•Business Information Systems.

Technology, Development and Management for the

Modern Business, 6th edition

Chapter 2
Basic concepts: An Introduction
to Business Information Systems
Learning objectives
After this lecture, you will be able to:
• Identify systems and their components;
• Identify and describe the behaviour of systems;
• Identify types of BIS, distinguishing them by category and the organizational
level at which they are used;
• Describe e-business, e-commerce and ERP and evaluate their relevance to the
organization;
• Identify basic strategies and methods used to gain competitive advantage
through the use of BIS.
Management issues
From a managerial perspective, this chapter addresses the following
areas:
• How systems theory is used as a means of defining problems and situations so
that they
can be understood more easily and BIS can be developed to support them.
• How managers can maximise an organisation’s use of technology by
understanding BIS.
• How BIS can help achieve competitive advantage.
Defining Systems and systems theory
• A system can be defined as a collection of interrelated components that work together
towards a collective goal. The function of a system is to receive inputs and transform
these into outputs.

Figure 2.1
A basic model of a transformation process
Defining Systems and systems theory
• Business systems often have multiple goals such as profit or improving the quality of a
product.
• The overall goal of a business is often described within a mission statement.
• A mission statement is a statement intended to encapsulate the overall goal(s) of an
organization.
• In transforming data into information through using the previous model (Figure
2.1), it can be said that data are used as the input for a process that creates information
as an output.
• However, this model illustrates a system that is essentially static.
Defining Systems and systems theory
• In static systems, the performance of the system cannot be adjusted and there are no
checks to ensure that it works correctly.

• However, in order to monitor the performance of the system, some kind of feedback
mechanism is required.

• In addition, control must be exerted to correct any problems that occur and ensure that
the system is fulfilling its purpose
Defining Systems and systems theory
• If these additional components are added to
the basic model of the system, it can be
illustrated as shown in Figure 2.2.
• The model shown in the diagram is
sometimes referred to as an adaptive
system, in order to signify that it has the
ability to monitor and regulate its own
performance
• Adaptive system is a system with the
ability to monitor and regulate its own
Figure 2.2
A generic model of a system
performance.
Defining Systems and systems theory
• Systems theory: The study of the behaviour and interactions within and between
systems. It provides a powerful means of analyzing and improving business processes. It
can be applied to a wide variety of different areas and is fundamental to gaining a good
understanding of the managerial application of BIS.
System components
At this point, it can now be argued that a generic system includes five components:
1) Input: the raw materials for a process that will produce a particular output.
2) Process: inputs are transformed into outputs through a transformation process.
3) Output: a product that is created by the system.
4) Feedback mechanism: provides information on the performance of the system which
can be used to adjust its behavior.
5) Control mechanism: if alterations are needed to the system, adjustments are made by
a control mechanism.
Note that
• In general, control is exerted as the result of feedback information regarding the
performance of the system.

• The function of the control component is to ensure that the system is working to fulfil its
objective (which is normally the creation of a specific output).

• Control tends to be exerted by adjusting the process and input components of the
system until the correct output is achieved
 System characteristics (1 of 7)
1) System’s objective: The components of a system work towards a collective goal. This is
known as the system’s objective. The objective of a system is normally very specific and
can often be expressed in a single sentence. As an example, the objective of a car might
be expressed simply as follows: to transport people and goods to a specified location.

Thus, system objective means that All components of a system should be related to one
another by a common objective.
 System characteristics (2 of 7)
2) Environment: Systems do not operate in complete isolation. They are contained within
an environment that contains other systems and external agencies.
3) Boundary: The scope of a system is defined by its boundary (The interface between a
system and its environment.)
Everything outside of the boundary is part of the system’s environment, everything within
the boundary forms part of the system itself.
4) Interface: The boundary also marks the interface between a system and its
environment. The interface describes exchanges between a system and the environment or
other systems.
 System characteristics (3 of 7)
5) Subsystems: Systems can be complex and can be made up of other smaller systems
known as subsystems.

6) Suprasystems: Systems composed of one or more subsystems are sometimes referred

to as suprasystems
 System characteristics
• Note that: The objective of a subsystem is to support the larger objective of the
suprasystem.

