 1982 Electronic Communications Privacy Act of 1986

Driver’s Privacy Protection Act of 1994 Video Privacy Protection Act of 1988

E-Government Act of 2002 The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Children’s Online Privacy Protection Act (COPPA) of 1998

Financial Modernization Act (Gramm-Leach-Bliley Act) of 1999

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in danger of being overturned.) The FTC has recommended additional legisla- tion to protect online consumer privacy in advertising networks that collect records of consumer Web activity to develop detailed profiles, which are then used by other companies to target online ads. Other proposed Internet privacy legislation focuses on protecting the online use of personal identification numbers, such as social security numbers; protecting personal information collected on the Internet that deals with individuals not covered by COPPA; and limiting the use of data mining for homeland security.

In February 2009, the FTC began the process of extending its fair information practices doctrine to behavioral targeting. The FTC held hearings to discuss its program for voluntary industry principles for regulating behavioral targeting. The online advertising trade group Network Advertising Initiative (discussed later in this section), published its own self-regulatory principles that largely agreed with the FTC. Nevertheless, the government, privacy groups, and the online ad industry are still at loggerheads over two issues. Privacy advocates want both an opt-in policy at all sites and a national Do Not Track list. The indus- try opposes these moves and continues to insist on an opt-out capability being the only way to avoid tracking (Federal Trade Commission, 2009). Nevertheless, there is an emerging consensus among all parties that greater transparency and user control (especially making opt-out of tracking the default option) is required to deal with behavioral tracking.

Privacy protections have also been added to recent laws deregulating finan- cial services and safeguarding the maintenance and transmission of health information about individuals. The Gramm-Leach-Bliley Act of 1999, which repeals earlier restrictions on affiliations among banks, securities firms, and insurance companies, includes some privacy protection for consumers of financial services. All financial institutions are required to disclose their policies and practices for protecting the privacy of nonpublic personal informa- tion and to allow customers to opt out of information-sharing arrangements with nonaffiliated third parties.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996, which took effect on April 14, 2003, includes privacy protection for medical records. The law gives patients access to their personal medical records maintained by health care providers, hospitals, and health insurers, and the right to authorize how protected information about themselves can be used or disclosed. Doctors, hospitals, and other health care providers must limit the disclosure of personal information about patients to the minimum amount necessary to achieve a given purpose.


1. Notice/awareness (core principle). Web sites must disclose their information practices before collecting data. Includes identification of collector; uses of data; other recipients of data; nature of collection (active/inactive); voluntary or required status; consequences of refusal; and steps taken to protect confidentiality, integrity, and quality of the data.

2. Choice/consent (core principle). There must be a choice regime in place allowing consumers to choose how their information will be used for secondary purposes other than supporting the transaction, including internal use and transfer to third parties.

3. Access/participation. Consumers should be able to review and contest the accuracy and completeness of data collected about them in a timely, inexpensive process.

4. Security. Data collectors must take responsible steps to assure that consumer information is accurate and secure from unauthorized use.

5. Enforcement. There must be in place a mechanism to enforce FIP principles. This can involve self-regulation, legislation giving consumers legal remedies for violations, or federal statutes and regulations.

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The European D i rect ive on Data Protect ion In Europe, privacy protection is much more stringent than in the United States. Unlike the United States, European countries do not allow businesses to use personally identifiable information without consumers’ prior consent. On October 25, 1998, the European Commission’s Directive on Data Protection went into effect, broadening privacy protection in the European Union (EU) nations. The directive requires companies to inform people when they collect information about them and disclose how it will be stored and used. Customers must provide their informed consent before any company can legally use data about them, and they have the right to access that information, correct it, and request that no further data be collected. Informed consent can be defined as consent given with knowledge of all the facts needed to make a rational decision. EU member nations must translate these principles into their own laws and cannot transfer personal data to countries, such as the United States, that do not have similar privacy protection regulations.

Working with the European Commission, the U.S. Department of Commerce developed a safe harbor framework for U.S. firms. A safe harbor is a private, self-regulating policy and enforcement mechanism that meets the objectives of government regulators and legislation but does not involve government regula- tion or enforcement. U.S. businesses would be allowed to use personal data from EU countries if they develop privacy protection policies that meet EU standards. Enforcement would occur in the United States using self-policing, regulation, and government enforcement of fair trade statutes.

Internet Cha l lenges to Pr ivacy Internet technology has posed new challenges for the protection of individual privacy. Information sent over this vast network of networks may pass through many different computer systems before it reaches its final destination. Each of these systems is capable of monitoring, capturing, and storing communications that pass through it.

It is possible to record many online activities, including what searches have been conducted, which Web sites and Web pages have been visited, the online content a person has accessed, and what items that person has inspected or purchased over the Web. Much of this monitoring and tracking of Web site visitors occurs in the background without the visitor’s knowledge. It is conducted not just by individual Web sites but by advertising networks such as Microsoft Advertising, Yahoo, and DoubleClick that are capable of tracking all browsing behavior at thousands of Web sites. Tools to monitor visits to the World Wide Web have become popular because they help businesses determine who is visiting their Web sites and how to better target their offerings. (Some firms also monitor the Internet usage of their employees to see how they are using company network resources.) The commercial demand for this personal information is virtually insatiable.

Web sites can learn the identities of their visitors if the visitors voluntarily register at the site to purchase a product or service or to obtain a free service, such as information. Web sites can also capture information about visitors without their knowledge using cookie technology.

Cookies are small text files deposited on a computer hard drive when a user visits Web sites. Cookies identify the visitor’s Web browser software and track visits to the Web site. When the visitor returns to a site that has stored a cookie, the Web site software will search the visitor’s computer, find the cookie, and know what that person has done in the past. It may also update the cookie, depending on the activity during the visit. In this way, the site can customize

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its contents for each visitor’s interests. For example, if you purchase a book on and return later from the same browser, the site will welcome you by name and recommend other books of interest based on your past pur- chases. DoubleClick, described earlier in this chapter, uses cookies to build its dossiers with details of online purchases and to examine the behavior of Web site visitors. Figure 4-3 illustrates how cookies work.

Web sites using cookie technology cannot directly obtain visitors’ names and addresses. However, if a person has registered at a site, that information can be combined with cookie data to identify the visitor. Web site owners can also com- bine the data they have gathered from cookies and other Web site monitoring tools with personal data from other sources, such as offline data collected from surveys or paper catalog purchases, to develop very detailed profiles of their visitors.

There are now even more subtle and surreptitious tools for surveillance of Internet users. Marketers use Web beacons as another tool to monitor online behavior. Web beacons, also called Web bugs, are tiny objects invisibly embed- ded in e-mail messages and Web pages that are designed to monitor the behav- ior of the user visiting a Web site or sending e-mail. The Web beacon captures and transmits information such as the IP address of the user’s computer, the time a Web page was viewed and for how long, the type of Web browser that retrieved the beacon, and previously set cookie values. Web beacons are placed on popular Web sites by “third party” firms who pay the Web sites a fee for access to their audience. Typical popular Web sites contain 25–35 Web beacons.

Other spyware can secretly install itself on an Internet user’s computer by piggybacking on larger applications. Once installed, the spyware calls out to Web sites to send banner ads and other unsolicited material to the user, and it can also report the user’s movements on the Internet to other computers. More information is available about intrusive software in Chapter 8.

About 75 percent of global Internet users use Google search and other services, making Google the world’s largest collector of online user data. Whatever Google does with its data has an enormous impact on online privacy. Most experts


Cookies are written by a Web site on a visitor’s hard drive. When the visitor returns to that Web site, the Web server requests the ID number from the cookie and uses it to access the data stored by that server on that visitor. The Web site can then use these data to display personalized information.

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believe that Google possesses the largest collection of personal information in the world—more data on more people than any government agency. Table 4-5 lists the major Google services that collect user data and how Google uses these data.

For a number of years, Google has been using behavioral targeting to help it display more relevant ads based on users’ search activities. One of its programs enables advertisers to target ads based on the search histories of Google users, along with any other information the user submits to Google that Google can obtain, such as age, demographics, region, and other Web activities (such as blog- ging). An additional program allows Google to help advertisers select keywords and design ads for various market segments based on search histories, such as helping a clothing Web site create and test ads targeted at teenage females.

Google has also been scanning the contents of messages received by users of its free Web-based e-mail service called Gmail. Ads that users see when they read their e-mail are related to the subjects of these messages. Profiles are developed on individual users based on the content in their e-mail. Google now displays targeted ads on YouTube and on Google mobile applications, and its DoubleClick ad network serves up targeted banner ads.

In the past, Google refrained from capitalizing too much on the data it collected, considered the best source of data about user interests on the Internet. But with the emergence of rivals such as Facebook who are aggres- sively tracking and selling online user data, Google has decided to do more to profit from its user data.

The United States has allowed businesses to gather transaction information generated in the marketplace and then use that information for other market- ing purposes without obtaining the informed consent of the individual whose information is being used. U.S. e-commerce sites are largely content to publish statements on their Web sites informing visitors about how their information will be used. Some have added opt-out selection boxes to these information policy statements. An opt-out model of informed consent permits the collec- tion of personal information until the consumer specifically requests that the



Google Search Google search topics Targeting text ads placed in Users’ Internet addresses search results

Gmail Contents of e-mail messages Targeting text ads placed next to the e-mail messages

DoubleClick Data about Web sites visited on Targeting banner ads Google’s ad network

YouTube Data about videos uploaded and downloaded; Targeting ads for Google display-ad some profile data network

Mobile Maps with User’s actual or approximate location Targeting mobile ads based on My Location user’s ZIP code

Google Toolbar Web-browsing data and search history No ad use at present

Google Buzz Users’ Google profile data and connections No ad use at present

Google Chrome Sample of address-bar entries when Google is No ad use at present the default search engine

Google Checkout User’s name, address, transaction details No ad use at present

Google Analytics Traffic data from Web sites using Google’s Analytics service No ad use at present

data not be collected. Privacy advocates would like to see wider use of an opt- in model of informed consent in which a business is prohibited from collecting any personal information unless the consumer specifically takes action to approve information collection and use.

The online industry has preferred self-regulation to privacy legislation for protecting consumers. In 1998, the online industry formed the Online Privacy Alliance to encourage self-regulation to develop a set of privacy guidelines for its members. The group promotes the use of online seals, such as that of TRUSTe, certifying Web sites adhering to certain privacy principles. Members of the advertising network industry, including Google’s DoubleClick, have created an additional industry association called the Network Advertising Initiative (NAI) to develop its own privacy policies to help consumers opt out of advertis- ing network programs and provide consumers redress from abuses.

Individual firms like AOL, Yahoo!, and Google have recently adopted policies on their own in an effort to address public concern about tracking people online. AOL established an opt-out policy that allows users of its site to not be tracked. Yahoo follows NAI guidelines and also allows opt-out for tracking and Web beacons (Web bugs). Google has reduced retention time for tracking data.

In general, most Internet businesses do little to protect the privacy of their customers, and consumers do not do as much as they should to protect them- selves. Many companies with Web sites do not have privacy policies. Of the companies that do post privacy polices on their Web sites, about half do not monitor their sites to ensure they adhere to these policies. The vast majority of online customers claim they are concerned about online privacy, but less than half read the privacy statements on Web sites (Laudon and Traver, 2010).

In one of the more insightful studies of consumer attitudes towards Internet privacy, a group of Berkeley students conducted surveys of online users, and of complaints filed with the Federal Trade Commission involving privacy issues. Here are some of their results. User concerns: people feel they have no control over the information collected about them, and they don’t know who to com- plain to. Web site practices: Web sites collect all this information, but do not let users have access; the policies are unclear; they share data with “affiliates” but never identify who the affiliates are and how many there are. (MySpace, owned by NewsCorp, has over 1,500 affiliates with whom it shares online information.) Web bug trackers: they are ubiquitous and we are not informed they are on the pages we visit. The results of this study and others suggest that consumers are not saying “Take my privacy, I don’t care, send me the service for free.” They are saying “We want access to the information, we want some controls on what can be collected, what is done with the information, the ability to opt out of the entire tracking enterprise, and some clarity on what the policies really are, and we don’t want those policies changed without our participation and permis- sion.” (The full report is available at

Techn ica l So lut ions In addition to legislation, new technologies are available to protect user privacy during interactions with Web sites. Many of these tools are used for encrypting e-mail, for making e-mail or surfing activities appear anonymous, for prevent- ing client computers from accepting cookies, or for detecting and eliminating spyware.

There are now tools to help users determine the kind of personal data that can be extracted by Web sites. The Platform for Privacy Preferences, known as P3P, enables automatic communication of privacy policies between an e-commerce site and its visitors. P3P provides a standard for communicating a Web site’s

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privacy policy to Internet users and for comparing that policy to the user’s preferences or to other standards, such as the FTC’s FIP guidelines or the European Directive on Data Protection. Users can use P3P to select the level of privacy they wish to maintain when interacting with the Web site.

The P3P standard allows Web sites to publish privacy policies in a form that computers can understand. Once it is codified according to P3P rules, the privacy policy becomes part of the software for individual Web pages (see Figure 4-4). Users of Microsoft Internet Explorer Web browsing software can access and read the P3P site’s privacy policy and a list of all cookies coming from the site. Internet Explorer enables users to adjust their computers to screen out all cookies or let in selected cookies based on specific levels of privacy. For example, the “Medium” level accepts cookies from first-party host sites that have opt-in or opt-out policies but rejects third-party cookies that use personally identifiable information without an opt-in policy.

However, P3P only works with Web sites of members of the World Wide Web Consortium who have translated their Web site privacy policies into P3P format. The technology will display cookies from Web sites that are not part of the consortium, but users will not be able to obtain sender information or privacy statements. Many users may also need to be educated about interpreting com- pany privacy statements and P3P levels of privacy. Critics point out that only a small percentage of the most popular Web sites use P3P, most users do not under- stand their browser’s privacy settings, and there is no enforcement of P3P standards—companies can claim anything about their privacy policies.

PROPERTY RIGHTS: INTELLECTUAL PROPERTY Contemporary information systems have severely challenged existing laws and social practices that protect private intellectual property. Intellectual property is considered to be intangible property created by individuals or

Web sites are posting their privacy policies for visitors to review. The TRUSTe seal designates Web sites that have agreed to adhere to TRUSTe’s established privacy principles of disclo- sure, choice, access, and security.

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corporations. Information technology has made it difficult to protect intellec- tual property because computerized information can be so easily copied or distributed on networks. Intellectual property is subject to a variety of protec- tions under three different legal traditions: trade secrets, copyright, and patent law.

Trade Secrets Any intellectual work product—a formula, device, pattern, or compilation of data—used for a business purpose can be classified as a trade secret, provided it is not based on information in the public domain. Protections for trade secrets vary from state to state. In general, trade secret laws grant a monopoly on the ideas behind a work product, but it can be a very tenuous monopoly.

Software that contains novel or unique elements, procedures, or compilations can be included as a trade secret. Trade secret law protects the actual ideas in a work product, not only their manifestation. To make this claim, the creator or owner must take care to bind employees and customers with nondisclosure agreements and to prevent the secret from falling into the public domain.

The limitation of trade secret protection is that, although virtually all software programs of any complexity contain unique elements of some sort, it is difficult to prevent the ideas in the work from falling into the public domain when the software is widely distributed.

Copyr ight Copyright is a statutory grant that protects creators of intellectual property from having their work copied by others for any purpose during the life of the author plus an additional 70 years after the author’s death. For corporate-owned works, copyright protection lasts for 95 years after their initial creation. Congress has extended copyright protection to books, periodicals, lectures, dramas, musical compositions, maps, drawings, artwork of any kind, and


P3P enables Web sites to translate their privacy policies into a standard format that can be read by the user’s Web browser software. The browser software evaluates the Web site’s privacy policy to determine whether it is compatible with the user’s privacy preferences.

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motion pictures. The intent behind copyright laws has been to encourage creativity and authorship by ensuring that creative people receive the financial and other benefits of their work. Most industrial nations have their own copyright laws, and there are several international conventions and bilateral agreements through which nations coordinate and enforce their laws.

In the mid-1960s, the Copyright Office began registering software programs, and in 1980, Congress passed the Computer Software Copyright Act, which clearly provides protection for software program code and for copies of the original sold in commerce, and sets forth the rights of the purchaser to use the software while the creator retains legal title.

Copyright protects against copying of entire programs or their parts. Damages and relief are readily obtained for infringement. The drawback to copyright protection is that the underlying ideas behind a work are not protected, only their manifestation in a work. A competitor can use your software, understand how it works, and build new software that follows the same concepts without infringing on a copyright.

“Look and feel” copyright infringement lawsuits are precisely about the distinction between an idea and its expression. For instance, in the early 1990s, Apple Computer sued Microsoft Corporation and Hewlett-Packard for infringe- ment of the expression of Apple’s Macintosh interface, claiming that the defen- dants copied the expression of overlapping windows. The defendants countered that the idea of overlapping windows can be expressed only in a single way and, therefore, was not protectable under the merger doctrine of copyright law. When ideas and their expression merge, the expression cannot be copyrighted.

In general, courts appear to be following the reasoning of a 1989 case—Brown Bag Software vs. Symantec Corp.—in which the court dissected the elements of software alleged to be infringing. The court found that similar concept, function, general functional features (e.g., drop-down menus), and colors are not protectable by copyright law (Brown Bag Software vs. Symantec Corp., 1992).

Patents A patent grants the owner an exclusive monopoly on the ideas behind an inven- tion for 20 years. The congressional intent behind patent law was to ensure that inventors of new machines, devices, or methods receive the full financial and other rewards of their labor and yet make widespread use of the invention pos- sible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. The granting of a patent is determined by the United States Patent and Trademark Office and relies on court rulings.

The key concepts in patent law are originality, novelty, and invention. The Patent Office did not accept applications for software patents routinely until a 1981 Supreme Court decision that held that computer programs could be a part of a patentable process. Since that time, hundreds of patents have been granted and thousands await consideration.

The strength of patent protection is that it grants a monopoly on the under- lying concepts and ideas of software. The difficulty is passing stringent criteria of nonobviousness (e.g., the work must reflect some special understanding and contribution), originality, and novelty, as well as years of waiting to receive protection.

Chal lenges to Inte l l ectua l Property R ights Contemporary information technologies, especially software, pose severe challenges to existing intellectual property regimes and, therefore, create

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significant ethical, social, and political issues. Digital media differ from books, periodicals, and other media in terms of ease of replication; ease of transmis- sion; ease of alteration; difficulty in classifying a software work as a program, book, or even music; compactness—making theft easy; and difficulties in estab- lishing uniqueness.

The proliferation of electronic networks, including the Internet, has made it even more difficult to protect intellectual property. Before widespread use of networks, copies of software, books, magazine articles, or films had to be stored on physical media, such as paper, computer disks, or videotape, creating some hurdles to distribution. Using networks, information can be more widely repro- duced and distributed. The Seventh Annual Global Software Piracy Study conducted by the International Data Corporation and the Business Software Alliance reported that the rate of global software piracy climbed to 43 percent in 2009, representing $51 billion in global losses from software piracy. Worldwide, for every $100 worth of legitimate software sold that year, an additional $75 worth was obtained illegally (Business Software Alliance, 2010).

The Internet was designed to transmit information freely around the world, including copyrighted information. With the World Wide Web in particular, you can easily copy and distribute virtually anything to thousands and even millions of people around the world, even if they are using different types of computer systems. Information can be illicitly copied from one place and distributed through other systems and networks even though these parties do not willingly participate in the infringement.

Individuals have been illegally copying and distributing digitized MP3 music files on the Internet for a number of years. File-sharing services such as Napster, and later Grokster, Kazaa, and Morpheus, sprung up to help users locate and swap digital music files, including those protected by copyright. Illegal file sharing became so widespread that it threatened the viability of the music recording industry. The recording industry won some legal battles for shutting these services down, but has not been able to halt illegal file sharing entirely. As more and more homes adopt high-speed Internet access, illegal file sharing of videos will pose similar threats to the motion picture industry.

Mechanisms are being developed to sell and distribute books, articles, and other intellectual property legally on the Internet, and the Digital Millennium Copyright Act (DMCA) of 1998 is providing some copyright protection. The DMCA implemented a World Intellectual Property Organization Treaty that makes it illegal to circumvent technology-based protections of copyrighted materials. Internet service providers (ISPs) are required to take down sites of copyright infringers that they are hosting once they are notified of the problem.

Microsoft and other major software and information content firms are represented by the Software and Information Industry Association (SIIA), which lobbies for new laws and enforcement of existing laws to protect intellectual property around the world. The SIIA runs an antipiracy hotline for individuals to report piracy activities, offers educational programs to help organizations com- bat software piracy, and has published guidelines for employee use of software.

ACCOUNTABILITY, LIABILITY, AND CONTROL Along with privacy and property laws, new information technologies are challenging existing liability laws and social practices for holding individuals and institutions accountable. If a person is injured by a machine controlled, in part, by software, who should be held accountable and, therefore, held liable? Should a public bulletin board or an electronic service, such as America Online,

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permit the transmission of pornographic or offensive material (as broadcast- ers), or should they be held harmless against any liability for what users trans- mit (as is true of common carriers, such as the telephone system)? What about the Internet? If you outsource your information processing, can you hold the external vendor liable for injuries done to your customers? Some real-world examples may shed light on these questions.

Computer-Re lated L iab i l i ty Prob lems During the last week of September 2009, thousands of customers of TD Bank, one of the largest banks in North America, scrambled to find their payroll checks, social security checks, and savings and checking account balances. The bank’s 6.5 million customers were temporarily out of funds because of a computer glitch. The problems were caused by a failed effort to integrate systems of TD Bank and Commerce Bank. A spokesperson for TD Bank, said that “while the overall integration of the systems went well, there have been some speed-bumps in the final stages, as you might expect with a project of this size and complexity.” (Vijayan, 2009). Who is liable for any economic harm caused to individuals or businesses that could not access their full account balances in this period?

