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CHAPTER ONE OUTLINE

STUDENT LEARNING OUTCOMES
1.

Define management information systems (MIS) and describe the three important organizational
resources within itpeople, information, and information technology.

2.

Describe how to use break-even analysis to assess the financial impact of information
technology.

3.

Describe how to use Porters Five Forces Model to evaluate the relative attractiveness of and
competitive pressures in an industry.

4.

Compare and contrast Porters three generic strategies and the run-grow-transform framework
as approaches to the development of business strategy.

10

PERSPECTIVES

WEB SUPPORT

Industry Perspective
Employment Information Has Gone
Social

www.mhhe.com/haag

18
22
25

Industry Perspective
Spending Money to Save Customers

Industry Perspective
Valentines Day Goes Virtual

Searching job databases

Interviewing and negotiating tips
Financial aid resources
Protecting your computer
Ethical computing guidelines
Global statistics and resources

Industry Perspective
Innovate, Or Go Home

SUPPORTING MODULES
XLM/A: Computer Hardware and Software
Extended Learning Module A is a comprehensive tour of technology terminology focusing on
personal technologies including application software, system software, input devices, output
devices, storage devices, CPU and RAM, and connecting devices such as cables and ports.
XLM/K: Careers in Business
Extended Learning Module K is an overview of job titles and descriptions in the fields
of accounting, finance, hospitality and tourism management, information technology,
management, marketing, productions and operations management, and real estate
and construction management including what IT skills you should acquire to be successful
in each field.

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CHAPTER ONE
The Information Age in Which You Live
Changing the Face of Business
OUTRAGEOUS INDUSTRY
TRANSFORMATION: CELL PHONES
DOOM PHONE REVENUES FOR HOTELS
Think about the title of this case. Its not the typical opening case study youve come to expect in
textbooks. This is about the outrageous, yes, literally outrageous, transformations that are being
caused by information technology. Newspaper
subscriptions are declining rapidly, as is revenue for
print advertising in magazines; people are building homes without land-based phone lines; movie
rentals largely happen online, not at a local video
store. The impact of technology is definitely profound, and it is transforming entire industries.
Consider hotels. They rely on a number of sources
of revenue to make a profit. These sources include
room rentals (the largest), restaurant food charges,
the use of banquet and conference facilities, parking lot fees, and charges for the use of in-room
telephones. But the latter is quickly going away.
With the proliferation of personal cell phones,
fewer and fewer hotel guests are picking up the
in-room hotel phone to make local and long distance calls.
Take a look at the accompanying graph. In
2000, a typical hotel received $1,274 annually per
available room for in-room phone charges. So, for
a hotel with 500 rooms, it could budget approximately $637,000 annually in phone revenue. Not
anymore. In 2009, that annual revenue per room
for phone charges had dropped to $178. Thats
a decline of almost 86 percent. For a hotel with
500 rooms, $637,000 in revenue had dropped to
$89,000 in a hurry.
This truly demonstrates the outrageous corrective and transformative nature of technology.
And its happening in most every industrytravel,

newspapers and magazines, music, movies, the

local news, education, financial services. The list
goes on and on.
As a future business leader, you dont need
to focus on how cell phones work. Rather, you
need to focus on how and why people use cell
phones. The same is true for all the new technologies. You dont really need to pop the
hood and learn all about the engine of technology. Rather, you need to focus on the personal and business uses of technology. Thats
the knowledge you need to effectively build
business strategy that incorporates technology.
And thats why we wrote this book. Welcome
to the wonderful and outrageous world of
technology.1,2
$1,400
$1,274
$1,200
$1,000
$800
$600
$400
$200
$-

$178
94

99

00

04

09

Questions
1. When was the last time you used a pay phone?
How often have you used a pay phone in the
last year?
2. If you needed to use a pay phone, would you
know immediately where one was located?
3. When was the last time you used your cell
phone? How often have you used your cell
phone in the last day?
3

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Chapter 1

The Information Age in Which You Live

Introduction

The Did You Know?

video series on YouTube
(www.youtube.com) is
an exellent resource for
learning fascinating facts
about how technology is
transforming our lives.

As you just read in the opening case study (appropriately titled Outrageous Industry
Transformation), the way in which people use technology can and, in fact, does radically change the competitive landscape of business. Hotels have traditionally relied on
making roughly $1,200 per room per year in phone charges. That annual per room telephone revenue, because people use their cell phones instead of the in-room fee-based
phone, is now less than $200 and may soon vanish altogether. In some way, this is an
unintended consequence of technology. No one set out to invent the cell phone for the sole
purpose of helping people lower their in-room hotel phone service charges. Indeed, the
original architects of the cell phone never envisioned the extent to which cell phones
(now more appropriately referred to as smartphones) would become such an integral
part of our lives through delivering so much functionality.
You live in the digital age. You live, work, learn, play, drive, network, eat, and shop
in a digital world. The influence of technology permeates everything you do. The average American relies daily on more than 250 computers. Every part of your life depends
on technology. Your TV, Kindle Fire, iPod, iPad, DVD player, car, and cell phone are all
technology enabled andmore importantnot able without technology. Technology
is so pervasive in your life it is often considered invasive. Heres a wild statistic:
According to a worldwide survey conducted by Time magazine in 2005, 14 percent of
cell phone users stated they had stopped having sex to take a phone call.3 Hmmm ...
Your generation, specifically the group of people born in the mid-to-late 1980s and early
1990s, was born into the digital age. Society refers to you as digital natives, while those of us
born earlier are referred to as digital immigrants. In the early 1990s, few people had yet heard
of the Internet, surfing was a term identified only as a water sport, and Microsoft was not
the dominant software publisher for word processing, spreadsheet, presentation, or DBMS
applications. Viruses were seen only under a microscope, worms were used for fishing, and
spam was just a canned meat. Back then, teachers of grammar and spelling would have
corrected you for using the term unfriend. But all this changed in your first years on earth.
As you moved through your early teens, e-commerce exploded and then quickly
imploded, transforming overnight Internet millionaires into overnight Internet paupers. You
are probably more than familiar with unique and interesting IT terms such as podcasting,
wiki, avatars, emoticons, spoofing, acorns, tweeting, retweeting, sexting, and phishing (now
with a completely different kind of bait). Technology has been so much a part of your life that
you may consider it more of a necessity than a convenience. Can you actually imagine what
your life would be like if you didnt have a cell phone? What would you do for a week without
text messaging? What if Facebooks Web site went down? How
often would you check to see if it was up and running again?
Not only that, the pace at which technology is changing
(and thus, transforming your life and the way business works)
is far faster now than for previous technologies and generations of people. Consider these statistics regarding the years to
penetrate a market audience of 50 million people.

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Radio38 years
Television12 years
Internet4 years
iPod3 years
Facebook2 years4

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MIS Resource No. 1: Information

Figure 1.1
PEOPLE

INFORMATION

TECHNOLOGY

The Synergy among

the Three Resources
of MIS

THE SYNERGY
How people can use information-based
technology tools to:
Achieve a competitive
advantage
Do things cheaper and faster
Increase revenue
Innovate new processes

Interesting stuff, huh? This book and the course youre in are about the dynamic mix of
information technology and how people use that technology, whether in their personal
lives, their careers in an organization, or perhaps for just making the world a better place
to live. Specifically, this book is about management information systems. Formally, we
define management information systems as follows:
Management information systems (MIS) deals with the planning for,
development, management, and use of information technology tools to help
people perform all tasks related to information processing and management.

LEARNING OUTCOME

So, MIS deals with the coordination and use of three very important organizational
resourcesinformation, people, and information technology. Stated another (and perhaps more simple) way, people use information technology to work with information.
Think of MIS as you would your other business courses. You take a course in finance,
perhaps called financial management. The focus of that course isnt really the money itself
(what it looks like, its color, etc.); rather its about how organizations can use money as a
resource. The same is true for a course in supply chain management. You wont spend the
entire course studying trains, planes, and trucks. Youll learn how to define and build effective supply chain management systemsthat include some combination of trains, planes,
and trucksto meet the distribution, shipping, and warehousing needs of an organization.
The same is true of MIS. While we explore numerous aspects of many different technologies like databases and artificial intelligence, our real focus is on how people can
use those technologies to work with and massage information to help an organization
achieves its goals. So, theres a real synergy among the three resources of MIS, that is,
the people, the information, and the information technology (see Figure 1.1).

MIS Resource No. 1: Information

While we have called it the digital age, we are also in the information age, and what that
means is knowledge is power. And information can take on many forms depending on
the context in which it is used. To shed some light on the often elusive term information
lets first define data and information and briefly look at business intelligence.

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Chapter 1

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Data are raw facts that describe a particular phenomenon such as the current
temperature, the price of a movie rental, or your age. (Actually, the term data is
plural; datum is singular.)
Information is data that have a particular meaning within a specific context.
The current temperature becomes information if youre deciding what to wear;
in deciding what to wear, the data describing the price of a movie rental are not
pertinent information (and therefore only data in that context).

Consider Figure 1.2. In the left is a single Excel workbook containing the number 21; lets
assume thats your age. That is a piece of data, some sort of fact that describes the amount of
time you have been alive. Now lets create a list of customers for a business that contains the
age of each customer (the right portion of Figure 1.2). This is potential information since

Figure 1.2
Data and Information
In an Excel cell, you can store a single
piece of data. Here, the cell contains
the number 21, which we're assuming
to be your age.