• For an organization, the subsystems such as marketing and finance would lie within the
system’s boundary, while the following elements would lie outside as part of the
business environment:
• Customers, sales channel/distributors, suppliers, competitors, partners, government
and legislation, the economy.
 System characteristics (4 of 7)
7) Open systems: An organisation will interact with all these elements which are beyond
the system boundary in the environment. Systems that have a high degree of interaction
with the environment are called open systems.

Note that: Open systems are influenced by changes in the environment and can also
influence the environment itself. Most information systems are open systems because they
accept inputs and react to them.

8) Closed systems: No or limited interaction occurs with the environment.

 System characteristics (5 of 7)
• Subsystems in an information system interact by exchanging information. This is known
as the interface between systems. For information systems and business systems, having
clearly defined interfaces is important to an efficient organization.

• For example, sales orders must be passed from the sales subsystem to the finance
subsystem and the distribution subsystem in a clear, repeatable way. If this does not
happen orders may be lost or delayed and customer service will be affected
 System characteristics (6 of 7)
• The linkage or coupling between subsystems varies. The degree of coupling defines
how closely linked different subsystems are. It is a fundamental principle of systems
theory and BIS design that subsystems should be loosely coupled. Coupling defines
how closely linked different subsystems are. Loose coupling means that subsystems are
not closely linked. Close-coupled systems are highly dependent on each other
Close-coupled systems: Systems or subsystems that are highly dependent on one
another are known as close-coupled systems.
Decoupled systems: Decoupled systems (or subsystems) are less dependent on one
another than coupled systems and so are more able to deal with unexpected situations or
events. Such systems tend to have higher levels of autonomy, being allowed more
freedom to plan and control their activities.
 System characteristics (6 of 7)
• Although decoupled systems are more flexible and adaptive than close-coupled systems,
this very flexibility increases the possibility that inefficiencies.

• The traditional method of production where material is held ‘in-hand’ as inventory is

decoupled.

• In this arrangement, it is not necessary for production to match sales so closely, but this
results in higher costs of holding inventory
 System characteristics (6 of 7)
• First example on close-coupled system: consider the way in which an examination
system might operate.

• The letter that confirms a student’s grade could be said to be the result of two
subsystems working together very closely. One subsystem ensures that all examination
scripts are marked and that a list of final results is produced.

• The second subsystem produces the letter of confirmation as its output. However, the
letter of confirmation can only be produced once all marks have been confirmed and
recorded. Thus, the output of the marking subsystem becomes the input to the subsystem
that creates the confirmation letter
 System characteristics (6 of 7)
• Second example on close-coupled systems: The ‘just-in-time’ method used by a
number of manufacturing organisations also illustrates a close-coupled system well.

• This method involves holding as few parts or raw materials as possible. In order to
ensure that production is not halted, parts must be supplied ‘just in time’ to be used in
the manufacturing process.

• Unless the manufacturing organisation has very close links with its suppliers, this
approach cannot work effectively
 System characteristics (7 of 7)
• Systems are hierarchical: Systems are made up of subsystems that may themselves be
made up of other subsystems.
•
• From this, one should realize that the parts of a system are dependent on one another in
some way. This interdependence means that a change to one part of a system leads to
or results from changes to one or more other parts.

• Interdependence: Interdependence means that a change to one part of a system leads to

or results from changes to one or more other parts.
 Control in Organizational Systems
• Figure 2.3 shows the relationship between different parts of an organization and how
they are related according to systems theory. The control mechanism is indicated by the
arrowed line from the output back to the input.