This case reveals the difficulties faced by information systems executives who ultimately are responsible for any harm done by systems developed by their staffs. In general, insofar as computer software is part of a machine, and the machine injures someone physically or economically, the producer of the soft- ware and the operator can be held liable for damages. Insofar as the software acts like a book, storing and displaying information, courts have been reluctant to hold authors, publishers, and booksellers liable for contents (the exception being instances of fraud or defamation), and hence courts have been wary of holding software authors liable for booklike software.

In general, it is very difficult (if not impossible) to hold software producers liable for their software products that are considered to be like books, regardless of the physical or economic harm that results. Historically, print publishers, books, and periodicals have not been held liable because of fears that liability claims would interfere with First Amendment rights guaranteeing freedom of expression.

What about software as a service? ATM machines are a service provided to bank customers. Should this service fail, customers will be inconvenienced and perhaps harmed economically if they cannot access their funds in a timely man- ner. Should liability protections be extended to software publishers and opera- tors of defective financial, accounting, simulation, or marketing systems?

Software is very different from books. Software users may develop expecta- tions of infallibility about software; software is less easily inspected than a book, and it is more difficult to compare with other software products for quality; software claims actually to perform a task rather than describe a task, as a book does; and people come to depend on services essentially based on software. Given the centrality of software to everyday life, the chances are excellent that liability law will extend its reach to include software even when the software merely provides an information service.

Telephone systems have not been held liable for the messages transmitted because they are regulated common carriers. In return for their right to provide telephone service, they must provide access to all, at reasonable rates, and achieve acceptable reliability. But broadcasters and cable television stations are subject to a wide variety of federal and local constraints on content and facilities. Organizations can be held liable for offensive content on their Web sites, and online services, such as America Online, might be held liable for postings by their

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users. Although U.S. courts have increasingly exonerated Web sites and ISPs for posting material by third parties, the threat of legal action still has a chilling effect on small companies or individuals who cannot afford to take their cases to trial.

SYSTEM QUALITY: DATA QUALITY AND SYSTEM ERRORS The debate over liability and accountability for unintentional consequences of system use raises a related but independent moral dimension: What is an acceptable, technologically feasible level of system quality? At what point should system managers say, “Stop testing, we’ve done all we can to perfect this software. Ship it!” Individuals and organizations may be held responsible for avoidable and foreseeable consequences, which they have a duty to perceive and correct. And the gray area is that some system errors are foreseeable and correctable only at very great expense, an expense so great that pursuing this level of perfection is not feasible economically—no one could afford the product.

For example, although software companies try to debug their products before releasing them to the marketplace, they knowingly ship buggy products because the time and cost of fixing all minor errors would prevent these products from ever being released. What if the product was not offered on the marketplace, would social welfare as a whole not advance and perhaps even decline? Carrying this further, just what is the responsibility of a producer of computer services—should it withdraw the product that can never be perfect, warn the user, or forget about the risk (let the buyer beware)?

Three principal sources of poor system performance are (1) software bugs and errors, (2) hardware or facility failures caused by natural or other causes, and (3) poor input data quality. A Chapter 8 Learning Track discusses why zero defects in software code of any complexity cannot be achieved and why the seriousness of remaining bugs cannot be estimated. Hence, there is a technological barrier to perfect software, and users must be aware of the potential for catastrophic failure. The software industry has not yet arrived at testing standards for producing software of acceptable but not perfect performance.

Although software bugs and facility catastrophes are likely to be widely reported in the press, by far the most common source of business system failure is data quality. Few companies routinely measure the quality of their data, but individual organizations report data error rates ranging from 0.5 to 30 percent.

QUALITY OF LIFE: EQUITY, ACCESS, AND BOUNDARIES The negative social costs of introducing information technologies and systems are beginning to mount along with the power of the technology. Many of these negative social consequences are not violations of individual rights or property crimes. Nevertheless, these negative consequences can be extremely harmful to individuals, societies, and political institutions. Computers and information technologies potentially can destroy valuable elements of our culture and society even while they bring us benefits. If there is a balance of good and bad consequences of using information systems, who do we hold responsible for the bad consequences? Next, we briefly examine some of the negative social consequences of systems, considering individual, social, and political responses.

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Balanc ing Power : Center Versus Per ipher y An early fear of the computer age was that huge, centralized mainframe computers would centralize power at corporate headquarters and in the nation’s capital, resulting in a Big Brother society, as was suggested in George Orwell’s novel 1984. The shift toward highly decentralized computing, coupled with an ideology of empowerment of thousands of workers, and the decentral- ization of decision making to lower organizational levels, have reduced the fears of power centralization in institutions. Yet much of the empowerment described in popular business magazines is trivial. Lower-level employees may be empowered to make minor decisions, but the key policy decisions may be as centralized as in the past.

Rapid i ty o f Change: Reduced Response T ime to Compet i t ion Information systems have helped to create much more efficient national and international markets. The now-more-efficient global marketplace has reduced the normal social buffers that permitted businesses many years to adjust to com- petition. Time-based competition has an ugly side: The business you work for may not have enough time to respond to global competitors and may be wiped out in a year, along with your job. We stand the risk of developing a “just-in-time society” with “just-in-time jobs” and “just-in-time” workplaces, families, and vacations.

Mainta in ing Boundar ies : Fami ly, Work, and Le i sure Parts of this book were produced on trains and planes, as well as on vacations and during what otherwise might have been “family” time. The danger to ubiq- uitous computing, telecommuting, nomad computing, and the “do anything anywhere” computing environment is that it is actually coming true. The traditional boundaries that separate work from family and just plain leisure have been weakened.

Although authors have traditionally worked just about anywhere (typewrit- ers have been portable for nearly a century), the advent of information

Although some people enjoy the convenience of working at home, the “do anything anywhere” computing environment can blur the traditional boundaries between work and family time.

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systems, coupled with the growth of knowledge-work occupations, means that more and more people are working when traditionally they would have been playing or communicating with family and friends. The work umbrella now extends far beyond the eight-hour day.

Even leisure time spent on the computer threatens these close social relationships. Extensive Internet use, even for entertainment or recreational purposes, takes people away from their family and friends. Among middle school and teenage children, it can lead to harmful anti-social behavior, such as the recent upsurge in cyberbullying.

Weakening these institutions poses clear-cut risks. Family and friends histor- ically have provided powerful support mechanisms for individuals, and they act as balance points in a society by preserving private life, providing a place for people to collect their thoughts, allowing people to think in ways contrary to their employer, and dream.

Dependence and Vu lnerab i l i ty Today, our businesses, governments, schools, and private associations, such as churches, are incredibly dependent on information systems and are, therefore, highly vulnerable if these systems fail. With systems now as ubiquitous as the telephone system, it is startling to remember that there are no regulatory or standard-setting forces in place that are similar to telephone, electrical, radio, television, or other public utility technologies. The absence of standards and the criticality of some system applications will probably call forth demands for national standards and perhaps regulatory oversight.

Computer Cr ime and Abuse New technologies, including computers, create new opportunities for committing crime by creating new valuable items to steal, new ways to steal them, and new ways to harm others. Computer crime is the commission of illegal acts through the use of a computer or against a computer system. Computers or computer systems can be the object of the crime (destroying a company’s computer center or a company’s computer files), as well as the instrument of a crime (stealing computer lists by illegally gaining access to a computer system using a home computer). Simply accessing a computer system without authorization or with intent to do harm, even by accident, is now a federal crime.

Computer abuse is the commission of acts involving a computer that may not be illegal but that are considered unethical. The popularity of the Internet and e-mail has turned one form of computer abuse—spamming—into a serious problem for both individuals and businesses. Spam is junk e-mail sent by an organization or individual to a mass audience of Internet users who have expressed no interest in the product or service being marketed. Spammers tend to market pornography, fraudulent deals and services, outright scams, and other products not widely approved in most civilized societies. Some countries have passed laws to outlaw spamming or to restrict its use. In the United States, it is still legal if it does not involve fraud and the sender and subject of the e-mail are properly identified.

Spamming has mushroomed because it only costs a few cents to send thousands of messages advertising wares to Internet users. According to Sophos, a leading vendor of security software, spam accounted for 97 percent of all business e-mail during the second quarter of 2010 (Schwartz, 2010). Spam costs for businesses are very high (estimated at over $50 billion per year) because of the computing and network resources consumed by billions of unwanted e-mail messages and the time required to deal with them.

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Internet service providers and individuals can combat spam by using spam filtering software to block suspicious e-mail before it enters a recipient’s e-mail inbox. However, spam filters may block legitimate messages. Spammers know how to skirt around filters by continually changing their e-mail accounts, by incorporating spam messages in images, by embedding spam in e-mail attach- ments and electronic greeting cards, and by using other people’s computers that have been hijacked by botnets (see Chapter 7). Many spam messages are sent from one country while another country hosts the spam Web site.

Spamming is more tightly regulated in Europe than in the United States. On May 30, 2002, the European Parliament passed a ban on unsolicited commercial messaging. Electronic marketing can be targeted only to people who have given prior consent.

The U.S. CAN-SPAM Act of 2003, which went into effect on January 1, 2004, does not outlaw spamming but does ban deceptive e-mail practices by requiring commercial e-mail messages to display accurate subject lines, identify the true senders, and offer recipients an easy way to remove their names from e-mail lists. It also prohibits the use of fake return addresses. A few people have been prosecuted under the law, but it has had a negligible impact on spamming. Although Facebook and MySpace have won judgments against spammers, most critics argue the law has too many loopholes and is not effectively enforced (Associated Press, 2009).

Another negative impact of computer technology is the rising danger from people using cell phones to send text messages while driving. Many states have outlawed this behavior, but it has been difficult to eradicate. The Interactive Session on Organizations explores this topic.

Employment : Tr ick le -Down Techno logy and Reeng ineer ing Job Loss Reengineering work is typically hailed in the information systems community as a major benefit of new information technology. It is much less frequently noted that redesigning business processes could potentially cause millions of mid-level managers and clerical workers to lose their jobs. One economist has raised the possibility that we will create a society run by a small “high tech elite of corporate professionals . . . in a nation of the permanently unemployed” (Rifkin, 1993).

Other economists are much more sanguine about the potential job losses. They believe relieving bright, educated workers from reengineered jobs will result in these workers moving to better jobs in fast-growth industries. Missing from this equation are unskilled, blue-collar workers and older, less well-edu- cated middle managers. It is not clear that these groups can be retrained easily for high-quality (high-paying) jobs. Careful planning and sensitivity to employee needs can help companies redesign work to minimize job losses.

Equi ty and Access : Increas ing Rac ia l and Soc ia l C lass C leavages Does everyone have an equal opportunity to participate in the digital age? Will the social, economic, and cultural gaps that exist in the United States and other societies be reduced by information systems technology? Or will the cleavages be increased, permitting the better off to become even more better off relative to others?

These questions have not yet been fully answered because the impact of systems technology on various groups in society has not been thoroughly studied. What is known is that information, knowledge, computers, and access

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Cell phones have become a staple of modern society. Nearly everyone has them, and people carry and use them at all hours of the day. For the most part, this is a good thing: the benefits of staying connected at any time and at any location are considerable. But if you’re like most Americans, you may regularly talk on the phone or even text while at the wheel of a car. This dangerous behavior has resulted in increasing numbers of accidents and fatalities caused by cell phone usage. The trend shows no sign of slowing down.

In 2003, a federal study of 10,000 drivers by the National Highway Traffic Safety Administration (NHTSA) set out to determine the effects of using cell phones behind the wheel. The results were conclusive: talking on the phone is equivalent to a 10- point reduction in IQ and a .08 blood alcohol level, which law enforcement considers intoxicated. Hands- free sets were ineffective in eliminating risk, the study found, because the conversation itself is what distracts drivers, not holding the phone. Cell phone use caused 955 fatalities and 240,000 accidents in 2002. Related studies indicated that drivers that talked on the phone while driving increased their crash risk fourfold, and drivers that texted while driving increased their crash risk by a whopping 23 times.

Since that study, mobile device usage has grown by an order of magnitude, worsening this already dangerous situation. The number of wireless subscribers in America has increased by around 1,000 percent since 1995 to nearly 300 million overall in 2010, and Americans’ usage of wireless minutes increased by approximately 6,000 percent. This increase in cell phone usage has been accompa- nied by an upsurge in phone-related fatalities and accidents: In 2010, it’s estimated that texting caused 5,870 fatalities and 515,000 accidents, up consider- ably from prior years. These figures are roughly half of equivalent statistics for drunk driving. Studies show that drivers know that using the phone while driving is one of the most dangerous things you can do on the road, but refuse to admit that it’s danger- ous when they themselves do it.

Of users that text while driving, the more youthful demographic groups, such as the 18–29 age group, are by far the most frequent texters. About three quarters of Americans in this age group regularly text, compared to just 22 percent of the

THE PERILS OF TEXTING 35–44 age group. Correspondingly, the majority of accidents involving mobile device use behind the wheel involve young adults. Among this age group, texting behind the wheel is just one of a litany of problems raised by frequent texting: anxiety, distraction, failing grades, repetitive stress injuries, and sleep deprivation are just some of the other problems brought about by excessive use of mobile devices. Teenagers are particularly prone to using cell phones to text because they want to know what’s happening to their friends and are anxious about being socially isolated.

Analysts predict that over 800 billion text messages will be sent in 2010. Texting is clearly here to stay, and in fact has supplanted phone calls as the most commonly used method of mobile communica- tion. People are unwilling to give up their mobile devices because of the pressures of staying connected. Neurologists have found that the neural response to multitasking by texting while driving suggests that people develop addictions to the digital devices they use most, getting quick bursts of adrenaline, without which driving becomes boring.

There are interests opposed to legislation prohibiting cell phone use in cars. A number of legislators believe that it’s not state or federal government’s role to prohibit poor decision making. Auto makers, and some safety researchers, are arguing that with the proper technology and under appropriate conditions, communicating from a moving vehicle is a manageable risk. Louis Tijerina, a veteran of the NHTSA and Ford Motor Co. researcher, notes that even as mobile phone sub- scriptions have surged to over 250 million during the past decade, the death rate from accidents on the highways has fallen.

Nevertheless, lawmakers are increasingly recog- nizing the need for more powerful legislation barring drivers from texting behind the wheel. Many states have made inroads with laws prohibiting texting while operating vehicles. In Utah, drivers crashing while texting can receive 15 years in prison, by far the toughest sentence for texting while driving in the nation when the legislation was enacted. Utah’s law assumes that drivers understand the risks of texting while driving, whereas in other states, prosecutors must prove that the driver knew about the risks of texting while driving before doing so.

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1. Which of the five moral dimensions of informa- tion systems identified in this text is involved in this case?

2. What are the ethical, social, and political issues raised by this case?

3. Which of the ethical principles described in the text are useful for decision making about texting while driving?

Utah’s tough law was the result of a horrifying accident in which a speeding college student, texting at the wheel, rear-ended a car in front. The car lost control, entered the opposite side of the road, and was hit head-on by a pickup truck hauling a trailer, killing the driver instantly. In September 2008, a train engineer in California was texting within a minute prior to the most fatal train accident in almost two decades. Californian authorities responded by banning the use of cell phones by train workers while on duty.

In total, 31 states have banned texting while driving in some form, and most of those states have a full ban for phone users of all ages. The remain- ing states are likely to follow suit in coming years as well. President Obama also banned texting while

1. Many people at state and local levels are calling for a federal law against texting while driving. Use a search engine to explore what steps the federal government has taken to discourage tex- ting while driving.

2. Most people are not aware of the widespread impact of texting while driving across the United States. Do a search on “texting while driving.” Examine all the search results for the first two pages. Enter the information into a two-column table. In the left column put the locality of the report and year. In the right column give a brief description of the search result, e.g., accident, report, court judgment, etc. What can you conclude from these search results and table?

driving for all federal government employees in October 2009. Still, there’s more work to be done to combat this dangerous and life-threatening practice.

Sources: Paulo Salazar, “Banning Texting While Driving,”, August 7, 2010; Jerry Hirsch, “Teen Drivers Dangerously Divide Their Attention,” Los Angeles Times, August 3, 2010; www.dri-, accessed July 2010;, accessed July 7, 2010; Matt Richtel, “Driver Texting Now an Issue in the Back Seat,” The New York Times, September 9, 2009; Matt Richtel, “Utah Gets Tough With Texting Drivers,” The New York Times, August 29, 2009; Matt Richtel, “In Study, Texting Lifts Crash Risk by Large Margin,” The New York Times, July 28, 2009; Matt Richtel, “Drivers and Legislators Dismiss Cellphone Risks,” The New York Times, July 19, 2009; Tom Regan, “Some Sobering Stats on Texting While Driving,” The Christian Science Monitor, May 28, 2009; Katie Hafner, “Texting May be Taking a Toll on Teenagers,” The New York Times, May 26, 2009; and Tara Parker-Pope, “Texting Until Their Thumbs Hurt,” The New York Times, May 26, 2009.


to these resources through educational institutions and public libraries are inequitably distributed along ethnic and social class lines, as are many other information resources. Several studies have found that certain ethnic and income groups in the United States are less likely to have computers or online Internet access even though computer ownership and Internet access have soared in the past five years. Although the gap is narrowing, higher-income families in each ethnic group are still more likely to have home computers and Internet access than lower-income families in the same group.

A similar digital divide exists in U.S. schools, with schools in high-poverty areas less likely to have computers, high-quality educational technology programs, or Internet access availability for their students. Left uncorrected, the digital divide could lead to a society of information haves, computer literate and skilled, versus a large group of information have-nots, computer illiterate

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and unskilled. Public interest groups want to narrow this digital divide by making digital information services—including the Internet—available to virtu- ally everyone, just as basic telephone service is now.

Heal th R i sks : RSI , CVS, and Technost ress The most common occupational disease today is repetitive stress injury (RSI). RSI occurs when muscle groups are forced through repetitive actions often with high-impact loads (such as tennis) or tens of thousands of repetitions under low-impact loads (such as working at a computer keyboard).

The single largest source of RSI is computer keyboards. The most common kind of computer-related RSI is carpal tunnel syndrome (CTS), in which pressure on the median nerve through the wrist’s bony structure, called a carpal tunnel, produces pain. The pressure is caused by constant repetition of keystrokes: in a single shift, a word processor may perform 23,000 keystrokes. Symptoms of carpal tunnel syndrome include numbness, shooting pain, inabil- ity to grasp objects, and tingling. Millions of workers have been diagnosed with carpal tunnel syndrome.

RSI is avoidable. Designing workstations for a neutral wrist position (using a wrist rest to support the wrist), proper monitor stands, and footrests all contribute to proper posture and reduced RSI. Ergonomically correct keyboards are also an option. These measures should be supported by frequent rest breaks and rotation of employees to different jobs.

RSI is not the only occupational illness computers cause. Back and neck pain, leg stress, and foot pain also result from poor ergonomic designs of work- stations. Computer vision syndrome (CVS) refers to any eyestrain condition related to display screen use in desktop computers, laptops, e-readers, smart- phones, and hand-held video games. CVS affects about 90 percent of people who spend three hours or more per day at a computer (Beck, 2010). Its symp- toms, which are usually temporary, include headaches, blurred vision, and dry and irritated eyes.

The newest computer-related malady is technostress, which is stress induced by computer use. Its symptoms include aggravation, hostility toward humans, impatience, and fatigue. According to experts, humans working continuously with computers come to expect other humans and human institu- tions to behave like computers, providing instant responses, attentiveness, and

Repetitive stress injury (RSI) is the leading occupational disease today. The single largest cause of RSI is computer keyboard work.

150 Part One Organizations, Management, and the Networked Enterprise

an absence of emotion. Technostress is thought to be related to high levels of job turnover in the computer industry, high levels of early retirement from computer-intense occupations, and elevated levels of drug and alcohol abuse.

The incidence of technostress is not known but is thought to be in the mil- lions and growing rapidly in the United States. Computer-related jobs now top the list of stressful occupations based on health statistics in several industrial- ized countries.

To date, the role of radiation from computer display screens in occupational disease has not been proved. Video display terminals (VDTs) emit nonionizing electric and magnetic fields at low frequencies. These rays enter the body and have unknown effects on enzymes, molecules, chromosomes, and cell mem- branes. Long-term studies are investigating low-level electromagnetic fields and birth defects, stress, low birth weight, and other diseases. All manufacturers have reduced display screen emissions since the early 1980s, and European countries, such as Sweden, have adopted stiff radiation emission standards.

In addition to these maladies, computer technology may be harming our cognitive functions. Although the Internet has made it much easier for people to access, create, and use information, some experts believe that it is also preventing people from focusing and thinking clearly. The Interactive Session on Technology highlights the debate that has emerged about this problem.

The computer has become a part of our lives—personally as well as socially, culturally, and politically. It is unlikely that the issues and our choices will become easier as information technology continues to transform our world. The growth of the Internet and the information economy suggests that all the ethical and social issues we have described will be heightened further as we move into the first digital century.


Do you think that the more information managers receive, the better their decisions? Well, think again. Most of us can no longer imagine the world without the Internet and without our favorite gadgets, whether they’re iPads, smartphones, laptops, or cell phones. However, although these devices have brought about a new era of collaboration and communication, they also have introduced new concerns about our relationship with technology. Some researchers suggest that the Internet and other digital technologies are fundamentally changing the way we think—and not for the better. Is the Internet actually making us “dumber,” and have we reached a point where we have too much technology? Or does the Internet offer so many new opportunities to discover information that it’s actually making us “smarter.” And, by the way, how do we define “dumber” and “smarter” in an Internet age?

Wait a second, you’re saying. How could this be? The Internet is an unprecedented source for acquiring and sharing all types of information. Creating and disseminating media has never been easier. Resources like Wikipedia and Google have helped to organize knowledge and make that knowledge accessible to the world, and they would not have been possible without the Internet. And other digital media technologies have become indispensable parts of our lives. At first glance, it’s not clear how such advancements could do anything but make us smarter.

In response to this argument, several authorities claim that making it possible for millions of people to create media—written blogs, photos, videos—has understandably lowered the quality of media. Bloggers very rarely do original reporting or research but instead copy it from professional resources. YouTube videos contributed by newbies to video come nowhere near the quality of professional videos. Newspapers struggle to stay in business while bloggers provide free content of inconsistent quality.