Data become information when they take

on meaning. Here, information is a list of
ages of all customers, which starts to
provide insight into your customers.

Average age: 22.8

Youngest age: 21

Oldest age: 25

6
5
4
3
2
1
0
21

Data can become

information when . . .

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22

23

24

25

You can use it to create

meaningful intellectual assets.

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MIS Resource No. 1: Information

your business can use it. Notice that you can create an average, find the ages of the youngest
and oldest customers, and build a frequency distribution of customers by age.
Now, look at Figure 1.3. There youll see an Excel workbook containing many
groups of information for each customer. From these multiple sources of customer
information, we can start to derive business intelligence. Business intelligence (BI) is
collective informationabout your customers, your competitors, your business partners, your competitive environment, and your own internal operationsthat gives you
the ability to make effective, important, and often strategic decisions. Lets explore a
few BI examples.
Notice coupon use by gender. Clearly, women use more coupons than men. That
sort of business intelligence leads to some interesting questions. Can we encourage
women to buy more by offering them more coupons? Does it even make sense to
continue to offer coupons to our male demographic? Take a look at total sales by
sales plan. Clearly, Plan A generates more revenue ($6,600) than Plan B ($2,650).
This raises even more questions. Does your growth opportunity lie in hoping to
expand the number of customers on Plan B? Or should you focus your marketing
efforts on getting more customers to spend even more money on Plan A, clearly the
more popular plan?
Notice that data, information, and business intelligence all build on each other.
Information is a more complete picture of multiple data points; in our example, an age
was a single piece of data while information was the collective ages of all customers.
Business intelligence extends that information to include gender behavior, the use of
coupons, preferred salespersons, and total purchases.

Figure 1.3
Business Intelligence

Total sales for all customers on

Plan A: $6,600
Total sales for all customers on
Plan B: $2,650

Average age of customer

preferring salesperson S3: 22.3

Average coupons women use: 3.7

Average coupons men use:
1.0

When you start to combine multiple sets of information, you can generate a considerable amount of business intelligence.
Business intelligence helps you make effective strategic business decisions.

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A critical characteristic of data, information, and business intelligence is that of quality. Quality is another one of those often elusive terms that can mean different things in
different contexts. (In our discussions of quality to follow, well be using the common
term information generically to refer to all intellectual assetsdata, information, and
business intelligence. We dont want you to forget the distinctions weve just described,
but the fact is that the term information is used by business people and academics alike
in a shorthand fashion in this way to cover all grades of intelligence.)
DEFINI NG I NF O R MAT I O N Q UAL I T Y
Information exhibits high quality only if it is pertinent, relevant, and useful to you.
Unfortunately, in todays information age, information is not exactly at a premium; you
are bombarded daily with information, much of which is not really important to you in
any way. Below are some information attributes that help define its quality.
TimelinessThere are two aspects here. Do you have access to information
when you need it? If youre preparing to make a stock trade, for example, you
need access to the price of the stock right now. Second, does the information
describe the time period or periods youre considering? A snapshot of sales
today may be what is relevant. Or for some important decisions, you really
need other information as wellsales yesterday, sales for the week, todays sales
compared to the same day last week, todays sales compared to the same day last
year, and so on.
LocationInformation is of no value to you if you cant access it. Ideally, your
location or the informations location should not matter. IT can definitely
create information quality here with technologies that support telecommuting,
workplace virtualization, mobile e-commerce, and so on, so you can access
information at or from any location.
FormThere are two aspects here also. Is the information in a form that is most
useful to or usable by youaudio, text, video, animation, graphical, or other?
Depending on the situation, the quality of information is defined by its form and
your ability to make use of it. Second, is the information free of errors? Think
of information as you would a physical product. If you have a defective product,
it lacks quality in that you cannot use it. Information is the same. This is the
concept of garbage-in garbage-out (GIGO). If the information coming into your
decision-making process is in bad form (i.e., garbage-in), youll more than likely
make a poor decision (i.e., garbage-out).
ValidityValidity is closely related to the second aspect of form above. Validity
addresses the credibility of information. Information is all over the Internet, but
does it come from a credible source? Much of the information on the Internet has
not gone through any sort of quality control or verification process before being
published, so you have to question its validity.

CONSIDE R I NG I NF O R MAT I O N F R O M AN O R GANI Z AT I O N A L

P E RSPEC T I V E
Organizations must treat information as any other resource or asset. It must be organized,
managed, and disseminated effectively for the information to exhibit quality. Within an
organization, information flows in four basic directions (see Figure 1.4):
1. Upward. Upward information flows describe the current state of the organization
based on its daily transactions. When a sale occurs, for example, that information

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MIS Resource No. 1: Information

Current state
of the organization

UP

IN/
OUT

Customers,
suppliers,
Coarse
and other
partners granularity

DOWN

Figure 1.4
An Organization, Its
Information Flows,
and Information
Granularity

INFORMATION
GRANULARITY

Strategies, goals,
and directives

Fine
granularity
HORIZONTAL

Between functional business units

and work teams

originates at the lowest level of the organization and is passed upward through
the various levels. Along the way, the information takes on a finer level of
granularity. Information granularity refers to the extent of detail within the
information. At lower organizational levels, information exhibits fine granularity
because people need to work with information in great detail. At the upper
organizational levels, information becomes coarser because it is summarized
or aggregated in some way. That is, strategic managers need sales by year, for
example, as opposed to knowing the detail of every single transaction.
2. Downward. Strategies, goals, and directives that originate at a higher level are
passed to lower levels in downward information flows. The upper level of an
organization develops strategies; the middle levels of an organization convert
those strategies into tactics; and the lower levels of an organization deal with the
operational details.
3. Horizontal. Information flows horizontally between functional business units
and work teams. The goal here is to eliminate the old dilemma of the right
hand not knowing what the left hand is doing. All units of your organization
need to inform other units of their processes and be informed by the other units
regarding their processes. In general, everyone in a company needs to know
everything relevant in a business sense (personal, sensitive data not included).
4. Outward/Inward. Information is communicated from and to customers,
suppliers, distributors, and other partners for the purpose of doing business.
These flows of information are really what electronic commerce is all about.
Today, no organization is an island, and outward/inward flows can yield a
competitive advantage.
Another organizational perspective on information regards what information describes.
Information is internal or external, objective or subjective, and various combinations of these.

Internal information describes specific operational aspects of an organization.

External information describes the environment surrounding the organization.
Objective information quantifiably describes something that is known.
Subjective information attempts to describe something that is unknown.

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INDUSTRY PERSPECTIVE
E M P L O Y M E N T I N F O R M AT I O N H A S G O N E S O C I A L
Social media tools and Web sites are all the rage.
LinkedIn, Facebook, Twitter, and hundreds of other
social media sites get millions of visitors per day, many
of whom spend several hours perusing those sites,
watching videos, catching up with friends, and creating
relationships.
And now, social media is quickly becoming the
preferred marketplace of employers and job seekers. In 2009, UPS hired 29 employees using the latest
and greatest Web 2.0 technologies such as videos and
mobile-friendly Web content for those job seekers
using a smartphone to find and apply for a job. One
year later, UPS hired 955 employees using the same
techniques. That represents a 3200 percent increase.
Over 40 percent of surveyed employers stated they
would use different recruiting tactics to attract the best
Generation Y job seekers. Over 60 percent of those
employers identified social media sites as being the
preferred places to meet Generation Y job seekers.
According to Matt Lavery, Managing Director of
Corporate Talent Acquisition for UPS, Our reason for
using social media is because thats where we think

the candidates are. And hes right. Almost 28 percent of surveyed college students plan to use LinkedIn
( www.linkedin.com ) to find a job. Thats up from
5 percent the previous year. LinkedIn is a professional
version of Facebook. At LinkedIn, you develop relationships for business. Only 7 percent of college graduates
planned to use Facebook for job searching.
Savvy graduating students are using social media
sites to gather valuable information about potential
employers. They read Facebook and Twitter updates
about potential companies. They read comments
posted by current and previous employees of those
same companies.
As you move forward through your studies and prepare to enter the job market, you need to develop a
social media strategyactually two strategies: The
first is in regard to using social media like LinkedIn to
review potential employers and make contacts. Do you
have a LinkedIn account? The second is in regard to
what information the Internet holds about you. Do you
want potential employers to see everything on your
Facebook wall? Thats a good question to ponder.5

Consider a bank that faces the decision about what interest rate to offer on a CD. That
bank will use internal information (how many customers it has who can afford to buy a
CD), external information (what rate other banks are offering), objective information (what
is todays prime interest rate), and subjective information (what the prime interest rate is
expected to be in the future). Actually, the rate other banks are offering is not only external
information (it describes the environment surrounding the organization) but objective information (it is quantifiably known). Information usually has more than one aspect to it.