Figure 2.3
Business information systems as an
organizational control mechanism
 Control in Organizational Systems

• The role of an information system is to support managers in making decisions that will
help the organization to function properly and achieve its objectives. Control is being
exercised correctly if the organization – including all subsystems – is moving towards its
objectives as efficiently as possible.
 Open Loop Control Systems in Business
• Figure 2.4 shows a generic open-loop system. An open-loop control system is one in
which there is an attempt to reach the system objective, but no action is taken to modify
the process or its input to achieve the targets once the process has begun

Figure 2.4
A generic open-loop system
 A) Open Loop Control Systems in Business
• Open-loop systems have no mechanism for ensuring goals are met once the process is
under way.
• Example: an electronics manufacturer might predict a huge demand for its new product
and decide to produce a large quantity of items. Once production begins, no changes
will be made to the production plan even in response to, say, the launch of a similar
product from a competitor.
• Open-loop systems are inadequate in an organizational context because of the
complexity of organizational systems and their environments.
• In other words, open-loop systems would only be successful in attaining the system
objectives in cases where we could plan with certainty the events that would take place
during the system’s process.
 B) Closed-loop control systems in Business
Two types of control mechanism that
can be employed in this situation
are:
(1) Feedback control: responds to
changes in the system or its environment
after they have taken place. Here, the
output achieved is monitored and
compared to the desired output and
corrective action is taken if a deviation
exists
Figure 2.5
A generic closed-loop feedback control system
 B) Closed-loop control systems in Business
• Feedback control systems generally provide a relatively cheap method of reactive
control and provide an effective method of bringing a system back under control. In a
manufacturing company, for example, measurements taken on the production line can
help to indicate when equipment needs to be adjusted.
 B) Closed-loop control systems in Business
(2) Feedforward systems: (Figure 2.6) provide a pro-active way of overcoming the
timing delays associated with feedback systems but depend upon the accuracy of the plans
on which they are based.

Figure 2.6
A generic closed-loop feedforward control system
B) Closed-loop control systems in Business
• Feedforward control systems attempt to overcome the overcorrection and time-delay
disadvantages of feedback systems by incorporating a prediction element in the control
feedback loop.
• In Feedforward systems the environment and system process are both monitored in
order to provide corrective action if it is likely that the system goal will not be met.
• Feedforward systems are not as common as feedback systems in business settings.
• Examples include inventory control systems which work to a planned sales level or
material usage rate. Elements of project management can also be seen as feedforward
control where plans are made for resource requirements over time.
 What is a Business Information system?
• A business information system is a group of interrelated components that work
collectively to carry out input, processing, output, storage and control actions in order to
convert data into information products that can be used to support forecasting, planning,
control, coordination, decision making and operational activities in an organization.
 Resources that Support BIS
1) People resources: People resources include the users of an information system
and those who develop, maintain and operate the system.
2. Hardware resources: The term hardware resources refers to all types of machines,
not just computer hardware.
3. Software resources: In the same way, the term software resources does not only
refer to computer programs and the media on which they are stored, but the term
can also be used to describe the procedures used by people.
4. Communications resources: Resources are also required to enable different
systems to transfer data.
5. Data resources: Data resources describe all of the data that an organisation has
access to, regardless of its form.
 Computer Based Information Systems

• An information system that makes use of information technology in order to

create management information.
 Advantages of Computer Processing
• Speed: Computers can process millions of instructions each second,
allowing them to complete a given task in a very short time.

• Accuracy: The result of a calculation carried out by a computer is likely to

be completely accurate. In addition, errors that a human might make, such
as a typing error, can be reduced or eliminated entirely.

• Reliability: In many organizations, computer-based information systems operate for 24

hours a day and are only ever halted for repairs or routine maintenance.
 Advantages of Computer Processing
• Programmability: Although most computer-based information systems are created to
fulfil a particular function, the ability to modify the software that controls them provides
a high degree of flexibility. Even the simplest personal computer, for example, can be
used to create letters, produce cash flow forecasts or manipulate databases.

• Repetitive tasks: Computer-based information systems are suited to highly repetitive

tasks that might result in boredom or fatigue in people. The use of technology can help
to reduce errors and free employees to carry out other tasks.
 Limitations of Computer-based Processing
• Judgement/experience: Despite advances in artificial intelligence techniques and
expert systems, computer-based information systems are considered incapable of
solving problems using their own judgement and experience.
• Improvisation/flexibility: In general, computer-based information systems are unable
to react to unexpected situations and events. Additionally, since most systems are
created to fulfil a particular function, it can be difficult to modify them to meet new or
changed requirements.
• Innovation: Computers lack the creativity of a human being. They are unable to think
in the abstract and are therefore restricted in their ability to discover new ways of
improving processes or solving problems.
 Limitations of computer-based processing
• Intuition: Human intuition can play an important part in certain social situations. For
example, one might use intuition to gauge the emotional state of a person before
deciding whether or not to give them bad news. BIS cannot use intuition in this way and
are therefore unsuitable for certain kinds of situations.