But similar warnings were issued in response to the development of the printing press. As Gutenberg’s invention spread throughout Europe, contemporary literature exploded in popularity, and much of it was considered mediocre by intellectuals of the era. But rather than being destroyed, it was simply in the early stages of fundamental change. As people came to grips with the new technology and

TOO MUCH TECHNOLOGY? the new norms governing it, literature, newspapers, scientific journals, fiction, and non-fiction all began to contribute to the intellectual climate instead of detracting from it. Today, we can’t imagine a world without print media.

Advocates of digital media argue that history is bound to repeat itself as we gain familiarity with the Internet and other newer technologies. The scientific revolution was galvanized by peer review and collaboration enabled by the printing press. According to many digital media supporters, the Internet will usher in a similar revolution in publishing capability and collaboration, and it will be a resounding success for society as a whole.

This may all be true, but from a cognitive standpoint, the effects of the Internet and other digital devices might not be so positive. New studies suggest that digital technologies are damaging our ability to think clearly and focus. Digital technology users develop an inevitable desire to multitask, doing several things at once while using their devices.

Although TV, the Internet, and video games are effective at developing our visual processing ability, research suggests that they detract from our ability to think deeply and retain information. It’s true that the Internet grants users easy access to the world’s information, but the medium through which that information is delivered is hurting our ability to think deeply and critically about what we read and hear. You’d be “smarter” (in the sense of being able to give an account of the content) by reading a book rather than viewing a video on the same topic while texting with your friends.

Using the Internet lends itself to multitasking. Pages are littered with hyperlinks to other sites; tabbed browsing allows us to switch rapidly between two windows; and we can surf the Web while watching TV, instant messaging friends, or talking on the phone. But the constant distractions and disruptions that are central to online experiences prevent our brains from creating the neural connections that constitute full understanding of a topic. Traditional print media, by contrast, makes it easier to fully concentrate on the content with fewer interruptions.

A recent study conducted by a team of researchers at Stanford found that multitaskers are not only more easily distracted, but were also surprisingly poor at

Chapter 4 Ethical and Social Issues in Information Systems 151


1. What are some of the arguments for and against the use of digital media?

2. How might the brain affected by constant digital media usage?

3. Do you think these arguments outweigh the positives of digital media usage? Why or why not?

4. What additional concerns are there for children using digital media? Should children under 8 use computers and cellphones? Why or why not?

multitasking compared to people who rarely do so themselves. The team also found that multitaskers receive a jolt of excitement when confronted with a new piece of information or a new call, message, or e-mail.

The cellular structure of the brain is highly adaptable and adjusts to the tools we use, so multitaskers quickly become dependent on the excitement they experience when confronted with something new. This means that multitaskers continue to be easily distracted, even if they’re totally unplugged from the devices they most often use.

Eyal Ophir, a cognitive scientist on the research team at Stanford, devised a test to measure this phe- nomenon. Subjects self-identifying as multitaskers were asked to keep track of red rectangles in series of images. When blue rectangles were introduced, multi- taskers struggled to recognize whether or not the red rectangles had changed position from image to image. Normal testers significantly outperformed the multi- taskers. Less than three percent of multitaskers (called “supertaskers”) are able to manage multiple information streams at once; for the vast majority of us, multitasking does not result in greater productiv- ity.

Neuroscientist Michael Merzenich argues that our brains are being ‘massively remodeled’ by our constant and ever-growing usage of the Web. And it’s not just the Web that’s contributing to this trend. Our ability to focus is also being undermined by the constant distractions provided by smart phones and other digital technology. Television and video games are no exception. Another study showed that when presented with two identical TV shows, one of which

had a news crawl at the bottom, viewers retained much more information about the show without the news crawl. The impact of these technologies on children may be even greater than the impact on adults, because their brains are still developing, and they already struggle to set proper priorities and resist impulses.

The implications of recent research on the impact of Web 2.0 “social” technologies for management decision making are significant. As it turns out, the “always-connected” harried executive scurrying through airports and train stations, holding multiple voice and text conversations with clients and co-workers on sometimes several mobile devices, might not be a very good decision maker. In fact, the quality of decision making most likely falls as the quantity of digital information increases through multiple channels, and managers lose their critical thinking capabilities. Likewise, in terms of manage- ment productivity, studies of Internet use in the workplace suggest that Web 2.0 social technologies offer managers new opportunities to waste time rather than focus on their responsibilities. Checked your Facebook page today? Clearly we need to find out more about the impacts of mobile and social technologies on management work. Sources: Randall Stross, “Computers at Home: Educational Hope vs. Teenage Reality,” The New York Times, July 9, 2010; Matt Richtel, “Hooked on Gadgets, and Paying a Mental Price,” The New York Times, June 6, 2010; Clay Shirky, “Does the Internet Make you Smarter?” The Wall Street Journal, June 4, 2010; Nicholas Carr, “Does the Internet Make you Dumber?” The Wall Street Journal, June 5, 2010; Ofer Malamud and Christian Pop-Echeles, “Home Computer Use and the Development of Human Capital,” January 2010; and “Is Technology Producing a Decline in Critical Thinking and Analysis?” Science Daily, January 29, 2009.

1. Make a daily log for 1 week of all the activities you perform each day using digital technology (such as cell phones, computers, television, etc.) and the amount of time you spend on each. Note the occasions when you are multitasking. On average, how much time each day do you spend using digital technology? How much of this time do you spend multitasking? Do you think your life is too technology-intense? Justify your response.


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Chapter 4 Ethical and Social Issues in Information Systems 153



Kelleher, Claire 45

Kelleher, Claire 107

Kelleher, Claire 96

McMahon, Patricia 83

McMahon, Patricia 44

Milligan, Robert 112

Milligan, Robert 43

Olivera, Ernesto 40

Talbot, Helen 125

Talbot, Helen 27

Talbot, Helen 35

Talbot, Helen 73

Wright, Steven 23

Wright, Steven 15

4.4 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience in analyzing the privacy implications of using online data brokers, developing a corporate policy for employee Web usage, using blog creation tools to create a simple blog, and using Internet newsgroups for market research.

Management Dec i s ion Prob lems

1. USAData’s Web site is linked to massive databases that consolidate personal data on millions of people. Anyone with a credit card can purchase marketing lists of consumers broken down by location, age, income level, and interests. If you click on Consumer Leads to order a consumer mailing list, you can find the names, addresses, and sometimes phone numbers of potential sales leads residing in a specific location and purchase the list of those names. One could use this capability to obtain a list, for example, of everyone in Peekskill, New York, making $150,000 or more per year. Do data brokers such as USAData raise privacy issues? Why or why not? If your name and other personal information were in this database, what limitations on access would you want in order to preserve your privacy? Consider the following data users: government agencies, your employer, private business firms, other individuals.

2. As the head of a small insurance company with six employees, you are concerned about how effectively your company is using its networking and human resources. Budgets are tight, and you are struggling to meet payrolls because employees are reporting many overtime hours. You do not believe that the employees have a sufficiently heavy work load to warrant working longer hours and are looking into the amount of time they spend on the Internet.

Each employee uses a computer with Internet access on the job. You requested the preceding weekly report of employee Web usage from your information systems department.

• Calculate the total amount of time each employee spent on the Web for the week and the total amount of time that company computers were used for this purpose. Rank the employees in the order of the amount of time each spent online.

154 Part One Organizations, Management, and the Networked Enterprise

• Do your findings and the contents of the report indicate any ethical problems employees are creating? Is the company creating an ethical problem by monitoring its employees’ use of the Internet?

• Use the guidelines for ethical analysis presented in this chapter to develop a solution to the problems you have identified.

Achiev ing Operat iona l Exce l lence : Creat ing a S imple Blog

Software skills: Blog creation Business skills: Blog and Web page design

In this project, you’ll learn how to build a simple blog of your own design using the online blog creation software available at Pick a sport, hobby, or topic of interest as the theme for your blog. Name the blog, give it a title, and choose a template for the blog. Post at least four entries to the blog, adding a label for each posting. Edit your posts, if necessary. Upload an image, such as a photo from your hard drive or the Web to your blog. (Google recommends Open Photo, Flickr: Creative Commons, or Creative Commons Search as sources for photos. Be sure to credit the source for your image.) Add capabilities for other registered users, such as team members, to comment on your blog. Briefly describe how your blog could be useful to a company selling products or services related to the theme of your blog. List the tools available to Blogger (including Gadgets) that would make your blog more useful for business and describe the business uses of each. Save your blog and show it to your instructor.

Improv ing Dec i s ion Making: Us ing Internet Newsgroups for On l ine Market Research

Software Skills: Web browser software and Internet newsgroups Business Skills: Using Internet newsgroups to identify potential customers

This project will help develop your Internet skills in using newsgroups for marketing. It will also ask you to think about the ethical implications of using information in online discussion groups for business purposes.

You are producing hiking boots that you sell through a few stores at this time. You think your boots are more comfortable than those of your competition. You believe you can undersell many of your competitors if you can significantly increase your production and sales. You would like to use Internet discussion groups interested in hiking, climbing, and camping both to sell your boots and to make them well known. Visit, which stores discussion postings from many thousands of newsgroups. Through this site you can locate all relevant newsgroups and search them by keyword, author’s name, forum, date, and subject. Choose a message and examine it carefully, noting all the information you can obtain, including information about the author.

• How could you use these newsgroups to market your boots?

• What ethical principles might you be violating if you use these messages to sell your boots? Do you think there are ethical problems in using newsgroups this way? Explain your answer.

• Next use Google or to search the hiking boots industry and locate sites that will help you develop other new ideas for contacting potential customers.

• Given what you have learned in this and previous chapters, prepare a plan to use newsgroups and other alternative methods to begin attracting visitors to your site.

Chapter 4 Ethical and Social Issues in Information Systems 155

LEARNING TRACK MODULES The following Learning Tracks provide content relevant to the topics covered in this chapter:

1. Developing a Corporate Code of Ethics for Information Systems

2. Creating a Web Page

Review Summary 1. What ethical, social, and political issues are raised by information systems?

Information technology is introducing changes for which laws and rules of acceptable conduct have not yet been developed. Increasing computing power, storage, and networking capabilities—including the Internet—expand the reach of individual and organizational actions and magnify their impacts. The ease and anonymity with which information is now communicated, copied, and manipulated in online environments pose new challenges to the protection of privacy and intellectual property. The main ethical, social, and political issues raised by information systems center around information rights and obligations, property rights and obligations, accountability and control, system quality, and quality of life.

2. What specific principles for conduct can be used to guide ethical decisions? Six ethical principles for judging conduct include the Golden Rule, Immanuel Kant’s Categorical

Imperative, Descartes’ rule of change, the Utilitarian Principle, the Risk Aversion Principle, and the ethical “no free lunch” rule. These principles should be used in conjunction with an ethical analysis.

3. Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

Contemporary data storage and data analysis technology enables companies to easily gather personal data about individuals from many different sources and analyze these data to create detailed electronic profiles about individuals and their behaviors. Data flowing over the Internet can be monitored at many points. Cookies and other Web monitoring tools closely track the activities of Web site visitors. Not all Web sites have strong privacy protection policies, and they do not always allow for informed consent regarding the use of personal information. Traditional copyright laws are insufficient to protect against software piracy because digital material can be copied so easily and transmitted to many different locations simultaneously over the Internet.

4. How have information systems affected everyday life? Although computer systems have been sources of efficiency and wealth, they have some negative

impacts. Computer errors can cause serious harm to individuals and organizations. Poor data quality is also responsible for disruptions and losses for businesses. Jobs can be lost when computers replace workers or tasks become unnecessary in reengineered business processes. The ability to own and use a computer may be exacerbating socioeconomic disparities among different racial groups and social classes. Widespread use of computers increases opportunities for computer crime and computer abuse. Computers can also create health problems, such as RSI, computer vision syndrome, and technostress.

Key Terms Accountability, 129 Carpal tunnel syndrome (CTS), 149 Computer abuse, 145 Computer crime, 145 Computer vision syndrome (CVS), 149 Cookies, 134 Copyright, 139 Descartes’ rule of change, 130 Digital divide, 148 Digital Millennium Copyright Act (DMCA), 141 Due process, 129

Ethical “no free lunch” rule, 130 Ethics, 124 Fair Information Practices (FIP), 132 Golden Rule, 130 Immanuel Kant’s Categorical Imperative, 130 Information rights, 125 Informed consent, 134 Intellectual property, 138 Liability, 129 Nonobvious relationship awareness (NORA), 128 Opt-in, 137 Opt-out, 136

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P3P, 137 Patent, 140 Privacy, 131 Profiling, 127 Repetitive stress injury (RSI), 149 Responsibility, 129 Risk Aversion Principle, 130

Safe harbor, 134 Spam, 145 Spyware, 135 Technostress, 149 Trade secret, 139 Utilitarian Principle, 130 Web beacons, 135

Collaboration and Teamwork: Developing a Corporate Ethics Code

Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos.

Review Questions 1. What ethical, social, and political issues are raised

by information systems?

• Explain how ethical, social, and political issues are connected and give some examples.

• List and describe the key technological trends that heighten ethical concerns.

• Differentiate between responsibility, accountability, and liability.

2. What specific principles for conduct can be used to guide ethical decisions?

• List and describe the five steps in an ethical analysis.

• Identify and describe six ethical principles.

3. Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellec- tual property?

• Define privacy and fair information practices.

• Explain how the Internet challenges the protection of individual privacy and intellec- tual property.

• Explain how informed consent, legislation, industry self-regulation, and technology tools help protect the individual privacy of Internet users.

• List and define the three different regimes that protect intellectual property rights.

4. How have information systems affected every- day life?

• Explain why it is so difficult to hold software services liable for failure or injury.

• List and describe the principal causes of system quality problems.

• Name and describe four quality-of-life impacts of computers and information systems.

• Define and describe technostress and RSI and explain their relationship to information technology.

Discussion Questions 1. Should producers of software-based services, such

as ATMs, be held liable for economic injuries suffered when their systems fail?

2. Should companies be responsible for unemploy- ment caused by their information systems? Why or why not?

3. Discuss the pros and cons of allowing companies to amass personal data for behavioral targeting.

With three or four of your classmates, develop a cor- porate ethics code that addresses both employee privacy and the privacy of customers and users of the corporate Web site. Be sure to consider e-mail privacy and employer monitoring of worksites, as well as corporate use of information about employ- ees concerning their off-the-job behavior (e.g.,

lifestyle, marital arrangements, and so forth). If pos- sible, use Google Sites to post links to Web pages, team communication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop your solution and presenta- tion for the class.

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When Radiation Therapy Kil ls CASE STUDY

hen new expensive medical therapies come along, promising to cure people of illness, one would think that the manufacturers, doctors, and technicians,

along with the hospitals and state oversight agencies, would take extreme caution in their application and use. Often this is not the case. Contemporary radiation therapy offers a good example of society failing to anticipate and control the negative impacts of a technology powerful enough to kill people.

For individuals and their families suffering through a battle with cancer, technical advancements in radiation treatment represent hope and a chance for a healthy, cancer-free life. But when these highly complex machines used to treat cancers go awry or when medical technicians and doctors fail to follow proper safety procedures, it results in suffering worse than the ailments radiation aims to cure. A litany of horror stories underscores the consequences when hospitals fail to provide safe radiation treatment to cancer patients. In many of these horror stories, poor software design, poor human-machine interfaces, and lack of proper training are root causes of the problems.

The deaths of Scott Jerome-Parks and Alexandra Jn-Charles, both patients of New York City hospitals, are prime examples of radiation treatments going awry. Jerome-Parks worked in southern Manhattan near the site of the World Trade Center attacks, and suspected that the tongue cancer he developed later was related to toxic dust that he came in contact with after the attacks. His prognosis was uncertain at first, but he had some reason to be optimistic, given the quality of the treatment provided by state-of-the-art linear accelerators at St. Vincent’s Hospital, which he selected for his treatment. But after receiving erroneous dosages of radiation several times, his condition drastically worsened.

For the most part, state-of-the-art linear accelera- tors do in fact provide effective and safe care for cancer patients, and Americans safely receive an increasing amount of medical radiation each year. Radiation helps to diagnose and treat all sorts of cancers, saving many patients’ lives in the process, and is administered safely to over half of all cancer patients. Whereas older machines were only capable of imaging a tumor in two dimensions and projecting straight beams of radiation, newer linear accelerators

are capable of modeling cancerous tumors in three dimensions and shaping beams of radiation to conform to those shapes.

One of the most common issues with radiation therapy is finding ways to destroy cancerous cells while preserving healthy cells. Using this beam- shaping technique, radiation doesn’t pass through as much healthy tissue to reach the cancerous areas. Hospitals advertised their new accelerators as being able to treat previously untreatable cancers because of the precision of the beam-shaping method. Using older machinery, cancers that were too close to important bodily structures were considered too dangerous to treat with radiation due to the imprecision of the equipment.

How, then, are radiation-related accidents increasing in frequency, given the advances in linear acceleration technology? In the cases of Jerome- Parks and Jn-Charles, a combination of machine malfunctions and user error led to these frightening mistakes. Jerome-Parks’s brain stem and neck were exposed to excessive dosages of radiation on three separate occasions because of a computer error. The linear accelerator used to treat Jerome-Parks is known as a multi-leaf collimator, a newer, more powerful model that uses over a hundred metal “leaves” to adjust the shape and strength of the beam. The St. Vincent’s hospital collimator was made by Varian Medical Systems, a leading supplier of radiation equipment.

Dr. Anthony M. Berson, St. Vincent’s chief radiation oncologist, reworked Mr. Jerome Parks’s radiation treatment plan to give more protection to his teeth. Nina Kalach, the medical physicist in charge of implementing Jerome-Parks’s radiation treatment plan, used Varian software to revise the plan. State records show that as Ms. Kalach was trying to save her work, the computer began seizing up, displaying an error message. The error message asked if Ms. Kalach wanted to save her changes before the program aborted and she responded that she did. Dr. Berson approved the plan.

Six minutes after another computer crash, the first of several radioactive beams was turned on, followed by several additional rounds of radiation the next few days. After the third treatment, Ms. Kalach ran a test to verify that the treatment plan was carried out as prescribed, and found that the multileaf collimator,


158 Part One Organizations, Management, and the Networked Enterprise

which was supposed to focus the beam precisely on Mr. Jerome Parks’s tumor, was wide open. The patient’s entire neck had been exposed and Mr. Jerome-Parks had seven times the prescribed dose of radiation.

As a result of the radiation overdose, Mr. Jerome- Parks’s experienced deafness and near-blindness, ulcers in his mouth and throat, persistent nausea, and severe pain. His teeth were falling out, he couldn’t swallow, and he was eventually unable to breathe. He died soon after, at the age of 43.

Jn-Charles’s case was similarly tragic. A 32-year old mother of two from Brooklyn, she was diagnosed with an aggressive form of breast cancer, but her outlook seemed good after breast surgery and chemotherapy, with only 28 days of radiation treatments left to perform. However, the linear accelerator used at the Brooklyn hospital where Jn-Charles was treated was not a multi-leaf collima- tor, but instead a slightly older model, which uses a device known as a “wedge” to prevent radiation from reaching unintended areas of the body.

On the day of her 28th and final session, techni- cians realized that something had gone wrong. Jn- Charles’s skin had slowly begun to peel and seemed to resist healing. When the hospital looked into the treatment to see why this could have happened, they discovered that the linear accelerator lacked the cru- cial command to insert the wedge, which must be programmed by the user. Technicians had failed to notice error messages on their screens indicating the missing wedge during each of the 27 sessions. This meant that Jn-Charles had been exposed to almost quadruple the normal amount of radiation during each of those 27 visits.

Ms. Jn-Charles’s radiation overdose created a wound that would not heal despite numerous sessions in a hyperbaric chamber and multiple surgeries. Although the wound closed up over a year later, she died shortly afterwards.

It might seem that the carelessness or laziness of the medical technicians who administered treatment is primarily to blame in these cases, but other factors have contributed just as much. The complexity of new linear accelerator technology has not been accompanied with appropriate updates in software, training, safety procedures, and staffing. St. Vincent’s hospital stated that system crashes similar to those involved in the improper therapy for Mr. Jerome- Parks “are not uncommon with the Varian software, and these issues have been communicated to Varian on numerous occasions.”

Manufacturers of these machines boast that they can safely administer radiation treatment to more and more patients each day, but hospitals are rarely able to adjust their staffing to handle those workloads or increase the amount of training technicians receive before using newer machines. Medical technicians incorrectly assume that the new systems and software are going to work correctly, but in reality they have not been tested over long periods of time.

Many of these errors could have been detected if the machine operators were paying attention. In fact, many of the reported errors involve mistakes as simple and as egregious as treating patients for the wrong cancers; in one example, a brain cancer patient received radiation intended for breast cancer. Today’s linear accelerators also lack some of the necessary safeguards given the amounts of radiation that they can deliver. For example, many linear accelerators are unable to alert users when a dosage of radiation far exceeds the necessary amount to effectively damage a cancerous tumor. Though responsibility ultimately rests with the technician, software programmers may not have designed their product with the technician’s needs in mind.

Though the complexity of newer machines has exposed the inadequacy of the safety procedures hospitals employ for radiation treatments, the increasing number of patients receiving radiation due to the speed and increased capability of these machines has created other problems. Technicians at many of the hospitals reporting radiation-related errors reported being chronically overworked, often dealing with over a hundred patients per day. These already swamped medical technicians are not forced to check over the settings of the linear accelerators that they are handling, and errors that are introduced to the computer systems early on are difficult to detect. As a result, the same erroneous treatment may be administered repeatedly, until the techni- cians and doctors have a reason to check it. Often, the reason is a seriously injured patient.