MIS Resource No. 2: People

The single most important resource in any organization is its people. People set
goals, carry out tasks, make decisions, serve customers, and, in the case of IT specialists, provide a stable and reliable technology environment so the organization
can run smoothly and gain a competitive advantage in the marketplace. So, this discussion is all about you.
In business, your most valuable asset is not technology but rather your mind. IT is
simply a set of tools that helps you work with and process information. Technology
really is just a mind support tool set. Technology such as spreadsheet software can help
you quickly create a high-quality and revealing graph. But it cant tell you whether you
should build a bar or a pie graph, and it cant help you determine whether you should
show sales by territory or sales by salesperson. Those are your tasks, and thats why
your business curriculum includes classes in human resource management, accounting,
finance, marketing, and perhaps production and operations management.
10

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MIS Resource No. 2: People

11

Nonetheless, technology is a very important set of tools for you. Technology can help you
be more efficient and can help you dissect and better understand problems and opportunities. So, its as important for you to learn how to use your technology tool set as its important that you understand the information to which youre applying your technology tools.
TECHNOLOGY LITERACY
A technology-literate knowledge worker knows how and when to apply technology.
The how aspect includes knowing which technology to purchase, how to exploit the
many benefits of application software, and what technology infrastructure is required
to get businesses connected to each other, just to name a few. From your personal perspective, weve provided extended learning modules in this text to help you become a
technology-literate knowledge worker.
We encourage you to read all the extended learning modules, especially Extended
Learning Module K (Careers in Business). That module covers career opportunities in
a variety of business disciplines including finance, marketing, accounting, management,
and many others. Reading Extended Learning Module K will help prepare you for whatever career you choose. Youll find a discussion there of key technologies for each business discipline that will help you succeed in your career.
A technology-literate knowledge worker also knows when to apply technology.
Unfortunately, in many cases, people and organizations blindly decide to use technology in a desperate effort to solve a business problem. What you need to understand
is that technology is not a panacea. You cant simply apply technology to a given process and expect that process instantly to become more efficient and effective. Look at it
this wayif you apply technology to a process that doesnt work correctly, then youll
only be doing things wrong millions of times faster. There are cases when technology is
not the solution. Being a technology-literate knowledge worker will help you determine
when and when not to apply technology.
IN FORMAT ION LITERACY
An information-literate knowledge worker
Can define what information is needed.
Knows how and where to obtain information.
Understands the information once it is received (i.e., can transform the
information into business intelligence).
Can act appropriately based on the information to help the organization achieve
the greatest advantage.

Consider a unique and real-life example of an information-literate knowledge worker.

Several years ago, a manager of a retail store on the East Coast received some interesting information: diaper sales on Friday evenings accounted for a large percentage of
total sales of that item for the week. Most people learning this would have immediately
jumped to the decision to ensure that diapers were always well stocked on Friday evenings or to run a special on diapers Friday evenings to increase sales even further, but
not our information-literate knowledge worker. She first looked at the information and
decided that she needed more information in order to create business intelligence. She
simply needed to know more before she could act.
She decided the business intelligence she needed was why a rash of diaper sales (pardon the pun) occurred on Friday evenings and who was buying the diapers. That intelligence was not stored within the computer system, so she stationed an employee in the
diaper aisle on Friday evening to record any information pertinent to the situation (i.e.,

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Chapter 1

The Information Age in Which You Live

she knew how and where to obtain the information). The store manager learned that
young businessmen purchased the most diapers on Friday evenings. Apparently, they
had been instructed to buy the weekend supply of diapers on their way home from work.
The managers response was to stock premium domestic and imported beer near the
diapers. Since then, Friday evening has been a big sales time not only for diapers but also
for premium domestic and imported beer.
There are a couple of important lessons you can learn from this story. First, as weve
stated, technology is not a panacea. Although a computer system generated the initial
report detailing the sales of diapers on Friday evenings, our retail store manager did not
make any further use of technology to design and implement her innovative and highly
effective solution. Second, this story can help you distinguish between information and
business intelligence. In this case, the information was the sales of diapers on Friday
evening. The business intelligence, however, included:
Who was making diaper purchases on Friday evening.
Why those people were purchasing diapers on Friday evening.
What complementary product(s) those people might also want or need. (This last
point might also illustrate the managers special knowledge.)

As a good rule of thumb, when you receive information and need to make a decision based
on it, ask yourself questions that start with who, what, when, why, where, and how. Answers
to those questions will help you create business intelligence and make better decisions.
Y OUR E T HI C AL R E S P O NS I B I L I T I E S
Your roles as a technology-literate and information-literate knowledge worker extend far
beyond using technology and business intelligence to gain a competitive advantage in
the marketplace for your organization. You must also consider your social responsibilities: This is where ethics become important. Ethics are the principles and standards that
guide our behavior toward other people. Your ethics have consequences for you just as
laws do. But ethics are different from laws. Laws either clearly require or prohibit an
action. Ethics are more subjective, more a matter of personal or cultural interpretation.
Thus, ethical decision making can be complex. A decision or an action in some cases
might haveor be expected to havean outcome that is actually right or wrong according to different peoples ethics. Consider the following examples of actions:
1. Copying software you purchase, making copies for your friends, and charging
them for the copies.
2. Making an extra backup of your software just in case both the copy you are using
and the primary backup fail for some reason.
3. Giving out the phone numbers of your friends and family, without their permission,
to a telecom provider of some sort of calling plan so you can receive a discount.
Each of these examples is either ethically (according to you or some people) or legally (according to the government) incorrect or both. In the second example, you might be ethically okay
in making an extra backup copy (because you didnt share it with anyone), but according to
some software licenses youre prohibited by law from making more than one backup copy.
What do you think about the first and third examples? Illegal? Unethical? Both?
To help you better understand the relationship between ethical acts and legal acts,
consider Figure 1.5. The graph is composed of four quadrants, and the complexity of
ethical decisions about behavior is suggested by quadrant III (legal but unethical). Do
any of the three examples above fall in quadrant III? Perhaps you can think of some other
actions that although legal might still be unethical (how about gossiping?). You always

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MIS Resource No. 3: Information Technology

want your actions to remain in quadrant I. If all your actions fall into that quadrant, youll
always be acting both legally and ethically and thus in a socially responsible way. Clearly,
technology has further increased the complexity of ethics in our society because of the
speed and casual ease with which people can access, distribute, and use
information.
Being socially and ethically responsible in the information age involves
not only the actions you initiate yourself but also what you do to protect
yourself and your organization against the actions of othersthat is, proEthical
tecting yourself and your organization against cyber crimes. There are
many types of cyber crimessuch as promulgating viruses or worms, committing identity theft, and engaging in Web defacingperformed by a variety of hackers such as black-hat hackers and cyberterrorists, and it is your
Unethical
responsibility to guard against them. It might even be considered an ethical
lapse not to do so. We cannot stress enough how important it is for you
to protect yourself and your organizations assets in cyberspace. Well talk
more about these issues in Chapter 8 (Protecting People and Information) and Extended
Learning Module H (Computer Crime and Forensics).

13

Figure 1.5
Acting Ethically
and Legally6
Legal

Illegal

II

III

IV

MIS Resource No. 3: Information

Technology
The third key resource for management information systems (MIS) is information
technology (IT), any computer-based tool that people use to work with information and
support the information and information-processing needs of an organization. IT includes
a cell phone or tablet PC that you use to obtain stock quotes, your home computer that
you use to write term papers, large networks that businesses use to connect to one another,
and the Internet that almost one in every six people in the world currently uses.
KEY TECHNOLOGY CAT E GO R I E S
One simpleyet effectiveway to categorize technology is as either hardware or software (see Figure 1.6 on the next page). Hardware is the physical devices that make up a
computer. Software is the set of instructions that your hardware executes to carry out a
specific task for you. So, your Blackberry is the actual hardware; and it contains software
that you use to maintain your calendar, update your address book, check your e-mail,
watch videos, obtain stock market quotes, and so on.
All hardware technology falls into one of the following six basic categories:
1. An input device is a tool you use to enter information and commands. Input
devices include such tools as keyboard, mouse, touch screen, game controller,
and bar code reader.
2. An output device is a tool you use to see, hear, or otherwise recognize the results
of your information-processing requests. Output devices include such tools as
printer, monitor, and speakers.
3. A storage device is a tool you use to store information for use at a later time.
Storage devices include such tools as thumb drive, flash memory card, and DVD.
4. The central processing unit (CPU) is the hardware that interprets and executes
the system and application software instructions and coordinates the operation of
all the hardware. RAM, or random access memory, is a temporary holding area

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Figure 1.6
INFORMATION
TECHNOLOGY

Information Technology
Hardware and Software

HARDWARE

SOFTWARE

Input Device
Mouse
Bar code scanner

Application Software
Word
Inventory
Payroll

Output Device
Monitor
Printer

System Software
Technology management
Coordination

Storage Device
DVD
Flash memory

CPU and RAM

The brains of your
computer

Operating System
Software
Windows
Mac OS
Linux
Utility Software
Anti-virus software
Disk optimization
software

Telecommunications
Device
Modem
Satellite
Connecting Device
Port
Cord

for the information youre working with as well as the system and application
software instructions that the CPU currently needs.
5. A telecommunications device is a tool you use to send information to and
receive it from another person or computer in a network. If you connect to the
Internet using a modem, the modem is a telecommunications device.
6. Connecting devices include such things as a USB port into which you would
connect a printer, connector cables to connect your printer to the USB port, and
internal connecting devices on the motherboard.
There are two main types of software: application and system. Application software
is the software that enables you to solve specific problems and perform specific tasks.
Microsoft Word, for example, can help you write term papers. From an organizational
point of view, payroll software, collaborative software, and inventory management software are all examples of application software.
System software handles tasks specific to technology management and coordinates
the interaction of all technology devices. System software includes network operating

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Financial Impact of IT: Break-Even Analysis

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system software, drivers for your printer and scanner, operating system software such as
Windows XP and Mac OS, and utility software such as anti-virus software, uninstaller
software, and file security software.
If this is your first exposure to technology hardware and software, we suggest you
explore Extended Learning Module A (Computer Hardware and Software).
As we have seen, management information systems really is all about three key organizational resourcesthe people involved, the information they need, and the information technology that helps them. MIS is about getting the right technology and the right
information into the hands of the right people at the right time.