• Qualitative information: Managers often make unstructured decisions based on the

recommendations of others. Their confidence in the person they are dealing with often
has a major influence on the decision itself. Once again, BIS cannot act upon qualitative
information of this kind.
 Business Applications of BIS
• Figure 2.7
 Business Applications of BIS
• The previous figure (figure 2.7) illustrates areas of applications for BIS in a typical
organization. Note that there will be fewer applications and therefore lower levels of
usage at the strategic level. A need for higher levels of automation and the structure of
the tasks carried out mean that highest levels of usage will be at the operational level.)

• Data processing: Handling the large volumes of data that arise from an organization’s
daily activities is described as data processing
• Transaction processing: Processing the sales and purchase transactions that an
organization carries out in the course of its normal activities.
• Process control systems: Systems which manage manufacturing and other production
processes.
 Business Applications of BIS
• The speed, accuracy and reliability of computer-based information systems mean that
they are able to handle repetitive tasks involving large volumes of data.
• Furthermore, they are best used in situations governed by clear, logical rules. This
makes them ideally suited to transaction processing or process control applications.
• From this, it is reasonable to suggest that the widest use of computer-based information
systems will be at the operational level of an organisation
 E-Business and E-Commerce
• Electronic business (e-business): All electronically mediated information exchanges, both
within an organization and with external stakeholders, supporting the range of business
processes.

• E-business is the use of ICT especially the internet to conduct business.

• E-business involves several key activities: (a) improving business processes, (b)
enhancing communications and (c) providing the means to carry out business transactions
securely.
 E-Business and E-Commerce
Three areas of business are enhanced by adopting an e-business approach. These
are:
• Production processes – including procurement, ordering stock, payment processing,
links with suppliers and production control.
• Customer-focused processes – including marketing, selling via the Internet, customer
support and processing of customer orders and payments.
• Internal management processes – including training, recruitment, internal information
sharing and other employee services.
 E-Business and E-Commerce
• Electronic commerce (e-commerce): All electronically mediated information
exchanges between an organization and its external stakeholders. It is using technology
to conduct business transactions such as buying and selling goods and services.
• Buy-side e-commerce: E-commerce transactions between a purchasing organization
and its suppliers.
• Sell-side e-commerce: E-commerce transactions between a supplier organization
and its customers.
• The importance of E-commerce can be illustrated by looking at the rapid growth of
online sales.
 E-Business and E-Commerce
• E-commerce activities can be broken down into five basic types:
1. Business-to-business (B2B). Transactions take place between companies. Approximately 80 per cent of
all e-commerce is of this type.
2. Business-to-consumer (B2C). Companies sell products directly to consumers. B2C can involve activities
such as product research (where consumers gather information and compare prices) and electronic delivery
(where information products are delivered to consumers via e-mail or other means).
3. Business-to-government (B2G). Transactions take place between companies and public sector
organizations.
4. Consumer-to-consumer (C2C). Transactions take place between private individuals. Perhaps the best
examples of C2C commerce are online auction sites and peer-to-peer systems.
5. Mobile commerce (m-commerce). M-commerce is a relatively new development and involves selling
goods or services via wireless technology, especially mobile phones and PDAs
 Enterprise systems
• Enterprise systems aim to support the business processes of an organisation across any
functional boundaries that exist within that organisation.
• They use Internet technology to integrate information within the business and with external
stakeholders such as customers, suppliers and partners.
Four main elements of an enterprise system are the following:
1. Enterprise resource planning (ERP) which is concerned with internal production,
distribution and financial processes
2. Customer relationship management (CRM) which is concerned with marketing and
sales processes
3. Supply chain management (SCM) which is concerned with the flow of materials,
information and customers through the supply chain
4. Supplier relationship management (SRM) which is concerned with sourcing,
purchasing and the warehousing of goods and services.
 Enterprise Systems