Further complicating the issue is the fact that the total number of radiation-related accidents each year is essentially unknown. No single agency exists to collect data across the country on these accidents, and many states don’t even require that accidents be reported. Even in states that do, hospitals are often reluctant to report errors that they’ve made, fearful that it will scare potential patients away, affecting their bottom lines. Some instances of hospital error are difficult to detect, since radiation-related cancer may appear a long while after the faulty treatment,

Chapter 4 Ethical and Social Issues in Information Systems 159

and under-radiation doesn’t result in any observable injury. Even in New York, which has one of the strictest accident reporting requirements in place and keeps reporting hospitals anonymous to encourage them to share their data, a significant portion of errors go unreported—perhaps even a majority of errors.

The problem is certainly not unique to New York. In New Jersey, 36 patients were over-radiated at a single hospital by an inexperienced team of technicians, and the mistakes continued for months in the absence of a system that detected treatment errors. Patients in Louisiana, Texas, and California repeatedly received incorrect dosages that led to other crippling ailments. Nor is the issue unique to the United States. In Panama, 28 patients at the National Cancer Institute received overdoses of radi- ation for various types of cancers. Doctors had ordered medical physicists to add a fifth “block,” or metal sheet similar to the “leaves” in a multi-leaf collimator, to their linear accelerators, which were only designed to support four blocks. When the staff attempted to get the machine software to work with the extra block, the results were miscalculated dosages and over-radiated patients.

The lack of a central U.S. reporting and regulatory agency for radiation therapy means that in the event of a radiation-related mistake, all of the groups involved are able to avoid ultimate responsibility. Medical machinery and software manufacturers claim that it’s the doctors and medical technicians’ responsibility to properly use the machines, and the hospitals’ responsibility to properly budget time and resources for training. Technicians claim that they are understaffed and overworked, and that there are no procedures in place to check their work and no time to do so even if there were. Hospitals claim that the newer machinery lacks the proper fail-safe mechanisms and that there is no room on already limited budgets for the training that equipment manufacturers claim is required.

Currently, the responsibility for regulating these incidents falls upon the states, which vary widely in their enforcement of reporting. Many states require no reporting at all, but even in a state like Ohio,

which requires reporting of medical mistakes within 15 days of the incident, these rules are routinely bro- ken. Moreover, radiation technicians do not require a license in Ohio, as they do in many other states.

Dr. Fred A. Mettler, Jr., a radiation expert who has investigated radiation accidents worldwide, notes that “while there are accidents, you wouldn’t want to scare people to death where they don’t get needed radiation therapy.” And it bears repeating that the vast majority of the time, radiation works, and saves some people from terminal cancer. But technicians, hospitals, equipment and software manufacturers, and regulators all need to collaborate to create a common set of safety procedures, software features, reporting standards, and certification requirements for technicians in order to reduce the number of radiation accidents.

Sources: Walt Bogdanich, “Medical Group Urges New Rules on Radiation,” The New York Times, February 4, 2010; “As Technology Surges, Radiation Safeguards Lag,” The New York Times, January 27, 2010; “Radiation Offers New Cures, and Ways to Do Harm,” The New York Times, January 24, 2010; and “Case Studies: When Medical Radiation Goes Awry,” The New York Times, January 21, 2010.

CASE STUDY QUESTIONS 1. What concepts in the chapter are illustrated in this

case? What ethical issues are raised by radiation technology?

2. What management, organization, and technology factors were responsible for the problems detailed in this case? Explain the role of each.

3. Do you feel that any of the groups involved with this issue (hospital administrators, technicians, medical equipment and software manufacturers) should accept the majority of the blame for these incidents? Why or why not?

4. How would a central reporting agency that gathered data on radiation-related accidents help reduce the number of radiation therapy errors in the future?

5. If you were in charge of designing electronic software for a linear accelerator, what are some features you would include? Are there any features you would avoid?

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Information Technology Infrastructure

Chapter 5 IT Infrastructure and Emerging Technologies

Chapter 6 Foundations of Business Intelligence: Databases and Information Management

Chapter 7 Telecommunications, the Internet, and Wireless Technology

Chapter 8 Securing Information Systems

Part Two provides the technical foundation for understanding information systems by examining hardware, software, database, and networking technologies along with tools and techniques for security and control. This part answers questions such as: What technologies do businesses today need to accomplish their work? What do I need to know about these technologies to make sure they enhance the performance of the firm? How are these technologies likely to change in the future? What tech- nologies and procedures are required to ensure that systems are reliable and secure?

LEARNING OBJECTIVESS After reading this chapter, you will be able to answer the following questions: 1. What is IT infrastructure and what

are its components?

2. What are the stages and technology drivers of IT infrastructure evolution?

3. What are the current trends in computer hardware platforms?

4. What are the current trends in software platforms?

5. What are the challenges of managing IT infrastructure and management solutions?


Defining IT Infrastructure Evolution of IT Infrastructure Technology Drivers of Infrastructure Evolution

5.2 INFRASTRUCTURE COMPONENTS Computer Hardware Platforms Operating System Platforms Enterprise Software Applications Data Management and Storage Networking/Telecommunications Platforms Internet Platforms Consulting and System Integration Services

5.3 CONTEMPORARY HARDWARE PLATFORM TRENDS The Emerging Mobile Digital Platform Grid Computing Virtualization Cloud Computing Green Computing Autonomic Computing High-Performance and Power-Saving Processors

5.4 CONTEMPORARY SOFTWARE PLATFORM TRENDS Linux and Open Source Software Software for the Web: Java and Ajax Web Services and Service-Oriented Architecture Software Outsourcing and Cloud Services

5.5 MANAGEMENT ISSUES Dealing with Platform and Infrastructure Change Management and Governance Making Wise Infrastructure Investments

5.6 HANDS-ON MIS PROJECTS Management Decision Problems Improving Decision Making: Using a Spreadsheet to

Evaluate Hardware and Software Options Improving Decision Making: Using Web Research to

Budget for a Sales Conference LEARNING TRACK MODULES

How Computer Hardware and Software Work Service Level Agreements The Open Source Software Initiative Comparing Stages in IT Infrastructure Evolution Cloud Computing

Chapter 5

IT Infrastructure and Emerging Technologies

Interactive Sessions:

New to the Touch

Is Green Computing Good for Business?


he Bay Area Rapid Transit (BART) is a heavy-rail public transit system that connects San Francisco to Oakland, California, and other neighboring cities to the east and south. BART has provided fast, reliable transportation for more than 35 years and now carries more than 346,000 passengers each day over 104 miles of track and 43

stations. It provides an alternative to driving on bridges and highways, decreasing travel time and the number of cars on the Bay Area’s congested roads. It is the fifth busiest rapid transit system in the United States.

BART recently embarked on an ambitious modernization effort to overhaul stations, deploy new rail cars, and extend routes. This modernization effort also encompassed BART’s information technology infrastructure. BART’s information systems were no longer state-of-the art, and they were starting to affect its ability to provide good service. Aging homegrown financial and human resources systems could no longer provide information rapidly enough for making timely decisions, and they were too unreliable to support its 24/7 operations.

BART upgraded both its hardware and software. It replaced old legacy mainframe applica- tions with Oracle’s PeopleSoft Enterprise applications running on HP Integrity blade servers and the Oracle Enterprise Linux operating system. This configuration provides more flexibil- ity and room to grow because BART is able to run the PeopleSoft software in conjunction with new applications it could not previously run.

BART wanted to create a high-availability IT infrastructure using grid computing where it could match computing and storage capacity more closely to actual demand. BART chose to run its applications on a cluster of servers using a grid architecture. Multiple operating environments share capacity and computing resources that can be provisioned, distributed, and redistributed as needed over the grid.

In most data centers, a distinct server is deployed for each application, and each server typically uses only a fraction of its capacity. BART uses virtualization to run multiple applica- tions on the same server, increasing server capacity utilization to 50 percent or higher. This means fewer servers can be used to accomplish the same amount of work.

With blade servers, if BART needs more capacity, it can add another server to the main system. Energy usage is minimized because BART does not have to purchase computing



capacity it doesn’t need and the blade servers’ stripped down modular design mini- mizes the use of physical space and energy.

By using less hardware and using existing computing resources more efficiently, BART’s grid environment saves power and cooling costs. Consolidating applications onto a shared grid of server capacity is expected to reduce energy usage by about 20 per- cent.

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Sources: David Baum, “Speeding into the Modern Age,” Profit, February 2010;, accessed June 5, 2010; and Steve Clouther, “The San Francisco Bay Area Rapid Transit Uses IBM Technology to Improve Safety and Reliability,” ARC Advisory Group, October 7, 2009.

BART has been widely praised as a successful modern rapid transitsystem, but its operations and ability to grow where needed were hampered by an outdated IT infrastructure. BART’s management felt the best solution was to invest in new hardware and software technologies that were more cost-effective, efficient, and energy-saving.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Management realized that in order to keep provid- ing the level of service expected by Bay Area residents, it had to modernize its operations, including the hardware and software used for running the organization. The IT infrastructure investments it made had to support BART’s business goals and contribute to improving its performance. Other goals included reducing costs and also “green” goals of reducing power and materials consumption.

By replacing its legacy software and computers with blade servers on a grid and more modern business software, BART was able to reduce wasted computer resources not used for processing, use existing resources more efficiently, and cut costs and power consumption. New software tools make it much easier to develop new applications and services. BART’s IT infrastuc- ture is easier to manage and capable of scaling to accommodate growing processing loads and new business opportunities. This case shows that the right hardware and software investments not only improve business perfor- mance but can also contribute to important social goals, such as conservation of power and materials.

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5.1 IT INFRASTRUCTURE n Chapter 1, we defined information technology (IT) infrastructure as the shared technology resources that provide the platform for the firm’s specific information system applications. IT infrastructure includes investment in hardware, software, and services—such as consulting, education, and training—that are shared across the entire firm or across

entire business units in the firm. A firm’s IT infrastructure provides the foun- dation for serving customers, working with vendors, and managing internal firm business processes (see Figure 5-1).

Supplying U.S. firms with IT infrastructure (hardware and software) in 2010 is estimated to be a $1 trillion industry when telecommunications, networking equipment, and telecommunications services (Internet, telephone, and data transmission) are included. This does not include IT and related business process consulting services, which would add another $800 billion. Investments in infrastructure account for between 25 and 50 percent of information technology expenditures in large firms, led by financial services firms where IT investment is well over half of all capital investment (Weill et al., 2002).

DEFINING IT INFRASTRUCTURE IT infrastructure consists of a set of physical devices and software applications that are required to operate the entire enterprise. But IT infrastructure is also a set of firmwide services budgeted by management and comprising both human and technical capabilities. These services include the following:



The services a firm is capable of providing to its customers, suppliers, and employees are a direct function of its IT infrastructure. Ideally, this infrastructure should support the firm’s business and information systems strategy. New information technologies have a powerful impact on business and IT strategies, as well as the services that can be provided to customers.

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• Computing platforms used to provide computing services that connect employees, customers, and suppliers into a coherent digital environment, including large mainframes, midrange computers, desktop and laptop computers, and mobile handheld devices.

• Telecommunications services that provide data, voice, and video connectivity to employees, customers, and suppliers.

• Data management services that store and manage corporate data and provide capabilities for analyzing the data.

• Application software services that provide enterprise-wide capabilities such as enterprise resource planning, customer relationship management, supply chain management, and knowledge management systems that are shared by all business units.

• Physical facilities management services that develop and manage the physical installations required for computing, telecommunications, and data management services.

• IT management services that plan and develop the infrastructure, coordinate with the business units for IT services, manage accounting for the IT expenditure, and provide project management services.

• IT standards services that provide the firm and its business units with policies that determine which information technology will be used, when, and how.

• IT education services that provide training in system use to employees and offer managers training in how to plan for and manage IT investments.

• IT research and development services that provide the firm with research on potential future IT projects and investments that could help the firm differentiate itself in the marketplace.

This “service platform” perspective makes it easier to understand the business value provided by infrastructure investments. For instance, the real business value of a fully loaded personal computer operating at 3 gigahertz that costs about $1,000 or a high-speed Internet connection is hard to under- stand without knowing who will use it and how it will be used. When we look at the services provided by these tools, however, their value becomes more apparent: The new PC makes it possible for a high-cost employee making $100,000 a year to connect to all the company’s major systems and the public Internet. The high-speed Internet service saves this employee about one hour per day in reduced wait time for Internet information. Without this PC and Internet connection, the value of this one employee to the firm might be cut in half.

EVOLUTION OF IT INFRASTRUCTURE The IT infrastructure in organizations today is an outgrowth of over 50 years of evolution in computing platforms. There have been five stages in this evo- lution, each representing a different configuration of computing power and infrastructure elements (see Figure 5-2). The five eras are general-purpose mainframe and minicomputer computing, personal computers, client/server networks, enterprise computing, and cloud and mobile computing.

Technologies that characterize one era may also be used in another time period for other purposes. For example, some companies still run traditional mainframe systems or use mainframe computers as massive servers supporting large Web sites and corporate enterprise applications.

Chapter 5 IT Infrastructure and Emerging Technologies 167


Illustrated here are the typical computing configurations characterizing each of the five eras of IT infrastructure evolution.

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Genera l -Purpose Mainf rame and Min icomputer Era : (1959 to Present ) The introduction of the IBM 1401 and 7090 transistorized machines in 1959 marked the beginning of widespread commercial use of mainframe computers. In 1965, the mainframe computer truly came into its own with the introduction of the IBM 360 series. The 360 was the first commercial computer with a power- ful operating system that could provide time sharing, multitasking, and virtual memory in more advanced models. IBM has dominated mainframe computing from this point on. Mainframe computers became powerful enough to support thousands of online remote terminals connected to the centralized mainframe using proprietary communication protocols and proprietary data lines.

The mainframe era was a period of highly centralized computing under the control of professional programmers and systems operators (usually in a corpo- rate data center), with most elements of infrastructure provided by a single vendor, the manufacturer of the hardware and the software.

This pattern began to change with the introduction of minicomputers produced by Digital Equipment Corporation (DEC) in 1965. DEC minicomput- ers (PDP-11 and later the VAX machines) offered powerful machines at far lower prices than IBM mainframes, making possible decentralized computing, customized to the specific needs of individual departments or business units rather than time sharing on a single huge mainframe. In recent years, the minicomputer has evolved into a midrange computer or midrange server and is part of a network.

Persona l Computer Era : (1981 to Present ) Although the first truly personal computers (PCs) appeared in the 1970s (the Xerox Alto, the MITS Altair 8800, and the Apple I and II, to name a few), these machines had only limited distribution to computer enthusiasts. The appear- ance of the IBM PC in 1981 is usually considered the beginning of the PC era because this machine was the first to be widely adopted by American busi- nesses. At first using the DOS operating system, a text-based command lan- guage, and later the Microsoft Windows operating system, the Wintel PC com- puter (Windows operating system software on a computer with an Intel microprocessor) became the standard desktop personal computer. Today, 95 percent of the world’s estimated 1.5 billion computers use the Wintel standard.

Proliferation of PCs in the 1980s and early 1990s launched a spate of personal desktop productivity software tools—word processors, spreadsheets, electronic presentation software, and small data management programs—that were very valuable to both home and corporate users. These PCs were standalone systems until PC operating system software in the 1990s made it possible to link them into networks.

Cl ient /Ser ver Era (1983 to Present ) In client/server computing, desktop or laptop computers called clients are networked to powerful server computers that provide the client computers with a variety of services and capabilities. Computer processing work is split between these two types of machines. The client is the user point of entry, whereas the server typically processes and stores shared data, serves up Web pages, or manages network activities. The term “server” refers to both the software application and the physical computer on which the network software runs. The server could be a mainframe, but today, server computers typically are more powerful versions of personal computers, based on inexpensive chips and often using multiple processors in a single computer box.

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The simplest client/server network consists of a client computer networked to a server computer, with processing split between the two types of machines. This is called a two-tiered client/server architecture. Whereas simple client/server networks can be found in small businesses, most corporations have more complex, multitiered (often called N-tier) client/server architec- tures in which the work of the entire network is balanced over several different levels of servers, depending on the kind of service being requested (see Figure 5-3).

For instance, at the first level, a Web server will serve a Web page to a client in response to a request for service. Web server software is responsible for locating and managing stored Web pages. If the client requests access to a cor- porate system (a product list or price information, for instance), the request is passed along to an application server. Application server software handles all application operations between a user and an organization’s back-end business systems. The application server may reside on the same computer as the Web server or on its own dedicated computer. Chapters 6 and 7 provide more detail on other pieces of software that are used in multitiered client/server architec- tures for e-commerce and e-business.

Client/server computing enables businesses to distribute computing work across a series of smaller, inexpensive machines that cost much less than minicomputers or centralized mainframe systems. The result is an explosion in computing power and applications throughout the firm.

Novell NetWare was the leading technology for client/server networking at the beginning of the client/server era. Today, Microsoft is the market leader with its Windows operating systems (Windows Server, Windows 7, Windows Vista, and Windows XP).

Enterpr i se Comput ing Era (1992 to Present ) In the early 1990s, firms turned to networking standards and software tools that could integrate disparate networks and applications throughout the firm into an enterprise-wide infrastructure. As the Internet developed into a trusted communications environment after 1995, business firms began seriously using the Transmission Control Protocol/Internet Protocol (TCP/IP) networking


In a multitiered client/server network, client requests for service are handled by different levels of servers.

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standard to tie their disparate networks together. We discuss TCP/IP in detail in Chapter 7.

The resulting IT infrastructure links different pieces of computer hardware and smaller networks into an enterprise-wide network so that information can flow freely across the organization and between the firm and other organiza- tions. It can link different types of computer hardware, including mainframes, servers, PCs, mobile phones, and other handheld devices, and it includes public infrastructures such as the telephone system, the Internet, and public network services. The enterprise infrastructure also requires software to link disparate applications and enable data to flow freely among different parts of the business, such as enterprise applications (see Chapters 2 and 9) and Web services (discussed in Section 5.4).

Cloud and Mobi le Comput ing Era (2000 to Present ) The growing bandwidth power of the Internet has pushed the client/server model one step further, towards what is called the “Cloud Computing Model.” Cloud computing refers to a model of computing that provides access to a shared pool of computing resources (computers, storage, applications, and services), over a network, often the Internet. These “clouds” of computing resources can be accessed on an as-needed basis from any connected device and location. Currently, cloud computing is the fastest growing form of computing, with global revenue expected to reach close to $89 billion in 2011 and nearly $149 billion by 2014 according to Gartner Inc. technology consul- tants (Cheng and Borzo, 2010; Veverka, 2010).

Thousands or even hundreds of thousands computers are located in cloud data centers, where they can be accessed by desktop computers, laptop computers, netbooks, entertainment centers, mobile devices, and other client machines linked to the Internet, with both personal and corporate computing increasingly moving to mobile platforms. IBM, HP, Dell, and Amazon operate huge, scalable cloud computing centers that provide computing power, data storage, and high-speed Internet connections to firms that want to maintain their IT infrastructures remotely. Software firms such as Google, Microsoft, SAP, Oracle, and sell software applications as services delivered over the Internet.

We discuss cloud computing in more detail in Section 5.3. The Learning Tracks include a table on Stages in IT Infrastructure Evolution, which compares each era on the infrastructure dimensions introduced.

TECHNOLOGY DRIVERS OF INFRASTRUCTURE EVOLUTION The changes in IT infrastructure we have just described have resulted from developments in computer processing, memory chips, storage devices, telecommunications and networking hardware and software, and software design that have exponentially increased computing power while exponentially reducing costs. Let’s look at the most important developments.

Moore ’s L aw and Microprocess ing Power In 1965, Gordon Moore, the directory of Fairchild Semiconductor’s Research and Development Laboratories, an early manufacturer of integrated circuits, wrote in Electronics magazine that since the first microprocessor chip was introduced in 1959, the number of components on a chip with the smallest

Chapter 5 IT Infrastructure and Emerging Technologies 171

manufacturing costs per component (generally transistors) had doubled each year. This assertion became the foundation of Moore’s Law. Moore later reduced the rate of growth to a doubling every two years.

This law would later be interpreted in multiple ways. There are at least three variations of Moore’s Law, none of which Moore ever stated: (1) the power of microprocessors doubles every 18 months; (2) computing power doubles every 18 months; and (3) the price of computing falls by half every 18 months.

Figure 5-4 illustrates the relationship between number of transistors on a microprocessor and millions of instructions per second (MIPS), a common measure of processor power. Figure 5-5 shows the exponential decline in the cost of transistors and rise in computing power. In 2010 for instance, and Intel 8-Core Xeon processor contains 2.3 billion transistors.

Exponential growth in the number of transistors and the power of processors coupled with an exponential decline in computing costs is likely to continue. Chip manufacturers continue to miniaturize components. Today’s transistors should no longer be compared to the size of a human hair but rather to the size of a virus.

By using nanotechnology, chip manufacturers can even shrink the size of transistors down to the width of several atoms. Nanotechnology uses individ- ual atoms and molecules to create computer chips and other devices that are thousands of times smaller than current technologies permit. Chip manufac- turers are trying to develop a manufacturing process that could produce nanotube processors economically (Figure 5-6). IBM has just started making microprocessors in a production setting using this technology.

The L aw of Mass D ig i ta l Storage A second technology driver of IT infrastructure change is the Law of Mass Digital Storage. The world produces as much as 5 exabytes of unique informa- tion per year (an exabyte is a billion gigabytes, or 1018 bytes). The amount of digital information is roughly doubling every year (Lyman and Varian, 2003). Fortunately, the cost of storing digital information is falling at an exponential


Packing over 2 billion transistors into a tiny microprocessor has exponentially increased processing power. Processing power has increased to over 500,000 MIPS (millions of instructions per second). Sources: Intel, 2010; authors’ estimate.

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Nanotubes are tiny tubes about 10,000 times thinner than a human hair. They consist of rolled up sheets of carbon hexagons and have the potential uses as minuscule wires or in ultrasmall electronic devices and are very powerful conductors of electrical current.


Packing more transistors into less space has driven down transistor cost dramatically as well as the cost of the products in which they are used. Source: Intel, 2010; authors’ estimates.