Financial Impact of IT: Break-Even

Analysis
When considering the use of any resource in an organization, you must ask questions
like, What sort of financial impact will this have on the organization? Whats the return
on our investment (ROI)? Is this going to help reduce costs or increase revenue, or perhaps both? All these questions address the financial impact of a resource. Technology
is no different; you must be able to financially justify the use of technology.
A simple, and yet very powerful, tool for assessing the financial impact of a resource is
called break-even analysis. In break-even analysis, you consider and chart the following financial information (see Figure 1.7):

LEARNING OUTCOME

Fixed costthe total of all costs that you incur whether or not you sell anything.
For example, rent for office or retail space is a fixed cost; even if you dont sell
a single thing, you still have to pay the monthly rent. Other fixed costs might
include utilities, insurance, employee salaries, and so on.
Variable costthe amount it costs to acquire/produce one unit that you will
eventually sell to your customers.
Revenuehow much you sell that one unit for.

Figure 1.7
Break-Even Analysis

Revenue.
This starts at zero and
increases by $9
for each movie
poster you sell.
Costs.
This line is for total costs.
So, it starts at the fixed
cost line and increases
by $6 for each movie
poster you sell.

$1,500

Fixed costs.
Regardless of how many
units you sell, you will
always have these costs.
500
The break-even point, 500 units.
You must sell 500 posters just
to cover your fixed costs.

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Lets assume that youve worked a deal with all the major movie studios to sell movie
posters. You can buy each movie poster for $4 and sell it in your online store for $9. It
costs you $2 to ship a movie poster to a customer. Your online store, product catalog,
credit card processing, domain name registration, and search engine placement are all
provided by GoDaddy (www.godaddy.com) at a cost of $1,500 per year. Your financial
information then is this:
Fixed costs$1,500 per year for GoDaddy services. Whether you sell no posters
or 10,000 posters, this cost remains fixed.
Variable costs$6, which represents $4 when you buy a movie poster from a
studio and $2 when you ship that poster to a customer.
Revenue$9, or the price at which you sell a movie poster.

Using break-even analysis, you answer an important question, How many movie posters do you have to sell to break even? Graphically, it looks like Figure 1.7 (on the previous
page). The logic is simple: You make a net profit of $3 per poster ($9 sales price minus $6
variable cost). To cover your $1,500 of fixed costs, you have to sell 500 posters ($1,500
divided by $3). What happens in a given year if you sell less than 500 posters? Right, you
lose money. So, 500 is the break-even point. And whats your net profit if you sell 700
posters in a year? The answer is $600, which is your net profit per poster ($3) times 200.
We derive 200 by subtracting the break-even point of 500 from total units sold of 700. Not
too difficult, huh?
Why is this important from a technology point of view? Because technology can help
you and your organization do one or any combination of the following three: reduce
fixed costs, reduce variable costs, and/or increase revenue.
REDUCI NG F I X E D C O S T S
One financial and operational goal of any organization is to have no fixed costs. That
is, in the business world you should strive to incur a cost only when you generate revenue. Why? Because when you have no fixed costs, your break-even point moves to zero
(see Figure 1.8). So, you actually begin generating a profit with the very first unit you sell
because the only costs you have are variable costs.
Technology can definitely play a part in helping you reduce fixed costs. Below are
some examples.
Digital storefrontsCompanies like Amazon and eBay that only have a presence
in the virtual world have significantly lower fixed costs in terms of retail space
than companies that have to pay for retail space, like retail stores you would find
in a mall.
TelecommutingThis is a popular trend in most industries. If you can create
a technology infrastructure that allows your employees to work from home (or
anywhere for that matter, as long as its not in the office), you can reduce your
expenses related to office space, which would also include utilities, insurance,
parking, etc.
VoIP, or Voice over IPAgain, this is another one of those initiatives gaining in
popularity. VoIP allows you to use the Internet for making phone calls instead of
leasing traditional telephone lines from the phone company. A popular variation on
VoIP is Skype. (Here we go againtraditional phones are really getting hammered
by technology. Remember the opening outrageous industry transformation.)
Cloud computingOne of the hottest topics in the business world right now
and one that well explore in great detail in Chapter 7. With cloud computing,

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Financial Impact of IT: Break-Even Analysis

Fixed costs
of $750
Break-even point of
250 posters

17

Fixed costs
of $0
Break-even
point of 0 posters

In Figure 1.7, fixed costs were $1,500, making the break-even point 500 movie posters. Above on the
left, we reduced fixed costs by 50 percent to $750, making the break-even point 250 movie posters.
Above on the right, we reduced fixed costs to $0, making the break-even point 0 movie posters.
In the latter case, you start making a profit on the very first poster you sell.

Figure 1.8
Driving Fixed Costs
to Zero

you dont buy hardware infrastructure like servers or perhaps software site
licenses. Instead, you rent them on an as-needed basis in the cloud.
Throughout this text, well alert you to IT-enabled opportunities for reducing fixed costs.
REDUCING VARIABLE COS T S
Variable costs basically define your profit margin. That is, the smaller the variable cost
the higher the profit margin (and vice versa). Your break-even point is smaller (moves to
the left) as you increase your profit margin by reducing variable costs (see Figure 1.9).
A couple of the really interesting IT-enabled variable cost reduction initiatives are listed
on the next page.

Figure 1.9
Reducing Variable Costs

As you reduce variable

costs, your break-even
point occurs sooner,
400 movie posters
in this case.
400

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INDUSTRY PERSPECTIVE
SPENDING MONEY TO SAVE CUSTOMERS
Sometimes, its not about spending money to make
money. It may very well be about spending money to
keep your customers from jumping ship and going over
to the competition. When NetFlix exploded onto the
video rental market with its model of allowing you
to keep movies as long as you want with no late fee,
Blockbuster reluctantly responded by eliminating its
late fees. Unfortunately, Blockbuster waited too long
to undertake the initiative and is suffering dearly for it.
Home Box Office (HBO) hopes to avoid sliding down
the same slippery slope as Blockbuster. HBO, just like
Blockbuster, is feeling the pinch of competing against
NetFlix. Using one of NetFlixs current models, for $8
per month you can connect your TV to the Internet and
download and watch as much NetFlix content as you
want. Many people are taking advantage of that, even
to the point of cancelling their HBO subscription and

even going so far as to cancel their cable programming

altogether.
In response in mid-2011, HBO introduced HBO Go.
HBO Go is a completely free service to HBO subscribers that allows you to watch HBO shows and movies
on your smartphone. Included in the HBO selection are
over 1,400 movie titles. In the first week of its release,
the HBO Go app (available for the Apple iPhone and
Google Android) was downloaded more than a million
times. That may very well be 1 million HBO customers
who wont jump ship and go to NetFlix.
And theres another reason for HBOs move to
mobile media. You can only use HBO Go if youre a
subscriber to HBO through traditional cable or satellite
programming. Non-HBO customers cant use it. HBO is
hoping that more people will subscribe to HBO just so
they can use HBO Go.7

Virtual goodsVirtual goods are as their name implies; they dont exist in
the physical world. These are the best types of goods to sell in financial terms
because you have no variable costs. Think about Farmville, Habbo Hotel, or even
World of Warcraft. In any of those environments, you can buy virtual goodsa
better tractor for farming, cool clothes for going dancing, or better weaponry.
What you get is a virtual good that has no variable cost associated with it because
its purely digital. So, the organization may have charged you $1 and that $1 was
pure profit.
CrowdsourcingThis is a great way to create value for free. Using
crowdsourcing, you get non-paid non-employees to do your work. Think about
eBay. eBay doesnt employ anyone to buy or sell in its marketplace. Instead,
crowds of people (whom eBay doesnt have on the payroll) do all the work of
listing items, taking photos, bidding, and even shipping goods and merchandise.
Likewise, YouTube doesnt hire people to post videos. Instead, you do all the
work to capture and upload a video, for free.

Virtual goods and crowdsourcing are two of the many IT-enabled methods for reducing
variable costs. Well cover more of them throughout the book.
INCRE AS I NG R E V E NUE
Finally, you can impact your break-even point by increasing revenue. That is to say, when
you increase revenue or price per unit, your break-even point comes earlier. In our movie
poster example, if you increased the price from $9 to $11 for a poster, your break-even
point would be 300 units. Of course, if you raise prices too much, your competition will
undercut you, and then youre in real trouble.
Technology can definitely help increase revenue. Below are a couple of ways.
Recommendation enginesThese engines make recommendations to you
based on your likes, dislikes, and past purchases. Youre very accustomed to
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these. Apples Genius tool for iTunes recommends additional music selections
based on your purchases. Amazon uses a recommendation engine to offer you
additional books based on the book(s) youre considering buying.
Long-tail economicsTechnology can help your organization overcome the
80/20 rule, which basically states that only 20 percent of the total available
products are worth selling. These are the big hits that everyone wants and that all
physical retail stores carry. But there is money to be made in niche products too.
Thats why iTunes offers millions of songs. (Compare that to the rather sparse
inventory of a brick-and-mortar music store.) Its also why Amazon has over 1
million book titles for sale and most brick-and-mortar book stores carry in the
neighborhood of 25,000 to 50,000.