Figure 2.8
Enterprise system in comparison to separate functional applications
 Enterprise systems
• Enterprise systems provide a single solution from a single supplier with integrated
functions for major business functions from across the value chain such as production,
distribution, sales, finance and human resources management.
• The main reason for implementing an enterprise system is explained by Figure 2.8. It
compares an enterprise application with the previous company arrangement of separate
data silos and applications (sometimes known as ‘information islands’) in different parts
of the company.
• Data Silos refers to a collection of data held by specific groups within the organization
that are not easily accessible by other departments
 BIS and Strategic Advantage
• In order to survive and grow in a competitive environment, organisations must seek to
gain strategic advantage (or competitive advantage) over their competitors.
• BIS play a crucial part in gaining and sustaining a competitive edge over other
organizations operating in the same industry.
In order to gain or maintain competitive advantage, organisations can adopt three
basic strategies which can be provided by BIS:
 Cost leadership.
Differentiation.
Innovation.
 BIS and Strategic Advantage
Cost Leadership:
• Cost leadership means simply providing goods or services at the lowest possible cost.
• In most cases this is achieved by reducing the organisation’s costs in producing goods or
providing services, for example by automating parts of the production process..
• Using Internet technologies for e-business can assist in achieving cost leadership by
helping to reduce transaction costs.
• Transaction Costs are the costs associated with a business transaction, such as selling a
product, or ordering stock.
 BIS and Strategic Advantage
Product Differentiation:
• Differentiation involves creating a distinction between the organization’s products and
those of its competitors.
• In many cases, differentiation is used to concentrate on a specific niche in the market so
that the company can focus on particular goods and services.
Innovation:
Innovation is concerned with finding new ways to approach an organisation’s activities.
Examples of innovation include improving existing products or creating new ones, forging
strategic linkages, improving production processes and entering new markets.
 The Value Chain and the Virtual Value Chain
• Value chain is a concept related to supply chain which analyzes how supply
chain activities can add value to products and services delivered to the
customer.

Figure 2.9
The value chain model
 The Virtual Value Chain
• Today’s modern marketplace sees many companies concerned with producing and
marketing non-physical products, such as subscription-based services. In these new
industries, primary and secondary activities may be so transformed as to be virtually
unrecognizable.
• As an example, delivering a digital product – such as a music track, movie or ring tone –
to buyers may involve little more than sending an automated e-mail or text message.
• Thus, the virtual value chain (VVC) allows value chain analysis to be extended to
modern businesses that operate across the Internet or market virtual products and
services. In the VVC, physical processes are replaced by virtual ones and the
marketplace is replaced by a virtual marketspace.
 The Virtual Value Chain
• Rayport and Sviokla have suggested the concept of the virtual value chain (VVC) to explain how
information can help to create competitive advantage. In doing this, they refer to the physical marketplace
and its virtual counterpart, the marketspace.
• They suggest that companies adopting a virtual value chain tend to go through three phases.
• In each phase, companies have the opportunity to reduce costs, improve efficiency or find new ways
of doing things:
1. Visibility. Companies use information to examine the physical value chain more closely. Technology is
used to manage activities in the physical value chain more efficiently.
2. Mirroring capability. Physical processes start to be replaced by virtual processes. A parallel value chain
is created in the marketspace. Put more simply, activities are moved from the marketplace to the
marketspace.
3. New customer relationships. Information drawn from the virtual value chain is used to create new
customer relationships by delivering value in new ways.
 Using Information Systems for Strategic
Advantage
• Porter’s work can also be used to identify a number of ways in which BIS can be used to
achieve competitive advantage.
These include:
■ improving operational efficiency;
■ raising barriers to entry;
■ locking in customers and suppliers;
■ promoting business innovation;
■ increasing switching costs;
■ leverage.
End of Chapter
Thank you