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rate of 100 percent a year. Figure 5-7 shows that the number of kilobytes that can be stored on magnetic media for $1 from 1950 to the present roughly dou- bled every 15 months.

Metca l fe ’ s L aw and Network Economics Moore’s Law and the Law of Mass Storage help us understand why computing resources are now so readily available. But why do people want more comput- ing and storage power? The economics of networks and the growth of the Internet provide some answers.

Robert Metcalfe—inventor of Ethernet local area network technology— claimed in 1970 that the value or power of a network grows exponentially as a function of the number of network members. Metcalfe and others point to the increasing returns to scale that network members receive as more and more people join the network. As the number of members in a network grows linearly, the value of the entire system grows exponentially and continues to grow forever as members increase. Demand for information technology has been driven by the social and business value of digital networks, which rapidly multiply the number of actual and potential links among network members.

Dec l in ing Communicat ions Costs and the Internet A fourth technology driver transforming IT infrastructure is the rapid decline in the costs of communication and the exponential growth in the size of the


Since the first magnetic storage device was used in 1955, the cost of storing a kilobyte of data has fallen exponentially, doubling the amount of digital storage for each dollar expended every 15 months on average. Sources: Kurzweil 2003; authors’ estimates.

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Internet. An estimated 1.8 billion people worldwide now have Internet access (Internet World Stats, 2010). Figure 5-8 illustrates the exponentially declining cost of communication both over the Internet and over telephone networks (which increasingly are based on the Internet). As communication costs fall toward a very small number and approach 0, utilization of communication and computing facilities explodes.

To take advantage of the business value associated with the Internet, firms must greatly expand their Internet connections, including wireless connectiv- ity, and greatly expand the power of their client/server networks, desktop clients, and mobile computing devices. There is every reason to believe these trends will continue.

Standards and Network Effects Today’s enterprise infrastructure and Internet computing would be impossible— both now and in the future—without agreements among manufacturers and widespread consumer acceptance of technology standards. Technology standards are specifications that establish the compatibility of products and the ability to communicate in a network (Stango, 2004).

Technology standards unleash powerful economies of scale and result in price declines as manufacturers focus on the products built to a single standard. Without these economies of scale, computing of any sort would be far more expensive than is currently the case. Table 5-1 describes important standards that have shaped IT infrastructure.

Beginning in the 1990s, corporations started moving toward standard comput- ing and communications platforms. The Wintel PC with the Windows operating system and Microsoft Office desktop productivity applications became the stan- dard desktop and mobile client computing platform. Widespread adoption of Unix as the enterprise server operating system of choice made possible the replace- ment of proprietary and expensive mainframe infrastructures. In telecommunica- tions, the Ethernet standard enabled PCs to connect together in small local area networks (LANs; see Chapter 7), and the TCP/IP standard enabled these LANs to be connected into firm-wide networks, and ultimately, to the Internet.


One reason for the growth in the Internet population is the rapid decline in Internet connection and overall communication costs. The cost per kilobit of Internet access has fallen exponentially since 1995. Digital subscriber line (DSL) and cable modems now deliver a kilobit of communication for a retail price of around 2 cents. Source: Authors.

Chapter 5 IT Infrastructure and Emerging Technologies 175



American Standard Code for Information Made it possible for computer machines from different manufacturers to exchange Interchange (ASCII) (1958) data; later used as the universal language linking input and output devices such as

keyboards and mice to computers. Adopted by the American National Standards Institute in 1963.

Common Business Oriented Language An easy-to-use software language that greatly expanded the ability of programmers to (COBOL) (1959) write business-related programs and reduced the cost of software. Sponsored by the

Defense Department in 1959.

Unix (1969–1975) A powerful multitasking, multiuser, portable operating system initially developed at Bell Labs (1969) and later released for use by others (1975). It operates on a wide variety of computers from different manufacturers. Adopted by Sun, IBM, HP, and others in the 1980s, it became the most widely used enterprise-level operating system.

Transmission Control Protocol/Internet Suite of communications protocols and a common addressing scheme that enables Protocol (TCP/IP) (1974) millions of computers to connect together in one giant global network (the Internet).

Later, it was used as the default networking protocol suite for local area networks and intranets. Developed in the early 1970s for the U.S. Department of Defense.

Ethernet (1973) A network standard for connecting desktop computers into local area networks that enabled the widespread adoption of client/server computing and local area networks, and further stimulated the adoption of personal computers.

IBM/Microsoft/Intel Personal The standard Wintel design for personal desktop computing based on standard Intel Computer (1981) processors and other standard devices, Microsoft DOS, and later Windows software.

The emergence of this standard, low-cost product laid the foundation for a 25-year period of explosive growth in computing throughout all organizations around the globe. Today, more than 1 billion PCs power business and government activities every day.

World Wide Web (1989–1993) Standards for storing, retrieving, formatting, and displaying information as a worldwide web of electronic pages incorporating text, graphics, audio, and video enables creation of a global repository of billions of Web pages.

5.2 INFRASTRUCTURE COMPONENTS IT infrastructure today is composed of seven major components. Figure 5-9 illustrates these infrastructure components and the major vendors within each component category. These components constitute investments that must be coordinated with one another to provide the firm with a coherent infrastructure.

In the past, technology vendors supplying these components were often in competition with one another, offering purchasing firms a mixture of incompati- ble, proprietary, partial solutions. But increasingly the vendor firms have been forced by large customers to cooperate in strategic partnerships with one another. For instance, a hardware and services provider such as IBM cooperates with all the major enterprise software providers, has strategic relationships with system integrators, and promises to work with whichever database products its client firms wish to use (even though it sells its own database management software called DB2).

COMPUTER HARDWARE PLATFORMS U.S. firms will spend about $109 billion in 2010 on computer hardware. This component includes client machines (desktop PCs, mobile computing devices such as netbooks and laptops but not including iPhones or BlackBerrys) and

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server machines. The client machines use primarily Intel or AMD micro- processors. In 2010, there will be about 90 million PCs sold to U.S. customers (400 million worldwide) (Gartner, 2010).

The server market uses mostly Intel or AMD processors in the form of blade servers in racks, but also includes Sun SPARC microprocessors and IBM POWER chips specially designed for server use. Blade servers, which we discussed in the chapter-opening case, are ultrathin computers consisting of a circuit board with processors, memory, and network connections that are stored in racks. They take up less space than traditional box-based servers. Secondary storage may be provided by a hard drive in each blade server or by external mass-stor- age drives.

The marketplace for computer hardware has increasingly become concen- trated in top firms such as IBM, HP, Dell, and Sun Microsystems (acquired by Oracle), and three chip producers: Intel, AMD, and IBM. The industry has collectively settled on Intel as the standard processor, with major exceptions in the server market for Unix and Linux machines, which might use Sun or IBM Unix processors.


There are seven major components that must be coordinated to provide the firm with a coherent IT infrastructure. Listed here are major technologies and suppliers for each component.

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Mainframes have not disappeared. The mainframe market has actually grown steadily over the last decade, although the number of providers has dwindled to one: IBM. IBM has also repurposed its mainframe systems so they can be used as giant servers for massive enterprise networks and corporate Web sites. A single IBM mainframe can run up to 17,000 instances of Linux or Windows server software and is capable of replacing thousands of smaller blade servers (see the discussion of virtualization in Section 5.3).

OPERATING SYSTEM PLATFORMS In 2010, Microsoft Windows comprises about 75 percent of the server operating system market, with 25 percent of corporate servers using some form of the Unix operating system or Linux, an inexpensive and robust open source rela- tive of Unix. Microsoft Windows Server is capable of providing enterprise-wide operating system and network services, and appeals to organizations seeking Windows-based IT infrastructures (IDC, 2010).

Unix and Linux are scalable, reliable, and much less expensive than main- frame operating systems. They can also run on many different types of proces- sors. The major providers of Unix operating systems are IBM, HP, and Sun, each with slightly different and partially incompatible versions.

At the client level, 90 percent of PCs use some form of Microsoft Windows operating system (such as Windows 7, Windows Vista, or Windows XP) to man- age the resources and activities of the computer. However, there is now a much greater variety of operating systems than in the past, with new operating systems for computing on handheld mobile digital devices or cloud-connected computers.

Google’s Chrome OS provides a lightweight operating system for cloud com- puting using netbooks. Programs are not stored on the user’s PC but are used over the Internet and accessed through the Chrome Web browser. User data resides on servers across the Internet. Microsoft has introduced the Windows Azure operating system for its cloud services and platform. Android is a mobile operating system developed by Android, Inc. (purchased by Google) and later the Open Handset Alliance as a flexible, upgradeable mobile device platform.

Conventional client operating system software is designed around the mouse and keyboard, but increasingly becoming more natural and intuitive by using touch technology. IPhone OS, the operating system for the phenomenally popu- lar Apple iPad, iPhone, and iPod Touch, features a multitouch interface, where users use their fingers to manipulate objects on the screen. The Interactive Session on Technology explores the implications of using multitouch to interact with the computer.

ENTERPRISE SOFTWARE APPLICATIONS In addition to software for applications used by specific groups or business units, U.S. firms will spend about $165 billion in 2010 on software for enterprise applications that are treated as components of IT infrastructure. We introduced the various types of enterprise applications in Chapter 2, and Chapter 9 pro- vides a more detailed discussion of each.

The largest providers of enterprise application software are SAP and Oracle (which acquired PeopleSoft). Also included in this category is middleware software supplied by vendors such as BEA for achieving firmwide integration by linking the firm’s existing application systems. Microsoft is attempting to move into the lower ends of this market by focusing on small and medium- sized businesses that have not yet implemented enterprise applications.


When Steve Jobs first demonstrated “the pinch”—the two-finger gesture for zooming in and out of photos and Web pages on the iPhone, he not only shook up the mobile phone industry—the entire digital world took notice. The Apple iPhone’s multitouch features dramatized new ways of using touch to interact with software and devices.

Touch interfaces are not new. People use them every day to get money from ATMs or to check into flights at airport kiosks. Academic and commercial researchers have been working on multitouch technology for years. What Apple did was to make multitouch more exciting and relevant, popularizing it just as it did in the 1980s with the mouse and the graphical user interface. (These had also been invented elsewhere.)

Multitouch interfaces are potentially more versatile than single-touch interfaces. They allow you to use one or more fingers to perform special gestures that manipulate lists or objects on a screen without moving a mouse, pressing buttons, turning scroll wheels, or striking keys. They take different actions depending on how many fingers they detect and which gestures a user performs. Multitouch gestures are easier to remember than commands because they are based on ingrained human move- ments that do not have to be learned, scientists say.

The iPhone’s Multi-Touch display and software lets you control everything using only your fingers. A panel underneath the display’s glass cover senses your touch using electrical fields. It then transmits that information to a LCD screen below it. Special software recognizes multiple simultaneous touch points, (as opposed to the single-touch screen, which recognizes only one touch point.) You can quickly move back and forth through a series of Web pages or photos by “swiping,” or placing three fingers on the screen and moving them rapidly sideways. By pinching the image, you can shrink or expand a photo.

Apple has made a concerted effort to provide multitouch features in all of its product categories, but many other consumer technology companies have adopted multitouch for some of their products. Synaptics, a leading supplier of touchpads for laptop makers who compete with Apple, has announced that it is incorporating several multitouch features into its touchpads.

NEW TO THE TOUCH Microsoft’s Windows 7 operating system sports

multitouch features: When you pair Windows 7 with a touch-screen PC, you can browse online newspa- pers, flick through photo albums, and shuffle files and folders using nothing but your fingers. To zoom in on something on the screen of a multitouch-com- patible PC, you would place two fingers on the screen and spread them apart. To right-click a file, touch it with one finger and tap the screen with a second.

A number of Microsoft Windows PCs have touch screens, with a few Windows laptops emulating some of the multitouch features of Apple computers and handhelds. Microsoft’s Surface computer runs on Windows 7 and lets its business customers use multitouch in a table-top display. Customers of hotels, casinos, and retail stores will be able to use multitouch finger gestures to move around digital objects such as photos, to play games, and to browse through product options. The Dell Latitude XT tablet PC uses multitouch, which is helpful to people who can’t grasp a mouse and want the functionality of a traditional PC. They can use a finger or a stylus instead. The Android operating system for smartphones has native support for multi-touch, and handsets such as the HTC Desire, Nexus One, and the Motorola Droid have this capability.

Hewlett-Packard (HP) now has laptops and desktops that use touch technology. Its TouchSmart computer lets you use two fingers at once to manipu- late images on the screen or to make on-screen gestures designating specific commands without using cursors or scroll bars. To move an object, you touch it with a finger and drag it to its new location. Sliding your finger up and down or sideways smoothly scrolls the display.

The TouchSmart makes it possible for home users to engage in a new type of casual computing— putting on music while preparing dinner, quickly searching for directions before leaving the house, or leaving written, video, or audio memos for family members. Both consumers and businesses have found other uses as well. According to Alan Reed, HP’s vice president and general manager for Business Desktops, “There is untapped potential for touch technology in the business marketplace to engage users in a way that has never been done before.”

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1. What problems does multitouch technology solve?

2. What are the advantages and disadvantages of a multitouch interface? How useful is it? Explain.

3. Describe three business applications that would benefit from a multitouch interface.

4. What management, organization, and technology issues must be addressed if you or your business was considering systems and computers with multitouch interfaces?

Chicago’s O’Hare Airport integrated a group of TouchSmart PCs into “Explore Chicago” tourist kiosks, allowing visitors to check out a virtual Visitor’s Center. TouchSmart computing helped an autistic student to speak to and communicate with others for the first time in the 14 years of his life. Without using the TouchSmart PC’s wireless keyboard and mouse, users can hold video chats with remote workers through a built-in Webcam and microphone, access e-mail and the Internet, and manage contacts, calendar items, and photos.

Touch-enabled PCs could also appeal to elemen- tary schools seeking an easy-to-use computer for students in early grades, or a wall-mountable infor- mation kiosk-type device for parents and visitors. Customers might use touch to place orders with a retailer, conduct virtual video service calls, or to teach or utilize social networking for business.

1. Describe what you would do differently on your PC if it had multitouch capabilities. How much difference would multitouch make in the way you use your computer?

It’s too early to know if the new multitouch inter- face will ever be as popular as the mouse-driven graph- ical user interface. Although putting ones fingers on the screen is the ultimate measure of “cool” in the cell phone market, a “killer application” for touch on the PC has not yet emerged. But it’s already evident that touch has real advantages on devices where a mouse isn’t possible or convenient to use, or the decades-old interface of menus and folders is too cumbersome. Sources: Claire Cain Miller, “To Win Over Today’s Users, Gadgets Have to be Touchable,” The New York Times, September 1, 2010; Katherine Boehret, “Apple Adds Touches to Its Mac Desktops,” The Wall Street Journal, August 4, 2010; Ashlee Vance, “ Tech Industry Catches Its Breath,” The New York Times, February 17, 2010; Kathy Sandler, “The Future of Touch,” The Wall Street Journal, June 2, 2009; Suzanne Robitaille, “Multitouch to the Rescue?”, January 22, 2009; and Eric Lai, “HP Aims TouchSmart Desktop PC at Businesses,” Computerworld, August 1, 2009.


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DATA MANAGEMENT AND STORAGE Enterprise database management software is responsible for organizing and managing the firm’s data so that they can be efficiently accessed and used. Chapter 6 describes this software in detail. The leading database software providers are IBM (DB2), Oracle, Microsoft (SQL Server), and Sybase (Adaptive Server Enterprise), which supply more than 90 percent of the U.S. database software marketplace. MySQL is a Linux open source relational database product now owned by Oracle Corporation.

The physical data storage market is dominated by EMC Corporation for large- scale systems, and a small number of PC hard disk manufacturers led by Seagate, Maxtor, and Western Digital.

Digital information is estimated to be growing at 1.2 zettabytes a year. All the tweets, blogs, videos, e-mails, and Facebook postings as well as traditional cor- porate data add up in 2010 to several thousand Libraries of Congress (EMC Corporation, 2010).

With the amount of new digital information in the world growing so rapidly, the market for digital data storage devices has been growing at more than 15 percent annually over the last five years. In addition to traditional

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disk arrays and tape libraries, large firms are turning to network-based storage technologies. Storage area networks (SANs) connect multiple storage devices on a separate high-speed network dedicated to storage. The SAN creates a large central pool of storage that can be rapidly accessed and shared by multiple servers.

NETWORKING/TELECOMMUNICATIONS PLATFORMS U.S. firms spend $100 billon a year on networking and telecommunications hardware and a huge $700 billion on networking services (consisting mainly of telecommunications and telephone company charges for voice lines and Internet access; these are not included in this discussion). Chapter 7 is devoted to an in-depth description of the enterprise networking environment, including the Internet. Windows Server is predominantly used as a local area network operating system, followed by Linux and Unix. Large enterprise wide area networks primarily use some variant of Unix. Most local area networks, as well as wide area enterprise networks, use the TCP/IP protocol suite as a standard (see Chapter 7).

The leading networking hardware providers are Cisco, Alcatel-Lucent, Nortel, and Juniper Networks. Telecommunications platforms are typically provided by telecommunications/telephone services companies that offer voice and data connectivity, wide area networking, wireless services, and Internet access. Leading telecommunications service vendors include AT&T and Verizon (see the Chapter 3 opening case). This market is exploding with new providers of cellular wireless, high-speed Internet, and Internet telephone services.

INTERNET PLATFORMS Internet platforms overlap with, and must relate to, the firm’s general network- ing infrastructure and hardware and software platforms. U.S. firms spent an estimated $40 billion annually on Internet-related infrastructure. These expen- ditures were for hardware, software, and management services to support a firm’s Web site, including Web hosting services, routers, and cabling or wireless equipment. A Web hosting service maintains a large Web server, or series of servers, and provides fee-paying subscribers with space to maintain their Web sites.

The Internet revolution created a veritable explosion in server computers, with many firms collecting thousands of small servers to run their Internet operations. Since then there has been a steady push toward server consolida- tion, reducing the number of server computers by increasing the size and power of each. The Internet hardware server market has become increasingly concentrated in the hands of IBM, Dell, and HP/Compaq, as prices have fallen dramatically.

The major Web software application development tools and suites are supplied by Microsoft (Microsoft Expression Web, SharePoint Designer, and the Microsoft .NET family of development tools); Oracle-Sun (Sun’s Java is the most widely used tool for developing interactive Web applications on both the server and client sides); and a host of independent software developers, includ- ing Adobe (Flash and text tools like Acrobat), and Real Media (media software). Chapter 7 describes the components of the firm’s Internet platform in greater detail.

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CONSULTING AND SYSTEM INTEGRATION SERVICES Today, even a large firm does not have the staff, the skills, the budget, or the necessary experience to deploy and maintain its entire IT infrastructure. Implementing a new infrastructure requires (as noted in Chapters 3 and 14) significant changes in business processes and procedures, training and educa- tion, and software integration. Leading consulting firms providing this exper- tise include Accenture, IBM Global Services, HP Enterprise Services, Infosys, and Wipro Technologies.

Software integration means ensuring the new infrastructure works with the firm’s older, so-called legacy systems and ensuring the new elements of the infrastructure work with one another. Legacy systems are generally older transaction processing systems created for mainframe computers that continue to be used to avoid the high cost of replacing or redesigning them. Replacing these systems is cost prohibitive and generally not necessary if these older systems can be integrated into a contemporary infrastructure.

5.3 CONTEMPORARY HARDWARE PLATFORM TRENDS The exploding power of computer hardware and networking technology has dramatically changed how businesses organize their computing power, putting more of this power on networks and mobile handheld devices. We look at seven hardware trends: the emerging mobile digital platform, grid computing, virtualization, cloud computing, green computing, high-performance/power- saving processors, and autonomic computing.

THE EMERGING MOBILE DIGITAL PLATFORM Chapter 1 pointed out that new mobile digital computing platforms have emerged as alternatives to PCs and larger computers. Cell phones and smartphones such as the BlackBerry and iPhone have taken on many func- tions of handheld computers, including transmission of data, surfing the Web, transmitting e-mail and instant messages, displaying digital content, and exchanging data with internal corporate systems. The new mobile platform also includes small low-cost lightweight subnotebooks called netbooks optimized for wireless communication and Internet access, with core computing functions such as word processing; tablet computers such as the iPad; and digital e-book readers such as Amazon’s Kindle with some Web access capabilities.

In a few years, smartphones, netbooks, and tablet computers will be the primary means of accessing the Internet, with business computing moving increasingly from PCs and desktop machines to these mobile devices. For example, senior executives at General Motors are using smartphone applica- tions that drill down into vehicle sales information, financial performance, manufacturing metrics, and project management status. At medical device maker Astra Tech, sales reps use their smartphones to access customer relationship management (CRM) applications and sales data, checking data on sold and returned products and overall revenue trends before meeting with customers.

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GRID COMPUTING Grid computing, involves connecting geographically remote computers into a single network to create a virtual supercomputer by combining the computa- tional power of all computers on the grid. Grid computing takes advantage of the fact that most computers use their central processing units on average only 25 percent of the time for the work they have been assigned, leaving these idle resources available for other processing tasks. Grid computing was impossible until high-speed Internet connections enabled firms to connect remote machines economically and move enormous quantities of data.

Grid computing requires software programs to control and allocate resources on the grid. Client software communicates with a server software application. The server software breaks data and application code into chunks that are then parceled out to the grid’s machines. The client machines perform their traditional tasks while running grid applications in the background.

The business case for using grid computing involves cost savings, speed of computation, and agility, as noted in the chapter-opening case. The chapter- opening case shows that by running its applications on clustered servers on a grid, BART eliminated unused computer resources, used existing resources more efficiently, and reduced costs and power consumption.

VIRTUALIZATION Virtualization is the process of presenting a set of computing resources (such as computing power or data storage) so that they can all be accessed in ways that are not restricted by physical configuration or geographic location. Virtualization enables a single physical resource (such as a server or a storage device) to appear to the user as multiple logical resources. For example, a server or mainframe can be configured to run many instances of an operating system so that it acts like many different machines. Virtualization also enables multiple physical resources (such as storage devices or servers) to appear as a single logical resource, as would be the case with storage area net- works or grid computing. Virtualization makes it possible for a company to handle its computer processing and storage using computing resources housed in remote locations. VMware is the leading virtualization software vendor for Windows and Linux servers. Microsoft offers its own Virtual Server product and has built virtualization capabilities into the newest version of Windows Server.