Industry Impact of IT: Porters Five

Forces Model
Simply put, business strategy drives technology decisions, not the reverse. In your personal
life, you may choose to buy the latest piece of technology because its cool. Not so in the
business world. Businesses carefully scrutinize their technology purchases, seeking to
find and justify a competitive advantage. A competitive advantage is providing a product
or service in a way that customers value more than what your competition is able to do.
To assess technology and the competitive advantage it can yield, many people choose
to use Michael Porters Five Forces Model.8 The Five Forces Model helps business people understand the relative attractiveness of an industry and the industrys competitive
pressures in terms of the following five forces (see Figure 1.10):
1.
2.
3.
4.
5.

LEARNING OUTCOME

Buyer power
Supplier power
Threat of substitute products or services
Threat of new entrants
Rivalry among existing competitors

BUY ER P OWE E R
Buyer power in the Five Forces Model is high when buyers have many choices from
whom to buy, and low when their choices are few. Providers of products and services in

Figure 1.10

Threat of New
Entrants

Bargaining Power
of Suppliers

Rivalry among
Existing Competitors

Michael Porters Five

Forces Model

Bargaining Power
of Buyers

Threat of Substitute
Products or Services

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a particular industry wish to reduce buyer power. They create a competitive advantage
by making it more attractive for customers to buy from them than from their competition. Below are a few of the many companies using IT-enabled processes to reduce buyer
power.
NetFlixSet up your movie list. After you watch a movie and return it, NetFlix
will send you the next movie on your list. You can also rent videos through the
mail, stream them to your computer, or stream them to your TV.
United Airlines (or almost any airline for that matter)Enroll in the Mileage Plus
program. As you travel using United (or perhaps make purchases using your
United credit card), you accumulate miles for free air travel, upgrades, and hotel
stays. Programs like this one, which reward customers based on the amount of
business they do with a particular organization, are called loyalty programs.
Apple iTunesCreate an iTunes account and buy and download whatever music
you want. Then, you can organize and manage your music, move it to your iPod,
and burn CDs. You can also store all your music (and photos and much more) in
Apples iCloud.
Dell ComputerCompletely customize your computer purchase. It will be
delivered to your doorstep within a few business days.

Whats interesting about each of these examples (as well as all the others you can
think of) is that the competitors in those industries have responded by creating similar
programs. This simply means that no competitive advantage is ever permanent. NetFlix
was the first to offer movie rentals (with a profitable business model) using the Internet
as the primary platform. Therefore, it had first-mover advantage, a significant impact
on gaining market share by being the first to market with a competitive advantage. Every
major airline has a loyalty program similar to that of United Airlines. There are many
places on the Internet where you can buy and download music. Almost every major
computer vendor allows you to customize your computer purchase. The lesson learned
hereand for all strategies that result in a competitive advantageis that a competitive
advantage is only temporary and your organization must constantly innovate to find new
competitive advantages.
S UPPLI E R P O W E R
Supplier power in the Five Forces Model is high when buyers have few choices from
whom to buy, and low when their choices are many. Supplier power is the opposite of
buyer power: As a supplier organization in an industry, you want buyer power to be low
and your supplier power to be high.
In a typical supply chain (see Figure 1.11), your organization will probably be both
a supplier (to customer organizations) and a buyer, or customer (of other supplier
organizations). As a customer of other supplier organizations, you want to increase your
buyer power. As a supplier to other organizations, you want to increase your supplier
power, thus reducing your customers buyer power.
In the quest for increasing supplier power, organizations use many tools at their disposal, not just IT. Companies obtain patents and trademarks to minimize the extent
to which products and services can be duplicated and offered by other organizations.
The De Beers Group for many years has fought fiercely to tightly control the supply
and distribution of diamonds. OPEC (the Organization of the Petroleum Exporting
Countries) has organized 11 oil-producing nations to better control the distribution of
the worlds most popular energy resource (supposedly to ensure the stabilization of oil
prices).

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Figure 1.11
Your
Suppliers

Your
Organization

You want supplier power

to be low here.
You want buyer power
to be high here.

Your
Customers

Evaluating Buyer
and Supplier Power
for Your Organization

You want supplier power

to be high here.
You want buyer power
to be low here.

TH R E AT OF SUBSTIT UTE P R O DUC T S O R S E RV I C E S

The threat of substitute products or services in the Five Forces Model is high when
there are many alternatives to a product or service, and low when there are few alternatives from which to choose. Ideally, your organization would like to be a supplier organization in a market in which there are few substitutes for the products and services you
offer. Of course, thats seldom possible in any market today, but you can still create a
competitive advantage by increasing switching costs. Switching costs are costs that make
customers reluctant to switch to another product or service supplier. What you need to
realize is that a switching cost does not necessarily have to be an actual monetary cost.
As you buy products at Amazon.com over time, for example, Amazon develops a
unique profile of your shopping and purchasing habits through such techniques as collaborative filtering. When you visit Amazon, products are offered to you that have been tailored to your profile. This is only possible through the use of sophisticated technologies.
If you choose to do your shopping elsewhere, there is a switching cost of sorts because
the new site you visit will not have a profile of you or a record of your past purchases.
(This is an effective variant of a loyalty program.) So, Amazon has reduced the threat
of substitute products and services, in a market in which there are many substitutes, by
tailoring offerings to you, by creating a cost to you to switch to another online retailer.
Switching costs can of course be real monetary costs too. Youve probably been introduced to a switching cost when you signed up for the services of a cell phone provider.
All the options and plans sound really great. But there is a serious switching cost in that
most cell phone providers require you to sign a long-term contract (as long as two years)
in order to receive a free phone or unlimited night and weekend calling minutes. The
very successful substitute to this is disposable cell phones that you buy and which contain a certain number of minutes for your use.
TH R E AT OF NE W ENT RANT S
The threat of new entrants in the Five Forces Model is high when it is easy for new competitors to enter a market, and low when there are significant entry barriers to entering
a market. An entry barrier is a product or service feature that customers have come to
expect from organizations in a particular industry and that must be offered by an entering organization to compete and survive. Such barriers are erected, and overcome, and
then new ones are created again. This is that vicious business cycle of build a competitive advantage, enjoy first-mover advantage, and then watch your competition develop
similar initiatives thereby nullifying your competitive advantage.
For example, if youre thinking of starting a bank, you must offer your customers an
array of IT-enabled services, including ATM use, online bill paying and account monitoring, and the like. These are significant IT-based entry barriers to entering the banking
market because you must offer them for free (or a very small fee). If you consider our
previous example of cell phone providers, a significant entry barrier in the past had to

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INDUSTRY PERSPECTIVE
VA L E N T I N E S D AY G O E S V I R T U A L
The average person was expected to spend $116 for
merchandise for Valentines Day in 2011. Total spending was expected to exceed $15 billion.
To capture a portion of that money, and perhaps
even more than previously, many companies went virtual in 2011 with Valentines Day stories, messages,
flowers, and even food (although the food is real).
Mattel, the toy giant, created a campaign to ask
people if Barbie should reunite with Ken. (Ken and
Barbie split on Valentines Day 2004.) Mattel used
Facebook and Twitter to have Ken post his love and
affection for Barbie. The purpose was to create
social noise so that Ken and Barbie lovers would
log on to BarbieandKen.com and vote one way or the
other. Of course, the site included a link to Barbies
Facebook page, where people could buy Barbie and
Ken merchandise.
Victorias Secret created sexy e-valentine cards that
people could send through a social network. Victorias
Secret posted photos and messages which people could

choose to include in a card. Women even had the

option of including a photo of a gift they wanted from
Victorias Secret.
Rovio Mobile, the creator of the ultra-popular Angry
Birds game, created a Valentines Day version of the
game. Of course, you had to pay 99 cents to download
it, but 99 cents is nothing to the millions of fanatic fans
of Angry Birds.
Mulberry, a British apparel maker, created virtual
flower seeds you could send via e-mail. When the
recipient clicked on the seeds, Valentines Day flowers
bloomed right before their eyes.
Even Lennys Sub Shop got into the social media
game for Valentines Day. It gave away subs (you had to
send them to someone as a Valentines Day gift) on its
Facebook page. According to George Alvord, Lennys
CEO, The quickest way to win someones heart is
through their stomach.
The lesson learned: Each of these gave some company a competitive advantage, if only for a day.9

do with your phone number. Previously, if you wanted to change cell phone providers,
you couldnt take your telephone number with you (i.e., you had to get a new cell phone
number). This created a significant entry barrier because new cell phone providers
entering the industry were mainly limited to obtaining new customers who did not currently have a cell phone. But that has all changed with LNP, Local Number Portability,
your ability to take your cell phone number with you to a new provider.
RIVALRY AMO NG E X I S T I NG C O MP E T I T O R S
The rivalry among existing competitors in the Five Forces Model is high when competition is fierce in a market, and low when competition is more complacent. Simply put,
competition is more intense in some industries than in others, although the overall trend
is toward increased competition in just about every industry. Rarely can you identify an
industry that exhibits complacent competition. (One example might be mortician and
burial services. Solely because of the nature of the services offered, you dont see mortician and burial service organizations actively advertising on TV, offering reduced rates,
and so on.)
The retail grocery industry is intensely competitive. While Target and Walmart in the
United States compete in many different ways, essentially they try to beat or match the
competition on price. Since margins are quite low in the grocery retail market, grocers
build efficiencies into their supply chains, connecting with their suppliers in IT-enabled
information partnerships. Communicating with suppliers over telecommunications
networks rather than using paper-based systems makes the procurement process much
faster, cheaper, and more accurate. That equates to lower prices for customersand
increased rivalry among existing competitors.
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As you can see, Porters Five Forces Model is extremely useful in helping you better
understand the positioning of your organization within its industry and in helping you
better understand the competitive forces affecting your organization. With this knowledge in mind, your organization now needs to develop specific business strategies to
remain competitive and profitable.

Strategy Impact of IT: Porter

(Again) and RGT
The development of business strategies is a vast and wide discipline. There are literally
hundreds of methodologies and approaches to the development of business strategy.
There are even more books on the subject. (One such book with a particularly innovative approach is Blue Ocean Strategy by Kim and Mauborgne. Be sure to put it on your
wish list of business books to read.) Here, well focus on Michael Porters three generic
strategies and two other approaches.
Michael Porter identified three approaches or strategies to beating the competition in
any industry (see Figure 1.12). They are

LEARNING OUTCOME

1. Overall cost leadership

2. Differentiation
3. Focus
O VERALL COST LE ADE RSHI P
Overall cost leadership is defined by Porter as offering the same or better quality product
or service at a price that is less than what any of the competition is able to do. Examples
of organizations focusing on overall cost leadership are numerous and change almost
daily, with the most well-known example being Walmart. Walmarts slogans of Always
Low Prices! and Every Day Low Prices accurately describe the strategy of overall cost

Figure 1.12
Michael Porters Three
Generic Strategies
Focus
Strategy

Narrow market
scope

Broad market
scope

Differentiation
Strategy

Unique
competency

haa7685X_ch01_002-033.indd 23

Overall
Cost
Leadership

Low-cost
competency

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leadership. For everything from womens lingerie to car batteries, Walmarts focus is on
offering the same products as the competition but at a lower price. Walmart relies on an
IT-enabled tight supply chain management system to squeeze every penny possible out
of the procurement, distribution, and warehousing of its products. It uses sophisticated
business intelligence systems to predict what customers will want and when.
Dell Computer works in similar fashion. Its famous sell-source-ship model of customizing computer purchases is the envy of the industry. Automobile makers Hyundai and
Kia similarly attempt to sell reliable low-cost vehicles to a wide audience, in contrast to
Hummer and Mercedes-Benz which have no overall cost leadership strategy.
IT can be a particularly effective tool if your organization chooses an overall cost leadership strategy. IT can tighten supply chain systems, help you capture and assimilate
customer information to better understand buying patterns in an effort to better predict product inventory and shelf placement, and make it easy (efficient) for customers to
order your products through Web-enabled e-commerce systems.
DIFFE R E NT I AT I O N
Differentiation is defined by Porter as offering a product or service that is perceived as
being unique in the marketplace. Hummer is an excellent example. Its differentiation
strategy is reinforced by the unique design and eye-appeal of its H1, H2, and H3 vehicle
lines. Even its sloganLike Nothing Elseclearly attempts to differentiate Hummer
vehicles from anything on the road. Another example is Lunds & Byerlys (usually just
referred to as Byerlys) in the grocery retail industry. While other competitors compete
mainly on price, Byerlys focuses on the shopping experience for differentiation. All of
the Byerlys stores offer cooking classes and in-store restaurants for lunch and dinner.
Many Byerlys stores have carpeted floors instead of tile and some even have chandeliers
instead of fluorescent lighting.
Apple Computer also focuses on differentiation as a business strategy. Not only do
Apple computers look different, they have a different screen interface and focus more
on nontextual information processing such as photos, music, and videos than any of the
competition. Both Audi and Michelin have successfully created a differentiation strategy
based on safety. To be sure, differentiation is not about being different based on lower
pricethats the strategy of overall cost leadershipbut the two are interrelated. While
many people are willing to pay extra for grocery products at Byerlys, they are not willing
to pay too much extra. Organizations focusing on differentiation must still be concerned
about price in relation to the competition.
FOCUS
Focus as a strategy is usually defined as focusing on offering products and services
(1) to a particular market segment or buyer group, (2) within a segment of a product
line, and/or (3) to a specific geographic market. Focus is the opposite of attempting to
be all things to all people. Many restaurants focus on only a certain type of food
Mediterranean, Mexican, Chinese, and so forth. Stores such as the Vitamin Cottage
Natural Foods Market sell only natural and organic food and nutrition supplements (one
form of focus on products within a product line) to a specific buyer group (another form
of focus on a particular market segment). Many doctors focus on only a particular type
of medical helponcology, pediatrics, and so on; similarly, many law offices focus on a
particular legal venueworkmans compensation, living trusts, patents and trademarks.
As with the other generic strategies defined by Porter, focus cannot be practiced in
isolation. If your organization chooses a particular buyer group on which to focus, you

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INDUSTRY PERSPECTIVE
I N N O VAT E , O R G O H O M E
The brief history of technology has moved through four
major cycles, with society now squarely in the fourth.
The first occurred in the 1950s and 1960s as the birth
of commercial technology automated routine tasks like
payroll and basic inventory management. The second
occurred in the early 1980s with the advent of the PC,
placing computing power and capability on the desktop. The third occurred in the late 1990s with the explosion of the Internet. It connected all of us together.
Whats the fourth? Youre in itmobile. With powerful, yet inexpensive, devices such as smartphones and
tablet PCs you can carry the Internet with you wherever you go. And that means its time for companies to
innovate in how they use technology. Consider these
examples.
Auto InsuranceWith the proliferation of sensors that communicate wirelessly, auto insurers
will gather driving information in real-time and
can adjust insurance rates in the same real-time.
Already, insurers like Allstate and Progressive
have implemented versions of pay-as-you-go
insurance. These programs are designed to
reward safe drivers, who agree to have their
driving monitored, with cheaper insurance
rates. Some insurers are toying with the idea of

sending a text message to Mom and Dad when

a son or daughter is driving too fast or in an
unsafe area.
Retail StoresRed Laser and other bar-code
reading apps have created the necessity of transparency. It used to be that, if you could get a
customer into your store through advertising
via newspaper, magazine, of TV, you could be
fairly well assured of a sale. Not so today. Smart
shoppers are using smartphones and bar-code
reading apps to compare prices. Many are opting to go to a different store for a cheaper price.
Still others are approaching store employees and
asking for a price match (or they will go to that
other store). There may even come a time when
Amazon could offer a 5 percent discount to
shoppers browsing its site while in a Walmart.
UtilitiesSmart meters are now being installed
in residential homes. These meters can adjust the
price of the utility in real time based on peakperiod usage. The meter may even notify the
home owners, giving them the opportunity to
turn off appliances to avoid higher prices.
Smart companies innovate; the others ... well, you
know.10

can bet that other competitors will do so as well, so youll also have to compete on price
(overall cost leadership) and/or differentiation too.
RUN-GROW-TRANSFORM FRAMEWORK A helpful conceptual framework for viewing the bigger organizational picture and determining the use of IT in it is the run-growtransform (RGT) framework, an approach in which you allocate in terms of percentages
how you will spend your IT dollars on various types of business strategies. For example, if
youre only interested in business-as-usual but cheaper and faster than the competition,
you would focus a great percentage of your IT dollars on a run strategy. If you wanted to
transform your business in some way, you would allocate a certain percentage of your IT
dollars to a transformation strategy. The following are the aspects of the RGT framework:

Runoptimize the execution of activities and processes already in place. Seek

organizational growth through offering products and services faster and cheaper
than the competition.
Growincrease market reach, product and service offerings, expand market
share, and so on. Seek organizational growth by taking market share from the
competition (i.e., get a bigger piece of the pie).
25

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Chapter 1

Figure 1.13
Historical Spending
in Run, Grow,
and Transform11

The Information Age in Which You Live

100%
90%

15%

14%

14%

22%

22%

24%

61%

63%

64%

62%

2002

2003

2004
Run

18%

80%
70%

21%

13%

13%

13%

19%

20%

21%

68%

67%

66%

2007

2008

60%
50%
40%
30%
20%
10%
0%
Grow

2005
2006
Transform

Transforminnovate business processes and/or products and services in a

completely new way, move into seemingly different markets, and so on. Seek
organizational growth through new and different means.

As you can see, the RGT framework is similar in many ways to Porters three generic strategies:
Run5overall cost leadership
Grow5focus and differentiation
Transform5(new) differentiation

The application of the RGT framework occurs in almost all industries. In Figure 1.13
you can see RGT data gathered by The Gartner Group over a seven-year period. Note the
general trend toward allocating more IT dollars to run initiatives and less to transform initiatives. Is this good or bad? Its hard to say with absolute certainty, but its not a favorable
trend. All organizations must focus to some extent on the transformation aspect. In the
business world, as is often said, if youre standing still, youre falling behind. Its a simple
factyour competition is always trying to do something better than you are. Therefore,
your organization must constantly seek to evolve and, in most cases, to transform itself.
Many times, your organization can take a proactive approach to using technology to
transform itself. Apple is perhaps the most widely discussed organization that is constantly in a state of transformation. Apple, a personal computer company, launched itself
into the music business with Apple iTunes in early 2001. Since then, Apple has added
games, books, music videos, and movies to iTunes. Apple has successfully held its firstmover advantage in the music space because of its continuing focus on transformation.