Bus iness Benef i t s o f V i r tua l i za t ion By providing the ability to host multiple systems on a single physical machine, virtualization helps organizations increase equipment utilization rates, conserv- ing data center space and energy usage. Most servers run at just 15-20 percent of capacity, and virtualization can boost server utilization rates to 70 percent or higher. Higher utilization rates translate into fewer computers required to process the same amount of work, as illustrated by BART’s experience with vir- tualization in the chapter-opening case.

In addition to reducing hardware and power expenditures, virtualization allows businesses to run their legacy applications on older versions of an operating system on the same server as newer applications. Virtualization also facilitates centralization and consolidation of hardware administration. It is now possible for companies and individuals to perform all of their computing work using a virtualized IT infrastructure, as is the case with cloud computing. We now turn to this topic.

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CLOUD COMPUTING Earlier in this chapter, we introduced cloud computing, in which firms and individuals obtain computer processing, storage, software, and other services as a pool of virtualized resources over a network, primarily the Internet. These resources are made available to users, based on their needs, irrespective of their physical location or the location of the users themselves. The U.S. National Institute of Standards and Technology (NIST) defines cloud computing as having the following essential characteristics (Mell and Grance, 2009):

• On-demand self-service: Individuals can obtain computing capabilities such as server time or network storage on their own.

• Ubiquitous network access: Individuals can use standard network and Internet devices, including mobile platforms, to access cloud resources.

• Location independent resource pooling: Computing resources are pooled to serve multiple users, with different virtual resources dynamically assigned according to user demand. The user generally does not know where the com- puting resources are located.

• Rapid elasticity: Computing resources can be rapidly provisioned, increased, or decreased to meet changing user demand.

• Measured service: Charges for cloud resources are based on amount of resources actually used.

Cloud computing consists of three different types of services:

• Cloud infrastructure as a service: Customers use processing, storage, networking, and other computing resources from cloud service providers to run their information systems. For example, Amazon uses the spare capacity of its IT infrastructure to provide a broadly based cloud environment selling IT infrastructure services. These include its Simple Storage Service (S3) for storing customers’ data and its Elastic Compute Cloud (EC2) service for running their applications. Users pay only for the amount of computing and storage capacity they actually use.

• Cloud platform as a service: Customers use infrastructure and program- ming tools hosted by the service provider to develop their own applications. For example, IBM offers a Smart Business Application Development & Test service for software development and testing on the IBM Cloud. Another example is’s, described in the chapter-ending case study, which allows developers to build applications that are hosted on its servers as a service.

• Cloud software as a service: Customers use software hosted by the vendor on the vendor’s hardware and delivered over a network. Leading examples are Google Apps, which provides common business applications online and, which also leases CRM and related software services over the Internet. Both charge users an annual subscription fee, although Google Apps also has a pared-down free version. Users access these applications from a Web browser, and the data and software are maintained on the providers’ remote servers.

A cloud can be private or public. A public cloud is maintained by an exter- nal service provider, such as Amazon Web Services, accessed through the Internet, and available to the general public. A private cloud is a proprietary network or a data center that ties together servers, storage, networks, data, and applications as a set of virtualized services that are shared by users inside a company. Like public clouds, private clouds are able to allocate storage, computing power, or other resources seamlessly to provide computing resources on an as-needed basis. Financial institutions and health care

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providers are likely to gravitate toward private clouds because these organiza- tions handle so much sensitive financial and personal data. We discuss cloud security issues in Chapter 8.

Since organizations using cloud computing generally do not own the infra- structure, they do not have to make large investments in their own hardware and software. Instead, they purchase their computing services from remote providers and pay only for the amount of computing power they actually use (utility computing) or are billed on a monthly or annual subscription basis. The term on-demand computing has also been used to describe such services.

For example, Envoy Media Group, a direct-marketing firm that offers highly- targeted media campaigns across multiple channels, including TV, radio, and Internet, hosts its entire Web presence on Azimuth Web Services. The “pay as you go” pricing structure allows the company to quickly and painlessly add servers where they are needed without large investments in hardware. Cloud computing reduced costs about 20 percent because Envoy no longer had to maintain its own hardware or IT personnel.

Cloud computing has some drawbacks. Unless users make provisions for storing their data locally, the responsibility for data storage and control is in the hands of the provider. Some companies worry about the security risks related to entrusting their critical data and systems to an outside vendor that also works with other companies. There are also questions of system reliability. Companies expect their systems to be available 24/7 and do not want to suffer any loss of business capability if their IT infrastructures malfunction. When Amazon’s cloud went down in December 2009, subscribers on the U.S. east coast were unable to use their systems for several hours. Another limitation of cloud computing is the possibility of making users dependent on the cloud computing provider.

There are some who believe that cloud computing represents a sea change in the way computing will be performed by corporations as business computing shifts out of private data centers into cloud services (Carr, 2008). This remains a matter of debate. Cloud computing is more immediately appealing to small and medium-sized businesses that lack resources to purchase and own their own hardware and software. However, large corporations have huge investments in complex proprietary systems supporting unique business processes, some of which give them strategic advantages. For them, the most likely scenario is a hybrid computing model where firms use their own infrastructure for their most essential core activities and adopt public cloud computing for less-critical systems or for additional processing capacity during peak business periods. Cloud computing will gradually shift firms from having a fixed infrastructure capacity toward a more flexible infrastructure, some of it owned by the firm, and some of it rented from giant computer centers owned by computer hard- ware vendors.

GREEN COMPUTING By curbing hardware proliferation and power consumption, virtualization has become one of the principal technologies for promoting green computing. Green computing or green IT, refers to practices and technolo- gies for designing, manufacturing, using, and disposing of computers, servers, and associated devices such as monitors, printers, storage devices,

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and networking and communications systems to minimize impact on the environment.

Reducing computer power consumption has been a very high “green” priority. As companies deploy hundreds or thousands of servers, many are spending almost as much on electricity to power and cool their systems as they did on purchasing the hardware. The U.S. Environmental Protection Agency estimates that data centers will use more than 2 percent of all U.S. electrical power by 2011. Information technology is believed to contribute about 2 percent of the world’s greenhouse gases. Cutting power consumption in data centers has become both a serious business and environmental challenge. The Interactive Session on Organizations examines this problem.

AUTONOMIC COMPUTING With large systems encompassing many thousands of networked devices, computer systems have become so complex today that some experts believe they may not be manageable in the future. One approach to dealing with this problem is to employ autonomic computing. Autonomic computing is an industry-wide effort to develop systems that can configure themselves, optimize and tune themselves, heal themselves when broken, and protect themselves from outside intruders and self-destruction.

You can glimpse a few of these capabilities in desktop systems. For instance, virus and firewall protection software are able to detect viruses on PCs, automatically defeat the viruses, and alert operators. These programs can be updated automatically as the need arises by connecting to an online virus protection service such as McAfee. IBM and other vendors are starting to build autonomic features into products for large systems.

HIGH-PERFORMANCE AND POWER-SAVING PROCESSORS Another way to reduce power requirements and hardware sprawl is to use more efficient and power-saving processors. Contemporary microprocessors now feature multiple processor cores (which perform the reading and execution of computer instructions) on a single chip. A multicore processor is an integrated circuit to which two or more processor cores have been attached for enhanced performance, reduced power consumption, and more efficient simultaneous processing of multiple tasks. This technology enables two or more processing engines with reduced power requirements and heat dissipa- tion to perform tasks faster than a resource-hungry chip with a single process- ing core. Today you’ll find dual-core and quad-core processors in PCs and servers with 8-, 10-, 12-, and 16-core processors.

Intel and other chip manufacturers have also developed microprocessors that minimize power consumption. Low power consumption is essential for prolonging battery life in smartphones, netbooks, and other mobile digital devices. You will now find highly power-efficient microprocessors, such as ARM, Apple’s A4 processor, and Intel’s Atom in netbooks, digital media players, and smartphones. The A4 processor used in the latest version of the iPhone and the iPad consumes approximately 500–800 milliwatts of power, about 1/50 to 1/30 the power consumption of a laptop dual-core processor.

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Computer rooms are becoming too hot to handle. Data-hungry tasks such as video on demand, down- loading music, exchanging photos, and maintaining Web sites require more and more power-hungry machines. Power and cooling costs for data centers have skyrocketed by more than 800 percent since 1996, with U.S. enterprise data centers predicted to spend twice as much on energy costs as on hardware over the next five years.

The heat generated from rooms full of servers is causing equipment to fail. Some organizations spend more money to keep their data centers cool than they spend to lease the property itself. It’s a vicious cycle, as companies must pay to power their servers, and then pay again to keep them cool and opera- tional. Cooling a server requires roughly the same number of kilowatts of energy as running one. All this additional power consumption has a negative impact on the environment and as well as corporate operating costs.

Some of the world’s most prominent firms are tackling their power consumption issues with one eye toward saving the environment and the other toward saving dollars. Google and Microsoft are building data centers that take advantage of hydroelectric power. Hewlett-Packard is working on a series of technologies to reduce the carbon footprint of data centers by 75 percent and, with new software and services, to measure energy use and carbon emissions. It reduced its power costs by 20 to 25 percent through consolidation of servers and data centers.

Microsoft’s San Antonio data center deploys sensors that measure nearly all power consumption, recycles water used in cooling, and uses internally- developed power management software. Microsoft is also trying to encourage energy-saving software practices by charging business units by the amount of power they consume in the data enter rather than the space they take up on the floor.

None of these companies claim that their efforts will save the world, but they do demonstrate recognition of a growing problem and the commencement of the green computing era. And since these companies’ technology and processes are more efficient than most other companies, using their online software services in place of in-house software may also count as a green investment.

IS GREEN COMPUTING GOOD FOR BUSINESS? PCs typically stay on more than twice the amount

of time they are actually being used each day. According to a report by the Alliance to Save Energy, a company with 10,000 personal computer desktops will spend more than $165,000 per year in electricity bills if these machines are left on all night. The group estimates that this practice is wasting around $1.7 billion each year in the United States alone.

Although many companies establish default PC power management settings, about 70 percent of employees turn these settings off. PC power management software from BigFix, 1E NightWatchman, and Verdiem locks PC power settings and automatically powers PCs up right before employees arrive for work in the morning.

Miami-Dade County public schools cut the time its PCs were on from 21 hours to 10.3 hours daily by using BigFix to centrally control PC power settings. City University of New York adopted Verdiem’s Surveyor software to turn off its 20,000 PCs when they are inactive at night. Surveyor has trimmed 10 percent from CUNY’s power bills, creating an annual savings of around $320,000.

Virtualization is a highly effective tool for cost-effective green computing because it reduces the number of servers and storage resources in the firm’s IT infrastructure. Fulton County, Georgia, which provides services for 988,000 citizens, scrutinizes energy usage when purchasing new information technology. It used VMWare virtualiza- tion software and a new Fujitsu blade server platform to consolidate underutilized legacy servers so that one machine performs the work that was formerly performed by eight, saving $44,000 per year in power costs. These efforts also created a more up-to-date IT infrastructure.

Experts note that it’s important for companies to measure their energy use and inventory and track their information technology assets both before and after they start their green initiatives. Commonly used metrics used by Microsoft and other companies include Power Usage Effectiveness, Data Center Infrastructure Efficiency, and Average Data Efficiency.

It isn’t always necessary to purchase new technologies to achieve “green” goals. Organizations can achieve sizable efficiencies by better managing the computing resources they already have.

I N T E R A C T I V E S E S S I O N : O R G A N I Z AT I O N S

1. What business and social problems does data center power consumption cause?

2. What solutions are available for these problems? Which are environment-friendly?

3. What are the business benefits and costs of these solutions?

4. Should all firms move toward green computing? Why or why not?

Health insurer Highmark initially wanted to increase its CPU utilization by 10 percent while reducing power use by 5 percent and eventually by 10 percent. When the company inventoried all of its information technology assets, it found that its information systems staff was hanging onto “dead” servers that served no function but continued to consume power. Unfortunately, many information systems departments still aren’t deploying their existing technology resources efficiently or using green measurement tools.

Programs to educate employees in energy conser- vation may also be necessary. In addition to using

Perform an Internet search on the phrase “green computing” and then answer the following questions:

1. Who are some of the leaders of the green comput- ing movement? Which corporations are leading the way? Which environmental organizations are playing an important role?

2. What are the latest trends in green computing? What kind of impact are they having?

3. What can individuals do to contribute to the green computing movement? Is the movement worth- while?

energy-monitoring tools, Honda Motor Corporation trains its data center administrators how to be more energy efficient. For example, it taught them to decommission unused equipment quickly and to use management tools to ensure servers are being optimized.

Sources: Kathleen Lao, “The Green Issue,” Computerworld Canada, April 2010; Matthew Sarrell, “Greening Your Data Center: The Real Deal,” eWeek, January 15, 2010; Robert L. Mitchell, “Data Center Density Hits the Wall,” Computerworld, January 21, 2010; Jim Carlton, “The PC Goes on an Energy Diet,” The Wall Street Journal, September 8, 2009; and Ronan Kavanagh, “IT Virtualization Helps to Go Green,” Information Management Magazine, March 2009.


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5.4 CONTEMPORARY SOFTWARE PLATFORM TRENDS There are four major themes in contemporary software platform evolution:

• Linux and open source software

• Java and Ajax

• Web services and service-oriented architecture

• Software outsourcing and cloud services

LINUX AND OPEN SOURCE SOFTWARE Open source software is software produced by a community of several hundred thousand programmers around the world. According to the leading open source professional association,, open source software is free and can be modified by users. Works derived from the original code must also be free, and the software can be redistributed by the user without additional licensing. Open source software is by definition not restricted to any

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specific operating system or hardware technology, although most open source software is currently based on a Linux or Unix operating system.

The open source movement has been evolving for more than 30 years and has demonstrated that it can produce commercially acceptable, high-quality software. Popular open source software tools include the Linux operating system, the Apache HTTP Web server, the Mozilla Firefox Web browser, and the Oracle Open Office desktop productivity suite. Open source tools are being used on netbooks as inexpensive alternatives to Microsoft Office. Major hard- ware and software vendors, including IBM, HP, Dell, Oracle, and SAP, now offer Linux-compatible versions of their products. You can find out more out more about the Open Source Definition from the Open Source Initiative and the history of open source software at the Learning Tracks for this chapter.

Linux Perhaps the most well known open source software is Linux, an operating system related to Unix. Linux was created by the Finnish programmer Linus Torvalds and first posted on the Internet in August 1991. Linux applications are embedded in cell phones, smartphones, netbooks, and consumer electronics. Linux is avail- able in free versions downloadable from the Internet or in low-cost commercial versions that include tools and support from vendors such as Red Hat.

Although Linux is not used in many desktop systems, it is a major force in local area networks, Web servers, and high-performance computing work, with over 20 percent of the server operating system market. IBM, HP, Intel, Dell, and Oracle-Sun have made Linux a central part of their offerings to corporations.

The rise of open source software, particularly Linux and the applications it supports, has profound implications for corporate software platforms: cost reduction, reliability and resilience, and integration, because Linux works on all the major hardware platforms from mainframes to servers to clients.

SOFTWARE FOR THE WEB: JAVA AND AJAX Java is an operating system-independent, processor-independent, object- oriented programming language that has become the leading interactive environment for the Web. Java was created by James Gosling and the Green Team at Sun Microsystems in 1992. In November 13, 2006, Sun released much of Java as open source software under the terms of the GNU General Public License (GPL), completing the process on May 8, 2007.

The Java platform has migrated into cellular phones, smartphones, automo- biles, music players, game machines, and finally, into set-top cable television systems serving interactive content and pay-per-view services. Java software is designed to run on any computer or computing device, regardless of the specific microprocessor or operating system the device uses. For each of the computing environments in which Java is used, Sun created a Java Virtual Machine that interprets Java programming code for that machine. In this manner, the code is written once and can be used on any machine for which there exists a Java Virtual Machine.

Java developers can create small applet programs that can be embedded in Web pages and downloaded to run on a Web browser. A Web browser is an easy-to-use software tool with a graphical user interface for displaying Web pages and for accessing the Web and other Internet resources. Microsoft’s Internet Explorer, Mozilla Firefox, and Google Chrome browser are examples. At the enterprise level, Java is being used for more complex e-commerce and

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e-business applications that require communication with an organization’s back-end transaction processing systems.

Ajax Have you ever filled out a Web order form, made a mistake, and then had to start all over gain after a long wait for a new order form page to appear on your computer screen? Or visited a map site, clicked the North arrow once, and waited some time for an entire new page to load? Ajax (Asynchronous JavaScript and XML) is another Web development technique for creating inter- active Web applications that prevents all of this inconvenience.

Ajax allows a client and server to exchange small pieces of data behind the scene so that an entire Web page does not have to be reloaded each time the user requests a change. So if you click North on a map site, such as Google Maps, the server downloads just that part of the application that changes with no wait for an entirely new map. You can also grab maps in map applications and move the map in any direction without forcing a reload of the entire page. Ajax uses JavaScript programs downloaded to your client to maintain a near-continuous conversation with the server you are using, making the user experience more seamless.

WEB SERVICES AND SERVICE-ORIENTED ARCHITECTURE Web services refer to a set of loosely coupled software components that exchange information with each other using universal Web communication stan- dards and languages. They can exchange information between two different systems regardless of the operating systems or programming languages on which the systems are based. They can be used to build open standard Web-based applications linking systems of two different organizations, and they can also be used to create applications that link disparate systems within a single company. Web services are not tied to any one operating system or program- ming language, and different applications can use them to communicate with each other in a standard way without time-consuming custom coding.

The foundation technology for Web services is XML, which stands for Extensible Markup Language. This language was developed in 1996 by the World Wide Web Consortium (W3C, the international body that oversees the devel- opment of the Web) as a more powerful and flexible markup language than hyper- text markup language (HTML) for Web pages. Hypertext Markup Language (HTML) is a page description language for specifying how text, graphics, video, and sound are placed on a Web page document. Whereas HTML is limited to describing how data should be presented in the form of Web pages, XML can perform presentation, communication, and storage of data. In XML, a number is not simply a number; the XML tag specifies whether the number represents a price, a date, or a ZIP code. Table 5-2 illustrates some sample XML statements.



Subcompact <AUTOMOBILETYPE=”Subcompact”>


$16,800 <PRICE CURRENCY=”USD”>$16,800</PRICE>

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By tagging selected elements of the content of documents for their meanings, XML makes it possible for computers to manipulate and interpret their data automatically and perform operations on the data without human intervention. Web browsers and computer programs, such as order process- ing or enterprise resource planning (ERP) software, can follow programmed rules for applying and displaying the data. XML provides a standard format for data exchange, enabling Web services to pass data from one process to another.

Web services communicate through XML messages over standard Web protocols. SOAP, which stands for Simple Object Access Protocol, is a set of rules for structuring messages that enables applications to pass data and instructions to one another. WSDL stands for Web Services Description Language; it is a common framework for describing the tasks performed by a Web service and the commands and data it will accept so that it can be used by other applications. UDDI, which stands for Universal Description, Discovery, and Integration, enables a Web service to be listed in a directory of Web services so that it can be easily located. Companies discover and locate Web services through this directory much as they would locate services in the yellow pages of a telephone book. Using these protocols, a software appli- cation can connect freely to other applications without custom programming for each different application with which it wants to communicate. Everyone shares the same standards.

The collection of Web services that are used to build a firm’s software systems constitutes what is known as a service-oriented architecture. A service- oriented architecture (SOA) is set of self-contained services that communicate with each other to create a working software application. Business tasks are accomplished by executing a series of these services. Software develop- ers reuse these services in other combinations to assemble other applications as needed.

Virtually all major software vendors provide tools and entire platforms for building and integrating software applications using Web services. IBM includes Web service tools in its WebSphere e-business software platform, and Microsoft has incorporated Web services tools in its Microsoft .NET platform.

Dollar Rent A Car’s systems use Web services for its online booking system with Southwest Airlines’ Web site. Although both companies’ systems are based on different technology platforms, a person booking a flight on can reserve a car from Dollar without leaving the airline’s Web site. Instead of struggling to get Dollar’s reservation system to share data with Southwest’s information systems, Dollar used Microsoft .NET Web services technology as an intermediary. Reservations from Southwest are translated into Web services protocols, which are then translated into formats that can be understood by Dollar’s computers.

Other car rental companies have linked their information systems to airline companies’ Web sites before. But without Web services, these connec- tions had to be built one at a time. Web services provide a standard way for Dollar’s computers to “talk” to other companies’ information systems without having to build special links to each one. Dollar is now expanding its use of Web services to link directly to the systems of a small tour operator and a large travel reservation system as well as a wireless Web site for cell phones and smartphones. It does not have to write new software code for each new partner’s information systems or each new wireless device (see Figure 5-10).

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SOFTWARE OUTSOURCING AND CLOUD SERVICES Today many business firms continue to operate legacy systems that continue to meet a business need and that would be extremely costly to replace. But they will purchase or rent most of their new software applications from external sources. Figure 5-11 illustrates the rapid growth in external sources of software for U.S. firms.

There are three external sources for software: software packages from a commercial software vendor, outsourcing custom application development to an external vendor, and cloud-based software services and tools.

Software Packages and Enterpr i se Software We have already described software packages for enterprise applications as one of the major types of software components in contemporary IT infra- structures. A software package is a prewritten commercially available set of software programs that eliminates the need for a firm to write its own software programs for certain functions, such as payroll processing or order handling.

Enterprise application software vendors such as SAP and Oracle-PeopleSoft have developed powerful software packages that can support the primary business processes of a firm worldwide from warehousing, customer relation- ship management, supply chain management, and finance to human resources. These large-scale enterprise software systems provide a single, integrated, worldwide software system for firms at a cost much less than they would pay if they developed it themselves. Chapter 9 discusses enterprise systems in detail.