SUMMARY: STUDENT LEARNING OUTCOMES REVISITED

1. Define management information systems (MIS) and describe the three
important organizational resources within itpeople, information, and
information technology. Management information systems (MIS) deals with
the planning for, development, management, and use of information technology
tools to help people perform all tasks related to information processing and
management. People, as an organizational resource within MIS, are the most

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Closing Case Study One

27

important of the three. To be successful in their use of technology, people must be

both information-literate and technology-literate. Information in various forms
goes by many names such as data, business intelligence, and knowledge. All
are intellectual assets but exhibit subtle differences. Information is data that has
meaning within a specific context. Information technology (IT) is any computerbased tool that people use to work with information and support the information
and information-processing needs of an organization.
2. Describe how to use break-even analysis to assess the financial impact of
information technology. Break-even analysis considers and charts three pieces
of financial information: fixed costs, variable costs, and revenue. You can use
break-even analysis to determine the financial impact of information technology
by assessing (1) how technology can help reduce fixed costs, (2) how technology
can help reduce variable costs, and (3) how technology can help increase revenue.
Each of those ultimately focuses on how technology can be used to impact the
break-even point, the point at which an organization has covered its fixed costs
and begins to make a profit.
3. Describe how to use Porters Five Forces Model to evaluate the relative
attractiveness of and competitive pressures in an industry. Porters Five Forces
Model focuses on industry analysis according to five forces: (1) buyer power
high when buyers have many choices and low when choices are few; (2) supplier
powerhigh when buyers have few choices and low when choices are many;
(3) threat of substitute products and serviceshigh when many alternative are
available and low when alternatives are few; (4) threat of new entrantshigh
when it is easy to get into a market and low when it is difficult to get into a market;
and (5) rivalry among existing competitorshigh when competition is fierce
and low when competition is more complacent.
4. Compare and contrast Porters three generic strategies and the rungrow-transform framework as approaches to the development of business
strategy. Porters three generic strategies are: (1) overall cost leadershipthe
same or better quality products at a price less than that of the competition; (2)
differentiationa product or service that is perceived as being unique; and (3)
focusproducts or services for a particular buyer group, within a segment of a
product line, and/or a specific geographic market. The RGT framework requires
that you allocate in terms of percentages how you will spend your IT dollars
among running the organization, growing the organization, and transforming the
organization.

CLOSING CASE STUDY ONE

The Social Media Megaphone: Transparent Life Intensified
Its a story thats been told before. Twenty-Five-year-old
Stacy Snyder was in her last semester of teacher-intraining at Millersville University School of Education.
On her MySpace page, she posted a photo of herself at
a party with a pirate hat and a cup in her hand. The caption read, Drunken Pirate. Her school decided that
the photo promoted drinking to her underage students

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at Conestoga Valley High School and denied her teaching degree. She sued citing her first amendment rights,
and a federal district court judge dismissed her suit
because she was a public employee and therefore her
public speech (i.e., Drunken Pirate) was not protected.
You may believe that Stacys story is an unfortunate
one, but the Internet, specifically social media tools

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Chapter 1

The Information Age in Which You Live

and sites, has made it far too easy to share all types of
information. If youre not careful, your use of social media
may expose your life in the most transparent of ways to
literally millions and millions of people. According to
one survey, 75 percent of recruiters and HR professionals in the United States stated that their organizations
required them to research applicants online. Some of the
most commonly visited places for that research included
search engines, social networking sites, photo and videoing sharing sites, personal Web sites, blogs, Twitter, and
gaming sites. In the same survey, over 70 percent of the
recruiters stated that they had rejected applicants based
on the information they found online.
Of course, all the examples of life transparency on the
Internet are not necessarily bad. Some have a good
ending, and others are simply interesting to consider.

WEBCASTING FUNERALS
According to John Reed, past president of the National
Funeral Directors Association and current owner of
two Virginia-based funeral homes, 20 to 30 percent
of all funeral homes in the U.S. now provide webcasting funeral services. I can honestly say that in the past
three years weve gone from absolute zero to the point
where we now do 50% of our funerals on the Web,
stated Reed. For Cliff Reedy, whose son tragically died
in a car accident, the webcast service was essential in
reaching out to all friends and family. His sons funeral
was webcast across the U.S. and in 10 countries. The
webcast funeral had more than 700 views.

MILITARY BAGS FLY FREE AFTER VIDEO

GOES VIRAL
Army Staff Sergeants Robert OHair and Fred Hilliker
were upset that airlines were charging baggage fees to
military service personnel returning from Afghanistan.
The two made a video in which they stated that 36 military personnel from Oklahoma were charged more than
$2,800 for excess baggage fees. The two sergeants posted
the video on YouTube, and many people commented to
express their outrage. Even congressman Bruce Baley
from Iowa demanded that the airline reimburse the soldiers for the fees. Now, all airlines allow military personnel to check more bags of greater weight for free.

MAN RETRIEVES STOLEN LAPTOP AFTER

TWEETING PHOTOS
Joshua Kaufman had his laptop stolen from his apartment. Fortunately, he had activated his theft-tracking
software which sent to Kaufmans e-mail periodic photos

haa7685X_ch01_002-033.indd 28

of the person using it taken from the computers Web

cam and screen shots of the laptop while in use. He
posted the photos through Twitter and instantly began
receiving retweets of support and leads of who the
person might be in the photos. One of the screen shots
included the name of the business for which the suspect
worked. Within days, the police had arrested the suspect
and returned Kaufmans laptop.

RASHARD MENDENHALL FIRED BECAUSE

OF OSAMA BIN LADEN TWEETS
Rashard Mendenhall, Pittsburgh Steelers running back,
had a lucrative endorsement contract with Champion.
But Champion fired Rashard over tweets he sent
regarding the death of Osama Bin Laden. In his tweets,
Rashard questioned why people would celebrate the
death of Bin Laden. In other tweets, Rashard also questioned the September 11th attacks. He tweeted that he
had a hard time believing a plane could take a skyscraper down demolition style.

POLICE STANDOFF LIVE ON FACEBOOK

Jason Valdez took a woman hostage at a motel in a
16-hour standoff with SWAT teams. During the ordeal,
he constantly updated his Facebook page, letting
friends and family know of his situation. Valdez even
posted two photos of himself and the hostage with the
caption, Got a cute Hostage huh. Family and friends
responded with over 100 comments to his Facebook
page. One friend even posted a comment regarding the location of SWAT personnel stating, gunner
in the bushes stay low. Valdez thanked him for the
information.12,13,14,15,16,17

Questions
1. What do you think of Stacy Snyders story?
Should she be denied a degree for publicly
endorsing drinking to her underage students?
To what extent do you believe that potential
employers should explore social networking
sites to validate the goodness of potential
employees? Is there anything on your Facebook
page that might turn off potential employers?
If so, are you going to take any action?
2. The webcasting of funerals is an interesting
example of the flatness of the world. Is this
an invasion of privacy or do next-of-kin have
the right to make such a decision? What other
significant events in a persons life might

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Closing Case Study Two

be suitable for webcasting? Identify at least
three such events and then do some research
to determine if webcasting of those events is
already taking place.
3. Osama Bin Laden represents a very dark
image for most Americans. His participation
in the planning of the September 11th
attacks will forever mark him as evil. Should
people, like Rashard Mendenhall, who make
positive or perhaps even neutral comments
about terrorists like Bin Laden be fired
from endorsement contracts? Can making
such comments be considered grounds for
termination of employment? Maybe dismissal
from your school as a student?

29

4. Very few people would question the service and

commitment of military personnel to our country.
The two sergeants who created the YouTube
video openly criticized Delta Airlines for its
charging of baggage fees to military personnel. Is
this open form of criticism of businesses and their
practices acceptable? Will it help businesses be
more accountable to customers?
5. The use of Facebook (or any other social
networking site) can truly make a persons life
transparent, available for the whole world
to see. Should there be legislation regulating
the openness of your life on the Internet? Can
we expect society somehow to regulate this
without any laws?

CLOSING CASE STUDY TWO

Google and Apple Know Where You Are, Maybe
In April 2011, some interesting discoveries were made
regarding location tracking by Apple iPhones and iPads
and Google Android smartphones. Pete Warden and
Alasdair Allan, British researchers, discovered a file on
Allans iPhone that provided a detailed list of places Allan
had visited in the U.S. and United Kingdom over a 300-day
period. The file included a time stamp of each location.
Similarly, Duke and Penn State student researchers, with the help of Intel, found that 15 of 30 popular Android apps systematically communicated location information to a variety of ad networks. Those
researchers found that some of the apps transmitted
location data only when displaying specific ads, while
others did so even while the app was not running.
On some Android smartphones, the location data was
transmitted as often as every 30 seconds.
Well, as you can imagine, this sent the public into
an uproar. Google and Apple (if youre using one their
smartphones) are tracking my every movement? Those
organizations know exactly where I was and when I
was there? The outcry was unbelievable.
Apple and Google went silent on the subject for several days, with neither returning phone calls or e-mails
or posting any information on their Web sites or blogs.
Senator Al Franken, Democrat from Minnesota,
quickly scheduled a hearing of the Judiciary Panels

haa7685X_ch01_002-033.indd 29

subcommittee on privacy for May 10, 2011. According

to Franken, People have the right to know who is getting their information and how (it) is shared and used.
Federal laws do far too little to protect this information... . No one wants to stop Apple or Google from
producing their products, but Congress must find a balance between all of those wonderful benefits (from
devices) and the publics right to privacy. After getting little or no response from either Apple or Google,
Franken went on to say, I have serious doubts those
rights are being respected in law or in practice.
At the time, Steve Jobs, CEO of Apple, was on
medical leave, and he came back from medical
leave to defend Apples location tracking technology. According to Jobss right-hand executive Guy
Tribble, Apple vice president of software technology,
Apple iPhones and iPads only gather location data
about nearby cell towers and Wi-Fi hot spots. As he
explained, [Apple] does not share personally identifiable information with third parties for their marketing purposes without customers explicit consent ...
[and] Apple does not track users locations. Apple has
never done so and has no plans to ever do so. Apple
intends to continue sending nearby cell tower and
Wi-Fi hot spot location data but will only store that
data for 7 days.

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Googles long-awaited explanation was similar,

with a few twists. Google did admit that Android
devices do harvest location data for marketing
campaigns. But Google stated that the locationtracking information is not traceable to individual
users. Google went on to defend its action in stating that Google does ask Android device owners if
they want to turn off the location-tracking feature.
According to Alan Davidson, Googles director of public policy for the Americas, If they opt in, all data is
made anonymous.18,19,20

Questions
1. Location-based tracking is common to all
smartphones, for good reason or bad. The
popular location-based service company
Foursquare has an app so you can check in
at various locations to receive discounts,
become Mayor, and see who else might be
there. DealLeak, which aggregates deals from
the likes of Groupon and Living Social, needs
your location in order to offer local discounts
on products and services to you. How many
location-based service apps do you have on
your smartphone? How often do you use them
and why?

2. Apple and Google defended their processes by

stating that their privacy policies very clearly
stated what information would be gathered, how
that information would be used, and how and
with whom that information might be shared.
When was the last time you read the privacy
policy of any technology tool, such as a Web
browser or app? Do you think very many people
actually read these? Do the disclaimers in these
privacy policies give the offering organization the
right to do anything with your information?
3. What about location-based tracking in car
systems like GMs OnStar? Those systems know
the cars location to give you driving directions
and perhaps identify local restaurants or other
venues. Are you comfortable with this? When
was the last time you bought a paper map?
How much do you rely on your cars GPS system?
4. What about smartphone tracking for parents
who want to know where their children are and
where theyve been? Minors under the age of 18
have very few privacy rights, especially when it
comes to parents knowledge of where they are.
Are parents going too far in wanting to know
where their children are? What are the benefits
of such systems for parents? For the children?
What does the term helicopter parent refer to?

KEY TERMS AND CONCEPTS

Application software, 14
Business intelligence (BI), 7
Buyer power, 19
Central processing unit (CPU), 13
Competitive advantage, 19
Data, 6
Differentiation, 24
Entry barrier, 21
Ethics, 12
External information, 9
First-mover advantage, 20
Five Forces Model, 19
Focus, 24
Garbage-in garbage-out (GIGO), 8
Hardware, 13
Information, 6
Information granularity, 9
Information-literate knowledge worker,
Information technology (IT), 13
Input device, 13

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11

Internal information, 9
Loyalty program, 20
Management information systems (MIS), 5
Objective information, 9
Output device, 13
Overall cost leadership, 23
RAM (random access memory), 13
Rivalry among existing competitors, 22
Run-grow-transform (RGT) framework, 25
Software, 13
Storage device, 13
Subjective information, 9
Supplier power, 20
Switching cost, 21
System software, 14
Technology-literate knowledge worker, 11
Telecommunications device, 14
Threat of new entrants, 21
Threat of substitute products or
services, 21

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Assignments and Exercises

31

SHORT-ANSWER QUESTIONS
1. What is the relationship between management
information systems (MIS) and information
technology (IT)?
2. What are some relationships among data,
information, business intelligence (BI),
and knowledge?
3. How does the granularity of information
change as it moves from lower to upper
organizational levels?
4. What is the difference between a technologyliterate knowledge worker and an informationliterate knowledge worker?

5. How do ethics differ from laws?

6. What are the three financial elements
of break-even analysis?
7. What role does the Five Forces Model play
in decision making?
8. Why are competitive advantages never
permanent?
9. What are the three generic strategies
according to Michael Porter?
10. How are Porters three generic strategies
and the RGT framework similar?

ASSIGNMENTS AND EXERCISES

1. USING PORTER TO EVALUATE THE MOVIE
RENTAL INDUSTRY One hotly contested
and highly competitive industry is the movie
rental business. You can rent videos from local
video rental stores, you can order pay-per-view
from the comfort of your own home, and you
can rent videos from the Web at such sites
as NetFlix. Using Porters Five Forces Model,
evaluate the relative attractiveness of entering
the movie rental business. Is buyer power low
or high? Is supplier power low or high? Which
substitute products and services are perceived
as threats? Can new entrants easily enter
the market? What are the barriers to entry?
What is the level of rivalry among existing
competitors? What is your overall view of
the movie rental industry? Is it a good or bad
industry to enter?
2. REVIEWING THE 100 BEST COMPANIES
TO WORK FOR Each year Fortune magazine
devotes an issue to the top 100 best companies
to work for. Find the most recent issue
of Fortune that does this. First, develop
a numerical summary that describes the
100 companies in terms of their respective
industries. Which industries are the most
dominant? Pick one of the more dominant
industries (preferably one in which you would
like to work) and choose a specific highlighted
company. Prepare a short class presentation
on why that company is among the 100 best
to work for.

haa7685X_ch01_002-033.indd 31

3. BREAK-EVEN ANALYSIS Perform a break-even

analysis for the following scenario. Assume
you sell widgets. You have total fixed costs
of $12,000. Your manufacturing and shipping
of widgets costs $7 per widget. You sell each
widget for $22. What is your break-even point?
How many widgets do you have to sell to
realize a net profit of $15,000?
4. BUSINESS STRATEGY FOR ENTERING
THE CELL PHONE SERVICE INDUSTRY Assume
that you run a start-up and have decided to
enter the cell phone service industry. Which of
the three generic strategies would you choose
as your primary business strategyoverall cost
leadership, differentiation, or focus? Explain
your choice by elaborating on the product
and service features you would offer to lure
customers from the competition.
5. RESEARCHING YOUR CAREER
AND INFORMATION TECHNOLOGY To position
yourself in the best possible way to succeed
in the business world, you need to start
researching your career right now. Here, we
would like you to focus on the IT skills your
career requires. First, consider what career you
want to have. Second, visit Monster.com (www.
monster.com) and search for jobs that relate
to your career. Read through several of the job
postings and determine what IT skills you need
to acquire.

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DISCUSSION QUESTIONS
1. The three key resources in management
information systems (MIS) are information,
information technology, and people. Which of
these three resources is the most important?
Why? The least important? Why?
2. We often say that hardware is the physical
interface to a technology system while
software is the intellectual interface. How
is your hardware your physical interface to
your computer? How is your software your
intellectual interface to your computer? Do
you see technology progressing to the point
that we may no longer distinguish between
hardware and software and thus no longer
perceive differing physical and intellectual
interfaces?
3. In a group of three to four students, consider
eBay in the context of Porters Five Forces
Model. How does eBay reduce the threat of
new entrants? If necessary, you may want
to explore eBays site (www.ebay.com) and

determine the role of buyer and seller ratings,

its integration with PayPal, and how it helps
buyers and sellers resolve disputes.
4. In this chapter, we discussed the use of loyalty
programs in the travel industry as a mechanism
for reducing buyer power. What is another
industry that also uses loyalty programs to
reduce buyer power? How does that industry
use loyalty programs to do so?
5. As an information-literate knowledge worker
for a local distributor of imported foods
and spices, youve been asked to prepare
a customer mailing list that will be sold to
international cuisine restaurants in your area.
If you do so, will you be acting ethically?
Suppose you dont consider the proposal
ethical. What will you do if your boss threatens
to fire you if you dont prepare the list?
Do you believe you would have any legal
recourse if you didnt prepare the list and were
subsequently fired?

CHAPTER PROJECTS
GROUP PROJECTS
Assessing the Value of Customer Relationship Management: Trevor Toy Auto
Mechanics (p. 286)
Analyzing the Value of Information:
Affordable Homes Real Estate (p. 287)
Making the Case with Presentation Software: Information Technology Ethics
(p. 296)

E-COMMERCE PROJECTS
Interviewing and Negotiating Tips (p. 311)
Ethical Computing Guidelines (p. 314)
Financial Aid Resources (p. 315)
Global Statistics and Resources (p. 316)
Protecting Your Computer (p. 317)
Searching Job Databases (p. 321)

Analyzing Strategic and Competitive

Advantage: Determining Operating Leverage (p. 303)

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