Dollar Rent A Car uses Web services to provide a standard intermediate layer of software to “talk” to other companies’ information systems. Dollar Rent A Car can use this set of Web services to link to other companies’ information systems without having to build a separate link to each firm’s systems.

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Software Outsourc ing Software outsourcing enables a firm to contract custom software develop- ment or maintenance of existing legacy programs to outside firms, which often operate offshore in low-wage areas of the world. According to the indus- try analysts, 2010 offshore outsourcing revenues in the United States will be approximately $50 billion, and domestic outsourcing revenues will be $106 billion (Lohr, 2009). The largest expenditure here is paid to domestic U.S. firms providing middleware, integration services, and other software support that are often required to operate larger enterprise systems.

For example, in March 2008, Royal Dutch Shell PLC, the world’s third largest oil producer, signed a five-year, $4 billion outsourcing deal with T-Systems International GmbH, AT&T, and Electronic Data Systems (EDS). The agree- ment assigned AT&T responsibility for networking and telecommunications, T-Systems for hosting and storage, and EDS for end-user computing services and for integration of the infrastructure services. Outsourcing this work has helped Shell cut costs and focus on systems that improve its competitive posi- tion in the oil and gas market.

Offshore outsourcing firms have primarily provided lower-level mainte- nance, data entry, and call center operations. However, with the growing sophistication and experience of offshore firms, particularly in India, more and more new-program development is taking place offshore. Chapter 13 discusses offshore software outsourcing in greater detail.


In 2010, U.S. firms will spend over $291 billion on software. About 40 percent of that ($116 billion) will originate outside the firm, either from enterprise software vendors selling firmwide applications or indi- vidual application service providers leasing or selling software modules. Another 10 percent ($29 billion) will be provided by SaaS vendors as an online cloud-based service. Sources: BEA National Income and Product Accounts, 2010; Gartner Group, 2010; author estimates.

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Cloud-Based Software Ser v ices and Too l s In the past, software such as Microsoft Word or Adobe Illustrator came in a box and was designed to operate on a single machine. Today, you’re more likely to download the software from the vendor’s Web site, or to use the software as a cloud service delivered over the Internet.

Cloud-based software and the data it uses are hosted on powerful servers in massive data centers, and can be accessed with an Internet connection and standard Web browser. In addition to free or low-cost tools for individuals and small businesses provided by Google or Yahoo!, enterprise software and other complex business functions are available as services from the major commercial software vendors. Instead of buying and installing software programs, subscrib- ing companies rent the same functions from these services, with users paying either on a subscription or per-transaction basis. Services for delivering and providing access to software remotely as a Web-based service are now referred to as software as a service (SaaS). A leading example is, described in the chapter-ending case study, which provides on-demand software services for customer relationship management.

In order to manage their relationship with an outsourcer or technology service provider, firms need a contract that includes a service level agreement (SLA). The SLA is a formal contract between customers and their service providers that defines the specific responsibilities of the service provider and the level of service expected by the customer. SLAs typically specify the nature and level of services provided, criteria for performance measurement, support options, provisions for security and disaster recovery, hardware and software ownership and upgrades, customer support, billing, and conditions for terminat- ing the agreement. We provide a Learning Track on this topic.

Mashups and Apps The software you use for both personal and business tasks may consist of large self-contained programs, or it may be composed of interchangeable compo- nents that integrate freely with other applications on the Internet. Individual users and entire companies mix and match these software components to create their own customized applications and to share information with others. The resulting software applications are called mashups. The idea is to take dif- ferent sources and produce a new work that is “greater than” the sum of its parts. You have performed a mashup if you’ve ever personalized your Facebook profile or your blog with a capability to display videos or slide shows.

Web mashups combine the capabilities of two or more online applications to create a kind of hybrid that provides more customer value than the original sources alone. For instance, EveryBlock Chicago combines Google Maps with crime data for the city of Chicago. Users can search by location, police beat, or type of crime, and the results are displayed as color-coded map points on a Google Map. Amazon uses mashup technologies to aggregate product descrip- tions with partner sites and user profiles.

Apps are small pieces of software that run on the Internet, on your com- puter, or on your cell phone and are generally delivered over the Internet. Google refers to its online services as apps, including the Google Apps suite of desktop productivity tools. But when we talk about apps today, most of the attention goes to the apps that have been developed for the mobile digital platform. It is these apps that turn smartphones and other mobile handheld devices into general-purpose computing tools.

Most of these apps are for the iPhone, Android, and BlackBerry operating system platforms. Many are free or purchased for a small charge, much less

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than conventional software. There are already over 250,000 apps for the Apple iPhone and iPad platform and over 80,000 that run on smartphones using Google’s Android operating system. The success of these mobile plat- forms depends in large part on the quantity and the quality of the apps they provide. Apps tie the customer to a specific hardware platform: As the user adds more and more apps to his or her mobile phone, the cost of switching to a competing mobile platform rises.

At the moment, the most commonly downloaded apps are games (65%), followed by news and weather (56%), maps/navigation (55%), social net- working (54%), music (46%), and video/movies (25%). But there are also seri- ous apps for business users that make it possible to create and edit docu- ments, connect to corporate systems, schedule and participate in meetings, track shipments, and dictate voice messages (see the Chapter 1 Interactive Session on Management). There are also a huge number of e-commerce apps for researching and buying goods and services online.

5.5 MANAGEMENT ISSUES Creating and managing a coherent IT infrastructure raises multiple challenges: dealing with platform and technology change (including cloud and mobile computing), management and governance, and making wise infrastructure investments.

DEALING WITH PLATFORM AND INFRASTRUCTURE CHANGE As firms grow, they often quickly outgrow their infrastructure. As firms shrink, they can get stuck with excessive infrastructure purchased in better times. How can a firm remain flexible when most of the investments in IT infrastructure are fixed-cost purchases and licenses? How well does the infrastructure scale? Scalability refers to the ability of a computer, product, or system to expand to serve a large number of users without breaking down. New applications, merg- ers and acquisitions, and changes in business volume all impact computer workload and must be considered when planning hardware capacity.

Firms using mobile computing and cloud computing platforms will require new policies and procedures for managing these platforms. They will need to inventory all of their mobile devices in business use and develop policies and tools for tracking, updating, and securing them and for controlling the data and applications that run on them. Firms using cloud computing and SaaS will need to fashion new contractual arrangements with remote vendors to make sure that the hardware and software for critical applications are always avail- able when needed and that they meet corporate standards for information security. It is up to business management to determine acceptable levels of computer response time and availability for the firm’s mission-critical systems to maintain the level of business performance they expect.

MANAGEMENT AND GOVERNANCE A long-standing issue among information system managers and CEOs has been the question of who will control and manage the firm’s IT infrastructure. Chapter 2 introduced the concept of IT governance and described some issues

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it addresses. Other important questions about IT governance are: Should departments and divisions have the responsibility of making their own infor- mation technology decisions or should IT infrastructure be centrally controlled and managed? What is the relationship between central information systems management and business unit information systems management? How will infrastructure costs be allocated among business units? Each organization will need to arrive at answers based on its own needs.

MAKING WISE INFRASTRUCTURE INVESTMENTS IT infrastructure is a major investment for the firm. If too much is spent on infrastructure, it lies idle and constitutes a drag on firm financial performance. If too little is spent, important business services cannot be delivered and the firm’s competitors (who spent just the right amount) will outperform the under- investing firm. How much should the firm spend on infrastructure? This question is not easy to answer.

A related question is whether a firm should purchase and maintain its own IT infrastructure components or rent them from external suppliers, including those offering cloud services. The decision either to purchase your own IT assets or rent them from external providers is typically called the rent-versus- buy decision.

Cloud computing may be a low-cost way to increase scalability and flexibil- ity, but firms should evaluate this option carefully in light of security require- ments and impact on business processes and work flows. In some instances, the cost of renting software adds up to more than purchasing and maintaining an application in-house. Yet there may be benefits to using SaaS if it allows the company to focus on core business issues instead of technology challenges.

Tota l Cost o f Ownersh ip of Techno logy Assets The actual cost of owning technology resources includes the original cost of acquiring and installing hardware and software, as well as ongoing administra- tion costs for hardware and software upgrades, maintenance, technical support, training, and even utility and real estate costs for running and housing the technology. The total cost of ownership (TCO) model can be used to analyze these direct and indirect costs to help firms determine the actual cost of specific technology implementations. Table 5-3 describes the most important TCO components to consider in a TCO analysis.

When all these cost components are considered, the TCO for a PC might run up to three times the original purchase price of the equipment. Although the purchase price of a wireless handheld for a corporate employee may run several hundred dollars, the TCO for each device is much higher, ranging from $1,000 to $3,000, according to various consultant estimates. Gains in productivity and efficiency from equipping employees with mobile computing devices must be balanced against increased costs from integrating these devices into the firm’s IT infrastructure and from providing technical support. Other cost components include fees for wireless airtime, end-user training, help desk support, and software for special applications. Costs are higher if the mobile devices run many different applications or need to be integrated into back-end systems such as enterprise applications.

Hardware and software acquisition costs account for only about 20 percent of TCO, so managers must pay close attention to administration costs to understand the full cost of the firm’s hardware and software. It is possible to reduce some of these administration costs through better management. Many large firms are

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saddled with redundant, incompatible hardware and software because their departments and divisions have been allowed to make their own technology purchases.

In addition to switching to cloud services, these firms could reduce their TCO through greater centralization and standardization of their hardware and software resources. Companies could reduce the size of the information systems staff required to support their infrastructure if the firm minimizes the number of different computer models and pieces of software that employees are allowed to use. In a centralized infrastructure, systems can be adminis- tered from a central location and troubleshooting can be performed from that location.

Compet i t i ve Forces Mode l fo r IT Inf ras t ructure Investment Figure 5-12 illustrates a competitive forces model you can use to address the question of how much your firm should spend on IT infrastructure.

Market demand for your firm’s services. Make an inventory of the services you currently provide to customers, suppliers, and employees. Survey each group, or hold focus groups to find out if the services you currently offer are meeting the needs of each group. For example, are customers complaining of slow responses to their queries about price and availability? Are employees complaining about the difficulty of finding the right information for their jobs? Are suppliers complaining about the difficulties of discovering your production requirements?

Your firm’s business strategy. Analyze your firm’s five-year business strategy and try to assess what new services and capabilities will be required to achieve strategic goals.

Your firm’s IT strategy, infrastructure, and cost. Examine your firm’s infor- mation technology plans for the next five years and assess its alignment with the firm’s business plans. Determine the total IT infrastructure costs. You will want to perform a TCO analysis. If your firm has no IT strategy, you will need to devise one that takes into account the firm’s five-year strategic plan.

Information technology assessment. Is your firm behind the technology curve or at the bleeding edge of information technology? Both situations are to be avoided. It is usually not desirable to spend resources on advanced technolo-



Hardware acquisition Purchase price of computer hardware equipment, including computers, terminals, storage, and printers

Software acquisition Purchase or license of software for each user

Installation Cost to install computers and software

Training Cost to provide training for information systems specialists and end users

Support Cost to provide ongoing technical support, help desks, and so forth

Maintenance Cost to upgrade the hardware and software

Infrastructure Cost to acquire, maintain, and support related infrastructure, such as networks and specialized equipment (including storage backup units)

Downtime Cost of lost productivity if hardware or software failures cause the system to be unavailable for processing and user tasks

Space and energy Real estate and utility costs for housing and providing power for the technology

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gies that are still experimental, often expensive, and sometimes unreliable. You want to spend on technologies for which standards have been established and IT vendors are competing on cost, not design, and where there are multiple suppliers. However, you do not want to put off investment in new technologies or allow competitors to develop new business models and capabilities based on the new technologies.

Competitor firm services. Try to assess what technology services competitors offer to customers, suppliers, and employees. Establish quantitative and qualita- tive measures to compare them to those of your firm. If your firm’s service lev- els fall short, your company is at a competitive disadvantage. Look for ways your firm can excel at service levels.

Competitor firm IT infrastructure investments. Benchmark your expendi- tures for IT infrastructure against your competitors. Many companies are quite public about their innovative expenditures on IT. If competing firms try to keep IT expenditures secret, you may be able to find IT investment information in public companies’ SEC Form 10-K annual reports to the federal government when those expenditures impact a firm’s financial results.

Your firm does not necessarily need to spend as much as, or more than, your competitors. Perhaps it has discovered much less-expensive ways of providing services, and this can lead to a cost advantage. Alternatively, your firm may be spending far less than competitors and experiencing commensurate poor per- formance and losing market share.


There are six factors you can use to answer the question, “How much should our firm spend on IT infrastructure?”

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5.6 HANDS-ON MIS PROJECTS The projects in this section give you hands-on experience in developing solutions for managing IT infrastructures and IT outsourcing, using spread- sheet software to evaluate alternative desktop systems, and using Web research to budget for a sales conference.

Management Dec i s ion Prob lems

1. The University of Pittsburgh Medical Center (UPMC) relies on information systems to operate 19 hospitals, a network of other care sites, and international and commercial ventures. Demand for additional servers and storage technology was growing by 20 percent each year. UPMC was setting up a separate server for every application, and its servers and other computers were running a number of different operating systems, including several versions of Unix and Windows. UPMC had to manage technologies from many different vendors, including HP, Sun Microsystems, Microsoft, and IBM. Assess the impact of this situation on business performance. What factors and management decisions must be consid- ered when developing a solution to this problem?

2. Qantas Airways, Australia’s leading airline, faces cost pressures from high fuel prices and lower levels of global airline traffic. To remain competitive, the airline must find ways to keep costs low while providing a high level of customer service. Qantas had a 30-year-old data center. Management had to decide whether to replace its IT infrastructure with newer technology or outsource it. Should Qantas outsource to a cloud computing vendor? What factors should be considered by Qantas management when deciding whether to outsource? If Qantas decides to outsource, list and describe points that should be addressed in a service level agreement.

Improv ing Dec i s ion Making: Us ing a Spreadsheet to Eva luate Hardware and Software Opt ions

Software skills: Spreadsheet formulas Business skills: Technology pricing

In this exercise, you will use spreadsheet software to calculate the cost of desk- top systems, printers, and software.

You have been asked to obtain pricing information on hardware and software for an office of 30 people. Using the Internet, get pricing for 30 PC desktop systems (monitors, computers, and keyboards) manufactured by Lenovo, Dell, and HP/Compaq as listed at their respective corporate Web sites. (For the purposes of this exercise, ignore the fact that desktop systems usually come with preloaded software packages.) Also obtain pricing on 15 desktop printers manufactured by HP, Canon, and Dell. Each desktop system must satisfy the minimum specifications shown in the following table:

MINIMUM DESKTOP SPECIFICATIONS Processor speed 3 GHz Hard drive 350 GB RAM 3 GB DVD-ROM drive 16 x Monitor (diagonal measurement) 18 inches

Each desktop printer must satisfy the minimum specifications shown in the following table:

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MINIMUM MONOCHROME PRINTER SPECIFICATIONS Print speed (black and white) 20 pages per minute Print resolution 600 × 600 Network ready? Yes Maximum price/unit $700

After pricing the desktop systems and printers, obtain pricing on 30 copies of the most recent versions of Microsoft Office, Lotus SmartSuite, and Oracle Open Office desktop productivity packages, and on 30 copies of Microsoft Windows 7 Professional. The application software suite packages come in various versions, so be sure that each package contains programs for word processing, spreadsheets, database, and presentations.

Prepare a spreadsheet showing your research results for the desktop systems, for the printers, and for the software. Use your spreadsheet software to determine the desktop system, printer, and software combination that will offer both the best performance and pricing per worker. Because every two workers will share one printer (15 printers/30 systems), assume only half a printer cost per worker in the spreadsheet. Assume that your company will take the standard warranty and service contract offered by each product’s manufacturer.

Improv ing Dec i s ion Making: Us ing Web Research to Budget for a Sa les Conference

Software skills: Internet-based software Business skills: Researching transportation and lodging costs

The Foremost Composite Materials Company is planning a two-day sales conference for October 15–16, starting with a reception on the evening of October 14. The conference consists of all-day meetings that the entire sales force, numbering 125 sales representatives and their 16 managers, must attend. Each sales representative requires his or her own room, and the company needs two common meeting rooms, one large enough to hold the entire sales force plus visitors (200 total) and the other able to hold half the force. Management has set a budget of $120,000 for the representatives’ room rentals. The hotel must also have such services as overhead and computer projectors as well as business center and banquet facilities. It also should have facilities for the company reps to be able to work in their rooms and to enjoy themselves in a swimming pool or gym facility. The company would like to hold the confer- ence in either Miami or Marco Island, Florida.

Foremost usually likes to hold such meetings in Hilton- or Marriott-owned hotels. Use the Hilton and Marriott Web sites to select a hotel in whichever of these cities that would enable the company to hold its sales conference within its budget.

Visit the two sites’ homepages, and search them to find a hotel that meets Foremost’s sales conference requirements. Once you have selected the hotel, locate flights arriving the afternoon prior to the conference because the attendees will need to check in the day before and attend your reception the evening prior to the conference. Your attendees will be coming from Los Angeles (54), San Francisco (32), Seattle (22), Chicago (19), and Pittsburgh (14). Determine costs of each airline ticket from these cities. When you are finished, create a budget for the conference. The budget will include the cost of each airline ticket, the room cost, and $60 per attendee per day for food.

• What was your final budget?

• Which did you select as the best hotel for the sales conference and why?

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LEARNING TRACK MODULES The following Learning Tracks provide content relevant to topics covered in this chapter:

1. How Computer Hardware and Software Work

2. Service Level Agreements

3. The Open Source Software Initiative

4. Comparing Stages in IT Infrastructure Evolution

5. Cloud Computing

Review Summary 1. What is IT infrastructure and what are its components?

IT infrastructure is the shared technology resources that provide the platform for the firm’s specific information system applications. IT infrastructure includes hardware, software, and services that are shared across the entire firm. Major IT infrastructure components include computer hardware platforms, operating system platforms, enterprise software platforms, networking and telecommunications platforms, database management software, Internet platforms, and consulting services and systems integrators.

2. What are the stages and technology drivers of IT infrastructure evolution? The five stages of IT infrastructure evolution are: the mainframe era, the personal computer era,

the client/server era, the enterprise computing era, and the cloud and mobile computing era. Moore’s Law deals with the exponential increase in processing power and decline in the cost of com- puter technology, stating that every 18 months the power of microprocessors doubles and the price of computing falls in half. The Law of Mass Digital Storage deals with the exponential decrease in the cost of storing data, stating that the number of kilobytes of data that can be stored on magnetic media for $1 roughly doubles every 15 months. Metcalfe’s Law helps shows that a network’s value to partic- ipants grows exponentially as the network takes on more members. Also driving exploding computer use is the rapid decline in costs of communication and growing agreement in the technology indus- try to use computing and communications standards.

3. What are the current trends in computer hardware platforms? Increasingly, computing is taking place on a mobile digital platform. Grid computing involves

connecting geographically remote computers into a single network to create a computational grid that combines the computing power of all the computers on the network. Virtualization organizes computing resources so that their use is not restricted by physical configuration or geographic loca- tion. In cloud computing, firms and individuals obtain computing power and software as services over a network, including the Internet, rather than purchasing and installing the hardware and software on their own computers. A multicore processor is a microprocessor to which two or more processing cores have been attached for enhanced performance. Green computing includes practices and technologies for producing, using, and disposing of information technology hardware to minimize negative impact on the environment. In autonomic computing, computer systems have capabilities for automatically configuring and repairing themselves. Power-saving processors dramat- ically reduce power consumption in mobile digital devices.

4. What are the current trends in software platforms? Open source software is produced and maintained by a global community of programmers and is

often downloadable for free. Linux is a powerful, resilient open source operating system that can run on multiple hardware platforms and is used widely to run Web servers. Java is an operating-system– and hardware-independent programming language that is the leading interactive programming environment for the Web. Web services are loosely coupled software components based on open Web

standards that work with any application software and operating system. They can be used as components of Web-based applications linking the systems of two different organizations or to link disparate systems of a single company. Companies are purchasing their new software applications from outside sources, including software packages, by outsourcing custom application devel- opment to an external vendor (that may be offshore), or by renting online software services (SaaS). Mashups combine two different software services to create new software applications and services. Apps are small pieces of software that run on the Internet, on a computer, or on a mobile phone and are generally delivered over the Internet.

5. What are the challenges of managing IT infrastructure and management solutions?

Major challenges include dealing with platform and infrastructure change, infrastructure management and governance, and making wise infrastructure investments. Solution guidelines include using a competitive forces model to determine how much to spend on IT infrastructure and where to make strate- gic infrastructure investments, and establishing the total cost of ownership (TCO) of information technology assets. The total cost of owning technology resources includes not only the original cost of computer hardware and software but also costs for hardware and software upgrades, maintenance, technical support, and training.

Key Terms Ajax, 189 Android, 177 Application server, 169 Apps, 193 Autonomic computing, 185 Blade servers, 176 Chrome OS, 177 Clients, 168 Client/server computing, 168 Cloud computing, 170 Extensible Markup Language (XML), 189 Green computing, 184 Grid computing, 182 Hypertext Markup Language (HTML), 189 Java, 188 Legacy systems, 181 Linux, 177 Mainframe, 168 Mashup, 193 Minicomputers, 168 Moore’s Law, 171 Multicore processor, 185 Multitiered (N-tier) client/server architecture, 169 Multitouch, 177 Nanotechnology, 171

Netbook, 181 On-demand computing, 184 Open source software, 187 Operating system, 177 Outsourcing, 192 Private cloud, 183 Public cloud, 183 SaaS (Software as a Service), 193 Scalability, 194 Service level agreement (SLA),193 Server, 168 Service-oriented architecture (SOA), 190 Software package, 191 Storage area network (SAN), 180 Technology standards, 174 Total cost of ownership (TCO), 195 Unix, 177 Utility computing, 184 Virtualization, 182 Web browser, 188 Web hosting service, 180 Web server, 169 Web services, 189 Windows, 169 Wintel PC, 168

Chapter 5 IT Infrastructure and Emerging Technologies 201

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Discussion Questions 1. Why is selecting computer hardware and software

for the organization an important management decision? What management, organization, and technology issues should be considered when selecting computer hardware and software?

2. Should organizations use software service providers for all their software needs? Why or why not? What management, organization, and technology factors should be considered when making this decision?

3.What are the advantages and disadvantages of cloud computing?

Review Questions 1. What is IT infrastructure and what are its com-


• Define IT infrastructure from both a technology and a services perspective.

• List and describe the components of IT infrastructure that firms need to man- age.

2. What are the stages and technology drivers of IT infrastructure evolution?

• List each of the eras in IT infrastructure evolution and describe its distinguishing characteristics.

• Define and describe the following: Web server, application server, multitiered client/server architecture.

• Describe Moore’s Law and the Law of Mass Digital Storage.

• Describe how network economics, declining communications costs, and technology standards affect IT infrastruc- ture.

3. What are the current trends in computer hardware platforms?

• Describe the evolving mobile platform, grid computing, and cloud computing.

• Explain how businesses can benefit from autonomic computing, virtualization, green computing, and multicore proces- sors.

4. What are the current trends in software platforms? • Define and describe open source software

and Linux and explain their business benefits.

• Define Java and Ajax and explain why they are important.

• Define and describe Web services and the role played by XML.

• Name and describe the three external sources for software.

• Define and describe software mashups and apps.

5. What are the challenges of managing IT infrastructure and management solutions?

• Name and describe the management challenges posed by IT infrastructure.

• Explain how using a competitive forces model and calculating the TCO of tech- nology assets help firms make good infrastructure investments.

Collaboration and Teamwork: Evaluating Server and Mobile Operating Systems

of the iPhone operating system (iOS). If possible, use Google Sites to post links to Web pages, team commu- nication announcements, and work assignments; to brainstorm; and to work collaboratively on project documents. Try to use Google Docs to develop a pre- sentation of your findings for the class.

Video Cases Video Cases and Instructional Videos illustrating some of the concepts in this chapter are available. Contact your instructor to access these videos.

Form a group with three or four of your classmates. Choose server or mobile operating systems to evalu- ate. You might research and compare the capabilities and costs of Linux versus the most recent version of the Windows operating system or Unix. Alternatively, you could compare the capabilities of the Android mobile operating system with the most recent version

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Salesforce.Com: Cloud Services Go Mainstream CASE STUDY, one of the most disruptive technology companies of the past few years, has single-handedly shaken up the software industry with its innovative business model

and resounding success. Salesforce provides customer relationship management (CRM) and other application software solutions in the form of software as a service leased over the Internet, as opposed to software bought and installed on machines locally.

The company was founded in 1999 by former Oracle executive Marc Benioff, and has since grown to over 3,900 employees, 82,400 corporate customers, and 2.1 million subscribers. It earned $1.3 billion in revenue in 2009, making it one of the top 50 software companies in the world. Salesforce attributes its suc- cess to the many benefits of its on-demand model of software distribution.

The on-demand model eliminates the need for large up-front hardware and software investments in systems and lengthy implementations on corporate computers. Subscriptions start as low as $9 per user per month for the pared-down Group version for small sales and marketing teams, with monthly subscriptions for more advanced versions for large enterprises starting around $65 per user.

For example, the Minneapolis-based Haagen-Dazs Shoppe owned by Nestle USA calculated it would have had to spend $65,000 for a custom-designed database to help management stay in contact with the company’s retail franchises. The company only had to pay $20,000 to establish service with Salesforce, plus a monthly charge of $125 per month for 20 users to use wireless handhelds or the Web to remotely monitor all the Haagen-Dazs franchises across the United States. implementations take three months at the longest, and usually less than a month. There is no hardware for subscribers to purchase, scale, and maintain. There are no operat- ing systems, database servers, or application servers to install, no consultants and staff, and no expensive licensing and maintenance fees. The system is acces- sible via a standard Web browser, with some func- tions accessible by mobile handheld devices. continually updates its software behind the scenes. There are tools for customizing some features of the software to support a company’s

unique business processes. Subscribers can leave if business turns sour or a better system comes along. If they lay people off, they can cut down on the number of Salesforce subscriptions they buy.

Salesforce faces significant challenges as it continues to grow and refine its business. The first challenge comes from increased competition, both from traditional industry leaders and new chal- lengers hoping to replicate Salesforce’s success. Microsoft, SAP, and Oracle have rolled out subscription-based versions of their CRM products in response to Salesforce. Smaller competitors like NetSuite,, and RightNow also have made some inroads against Salesforce’s market share.

Salesforce still has plenty of catching up to do to reach the size and market share of its larger competitors. As recently as 2007, SAP’s market share was nearly four times as large as Salesforce’s, and IBM’s customer base includes 9,000 software compa- nies that run their applications on their software and that are likelier to choose a solution offered by IBM over Salesforce.

Salesforce needs to continually prove to customers that it is reliable and secure enough to remotely handle their corporate data and applications. The company has experienced a number of service outages. For example, on January 6, 2009, a core net- work device failed and prevented data in Europe, Japan, and North America from being processed for 38 minutes. Over 177 million transactions were affected. While most of Salesforce’s customers accept that IT services provided through the cloud are going to be available slightly less than full time, some cus- tomers and critics used the outage as an opportunity to question the soundness of the entire concept of cloud computing. In February 2009, a similar outage occurred, affecting Europe and as well as North America a few hours later.

Thus far, Salesforce has experienced only one security breach. In November 2007, a Salesforce employee was tricked into divulging his corporate password to scammers, exposing Salesforce’s customer list. Salesforce clients were subjected to a barrage of highly targeted scams and hacking attempts that appeared authentic. Although this incident raised a red flag, many customers reported that Salesforce’s handling of the situation was satisfactory. All of Salesforce’s major customers


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regularly send auditors to Salesforce to check security.

Another challenge for Salesforce is to expand its business model into other areas. Salesforce is currently used mostly by sales staff needing to keep track of leads and customer lists. One way the company is trying to provide additional functionality is through a partnership with Google and more specifically Google Apps. Salesforce is combining its services with Gmail, Google Docs, Google Talk, and Google Calendar to allow its customers to accomplish more tasks via the Web. Salesforce and Google both hope that their for Google Apps initia- tive will galvanize further growth in on-demand soft- ware.

Salesforce has also partnered with Apple to distribute its applications for use on the iPhone. The company hopes that it can tap into the large market of iPhone users, pitching the ability to use Salesforce applications any time, anywhere. And Salesforce introduced a development tool for integrating with Facebook’s social network to enable customers to build applications that call functions at the Facebook site. (In early 2010, Salesforce intro- duced its own social networking application called Chatter, which enables employees to create profiles and make status updates that appear in colleagues’ news feeds, similar to Facebook and Twitter.)

In order to grow its revenues to the levels that industry observers and Wall Street eventually expects Salesforce is changing its focus from selling a suite of software applications to providing a broader cloud computing “platform” on which many software com- panies deliver applications. As CEO Marc Benioff put it, over the past decade, “we focused on software as a service…In the next decade, will really be focused on the platform as a service.”

The company has intensified its efforts to provide cloud computing offerings to its customers. The new Web site places much more emphasis on cloud computing, grouping products into three types of clouds: the Sales Cloud, the Service Cloud, and the Custom Cloud. The Sales and Service clouds consist of applications meant to improve sales and customer service, respectively, but the Custom Cloud is another name for the application development platform, where customers can develop their own applications for use within the broader Salesforce network. provides a set of development tools and IT services that enable users to customize their Salesforce customer relationship management appli- cations or to build entirely new applications and run

them “in the cloud” on Salesforce’s data center infra- structure. Salesforce opened up to other independent software developers and listed their programs on its AppExchange.

Using AppExchange, small businesses can go online and easily download over 950 software applications, some add-ons to and others that are unrelated, even in non-customer- facing functions such as human resources. Sites, based on the development environ- ment, enables users to develop Web pages and regis- ter domain names. Pricing is based on site traffic.

Salesforce’s cloud infrastructure includes two data centers in the United States and a third in Singapore, with others in Europe and Japan planned for the future. Salesforce has additionally partnered with Amazon to enable customers to tap into Amazon’s cloud computing services (Elastic Compute Cloud and Simple Storage Service.) Amazon’s services would handle the “cloudburst computing” tasks of applications that require extra processing power or storage capacity.

An International Data Center (IDC) report esti- mated that the platform enables users to build and run business applications and Web sites five times faster and at half the cost of non-cloud alternatives. For instance, RehabCare, a national provider of medical rehabilitation services, used to build a mobile iPhone patient admission application for clinicians. RehabCare’s information systems team built a prototype applica- tion within four days that runs on the platform. It would have taken six months to build a similar mobile application using Microsoft develop- ment tools. About 400 clinicians now use the app.

Author Solutions, a self-publishing company based in Bloomington, Minnesota, uses the platform to host the applications driving its operations. It reports saving up to 75 percent from not having to maintain and manage its own data center, e-commerce, and workflow applications, and the ability to scale as it business mushroomed. Workflow modifications that once took 30 to 120 hours are accomplished in one-fourth the time. The time and cost for adding a new product, which used to take 120 to 240 hours (and cost $6,000 to $12,000) has been reduced by 75 percent. The new platform is able to handle 30 percent more work volume than the old systems with the same number of employees.

The question is whether the audience for Salesforce’s AppExchange and platforms will prove large enough to deliver the level of growth Salesforce wants. It still isn’t clear whether the

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company will generate the revenue it needs to provide cloud computing services on the same scale as Google or Amazon and also make its cloud com- puting investments pay off.

Some analysts believe the platform may not be attractive to larger companies for their application needs. Yet another challenge is providing constant availability. subscribers depend on the service being available 24/7. But thanks to the previously described outages, many companies have rethought their dependency on software as a service. provides tools to assure customers about its system reliability and also offers PC applications that tie into their services so users can work offline.

Still, a number of companies are reluctant to jump on the SaaS and cloud computing bandwagon. Moreover, it is still not clear whether software delivered over the Web will cost less in the long run. According to Gartner consultants analyst Rob DiSisto, it may be cheaper to subscribe to’s software services for the first few years, but what happens after that? Will the expense of upgrading and managing on-demand software become higher than the fees companies are paying to own and host their own software?

Sources: “How Brings Success to the Cloud,” IT, accessed June 10, 2010; Lauren McKay, “ Extends Chatter Across the Cloud,” CRM Magazine, April 14, 2010; Jeff Cogswell, “ Assembles an Array of Development Tools for,” eWeek, February 15, 2010; Mary Hayes Weier, “Why Is Important to Cloud Computing,” Information Week, November 23, 2009; Jessi Hempel, “Salesforce Hits Stride,” CNN, March 2, 2009; Clint Boulton, “ Network Device Failure Shuts Thousands Out of SaaS Apps,” eWeek, January 7, 2009; J. Nicholas Hoover, “Service Outages Force Cloud Adopters to Rethink Tactics,” Information Week, August 18/25, 2008; and Charles Babcock, “Salesforce Ascends Beyond Software As Service,” Information Week, November 10, 2008.

CASE STUDY QUESTIONS 1. How does use cloud computing?

2. What are some of the challenges facing Salesforce as it continues its growth? How well will it be able to meet those challenges?

3. What kinds of businesses could benefit from switching to Salesforce and why?

4. What factors would you take into account in decid- ing whether to use for your business?

5. Could a company run its entire business using,, and App Exchange? Explain your answer.


After reading this chapter, you will be able to answer the following questions: 1. What are the problems of managing

data resources in a traditional file environment and how are they solved by a database management system?

2. What are the major capabilities of database management systems (DBMS) and why is a relational DBMS so powerful?

3. What are some important principles of database design?

4. What are the principal tools and technologies for accessing informa- tion from databases to improve business performance and decision making?

5. Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?


6.1 ORGANIZING DATA IN A TRADITIONAL FILE ENVIRONMENT File Organization Terms and Concepts Problems with the Traditional File Environment

6.2 THE DATABASE APPROACH TO DATA MANAGEMENT Database Management Systems Capabilities of Database Management Systems Designing Databases

6.3 USING DATABASES TO IMPROVE BUSINESS PERFORMANCE AND DECISION MAKING Data Warehouses Tools for Business Intelligence: Multidimensional

Data Analysis and Data Mining Databases and the Web

6.4 MANAGING DATA RESOURCES Establishing an Information Policy Ensuring Data Quality

6.5 HANDS-ON MIS PROJECTS Management Decision Problems Achieving Operational Excellence: Building a

Relational Database for Inventory Management Improving Decision Making: Searching Online

Databases for Overseas Business Resources

LEARNING TRACK MODULES Database Design, Normalization, and

Entity-Relationship Diagramming Introduction to SQL Hierarchical and Network Data Models

Chapter 6

Foundations of Business Intelligence: Databases and Information Management

Interactive Sessions:

What Can Businesses Learn from Text Mining?

Credit Bureau Errors—Big People Problems


ight now you are most likely using an RR Donnelley product. Chicago-based RR Donnelley is a giant commercial printing and service company providing printing services, forms and labels, direct mail, and other services. This textbook probably

came off its presses. The company’s recent expansion has been fueled by a series of acquisi- tions, including commercial printer Moore Wallace in 2005 and printing and supply chain management company Banta in January 2007. RR Donnelley’s revenue has jumped from $2.4 billion in 2003 to over $9.8 billion today.

However, all that growth created information management challenges. Each acquired company had its own systems and its own set of customer, vendor, and product data. Coming from so many different sources, the data were often inconsistent, duplicated, or incomplete. For example, different units of the business might each have a different meaning for the entity “customer.” One might define “customer” as a specific billing location, while another might define “customer” as the legal parent entity of a company. Donnelley had to use time- consuming manual processes to reconcile the data stored in multiple systems in order to get a clear enterprise-wide picture of each of its customers, since they might be doing business with several different units of the company. These conditions heightened inefficiencies and costs.

RR Donnelley had become so big that it was impractical to store the information from all of its units in a single system. But Donnelley still needed a clear single set of data that was accu- rate and consistent for the entire enterprise. To solve this problem, RR Donnelley turned to master data management (MDM). MDM seeks to ensure that an organization does not use multiple versions of the same piece of data in different parts of its operations by merging disparate records into a single authenticated master file. Once the master file is in place, employees and applications access a single consolidated view of the company’s data. It is especially useful for companies such as Donnelley that have data integration problems as a result of mergers and acquisitions.

Implementing MDM is a multi-step process that includes business process analysis, data cleansing, data consolidation and reconciliation, and data migration into a master file of all the company’s data. Companies must identify what group in the company “owns” each piece of


data and is responsible for resolving inconsistent defini- tions of data and other discrep- ancies. Donnelley launched its MDM program in late 2005 and began creating a single set of identifiers for its customer and vendor data. The company opted for a registry model using Purisma’s Data Hub in which customer data continue to reside in the system where they originate but are registered in a master “hub” and cross-refer- enced so applications can find the data. The data in their source system are not touched.

Nearly a year later, Donnelley brought up its


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Customer Master Data Store, which integrates the data from numerous systems from Donnelley acquisitions. Data that are outdated, incomplete, or incorrectly formatted are corrected or eliminated. A registry points to where the source data are stored. By having a single consistent enterprise-wide set of data with common definitions and standards, management is able to easily find out what kind of business and how much business it has with a particular customer to identify top customers and sales opportunities. And when Donelley acquires a company, it can quickly see a list of overlapping customers. Sources: John McCormick, “Mastering Data at R.R. Donnelley,” Information Management Magazine, March 2009;, accessed June 10, 2010; and, accessed June 10, 2010.

RR Donnelley’s experience illustrates the importance of data managementfor businesses. Donnelley has experienced phenomenal growth, primar- ily through acquisitions. But its business performance depends on what it can or cannot do with its data. How businesses store, organize, and manage their data has a tremendous impact on organizational effectiveness.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Management decided that the company needed to centralize the management of the company’s data. Data about customers, vendors, products, and other important entities had been stored in a number of different systems and files where they could not be easily retrieved and analyzed. They were often redundant and inconsistent, limiting their useful- ness. Management was unable to obtain an enterprise-wide view of all of its customers at all of its acquisitions to market its products and services and provide better service and support.

In the past, RR Donnelley had used heavily manual paper processes to reconcile its inconsistent and redundant data and manage its information from an enterprise-wide perspective. This solution was no longer viable as the organization grew larger. A more appropriate solution was to identify, consoli- date, cleanse, and standardize customer and other data in a single master data management registry. In addition to using appropriate technology, Donnelley had to correct and reorganize the data into a standard format and establish rules, responsibilities, and procedures for updating and using the data.

A master data management system helps RR Donnelley boost profitability by making it easier to identify customers and sales opportunities. It also improves operational efficiency and decision making by having more accurate and com- plete customer data available and reducing the time required to reconcile redundant and inconsistent data.

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n effective information system provides users with accurate, timely, and relevant information. Accurate information is free of errors. Information is timely when it is available to decision makers when it is needed. Information is relevant when it is useful and appropriate

for the types of work and decisions that require it. You might be surprised to learn that many businesses don’t have timely,

accurate, or relevant information because the data in their information systems have been poorly organized and maintained. That’s why data management is so essential. To understand the problem, let’s look at how information systems arrange data in computer files and traditional methods of file management.

FILE ORGANIZATION TERMS AND CONCEPTS A computer system organizes data in a hierarchy that starts with bits and bytes and progresses to fields, records, files, and databases (see Figure 6-1). A bit represents the smallest unit of data a computer can handle. A group of bits, called a byte, represents a single character, which can be a letter, a



A computer system organizes data in a hierarchy that starts with the bit, which represents either a 0 or a 1. Bits can be grouped to form a byte to represent one character, number, or symbol. Bytes can be grouped to form a field, and related fields can be grouped to form a record. Related records can be collected to form a file, and related files can be organized into a database.

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The use of a traditional approach to file processing encourages each functional area in a corporation to develop specialized applications. Each application requires a unique data file that is likely to be a subset of the master file. These subsets of the master file lead to data redundancy and inconsistency, processing inflexibility, and wasted storage resources.

number, or another symbol. A grouping of characters into a word, a group of words, or a complete number (such as a person’s name or age) is called a field. A group of related fields, such as the student’s name, the course taken, the date, and the grade, comprises a record; a group of records of the same type is called a file.

For example, the records in Figure 6-1 could constitute a student course file. A group of related files makes up a database. The student course file illustrated in Figure 6-1 could be grouped with files on students’ personal histories and financial backgrounds to create a student database.

A record describes an entity. An entity is a person, place, thing, or event on which we store and maintain information. Each characteristic or quality describing a particular entity is called an attribute. For example, Student_ID, Course, Date, and Grade are attributes of the entity COURSE. The specific values that these attributes can have are found in the fields of the record describing the entity COURSE.

PROBLEMS WITH THE TRADITIONAL FILE ENVIRONMENT In most organizations, systems tended to grow independently without a company-wide plan. Accounting, finance, manufacturing, human resources, and sales and marketing all developed their own systems and data files. Figure 6-2 illustrates the traditional approach to information processing.

Each application, of course, required its own files and its own computer program to operate. For example, the human resources functional area might have a personnel master file, a payroll file, a medical insurance file, a pension file, a mailing list file, and so forth until tens, perhaps hundreds, of files and programs existed. In the company as a whole, this process led to multiple master files created, maintained, and operated by separate divisions or depart- ments. As this process goes on for 5 or 10 years, the organization is saddled with hundreds of programs and applications that are very difficult to maintain and manage. The resulting problems are data redundancy and inconsistency, program-data dependence, inflexibility, poor data security, and an inability to share data among applications.

Data Redundancy and Incons i s tency Data redundancy is the presence of duplicate data in multiple data files so that the same data are stored in more than place or location. Data redundancy occurs when different groups in an organization independently collect the same piece of data and store it independently of each other. Data redundancy wastes storage resources and also leads to data inconsistency, where the same attribute may have different values. For example, in instances of the entity COURSE illustrated in Figure 6-1, the Date may be updated in some systems but not in others. The same attribute, Student_ID, may also have different names in different systems throughout the organiza- tion. Some systems might use Student_ID and others might use ID, for example.

Additional confusion might result from using different coding systems to represent values for an attribute. For instance, the sales, inventory, and manu- facturing systems of a clothing retailer might use different codes to represent clothing size. One system might represent clothing size as “extra large,” whereas another might use the code “XL” for the same purpose. The resulting confusion would make it difficult for companies to create customer relationship management, supply chain management, or enterprise systems that integrate data from different sources.

Program-Data Dependence Program-data dependence refers to the coupling of data stored in files and the specific programs required to update and maintain those files such that changes in programs require changes to the data. Every traditional computer program has to describe the location and nature of the data with which it works. In a traditional file environment, any change in a software program could require a change in the data accessed by that program. One program might be modified from a five-digit to a nine-digit ZIP code. If the original data file were changed from five-digit to nine-digit ZIP codes, then other programs that required the five-digit ZIP code would no longer work properly. Such changes could cost millions of dollars to implement properly.

L ack of F lex ib i l i ty A traditional file system can deliver routine scheduled reports after extensive programming efforts, but it cannot deliver ad hoc reports or respond to unanticipated information requirements in a timely fashion. The information required by ad hoc requests is somewhere in the system but may be too expen- sive to retrieve. Several programmers might have to work for weeks to put together the required data items in a new file.

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Poor Secur i ty Because there is little control or management of data, access to and dissemi- nation of information may be out of control. Management may have no way of knowing who is accessing or even making changes to the organization’s data.

L ack of Data Shar ing and Ava i lab i l i ty Because pieces of information in different files and different parts of the organization cannot be related to one another, it is virtually impossible for information to be shared or accessed in a timely manner. Information cannot flow freely across different functional areas or different parts of the organiza- tion. If users find different values of the same piece of information in two different systems, they may not want to use these systems because they cannot trust the accuracy of their data.

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